May 2025 – Your Financial Pharmacist

YFP 408: What Should You Do With an Old 401(k)?

Posted on by Caitlin Boyle

What should you do with an old 401(k)? Tim Ulbrich and Tim Baker explore your options, common pitfalls, rollover strategies, and how to make smart moves with old retirement accounts after leaving a job.

Episode Summary

When you leave a job, what happens to the retirement account you left behind? In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, and YFP Co-Founder & COO, Tim Baker, CFP®, RLP®, RICP®, take a deep dive into the important financial decisions surrounding old employer-sponsored retirement plans, such as 401(k)s and 403(b)s.

Tim and Tim discuss the impact these often-overlooked accounts can have on your overall financial plan and explore your available options, whether that’s leaving the money in your former employer’s plan, rolling it over to your new employer’s plan, or transferring it to an IRA.

They break down the pros and cons of each approach, highlight common mistakes like the “set it and forget it” trap, and explain why understanding fees and account access is so important. The conversation also emphasizes the value of working with a fiduciary advisor and the serious risks of cashing out these accounts too soon.

To complement the episode, they introduce YFP’s new guide: The Best and Worst Moves to Make with an Old 401(k), designed to help you avoid costly missteps and feel confident in your next move.

Whether you’re changing jobs, planning ahead for a career transition, or simply want to be more intentional about your retirement savings, this episode will give you the clarity and guidance you need.

Key Points from the Episode

00:00 Introduction and Episode Overview
01:15 Sponsor Message: First Horizon
02:23 Discussion Begins: What to Do with Old Employer Retirement Accounts
03:35 Importance of Managing Old Retirement Accounts
05:53 Options for Old 401(k) and 403(b) Accounts
12:58 Pros and Cons of Leaving Money in Old Plans
19:18 Rolling Over to a New 401(k)
27:31 Understanding Asset Location and Allocation
27:47 Rolling Over to a New Employer’s Plan
28:04 Advantages and Disadvantages of Consolidation
29:50 Rolling Over to an IRA: A Common Approach
30:27 Investment Options and Flexibility in IRAs
33:44 The Importance of Transparency in Financial Services
46:23 Considering All Options for Old Retirement Accounts
47:22 Conclusion and Additional Resources

Episode Highlights

“ These employer-sponsored retirement plans may seem like old news, especially if you’ve been in the workforce for a while, but what you do or don’t do with them can have a lasting impact on your financial future.” – Tim Ulbrich [00:23]

“As your career continues, a 401k or if you rolled into an IRA will be one of the largest things on your balance sheet over time. So it’s really important to have an intentional plan with how you’re gonna manage these assets and how do they fit in the overall picture of your ability to build wealth and then to spend that wealth like in retirement.” – Tim Baker [7:23]

“ If you’re actively contributing to a 401k, the action of rebalancing kind of happens naturally every time you get paid and put money in if you leave that job. And that money’s just sitting there. The market does what it does, so that that asset loca, that asset allocation that you set will drift because you’re not actively putting money into it.” – Tim Baker [11:50]

Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: [00:00:00] Hey everybody. Tim Ulbrich here, and welcome to this week’s episode of the YFP Podcast where we strive to inspire and encourage you on your path towards achieving financial freedom. Whether you’re transitioning to a new job or just taking a closer look at your finances. One of the most overlooked but critically important pieces of your retirement plan is your old 401k or 4 0 3 B account.

Tim Ulbrich: These employer-sponsored retirement plans may seem like old news, especially if you’ve been in the workforce for a while, but what you do or don’t do with them can have a lasting impact on your financial future. In this episode, we’re diving deep into what happens after you leave a job and what your options are.

Tim Ulbrich: When it comes to your old 401k or four oh through B, we’ll tackle why it’s so important not to let these accounts fall into, set it and forget it mode. Explore the pros and cons of common rollover strategies and break down how fees, fund options, and even asset protection rules differ between the options.

Tim Ulbrich: [00:01:00] And finally, we’ll help you think through whether this is something you want to manage on your own, or if it might make sense to partner with a fiduciary advisor who can help you align this decision. With your broader financial plan and goals, before we jump in, let’s hear from today’s sponsor. First Horizon.

Tim Ulbrich: First Horizon is a paying sponsor of this episode of the Your Financial Pharmacist Podcast.

Tim Ulbrich: The saving 20% for a down payment on a home feel like an uphill battle. It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for down payment on a home may take years. First Horizon offers a professional home loan option, a KAA doctor or pharmacist loan that requires a 3% down payment for a single family home.

Tim Ulbrich: Or townhome for the first time. Home buyers, 5% for non-first time home buyers has no PMI and offers a 30 year fixed rate mortgage on home loans up to 8 0 6 500 in most areas. The pharmacist’s home loan is [00:02:00] available in all states except Alaska and Hawaii, and can be used to purchase condos as well.

Tim Ulbrich: However, rates may be higher. A condo review has to be completed. To check out the requirements of Pharmacist Home Loan through First Horizon, and to start the pre-approval process, visit your financial pharmacist.com/home-loan. Again, that’s your financial pharmacist.com/home-loan. Tim Baker, welcome back to the show.

Tim Baker: Good to be back. What’s going on, Tim?

Tim Ulbrich: I am looking forward to the discussion. Uh, today we’re gonna talk about, uh, a question that really comes up often in pharmacists that both you and I have a chance to converse with, which is, you know, what, what do I do with an old employer retirement account? Uh, it could be the first job transition or the fifth job transition, but you know, often, we’ll, we’ll have these 4 0 1 Ks or these 4 0 3 Bs and.

Tim Ulbrich: Wondering, like, what, what should I do with them? Should I leave them? Should I move them? And so today we’re gonna talk about the different options, some of the pros and cons of what you might do with those accounts. [00:03:00] Um, before we get too far into it, we have a brand new guide that we’ve released, uh, titled The Best and Worst Moves to Make with an old 401k.

Tim Ulbrich: You can download that guide, which is a, a supplement to today’s episode. Go to your financial pharmacist.com/moves. Again, your financial pharmacist.com/moves. And a shout out to Jeff Kimer, uh, pharmacist at. Has collaborated with us on, on several, uh, writings. He wrote the book, fire Rx, the Pharmacist Guide of Financial Independence.

Tim Ulbrich: He helped us put together the content for this guide, uh, as well, just an, an overall, uh, community pharmacist, uh, money nerd. So shout out to Jeff for his help in, in putting together this guide, Tim, this topic probably I would suspect, is you’re, you’re conversing with, uh, pharmacists that are. Wanting to learn more about our fee only financial planning services.

Tim Ulbrich: I’ve gotta believe that this is one that comes up fairly often. Is that, is that correct?

Tim Baker: It does. One of the things that, you know, when I talk to a prospective client that is [00:04:00] in transition, it’s like, you know, I’m unsure what the best. Path is for, you know, my old 401k, or, you know, some people, you know, make the habit of collecting 4 0 1 Ks or 4 0 3 Bs, and they’re just kind of scared,

Tim Ulbrich: Mm-hmm.

Tim Baker: So, you know, what is, what’s the best, you know, path for me and what should I do with those, with those plans. So, yeah, it’s important because as you, if you think about it, Tim, like, you know, 401k, 4 0 3 B. You know, often outside of your house, and then eventually it will eclipse the value of your, your house in terms of like the, the biggest asset on your

Tim Ulbrich: Mm-hmm.

Tim Baker: is a big really over the course of your career in terms of like what to do with, you know, your, your 401k, especially when you leave an employer. Um, You know, I think it’s important to analyze and examine and just try, try to figure out what, what’s the best thing for [00:05:00] you to do.

Tim Ulbrich: Yeah. And especially, you know, I think about the, the job transitions that may happen, it’s, it’s rare to see someone now that’s worked with the same employer, you know, for 20, 25 years, right? So if, if you’re changing jobs every 3, 4, 5 years, which can be pretty, pretty normal, uh, you know, you’re gonna start to, to accrue several of these accounts.

Tim Ulbrich: And what are the options that we have to do with them along the way and. We’re gonna talk about 401k, 4 0 3 B interchangeably. They are similar, yet different. Uh, we’ve covered that on on previous episodes. Both of them are employer-sponsored retirement plans. Typically, we think 401k. Those that work for a for-profit, 4 0 3 B, those that work for a, a non-profit or thinking about something like A TSP for those that work for the federal government.

Tim Ulbrich: So we’re gonna use those terms interchangeably, but they’re not. Not the same thing. There are important differences, uh, between them, but for the sake of the conversation of job transitions and what do I do with these accounts, we’re gonna lump, lump both of them together. Tim, before we get into the options.

Tim Ulbrich: Let’s cast a vision for, for why this is [00:06:00] important, right? When I think about my own experiences, you know, uh, fir first job or two specifically thinking back to a memory of, of Jess’s, uh, old 4 0 3 B, that was kind of hanging out there. And, you know, after a while we, we didn’t really remember kind of what, what was there.

Tim Ulbrich: And we, we were moving on to the next account. We left it at the time being, we would eventually do a transfer, uh, and a rollover that we’ll talk about in this episode. But when I think about the, the potential. Consequences here, things come to mind like, hey, it’s, it’s outta sight, outta mind, which means we might not just be paying a attention to it like we are, uh, other accounts and, and therefore it might not be optimized in, in the same way that we’re treating our other investment accounts.

Tim Ulbrich: What, what else comes to mind for you about why, why this is important? Before we talk about functionally what we do with them, why, why is it important that we evaluate what we might do with these old accounts?

Tim Baker: I mean, I think one of the first things that we do with clients when we kind of down the path of like our financial roadmap is. We call it a get [00:07:00] organized meeting where we’re essentially taking inventory of everything that we have. so you know, it’s cash, it’s it’s credit card debt, it’s student loans, it’s investment accounts. real estate, those types of things, right? So often what can sometimes be a black box in this, especially if you, if collected 4 0 1 Ks, is like, what are these plans and how are they actually invested and what am I actually paying in fees?

Tim Ulbrich: Hmm.

Tim Baker: So visibility is, is really the first step to, to build a cohesive, comprehensive plan. And like I mentioned, as your career continues, a 401k or if you rolled into an IRA will be one of the largest things on your balance sheet

Tim Ulbrich: Mm-hmm.

Tim Baker: So it’s really important to have a, intentional plan with how you’re gonna manage these assets and how do they fit [00:08:00] in the overall picture of your ability to build wealth and then to spend that wealth like in retirement. So. You know, a for a lot of people, you know, they’ll say like, I don’t even know where these

Tim Ulbrich: Mm-hmm.

Tim Baker: Or, I have a statement, I have no idea like how it’s invested or, or what it’s, you know, and it, and it’s, it could be, it could be at one extreme of like, I just don’t know what this is to like, you know, the other extreme of like, I know it’s probably not optimized and I need some help with this.

Tim Baker: So I think it’s really important to, you know, again, have a plan for this asset and, and make sure that. It is aligned with what you’re trying to achieve,

Tim Ulbrich: Yeah. When I think about the maintenance that we typically will do. With our clients on their various investment accounts, right? We’re looking at things like, you know, what’s, what’s the asset allocation according to our goals, according to our risk tolerance and capacity? And, you know, as the market does its thing over time and, and things may get outta whack, how do we rebalance those accounts?

Tim Ulbrich: How do we make sure that this is fee efficient, right? So [00:09:00] if, if that’s outta sight, outta mind, that’s the potential risk that we’re, we’re losing eyes on the intentionality of those funds. And, and one other thing I want to say here while we’re talking about this. Is that it’s not uncommon, correct me if I’m wrong, but it’s not uncommon for some financial planning firms to look at your current employer, 401k or 4 0 3 B uh, and say like, Hey, we see that, but we’re not necessarily gonna spend time helping you.

Tim Ulbrich: You manage that, which can be another, another thing to think about.

Tim Baker: Yeah, I think a quarter of advisors, if you’re working with a quarter of advisors, don’t help you with a current 401k, which I think is bonkers. Um, so to me, like if you’re, if you’re looking at a comprehensive plan, like I think that’s important to make sure. Like if I’m, you know, the, the, like when we do, you know, you don’t mention asset allocation.

Tim Baker: When we set, when we establish an asset allocation, what, whether it’s 90, 10, 90% equities, 10, 10% in bonds, or [00:10:00] 70 30 or 80, whatever it is, like to me that conversation isn’t complete until you give a 70 30 or a 90 10 or whatever it is for that held away or for that current 401k. I just think that, that, I don’t, lazy is not the word, but the reason that advisors don’t do that is ’cause they don’t get paid on those.

Tim Baker: They

Tim Ulbrich: Mm-hmm.

Tim Baker: on that. So part of this discussion is following the money. Like, you know, how, how does it, how do fees work? And, you know, what’s the scope for the fee that I’m paying? And to me, if advisors is, is unwilling to help me with a, with a, you know, a 401k, they’re not getting paid directly on.

Tim Baker: That’s, that to me is a red flag. Um. You know, you’re, if you have my best interest in mind, and this is a big part of my balance sheet, then help a brother, help a sister out. Is, is my, my viewpoint. Um, but you mentioned like asset allocation [00:11:00] is, is big, is a big part of this, but I think part of this discussion of like the options and, and what to do is also asset location and. And how an asset location is often forgotten. But I think it’s, it’s one of the things that is, is just as important as, as asset allocation. Meaning, you know, are these accounts taxable, pre-tax, Roth, that type of thing. And to me, you are confined inside of a 401k to be able to pull some levers to make sure that the percentages of where your assets are held, are. Controllable or you can affect change there. And in, in some, in some accounts you can and in others you can’t. Um, so it’s important to understand that. So, and again, one of the things you mentioned is like Reba, and just to address that really quick, know, if you’re, if you’re actively contributing to a 401k, the action of rebalancing kind of happens naturally every time you get paid and put money in if you [00:12:00] leave that job. And that money’s just sitting there. The market does what it does, so that that asset loca, that asset allocation that you set will drift because you’re not actively putting money into it. So you could drift into something that’s much, much more conservative or more likely, much, much more aggressive than what you signed up for. So that’s another thing to be aware of, is that, you know, one of the important things about this is that, you know, when you’re not actively putting dollars in. It, you tend to drift more out of, you know what you signed up for, which can be problematic, especially when the market turns sour.

Tim Ulbrich: Yeah. Great, great points. And, um, I’m glad you mentioned the asset location because that’s a really important one, that if, if we’re on autopilot with some of these things or we just leave them and forget ’em, we’re not necessarily thinking about those asset location questions, which will raise some important decisions like.

Tim Ulbrich: Might we or might we not do Roth conversions, you know, for example. So,

Tim Baker: Right,

Tim Ulbrich: um, really good stuff. Let, let’s talk about the various options. Option one, [00:13:00] perhaps the option, uh, that has the least amount of friction, uh, is do nothing and leave money in the old plan. So I, I leave my employer, I go to work for a new employer, and I just leave the funds in the provider that was managing the 401k for the employer That, that I just left.

Tim Ulbrich: Tim, where, where might this, or might this option not make the most sense?

Tim Baker: Yeah, if you’re, if you’re lazy or you don’t want to deal with, uh, pulling statements and everything that you know it takes to uh, an account, this might be right for you. Right? You just basically don’t do

Tim Ulbrich: Mm-hmm.

Tim Baker: Um, you still enjoy. I. The continued tax defer growth, whether it’s a traditional, um, bucket or a Roth bucket, you still get that benefit, which is great. Um, you still get potential, um, benefits of a lot of 4 0 1 Ks will have the options for like in institutional share classes, which are, can be

Tim Ulbrich: Mm-hmm.

Tim Baker: in [00:14:00] fees compared to like just a retail, you know, what you would buy on the street. Um. And one of the things that’s what’s great about, you know, keeping it at the 401k or even transferring it to a new 401k is that. 4 0 1 Ks had a little bit more protection, um, by erisa, which is the Employment Retirement Income Security Act. So under this federal law, creditors can’t touch your 401k in most cases. E you know, even in cases of like bankruptcy lawsuits or collections, they still, the I risk can still get to your money.

Tim Baker: If you’re in, in a divorce, a Quadra, a qualified domestic relations order, can still access those accounts or any type of CRI criminal risk. Restitution IRAs still have protection, but it could be limited compared. I can kind of get into that a little bit more when we talk about IRAs, but that’s, that’s the big benefit.

Tim Baker: Um, I think the cons here, you know, just like if you, if you leave it or if you move it, you’re still limited to the

Tim Ulbrich: Yeah.

Tim Baker: by that

Tim Ulbrich: Mm-hmm.

Tim Baker: So I always talk about like, you know, [00:15:00] with a 401k, you’re in a sandbox and you only have so many toys that

Tim Ulbrich: Mm-hmm.

Tim Baker: with. And those toys are typically mutual funds. average, 4 0 1 Ks have about 20 to 25 investment options, is typically good enough to build a, you know, a diverse portfolio. But looking at many, many 4 0 1 Ks, I think you can throw out of ’em because they’re crap. And what I mean crap is like they’re typically

Tim Ulbrich: Expense ratios. Yep.

Tim Baker: Exactly, so, so you’re, you’re, you’re often stuck with just,

Tim Ulbrich: I.

Tim Baker: maybe four or five or six funds that are, that are good.

Tim Baker: Most of them, most 4 0 1 Ks will have exposure to US stocks from large, mid small, not all the time. Um, most will have exposure to internationals. They’ll have bond funds. They’ll typically have a stable like money market fund. Um, but they often, they’ll miss things like real estate. If you believe in real estate, emerging market. A lot of 4 0 1 Ks don’t have a digital [00:16:00] exposure if you believe in commodities. Um, so I think that’s one of the cons. I think also one, the big, the big con I think is like the, the possibility of higher fees, um, related to the

Tim Ulbrich: Yeah.

Tim Baker: So we mentioned investment fees. Um. So this is the expense ratio that, the fee that the funds themselves take to

Tim Ulbrich: Mm-hmm.

Tim Baker: of a, uh, a balanced, um, ETF or a mutual fund in this case. So, a, on average the investment fees, uh, inside of a 401k are about 39 basis points or 0.39%. So if I have a hundred thousand dollars portfolio every year, $390 of that is basically being absorbed by the funds that I’m in. Um. And the other big thing that I think is a detriment to a 401k is administrative fee.

Tim Baker: So this covers the cost of running the plan, record keeping compliance, compliance tests, and maybe legal fees. Um, [00:17:00] so there’s really no getting away because, because these plans are, um. very much tested and looked at by the federal government. There’s a lot of record keeping that goes, and that typically is passed on to the participants, to the investor. So the average administrative fees for a smaller plan can range anywhere from 0.5% to 1%. So if it’s, if it’s 1% and I’m paying 30, you know, 0.39%. On, um, investment fees, that’s 1.39 or almost $1,400 of a hundred thousand dollars. As the plans get bigger, like a mid-size plan, so this is a plan that has assets of 10 to a hundred million. You know, you’re looking at 25 to 50 basis points, so a quarter of a percent to a half percent. And then larger plans, you know, you’re looking at, you know, 0.10, that type of thing, but then you add the investment. You know, the expense ratio, there could also be flat fees associated with, um, [00:18:00] administrative fees, that type of thing.

Tim Baker: So, you know, it’s important to, to understand this and this, this data is hard

Tim Ulbrich: Yes.

Tim Baker: not

Tim Ulbrich: Yeah.

Tim Baker: statement. It’s, it’s not transparent. We talked about how poor, um, financial services can be in terms of transparency. So you could be paying anywhere from. 20 basis points, 2.2% to 1.5% and not know it.

Tim Baker: Right. Um, so it’s important that, you know, and it’s kind of like the, the, the, the rule that if your employer is bigger, typically the plan is better. Not always. If your, if your employer is smaller, typically the worse it is for a participant. Um, so fees are gonna be a big thing. And, and we, what we talked about too is like the last couple things this year, like if you’re inside of a 401k, you can’t really do Roth

Tim Ulbrich: Mm-hmm.

Tim Baker: Which I think from an asset location perspective, it really limits your, in your, your ability to

Tim Ulbrich: Yeah.

Tim Baker: the tax, um, portion of your plan. Um, and I think just if you’re [00:19:00] keeping it there and you’re collecting 4 0 1 Ks, I think it’s harder to manage a cohesive plan that is pointing in the direction that you need to point it in and, and optimize for what you’re trying to do. So are pros, there’s obviously cons and a lot of the pros and cons will kind of. You know, we are kind of the same with the, the second option, which is kind of rolling it into your, your new 401k. Um, they’re very similar.

Tim Ulbrich: Yeah, and I think as you’re describing some of the limitations of, of a 401k, you know, we, we’ve seen in the clients that we’ve talked with and, and worked with everything from, Hey, I work for, let’s say, an independent pharmacy that doesn’t even offer. A 401k, or if they do, it might have very limited options, higher fee options, right?

Tim Ulbrich: Very small. E employer all the way up to, I work for a, a giant company where we’ve got, you know, may maybe more options, maybe not more options because of the sandbox that you were talking about, but I might have, you know, lower fees on, on the administrative side as well as the investment options. So 4 0 1 Ks are not all created equal, which, [00:20:00] which really plays into this decision.

Tim Ulbrich: What might I do with. This 401k, this old 401k in terms of either leave it or move it or put it in an IRA, and we’ll talk about here in a moment when, when you go from some of the variants, we’re talking about various 4 0 1 Ks, and you look at something like an IRA rollover, at that moment, we’re starting to level the playing field, right?

Tim Ulbrich: Because once we’re into the open market. You know, those limitations aren’t, aren’t necessarily the same that they were, uh, by any means. We’ve got more options to, to be able to choose from, which might might for some, to be fair, you know, this can be overwhelming and, and I think this is where.

Tim Baker: con.

Tim Ulbrich: It’s a con.

Tim Ulbrich: Yeah. And I, I, I think about some of the, the employers that I had early in my career, you know, I remember it was about 15, 20 options as you mentioned. And the visual that was coming to mind as you were talking is, you know, if we’re bowling and we got bumper lanes on, right. In terms of like, I can only, you know, mo move so far, thankfully I can’t put the ball in the gutter.

Tim Ulbrich: So if I’m overwhelmed by, you know, asset allocation decisions or choosing investments or not understanding where those investments might want [00:21:00] to go, you know, there, there’s a limited. Menu of choice, which can be valuable, but also as we start to really build the financial plan in a way that it’s, it’s custom to you and your goals and individualized to what we’re trying to achieve long term.

Tim Ulbrich: Some of those options that we have might be more valuable as well as you articulated, really trying to keep those fees down because as we’ve covered in this podcast many times before the, the erosion of the portfolio that can happen due to those fees can, can be very real over the long, long term. Tim, one other idea that just came to mind that I wanna get your thoughts on.

Tim Ulbrich: Uh, and, and probably I’m bringing my, my own personal experience bias here. ’cause I made this mistake on, uh, Jess and I made this mistake on her 4 0 3 B very early, uh, in, in our, uh, investing career is, it was a very small account, wasn’t there for a long period of time. We, we chose the option one, do nothing.

Tim Ulbrich: Uh, at that time, admittedly didn’t really have a good idea of what were the options available and it became a, a, a [00:22:00] nuisance after a while I remember getting these statements. Uh, in the mail periodically, and it was like just something we weren’t often thinking about, right? Because it was from a year ago, two years ago, whatever the timeline was.

Tim Ulbrich: And because the account was so small, I felt like the combination of outta sight outta mind and the smaller account balance, uh, drew us into the temptation of perhaps the absolute worst move to make, which is cash out that account. So I, I think, you know, if you, if you think of an account that’s relatively small.

Tim Ulbrich: And is kind of an annoyance factor outta sight, outta mind, that tendency, that risk arguably could increase. Versus if we’re able to combine that with other funds and we, we’ve set an intentional plan and strategy for those funds, I think, I think it might minimize the likelihood of making a decision like that.

Tim Baker: Yeah, and I don’t know if this is one up in you, Tim, but I, I think that. I did the same thing, but it was more of avoidance and they, they said, Hey. They basically, they were sending me [00:23:00] letters that said like, if you don’t do something with this, we’re gonna send you a check. Like, so they cashed it out for me. Um, which is obviously a, you know, something that you don’t want to do. Any, any dollars that you have the, the wall of, you know, a, a Roth or a traditional is

Tim Ulbrich: Mm-hmm.

Tim Baker: And, you know, if you extrapolate, extrapolate those dollars out over the course of a career, even if you don’t do anything with it, um, and it, you know, if we’re invested somewhat, um, appropriately, those dollars are gonna

Tim Ulbrich: Mm-hmm.

Tim Baker: and be, you know, potentially substantial by the end of a 30, 40, 50 year career. So, I mean, those are those, you know, some plans have, You have things built into the plan documents that say if they, if you’re not a

Tim Ulbrich: Right.

Tim Baker: a non participant, meaning you’ve moved on and the, the, the, um, account is this small, then they’re not

Tim Ulbrich: Mm-hmm.

Tim Baker: keep you on their books and they’re gonna basically force [00:24:00] a rollover, um, which. Then if you don’t know what you’re doing, you know, you go to cash and you’re paying the 10% penalty plus, plus the, uh, the taxes. So it might not seem that big of a deal, but I think in the grand scheme of things, it can, it can be. So, yes, absolutely. And, and, and again, I’m, I’m, I’m biased here, but I’m like, that’s

Tim Ulbrich: Mm-hmm.

Tim Baker: advisor.

Tim Baker: Just help

Tim Ulbrich: Mm-hmm. Mm-hmm.

Tim Baker: if you can get the statements, an advisor can do the rest. Um, so I think it’s really important to, um, you know, if you, if you’re. I, I, it’s frequent that I talk to, to pharmacists and they’re like, yeah, I have, you know, I have three old retirement accounts.

Tim Baker: My spouse has two old retirement accounts. We’re finally at a point where we just need to figure out, ’cause like, I’ll ask like, well, know, like, what’s your, you know, and if you, and if we add up these accounts, like there might be half a million dollars, 750,000, maybe even more. And I’m like, well, what’s your philosophy?

Tim Baker: Like, how are you managing it? And it’s like, uh. [00:25:00] Don’t

Tim Ulbrich: Mm-hmm.

Tim Baker: think, I think that, and we’ve talked about this before. A pharmacist with the count kind of money that pharmacists make and what they will amass over the, their course of their career. The sooner they answer that question or work with an advisor to help them answer the question, the more efficient and optimized they

Tim Ulbrich: Yeah.

Tim Baker: The longer that you’re like, I don’t know, or it’s in target date funds, and again, I don’t, I’m not hating on target date funds, but target date funds typically. Don’t, are more expensive and their glide paths of how they transition for from equity to fixed income over the course of the life of the fund is typically not in line with

Tim Ulbrich: Yeah. Yep.

Tim Baker: It’s just not

Tim Ulbrich: Yep.

Tim Baker: to me, the sooner that you are. On the path, you know, you’re following a roadmap from a financial perspective, the, the more efficient and it’s, you know, it’s kind of the whole adage of like, work smarter, not harder. Right? And [00:26:00] I think sometimes the dis disjointed, um, investment philosophy across multiple accounts lends itself to just being again, inefficient and wasting time and money that you don’t otherwise have to.

Tim Ulbrich: I think there’s also decision fatigue there. You know, when I think about the, the exam, the example you gave, which is not an uncommon one. You and I were talking about

Tim Baker: Mm-hmm.

Tim Ulbrich: a couple weeks ago and I wrote a blog post on this called The Accidental Millionaire, which is like, Hey, I wake up in my forties and we’ve been saving 10, 15, 20% of our account.

Tim Ulbrich: I. You know, of our income towards various investment accounts, and we wake up and we’re like, oh, wow, we’ve got north of a million dollars a, a fairly common situation. And, and naturally there’s this. Point, not of reckoning, but of like, well now what we, we haven’t really necessarily been super intentional on where we’re going, why we’re going there, what’s the asset allocation?

Tim Ulbrich: What’s the asset location? Are we on track? Are we not on track? I mean, but those unanswered questions can be exhausting and they’re all answerable questions. Right. And I think that’s to the point you’re making [00:27:00] of like, let’s figure ’em out.

Tim Baker: Yeah. I mean, I mean, in the beginning you’re just like, it’s just the start, right? And just get it rolling. And then it’s kind of, you know, you’re kind of shooting first ask questions later, but eventually you need to ask those questions of like, am I truly optimized? And again, like we’re not talking chump change, you know, the, the, the wealth that you should amass over the course of your career. Um. That should sustain you till the end of your life substantial, or it should be

Tim Ulbrich: Mm-hmm.

Tim Baker: um, you know, having a, a plan and a strategy, um, asset location, asset allocation. Again, if all those things sound like foreign to you, that’s okay,

Tim Ulbrich: Mm-hmm.

Tim Baker: you know, but I would say hire an advisor like you need it.

Tim Ulbrich: So option two is we can roll it over to our new employer. So let’s say I worked at a hospital, I had a 4 0 3 b, I left that hospital. I’m now working for another hospital. I do have an option to roll over my [00:28:00] old 4 0 3 B or old 401k to my new employer count. Now this might Tim, bring an advantage of consolidation.

Tim Ulbrich: It could bring an advantage that we have everything in one place. We can see it, we can be intentional. It’s not that out ofci outta sight, outta mind risk that we were just talking about, but it still carries all the similar, same limitations we were just talking about. Of the, of the limited options and fees within the the retirement Plan sandbox, correct?

Tim Baker: Yeah, you, you, you consolidate. So instead of collecting, you know, two or three or 4, 4 0 1 ks, you still have the one, if you leave that job, you can

Tim Ulbrich: Mm-hmm.

Tim Baker: and you still have the one. Um, you know, there are things that 4 0 1 ks offer, like loan provisions and things like that, that IRAs do not, um, that I guess can be a pro, you know, you still have the, you know, the creditor protection, um, under the, the new 401k. it can allow for easier. Backdoor Roth, IRA contributions since it keeps, you know, pre-tax

Tim Ulbrich: Mm.

Tim Baker: out of a traditional

Tim Ulbrich: Mm-hmm.

Tim Baker: So that’s a big, that would be a big plan, uh, plus as well. [00:29:00] But yeah, to your point, the cons are you’re still limited by the investment menu, that you’re still limited by the fees, which I think are substantial compared to, um, an IRA, uh, you can’t do those conversions, which I think are gonna be more important.

Tim Baker: More important down the road. And I think, again, the sooner that you can kind of figure out. How much you should have in each bucket, the easier it is to do. If you’re overly weighted and pre-tax or overly weighted in taxable or Roth, then that’s a problem, um, or can be a problem. Um, and then there’s some plans, Tim, that don’t accept rollovers.

Tim Baker: They just don’t do it. Which I think is becoming more and more rare, but they

Tim Ulbrich: Hmm.

Tim Baker: those do exist. Um, so you might be forced to, to do, you know, to either leave it or roll to an an IRA. So yeah, a lot of the same things. Pros and cons, that you know, your old 401k will follow you to the

Tim Ulbrich: Mm-hmm. Option three, Tim, then is that we could roll it over to an IRA. So we’re gonna move a old 401k, or an old 4 0 3 B, or multiple old 4 [00:30:00] 0 1 Ks. 4 0 3 Bs into an IRA. And I know this is a very common approach. It’s what, you know, I did in my own 4 0 1 a when I left, left Ohio State. Um, and ultimately put that in, into an IRA.

Tim Ulbrich: And the idea is that you could, you know, if you have multiple old accounts, eventually you can consolidate those all into one. So tell us about this option. Why often, but not always. Why often it’s, it may be the preferred option. And, and what are some of the pros and cons here?

Tim Baker: Yeah, so, so the big thing is like, you’re, you’re, you have wider. Investment options, right? So that can be a pro anacon. So you’re, you’re out of the sandbox. You’re not limit to what the 401k offers. And there’s thousands of stocks, bonds, mutual funds, ETFs, that cover all asset classes. So typically of, you know, some of the, the risk associated with investments, 4 0 1 Ks don’t want to do certain asset classes.

Tim Baker: So they say, Hey, we’re just gonna offer these, they’re kind of down the middle and that’s it. [00:31:00] So outside of the 401k and in IRAs, you can really tailor the portfolio to what you want as an investor. So that could be looking at all the asset classes that we mentioned and have a diversified portfolio that way. It could be where you are a vanguard, you’re a boggle head, and you want all Vanguard. Sometimes you can’t do that inside of a 401k ’cause they only offer

Tim Ulbrich: Mm-hmm.

Tim Baker: Fidelity or things like that. Um, most 4 0 1 Ks don’t offer like a digital asset exposure if you believe in that. Um. lot of 4 0 1 Ks won’t allow you to, um, invest directly into stocks outside of the, the, the stock that they, you know, their own, you know, the employer stock. Um, so some people like things like, you know, individual stocks or like right now my brokerage account is invested like direct index in, so this enables you to buy stocks that make up a particular index, like the s and p 500 that has. benefits. So you can book tax losses on positions that [00:32:00] have decreased in value. Um, so these losses can be harvested. Um, even when the, the market is, you know, up overall. So this is another, you know, strategy that one can use that is not available inside of a 401k. And then, you know, if you lean more towards value or growth or emerging market, some of those things might not be available in a 401k.

Tim Baker: So you can kind of get a little bit more nuanced, with what you’re trying to achieve. The big thing here is that. The fees, the fees are often, you know, not the same. So like, like we mentioned, you could be paying north of 1%, one and a half percent, um, in a 401k, which that, that doesn’t necessarily exist in a, in, in IRA.

Tim Baker: Now there’s a caveat, and I’ll get to that in a second. Um, you know, it simplifies the planning, you know, if, if you consolidate counts, which is true if you consolidate a 401k to a 401k. Um, the big thing again, asset location, is that you can convert.

Tim Ulbrich: Yeah,

Tim Baker: IRA, which is

Tim Ulbrich: I.

Tim Baker: with the traditional [00:33:00] IRA to a Roth IRA and do that like this has nothing to do with a, a backdoor conversion.

Tim Baker: This is, I have a hundred thousand dollars in a traditional, I’m not making any money this year. I’m gonna put $40,000 from my traditional to my Roth. Pay the taxes when I don’t make, I’m not making any money. basically now I have $40,000 in a Roth and $60,000 in a traditional, there’s a lot of power in that and the ability to do that in a four in a IRA that you can’t do in a 401k.

Tim Baker: So those levers that we’re pulling, um, as we’re in the accumulation phase to then with then go into the withdrawal phase, that’s work that can be done in the accumulation phase that you can’t do on a 401k. Um. The big thing here, and I think from a, a advisor perspective, is follow the money. So why is my advisor telling me that a hundred percent of my time I should roll it over? Typically it’s because that’s how advisors get [00:34:00] paid. So advisors will say, Hey, I can’t help you unless you have a half a million dollars, or, I, I can’t help you unless I have a million dollars. You have a million dollars. What does that actually mean? That means that that advisor only works with clients that have investible assets of a half a million or a million dollars. Investible assets are typically old, 4 0 1 Ks old, 4 0 3 Bs, IRA accounts, Roth IRAs, brokerage

Tim Ulbrich: Yep.

Tim Baker: Any other, any other accounts are typically not. Accounts that tho that advisor can get managed on. So there’s a conflict of interest there in, in their advice to their, to their client or to a prospective client. Um, and that should be known. And again, I think what we have said often, um, and consistently is that in financial services. We are terrible at being transparent with the scope of work that’s being provided [00:35:00] and the fee that’s being charged. It’s often nebulous in terms of the scope of work. Yeah, we do plan and well, what does that mean?

Tim Baker: Are you gonna help me with my, my 401k that I contributed a lot of times? No. Um, are you gonna help me with my student loans? Are you gonna help me with, um, you know, insurance or whatever that is? And a lot of the case like it is. Not explain and the client is left confused. And then how am I being charged?

Tim Baker: And we went through that whole episode, Tim, is it buried in a, uh, insurance product? Um, is it transparent? Can I actually see the fee or not? So what we have found is that, again, transparency and, and explaining the conflicts of interest are important. So if you have an old 401k. And you can roll it over a lot of the times for the reason that we, we talk about it’s important or it’s good for you to do that.

Tim Baker: However, at YFP, we’re gonna bill part of your fee [00:36:00] from that

Tim Ulbrich: Yep.

Tim Baker: It. And what we have found is it’s more of a sustainable relationship with clients if we’re billing them from the assets that we’re managing versus cash flow. What do I mean by that? What I mean by that is if we’re charging 1% on a $500,000, um, you know, old 401k that we’re managing, that is easier for a client to pay than to bill. Um, and pay out a cash flow or to pay out a credit, a credit card, that money is still your money. Money is fungible. It’s still important to understand that

Tim Ulbrich: Mm-hmm.

Tim Baker: that, but, um, from a longevity perspective, it’s easier to pay from an asset. So a lot of advisors say, I can’t help you unless you have that amount of, those amount of assets.

Tim Baker: So I think it’s just be really important to be upfront. I think what a lot of people do is like, they’re like, oh, well I’m, I’m paying 1%, or I’m paying half a percent at my 401k. Like, it doesn’t make sense for me to roll it [00:37:00] over the apple’s. The orange it is, is that if you’re working with an advisor, if they’re doing it correctly, you get access to a comprehensive plan that is going to not only advise on the asset that they’re managing, but the held away assets and every other a, you know, part of the financial plan.

Tim Baker: Right. So. The, the assets is often, are often the engine for which to pay an advisor. It’s just important to know that upfront, which a lot of people don’t

Tim Ulbrich: Yeah, I think what you’re talking about there is, is transparency, right? In that model and making sure that we, we understand it as you mentioned, where a fee comes from. Money is money. Um, and as long as we, we, we know where it’s coming from. We feel comfortable. We understand that, that that’s really important.

Tim Ulbrich: And, and I’ll add to your, your discussion, why is longevity of the relationship important? Right. What we know, myself included, yourself included, is that the market cycles are going to have significant ups and downs, and we are in this for the long run, not just the long run to like retirement, like the [00:38:00] long run of our funds, being able to continue to grow and produce a retirement paycheck so that inflation doesn’t erode our purchasing power.

Tim Ulbrich: That means that we need to sustain. The progress and the momentum, not only on our investments, but as you highlighted in every other part of the financial plan. And if the market’s going to do what it has done historically in every five years, we’re gonna have a fairly significant drop of, say, 20% or more.

Tim Ulbrich: Human behavior and emotion suggests that most of us, if we do this completely ourselves at one point, if not more than one point, are going to make a mistake, whether it be buy in high or sell low, and not keeping that long-term horizon in mind and a huge piece of the value equation. Again, we’re only talking about investments key part of the financial plan.

Tim Ulbrich: But of course there’s a lot more than just the investment. Part of the plan is to have a person in our corner that is helping us keep the long-term perspective and horizon, uh, in, in mind because we know that it’s [00:39:00] those decisions If we make them irrationally, which. A lot of us, I’ve done it before. I was telling you, you know, before we hit record, like I’m guilty of back in the day, you know, buying Circuit City Penny stock.

Tim Ulbrich: I was convinced him Circuit City was coming back, like laughable. Right At this moment, you know, I, I’ve cashed out an old 4 0 3 B account. Like these things, when we look at the volatility and this season we’re in right now is just a great reminder. You know, if, if you would’ve been napping the last three months, it’s like nothing has happened in the market.

Tim Ulbrich: Right. But if you’re checking your accounts every single day, especially thinking about those people that are nearing retirement or transitioning out, like palpitations might be happening, we, we need someone alongside of us to say, Hey, we’ve got this. We’ve planned for this, we accounted for this. Let the markets do its thing and we’re gonna be able to weather this and look at the long term perspective.

Tim Baker: Yeah, and like, you know, like we, we were talking about like asset location, like in a RoboAdvisor is not gonna

Tim Ulbrich: Totally.

Tim Baker: most and most, again, most, a lot of advisors aren’t looking at that. They’re. [00:40:00] I’ve had so many conversations in the last couple weeks, Tim, where it’s like I’m, I’ve been working with an advisor, you know, they are like the one I had recently.

Tim Baker: It’s like I have a Roth IRA with them. I have a brokerage account with them, and I’m like, why are you funding a brokerage account? And he’s like, I don’t know, I just recommended him. I’m like, are you maxing out your 401k? He’s like, no. Um, so they’re like, they’re setting up these accounts that they can get paid on. They

Tim Ulbrich: a whole life, A whole life policy or, yeah.

Tim Baker: crappy insurance that they, they don’t need, no help on the student loans. No help on, you know, this goal or that goal. I’m like, did you guys sit down and talk about goals? No. So, and again, like, I don’t want to sit here and like, like talk negative about, but like, that, that’s just not serving your interest.

Tim Baker: Like it’s not serving your interest. And, you know, to me, um. You know, I think what we’re talking about is, is again, looking at this from A to Z, you know, and

Tim Ulbrich: Yep.

Tim Baker: it’s, it’s not like, oh, well, we’re not getting [00:41:00] paid on that directly, so I, I can’t help

Tim Ulbrich: Mm-hmm.

Tim Baker: that’s asinine. So it’s really aligning yourself with a planner, I think that has your best interest in mind. And it’s hard to talk about this without kind of sounding like, you know, Hey, these people are bad. I don’t think they’re bad. I just think it, I think it’s the, the environment that they’re, they are in is not conducive to put in the interest of their clients first.

Tim Baker: You could li you could listen to that and be like, and, and be scared away and be like, well, I don’t wanna work with advisor.

Tim Baker: But I also would say that the majority

Tim Ulbrich: I.

Tim Baker: of, of the people listening to this podcast. I think need an

Tim Ulbrich: Mm-hmm.

Tim Baker: on the level of wealth that we’re, that we’re, you know, we’re talking about, um, know, pharmacists are in the, the top 10 to 15% of income earners in the United States. Those are typically individuals that need professional help, that, you know, it becomes more complicated as your estate grows, the taxes all, you know, the complexity, all that. Um, and again, I think the sooner that you get in front of [00:42:00] that, the more efficient you’re gonna be. So, um. But I, I think us speaking about this directly, ’cause I’m just like, you know, I, I kind of get it exasperated. I’m like, why? Like, why? Because like, you know, I’m, and I’m sure there’s examples in the medical world where

Tim Ulbrich: Mm-hmm.

Tim Baker: is this prescribed?

Tim Baker: Or like, what, what

Tim Ulbrich: Mm-hmm.

Tim Baker: on here? And it’s like, you probably follow the money with the doctor’s office, right? No offense to doctors, but I’m sure there’s, you know, we talk, I’ve talked about this, like when I first got into financial services. We’d have mutual fund, whole mutual fund wholesalers come to our office in a fancy car wearing a fancy suit, taking, take us out to a fancy lunch, show us fancy glossaries of their fancy funds, and said, Hey, Tim, when client X, Y, Z rolls over their half a million dollar portfolio, wink like, use our funds.

Tim Baker: And I’m just like,

Tim Ulbrich: Mm-hmm.

Tim Baker: your funds are. 20 times more expensive than, you know, what, what you can get out there. Are they 20 times better from a performance perspective? Are they 20 times safer for the same amount of performance? And often the time is [00:43:00] the, the answer to that is no. So you know, it is kind of following the money.

Tim Baker: And I think most of the time when you ask advisors, they kind of

Tim Ulbrich: Mm-hmm.

Tim Baker: seat about how they arrive at fees or how they get paid or things like that. And I think that’s a huge red flag.

Tim Ulbrich: Yeah, and I think this is really where the fiduciary obligation matters. We throw that term around a lot, but you know, if, if you’re having a conversation with someone about what should I do with an old account? I. Right. We, we, we’ve kind of made the case that in, in many instances, it may make senator to roll, roll it over an IRA, but there may be a case where that doesn’t, for, for whatever reason.

Tim Ulbrich: Um, and so to have that perspective where, you know, yes, this may be where the fees derive, but if that were to be the case or the situation, right? The fiduciary obligations says I’m acting in the best interest of the client as they’re making these decisions. So as we wrap up this third option of rolling it over to an IRA, some of the key benefits I heard you say, were consolidation.

Tim Ulbrich: Right. We have multiple accounts that we can have eyes in one account. We have more investment options. We’re outta the sandbox. We typically can have lower, [00:44:00] lower fees. Uh, as we look at more options. And then asset location, we, we’ve made a case about why asset location is so important and inside of an employer account, we don’t have that same flexibility.

Tim Ulbrich: If we were to want to do things like a Roth conversion, you know, for example.

Tim Baker: And, and if we think about this with the end in mind, like I think if, if I’m building out, like if I’m looking at a client, the, and, and I’m trying to build out a retirement paycheck, I think the perfect makeup of that client in terms of the ability to have a con, like a concentrated focused strategy that I can then spend is. That they have a brokerage account, they have a pre-tax, a rollover, or traditional IRA have a Roth. And then we’re figuring out social security and, and maybe they’re making consultant income and things like that, but that’s essentially it. Like the 401k that they had, we’ve

Tim Ulbrich: Mm-hmm.

Tim Baker: um, they might get some pension dollars.

Tim Baker: That’s great, that’s gravy. But those are the three accounts in which we’re basically [00:45:00] pulling the levers to then say, Hey. You know, you need $55,000 out of your, out of these three accounts, we’re gonna get X per year, or, you know, per month from social security, maybe x from a, a pension, maybe some. But that, that to me is the end in mind.

Tim Baker: You’re not looking at. 401k. Old 401k IRAs. It’s, it’s those three accounts that you’re essentially is your dashboard. I will say, Tim, I just wanna mention, mention the cons on this. So we mentioned of, of doing, going to an IRA, it’s the paralysis by an analysis, right?

Tim Ulbrich: Yeah.

Tim Baker: overthinker, you know, I don’t want these, you know, accounts being stuck in cash ’cause

Tim Ulbrich: Yeah.

Tim Baker: what to do.

Tim Baker: Um. IRAs typically don’t offer loan provisions, which can be both a pro

Tim Ulbrich: Yeah, yeah.

Tim Baker: Uh, the creditor protection might be

Tim Ulbrich: Mm-hmm.

Tim Baker: in bankruptcy, IRAs are protected up to 1.512 million, um, under federal bankruptcy law. So, and then per like, different states have different, you know, things, so that might be something to, to consider. Um, and then moving [00:46:00] funds here could complicate like a backdoor

Tim Ulbrich: Yep.

Tim Baker: um, potentially. So those are are the cons. But you know, to me. To me, this is all about transparency, understanding the conflict of interest, um, and knowing, again, like if you’re gonna work with someone, how does, what’s the scope of

Tim Ulbrich: Mm-hmm.

Tim Baker: does the fee get charged? And then being able to make, you know, a, a decision that you think is best for you. I.

Tim Ulbrich: So we’ve covered three options, right? Option one was do nothing. Option two is roll it over to a new employer account. Uh, option three is rolled to IRA to be complete. There’s technically a fourth option, which would be that you could cash it out. I think we’ve made the case for why that’s typically, if not always, not what we want to do, right?

Tim Ulbrich: So. If it’s something we cash out, if it ever hits your bank account, and it’s not a direct rollover to either a new employer account or to an IRA, we’ve got a tax problem on on a traditional account. So that’s gonna be subject to to federal income tax, state income tax, and often because of when those funds hit and it may be a while till your fire taxes, that might [00:47:00] mean we have a surprise coming at tax.

Tim Ulbrich: Tax filing time if we weren’t thinking about what the impact of that was gonna be. So that account’s gonna take a major haircut. Um, and so if at all possible, especially if they, we have a lot of time for that money to grow compound for time, value, money to work its magic, we wanna let those funds continue to do that.

Tim Ulbrich: Uh, whether it mean a rollover or one of the other options we’ve already discussed. All right, as we wrap up here, um, we’ve covered several options of what you can do with an old 401k, 4 0 3 b. As a reminder, we’ve got a brand new guide, uh, that will help give you some more information on this topic. You can download that guide Bests and wor Worst Moves to Make with an old 401k.

Tim Ulbrich: By going to your financial pharmacist.com/moves. Again, that’s your financial pharmacist.com/moves. And if you’re listening to this, say, Hey, I’d love to have a conversation to learn more about Y fps one-on-one fee only financial planning services. We’d love to do that. We work with pharmacists virtually all across the country.

Tim Ulbrich: Uh, you can book a discovery call by going to your financial [00:48:00] pharmacist.com. You’ll see an option to book a discovery call. Tim Baker leaves, leads those calls, typically 45 to 60 minutes in length. It is an opportunity for us to learn more about your financial situation, your goals, what’s going on, not only with something like an old account, but what’s going on with the rest of the financial plan.

Tim Ulbrich: What are the goals? What’s our progress? How are we tracking? We can share more about our services and ultimately see whether or not there’s a good fit for there. So again, your financial pharmacist.com, and you can click on the option to book a discovery call. Tim Baker. Great stuff as always. Uh, thanks so much and, uh, wishing everyone a great week.

Tim Ulbrich: Take care. Thank you so much for listening to this week’s episode of the YFP Podcast. And if you like what you heard, please do us a favor and leave us a rating and review on Apple Podcast or wherever you listen to the show, which will help other pharmacists find the podcast. Before we conclude, I wanna again, thank this week’s sponsor of the Or Financial Pharmacist Podcast, first Horizon.

Tim Ulbrich: First Horizon offers a professional home loan option, a KAA doctor or pharmacist loan that requires a 3% down [00:49:00] payment for a single family home or town home for first time home buyers. 5% for non-first time home buyers, has no PMI and offers a 30 year fixed rate mortgage on home loans up to 8 0 6 500 in most areas.

Tim Ulbrich: The pharmacist’s home loan is available in all states except Alaska and Hawaii can be used to purchase condos as well. However, rates may be higher and a condo review has to be completed. And finally, an important reminder that the content in this podcast is provided for informational purposes only, and is not intended to provide and should not be relied on for investment or any other advice.

Tim Ulbrich: Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. For more information on this, you can visit your financial pharmacist.com/disclaimer. Thanks so much for listening. Have a great rest of your week.

[END]

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YFP REI 134: From Pharmacy To Real Estate: Why This Couple Invests in Raw, Vacant Land

Posted on by Caitlin Boyle

Quynh and Tri Vu, two professionals who transitioned from pharmacy and IT careers into real estate, share their journey into investing in raw, vacant land and building Secure Land Co.

Episode Summary

Quynh and Tri Vu, two professionals who transitioned from IT and pharmacy to real estate, share their journey into investing in raw, vacant land in this episode of the YFP Real Estate Investing Podcast.

Joined by hosts Nate Hedrick, PharmD, and David Bright, PharmD, Quynh and Tri walk through their early steps in real estate, starting with single-family rentals and moving into the world of short-term rentals like Airbnbs. As their experience grew, so did their ambition, leading them to explore diverse markets and ultimately carve out a niche in the often-overlooked space of raw, vacant land.

They break down what makes land investing unique, detailing the due diligence required, the creative value-add strategies they use, and how they evaluate properties with potential. Along the way, they also share how they balanced their demanding careers while building a real estate portfolio, leaned on community and mentorship, and eventually took the leap into full-time investing through their business, Secure Land Co.

Whether you’re just getting started or looking to diversify your real estate strategy, this episode offers valuable insights, encouragement, and practical advice from two people who made the leap and never looked back.

Key Points from the Episode

00:00 Welcome and Introductions
00:21 Quynh’s Pharmacy Journey
01:43 Tri’s IT Background
02:12 Diving into Real Estate
02:32 First Steps in Real Estate Investing
03:45 Transition to Land Investments
12:44 Balancing Careers and Real Estate
19:04 Starting a Land Investment Company
19:57 Why People Sell Their Land
20:12 Methods of Acquiring Land
21:35 Becoming Private Lenders
22:17 Due Diligence in Land Investment
23:40 Understanding Mineral and Water Rights
25:46 Value Add Potential in Raw Land
26:50 Owner Financing and Selling Notes
31:17 Diverse Uses for Raw Land
34:18 Getting Started in Land Investment
35:31 Final Infusion Questions

Episode Highlights

“If someone doesn’t want their property, sometimes they’re just happy for someone else to take it over. And a lot of the opportunities that we’ve gotten are from people, sometimes they don’t want the land anymore. They may have inherited it, and they’re just paying back taxes on it. They never wanted it to begin with. Or maybe they bought land thinking that one day they’re going to move there and retire, but their retirement plans might have changed.” – Quynh Vu [19:41]

“When I first thought about land, too, I was thinking beautiful farmland, really green rolling hills. We don’t have that. We have mostly a lot of land that’s in the desert, and people who want land in some of those areas, it’s high desert, higher elevation. So they may want the land to go camping. They may bring out their RV there for, you know, a weekend, a long, like a week trip, or something like that. But they just want land for that purpose.” – Quynh Vu [31:54]

“ We have properties that are as low as $2,000 and some of them around $20,000. So there’s a huge range in terms of the cost of the land. So, for a lot of families, it may be more reachable for them.” – Quynh Vu [33:50]

Mentioned in Today’s Episode

Episode Transcript

[00:00:00]

Nate Hedrick: Hey, Quinn, try welcome to the show.

Quynh & Tri Vu: Hi. Thanks for having us. Hey.

Nate Hedrick: Absolutely. Yeah. Really excited to have you guys here. Uh, Quinn, you and I got the Connect a couple weeks back, and I just, I loved your story, loved that you guys were doing this together. And so we wanted to have you on to discuss, uh, all things real estate, all things pharmacy, and, uh, uh, why don’t we start there then with pharmacy.

Nate Hedrick: Tell us a little bit about your background, um, your, your professions and kind of, uh, uh, how you got there.

Quynh & Tri Vu: Okay. Um, well, I graduated from the University of Texas in Austin and when I graduated I became a pediatric clinical pharmacist. Um, so I worked as a pediatric pharmacist for most of my career. And then even within pharmacy, I was like super involved. Like I did, um, you know, the C-B-I-C-U, the PICU worked night shift, IV room.

Quynh & Tri Vu: Just pretty much everywhere. And I also worked in retail too. So I worked in a community pharmacy ’cause I was a intern, a tech, like all of that stuff, even before pharmacy school. Um, and then back in like 2014, I started kind of [00:05:00] like getting really tired of like working night shift, weekends, holidays, all that stuff.

Quynh & Tri Vu: And my kids were pretty young. I. So I transitioned into like being a manager in the inpatient pharmacy. ’cause I thought it would be like a little bit easier to be a manager, but it was still like pretty crazy. Um, uh, so then after that we went, I worked at an adult hospital too. Went into management, worked, did healthcare administration at adult hospital.

Quynh & Tri Vu: And then the last few years of my career, I worked at a biotech company and did, um, you know, worked with the development team so they can create software for analytics for healthcare organizations.

Quynh & Tri Vu: Yeah, that was for pharmacy. We had a sweet Walmart, 10% discount back, back in the day. Really helpful.

Nate Hedrick: Tri, you are, you are not a pharmacist, right? So I, that doesn’t exclude you from the podcast, obviously. But we still, we still love hearing everyone’s background, so.

Quynh & Tri Vu: Yeah. Um, I’m a recovering IT guy. I was doing it in Dallas and then Austin doing the big boom with [00:06:00] Dell. And uh, then we moved out to California and, uh, yeah, just stayed in that space till about two years ago.

Nate Hedrick: Yeah, we’re gonna dive into that for sure. So it’s great. Thank you.

David Bright: Yeah, both of those careers at face value don’t really scream like real estate, so I’d love to hear how that jump happened. Or how that expansion happened, or what got you excited about real estate. Maybe just give us like the 32nd overview of the things you’ve done in real estate. Just like you gave us the 32nd overview of the variety in your career.

Quynh & Tri Vu: Yeah. So, um, I think we just bought single family houses just for ourselves, right? Just as a owner. And then maybe about eight years ago is when we broke into like Airbnbs and, uh, all the bigger pocket stuff kicked in. Like we did it all like long term rental, short term, midterm. And then, uh, out of state we got into doing burrs and flips.

Quynh & Tri Vu: And uh, I think the last one was like commercial with [00:07:00] partnerships. We moved into, uh, uh, vacant land, raw vacant land. No power, no literacy, nothing. The best one.

David Bright: So. And I feel like that is a, a departure, like you hit long-term rentals, short-term rentals, midterm rentals. We’ve talked about those on different episodes, and we can link to some of those in the show notes where that feels like the very kind of traditional real estate investing, a residential house just like you had bought personally, and then you buy that to rent it out outta state.

David Bright: Flipping those kind of things make sense, but vacant raw land. Is such a departure. So can you just give us the quick pitch of why anyone would invest in raw vacant land?

Quynh & Tri Vu: Okay, so I was actually, so I had left pharmacy, um, back in 20. Was it 2022? Yeah, 2022. And during, when I left pharmacy, I was working as a residential [00:08:00] real estate agent. And part of it was because our friends kept asking us like, Hey, what are you guys doing? And I was referring a lot of. Clients to my realtor and he was like, why don’t you just get a license?

Quynh & Tri Vu: And then I was like, okay. So I got a license and I started selling houses and um, I was also in a mastermind, so twice in like GoBundance men, and there was a female mastermind, GoBundance women. And I had a good friend who was a land investor. She was doing like Airbnbs, she had long-term rentals, short-term rentals, commercial property, all that stuff.

Quynh & Tri Vu: But she said the thing that she liked the most was land. And I actually didn’t really understand it at all. And she told me she just, you know, bought land from people. She didn’t really, um, she bought land from people who didn’t want it anymore, and then she would sell it to someone else. I was like, well, what would you do with it after you buy it?

Quynh & Tri Vu: Like, do you have to improve it, make it better? And she’s like, no. She just remarket it to someone who’s looking for that type of property. And I was just really [00:09:00] fascinated by it. So then I was like, well, I wanna do what you’re doing. ’cause it sounds to me like you’re just a bank that happens to sell land.

Quynh & Tri Vu: ’cause she told me she also did own our financing for those properties as well.

Nate Hedrick: Hmm. Yeah, and I wanna dig into that because I feel like there’s so many things to unpack there. So, so again, this journey of like. Short-term rentals, long-term rentals, traditional real estate, all the way to this, this step that really we haven’t discussed before in the show. I think it’s unique to a lot of people. Um, but how did you make that initial switch? Like whose idea was it to say, you know what, pharmacy it, like, it’s fine, but let’s think about adding real estate into our, into our portfolios.

Quynh & Tri Vu: We, I think Quinn read like Rich, that poor dad way back in the day and uh, you know, the four hour work week. And we were like, we’re, we’re too poor to do this. Right? We didn’t have any money. We had, we had like a thousand bucks savings after two years or something, and we were like, we can’t afford it. So it just kind of sat there in the back of our heads thinking.

Quynh & Tri Vu: Awesome. And, uh, you fast forward to about [00:10:00] eight years ago, nine, nine years ago, I had, uh, probably my second or third midlife crisis and, uh, she went into management and then first and like 10, 11 years ago. And then I went like shortly after. But, um, man, they don’t, sometimes they don’t train you and you just, you know, ’cause you’re, you’re doing technical stuff, you’re doing well and then you just kinda.

Quynh & Tri Vu: You know, uh, get promoted. I’ve seen a lot of pharmacists too, right outta high school. They’re managers now. Like, how did that happen? You know, you know, so it’s kind of the same situation where like, uh, you’re doing well, they think it would transfer over to other areas. And, uh, we had just a lot of issues with, um, with a lot of outages.

Quynh & Tri Vu: ’cause I was doing operations and um, I was just pulling, I was working like 9:00 AM to like 9:00 PM and after about six months, Quin was like. You gotta find another job. Like it was just, this is too much. And uh, that was like, all right, I gotta do something. I can’t keep, I can’t sustain [00:11:00] this. And years of bigger pockets, like all that.

Quynh & Tri Vu: So subconscious stuff was kicking in, like, try, sell everything, get into real estate. And, uh, I went to meet up, met a realtor that was pitching an invest, like how to invest in, you know. And, uh, single families. And I was like, all right, sign me up. And I didn’t know about loans, I didn’t know about anything.

Quynh & Tri Vu: And then he was like, you don’t have any money. So I had to get a heloc. It took another month. I came back to him, I got money now, and he’s like, all right, let’s go find land, or, uh, let’s go find a house. And I was pretty much making an offer in every house. Like the walls were crook and all sorts of stuff.

Quynh & Tri Vu: We had like GCs coming by, they were walking away like, don’t get it. And I was like, no, we have to do it. We have to do it now. Um, yeah, we was just like, you know how like when you suffer and struggle so much, like the pain is so like you had to do, like, it causes the change. And we were kind of at that point where we were just like struggling with like just too much work and uh, and we didn’t [00:12:00] know how to manage other, and we had to change something.

Quynh & Tri Vu: So that’s kind of when the, when all the equity was like, you gotta do something with equity, it just sits there. It makes no no sense. And all those books and podcasts just kind of kicked in.

Nate Hedrick: I love that we’ve got both of you guys on the show because one of the things that we don’t get to talk a lot about is like, what that was like as, as a couple, like figuring that out as partners. So Quinn, were you immediately on board, like, no, no reservations, like he’s taking. The HELOC and you’re like, yeah, let’s do it.

Nate Hedrick: Buy a house.

Quynh & Tri Vu: No, I was like very, very nervous ’cause I was not listening to BiggerPockets and I was scared and he kept like leaving to go to these meetups and come back, like really excited. And um, every time he would. Know, find a deal. He would like show me. And he was like, oh, what do you think? I’m like, oh no, that’s not good.

Quynh & Tri Vu: Not a good deal then. And then he would like keep coming back to me and say, Hey, like, what questions do you have about it? Let’s talk through that. And then, you know, I felt like that was, he was really patient with the fact that I was like still like nervous and trying to work it through [00:13:00] it with me. And then eventually he was like, okay, well at what price would it make sense?

Quynh & Tri Vu: So I like couldn’t say, no, it’s not a good deal. He was like, what price would it make sense where like all of the risk and stuff would not feel like risk. Um, so then I started like doing like more research and kind of like reading some of the books that he was listening to, listening to the podcast and just getting a better understanding of it.

Quynh & Tri Vu: And I was so nervous because I, I even told him like, we already have one mortgage, like, why would we want another mortgage? And we have four kids. So we wanted to live like in a nice neighborhood, good school district, flat street, cul-de-sac, like very traditional. We never wanted to even get a fancy house where we could only afford under two incomes.

Quynh & Tri Vu: We wanted a house we could afford under one income. ’cause that’s how conservative we were. Um, financially, I. So I was really, really nervous when we started, but I’m, I’m glad that I didn’t like just say, you know, I had to like, learn [00:14:00] more about what made me nervous. But I do think that if you’re at the point where you don’t know the difference between a good deal and a bad deal, you shouldn’t do anything.

Quynh & Tri Vu: You need to figure out at least that much.

David Bright: Yeah.

Nate Hedrick: think that’s great advice and I really like how try approached it of like, Hey, what is the number that makes sense? Is it a dollar? Are we buying this house for 10 bucks? Like, is that the only way this makes sense? Like, well no. Okay, so what is the number? Right? Rather than just none of these work, we’re not buying anything.

Nate Hedrick: I think that’s a great, like bring you along sort of a thing. And then you took the initiative to actually learn the pieces and do the deal analysis and I, I, I think that’s great. ’cause that’s hard for a lot of people out there and I’m sure there’s a ton of people listening right now. One of them is super interested in real estate.

Nate Hedrick: The other one has. No radar for that at all. And so how do you bring those pieces together?

Quynh & Tri Vu: And you know, the other thing too, Nate, that I was, I thought I was being like very conservative because, um. I didn’t wanna invest and try was like saying, well, you know, having only one source of income is kind of risky too. And I never looked at it like that until [00:15:00] he said that.

Nate Hedrick: great point.

David Bright: Yeah, that I, I love that mindset shift of what really is risk. And I think taking that on the question of like, what questions do you have? Creating a lot of that conversation, open communication, I. Sounds like that was all part of this trick that got you to buy the first house, right? And then eventually, it sounds like there was more than that, right?

David Bright: So how did that growth look? And uh, and particularly from a pace standpoint, like you guys described eight or nine years and you’ve already done all these different things, like I think that feels really intimidating to a lot of people. So I’m curious how that story evolved, uh, into the next house, the next house, the next house.

Quynh & Tri Vu: We were just all in. So we got the HELOC that first year, and we bought a house. Then six months later, we’re like, all right, it is working. Just do it again. We spent the rest of the HELOC and then we had to save up ’cause we ran outta money. We’re like, all right, let’s do it [00:16:00] again. So. I saw this chart, you can’t see it back here, but it was a little pyramid, like one year, two doors next year, four doors next year.

Quynh & Tri Vu: It was just a stack, right. It just stacked up and I loved it. And uh, it was two doors, four doors next year, eight doors, and then there’s a little break ’cause we were literally broke. Right. And, uh, ’cause like when you’re in real estate, you’re just stacking money away. All the money you make just goes right back into more property.

Quynh & Tri Vu: It’s delayed for, for sure. Uh, yeah. So that, that little pyramid really helped us, like kind of see the vision and it was kind of gamifying it. Um, but yeah, so we just saved money and reinvested everything.

Nate Hedrick: And during all that, like again, you’re both pretty serious careers. I mean, again, really involved in your careers at the time, even though you’re trying to start making this transition out like. Did you manage that? How did you maintain the balance? Like, was that, was that difficult or, or try, did you just totally step away and say, okay, I’m all in on real estate, let’s make this happen.

Quynh & Tri Vu: Well, the first [00:17:00] couple were Airbnbs and they were local and.

Quynh & Tri Vu: Pretty, um, assertive, uh, property manager helping us. We hired a property manager before we self-managed, and then, uh, we’re like, she’s not doing anything. We could do it. And we got greedy and we started doing rentals by the room. And, uh, that made a ton of money, but that was a ton of work too. Um, so we’re like, all right, we can’t, this is not sustainable.

Quynh & Tri Vu: We had like four listings outta one property. Like it was like four times as much work. But, uh. Was it the Bur book or the long distance investing book? Um, we started like looking, uh, out of state. It was a commercial and BiggerPockets, one of the intros or outros they had is promo, Hey, we do it all. We buy, flip and find a person and then you just buy it from us and we manage it.

Quynh & Tri Vu: And I was like, easy button, let’s do it. And uh, we went the, the property managed route, they find flip property, manage it. And we just did that for, uh, the next couple. [00:18:00] Um. We, we had this problem of shiny object syndrome. So you’re one market and you just keep on buying in that same market. So we got into like eight states or something, uh, just because that looked cool.

Quynh & Tri Vu: That looked cool. Okay. That number looks right, just buy, buy, buy. And um, so yeah, that’s how we kind of scaled, uh, unnaturally through all these other states and through property managers helping us scale.

Nate Hedrick: That’s awesome. Wow.

Quynh & Tri Vu: As far as the balance, yeah, we just had to leverage the, the other, uh, the teams and the, uh, the property managers teams to, to take care of everything.

David Bright: It sounds like it’s part of your story because you hinted earlier, like up until a few years ago, you were doing these things, so it sounds like there. Was some kind of like titration away from your careers and into more real estate. Um, and I know that there are some people out there that are looking to that.

David Bright: There’s some people out there that love their, their pharmacy job and they wanna stay in that. And I can totally [00:19:00] respect both of those avenues, but you guys have done both. So I’m just curious, since you’ve been in, in both of those, you know, the kind of the pros and cons or what made you think now is the time to make that jump?

Quynh & Tri Vu: I, I love this question because when we got to the point where we’re so busy between work and family, and then even if you’re not managing the rentals directly. Everything bubbles up to the owners. If there’s an insurance claim that needs to be made, if there’s some type of complaint, sometimes Airbnb calls us directly.

Quynh & Tri Vu: So we were still like involved and try kind of mentioned like, Hey, one of us needs to leave our job. Do you wanna go first or do you want me to go first? And I was like, I definitely wanna go first. I don’t even know what going first means. I,

Nate Hedrick: That’s awesome.

Quynh & Tri Vu: and then shortly after the following year left his. Those, those good advice that someone gave us. Like if you both were gonna check out and leave your careers, don’t do it the same year. Like one person [00:20:00] does it one year, someone else do it the next year. And um, I guess we were in the circles where like everybody was entrepreneurs and it was like, man, I gotta be one.

Quynh & Tri Vu: I need to leave my job. But. You know, I still, I, I really liked it and, um, it was kind of like a part of a identity thing, to be honest. It’s hard separating it. I’m sure you guys know, like, you know, what do you do? Who are you? You just naturally say, Hey, I do a tech, or I, I’m a pharmacist, and separate. It was hard.

Quynh & Tri Vu: And then when you all in as a entrepreneur, you still kind of miss it. So, um, I don’t think it’s for everybody, like some people are, if you’re good and you like what you do, just stick with it and give someone else money. And then invest passively. Like, you don’t need to like, figure out how to do real estate.

Quynh & Tri Vu: It’s a, it’s still a job until it isn’t a job. Right? So, um, I didn’t think about that initially. Like, flipping houses is literally another career. Like, why would you, if you’re good at tech, why would you learn another skill and have to like rema, you know, take [00:21:00] years to master that before you get good and great at it when you just gave someone the money and then they do it and still enjoy your job.

Quynh & Tri Vu: So. In hindsight, like you didn’t have to follow, we had like shiny object syndrome where I did at that point, like, I need to leave, I need to do, you know, entrepreneurship, give it a shot when like, I liked tech still, like even though it was like operations support, long hours, like it was super fun with the team fixing stuff.

Quynh & Tri Vu: So it really depends on your person.

Nate Hedrick: Yeah. I’m glad you mentioned the identity thing too, because I think a lot of people struggle with that. Even just in like, like for example, like when I got my real estate license, people were like, oh, so you’re done being a pharmacist? Like, well, no, hold on. Like I’m still working. Like you can have two things, but nobody talks that way.

Nate Hedrick: You just like, what is the thing you do for work? Like, or what is what? What do you do? Right? It’s not like. And everyone expects you to be like, I got a degree in blah, blah, blah, and I do x like, and that’s it. Uh, and so I think that’s, that’s a good thing for people to hear is like, it, it can be many things and that’s, that’s enjoyable as well.

Nate Hedrick: So I [00:22:00] think that’s, that’s a really good point. You, you, you landed on.

Quynh & Tri Vu: Yeah. And you know, there’s a lot of skills that I think we learn in our professional careers that translate into real estate investing, which it’s not like, okay, completely foreign. I mean, it’s very data-driven, which pharmacy is. Um, and just like kind of following, hey, what worked well for other people?

Quynh & Tri Vu: So like, just looking at actual case studies, um, other people who have been successful around us, I felt like has really helped us. So having that professional background, I feel like I. Really did kind of give us an advantage. Um, but if you were to just start researching and learning, like we didn’t go to school for, for business, so we kind of felt like when we’re learning about real estate, we had to like learn, we had to read books, we had to listen to podcasts, we had to like go to like a different type of school to learn about it.

Nate Hedrick: I think that’s great though. Like, and, and you have the skills. Both of you like to go in, out and do that, right? We’re all lifelong learners if [00:23:00] we, if we believe that, so that there’s a way to go out and, and get that information, so that’s great. So, so I know now you guys, today you run this, this, land investment company.

Nate Hedrick: I, I want to dig into that. ’cause again, that’s something we’ve not discussed on the show in the past. I think there’s a lot to a lot there. Um, so those listening are probably more familiar with, again, the long and short term rental stuff. But, but give us kind of the background of like, what does it look like to flip raw land?

Nate Hedrick: Like you’ve mentioned it a little bit, but like give us the kind of the, the details of like, looking for these properties and, and how you turn that around.

Quynh & Tri Vu: So great question. Um, in terms of like land, it’s very similar to traditional real estate in that you wanna buy low and you wanna sell high, right? And if someone doesn’t want their property, sometimes they’re just happy for someone else to take it. Take it over. And a lot of the opportunities that we’ve gotten are from people.

Quynh & Tri Vu: Sometimes they don’t want the land anymore. They may have inherited it, they’re just paying back taxes on it. They never wanted it to begin with. Or [00:24:00] maybe they bought land thinking that one day they’re gonna move there and retire. But their retirement plans might have changed. They may have had grandkids in a different part of the country and now they wanna live closer to their grandkids.

Quynh & Tri Vu: So, um, in terms of like how we get deals, we similar to like, you know, people who are doing flips and developments, they’ll send out letters to people asking like, Hey, do you still want your property? Or Have you ever considered selling? Do you know how much your property’s worth? So we do those things in terms of outreach.

Quynh & Tri Vu: In order to acquire land and acquire is sometimes people, even within the land space. They want a change, like everything looks greener on the other side. So they might like, Hey, I don’t wanna be in this state anymore. I wanna be in another state to buy my land. So then they’ll sell us all of their land.

Quynh & Tri Vu: So that’s another way that we can, you know, acquire property. So there’s a lot of different ways. Um, sometimes we buy land from wholesalers. Sometimes [00:25:00] we buy land from tax auction, and sometimes we buy like loans from people. So a lot of different ways in which we can acquire land.

Nate Hedrick: So really similar, honestly, it sounds like, again, we’re talking wholesalers, talking, you know, multiple people that want to get out of a tired investment. Like it almost sounds like you could be talking about single family rentals. That’s cool.

Quynh & Tri Vu: The same thing. So we were doing like cold when doing residential, and it’s literally the.

Quynh & Tri Vu: And then, um, on the tail end, which is kind of new, is like we unintentionally became private lenders when we sell or finance these lots. Um, you could buy lots just like your mortgage gets transferred or sold to another service provider, right? We just found that out recently in the last like six months, a year, that you could buy and sell these notes.

Quynh & Tri Vu: So as we build our portfolio of notes, so we sell our [00:26:00] financed. Buy or sell these things as well. So it’s a new niche that we,

Nate Hedrick: Yeah, that’s interesting. So, so just like, again, like people are buying and selling notes on, on other properties, it’s kind of the same sort of strategy,

Quynh & Tri Vu: yeah, they don’t have to wait as long to recoup.

Nate Hedrick: I. Tell me about, um, due diligence. Like, I’m trying to think of a difference now, right? Like you’re, you’re, you’re teaching me how, how similar it actually is, but like, what about due diligence? Like, you’re not sending out an inspector to see if the roof is collapsing, right? ’cause it’s just trees and bushes and like, so what is that process like for you guys?

Quynh & Tri Vu: Yeah, I mean we have like a team that does like due diligence for us, and what they do is they fill out a report and it has things on there, very basic. Like, Hey, what, how big is the property? What is the parcel number? Um, what is the zoning, what’s the legal description? Is there back taxes owed on it? Um, are there any easements on the property?

Quynh & Tri Vu: Um, you know, [00:27:00] does it have like legal access? Does it have direct road access? So the, the questions that we’re kind of looking at are a little bit, they’re similar to residential real estate, but it’s actually a little simpler because we’re like not worried if the the roof is old. We’re not worried if Central or not No.

Quynh & Tri Vu: Of that stuff. Easier. Yeah. We’re selling one of our rentals and they’re like, Hey, how this list right now? And they’re asking, how old’s the roof again? What about the hvac? What year? I’m like, man, I haven’t heard about that in a while. Have to worry about that. You know? Is there power? No isity, no water. No.

Quynh & Tri Vu: You know, so.

Nate Hedrick: The, the one thing I’ll, I’ll ask then, what about like mineral rights? Does that come up or does it vary based on the property? Like if you know that it doesn’t matter for this property, you just kind of ignore that, or like how does that work for you guys?

Quynh & Tri Vu: That’s, that’s actually a really good question and that’s a common question that we actually get from clients that are, and many [00:28:00] times, like when you buy property, it’ll say something very vague, like if there’s.

Quynh & Tri Vu: It doesn’t say whether or not they actually have mineral rights and most of.

Nate Hedrick: Right.

Quynh & Tri Vu: And if you actually want to have mineral rights, you may have to go through a, like a separate search. Like there’s a specialized company who will kind of trace back through and similar to like title being transferred, mineral rights being transferred, and um, there’s like an hourly rate that they charge just to check.

Quynh & Tri Vu: And even if nothing comes up, you still have to pay that. So we haven’t really. Um, trying to get mineral rights in any area. We just tell people like, we, we don’t know if we have anything, and we just kind of leave it at that. But the other question people do ask though is, do you have water rights? And most of the properties that we do buy.

Quynh & Tri Vu: You know, they’re asking for water rights because they wanna have a well, and many times you can have a well without having any special water [00:29:00] rights. So it may not even be necessary, but they think it’s necessary to ask. So it’s just a good question that comes up pretty often.

Nate Hedrick: Yeah. Cool.

David Bright: I would imagine a lot of these are are like state dependent or area dependent, where there’s probably nuanced questions that exist in certain areas and not in others. Then as well.

Quynh & Tri Vu: Yeah, so we’re in, I think 11, 11 different states now for our land, and every county has different rules and regulations. Every state has regulations too. So depending upon the zoning where the property’s located, we have kind of like a little quick. Tip sheet sheet on each of the properties when people call, ask about it.

Quynh & Tri Vu: Um, our sales team, it.

David Bright: Okay. Um, we’re making so many comparisons to the single family space, one of the other things that I think about is, is the value add. Like, I think we’ve all done the, the thing where you buy an ugly house and you make it pretty and suddenly it’s worth more. Is there a lot [00:30:00] of value add potential with raw land, or is it even easier than that where you’re simply buying and selling without making any improvements or doing any direct added addition to value?

Quynh & Tri Vu: Yeah, there’s opportunities for sure. You get entitled. Subdivided, you could put in easements when they don’t have an easement, you talk to the neighbors to negotiate that kind of stuff. So there’s definitely opportunities to do all that stuff, just like residential, where you could just buy and just sell it to another wholesaler, to another flipper, and then just make the, you know, the margin and the sale or the assignment.

Quynh & Tri Vu: You could do literally the. And, um, because we are buying property from people who don’t want it anymore in, we’re buying it below market value substantially. So the value is.

Nate Hedrick: Hmm. And you mentioned earlier too, about owner financing. Are you, are you doing a lot of the, uh, those properties in that way where your, your finance. It through the owner because they’re [00:31:00] just, they’re looking to do anything with it, or are a lot of those being bought outright and then you’re financing them yourselves, or how does that work?

Quynh & Tri Vu: We started out by, um, when we wanted out a new market, we would get properties.

Nate Hedrick: Mm-hmm.

Quynh & Tri Vu: we weren’t like a lot money in a new area that we, uh, experienced in. And then after we started doing well. Those areas, then we would start buying and mailing out. That’s how we kind of break in by, um, buying owner finance properties.

Quynh & Tri Vu: And then, uh, we, when we acquired the properties, we would own it outright and sell it. A majority of ’em we would own outright and sell it, uh, on terms or sell our finance. That’s probably like 90% of, uh, the business initially. And, uh.

Nate Hedrick: Wow.

David Bright: Wow.

Nate Hedrick: That’s awesome.

Quynh & Tri Vu: Yeah, a lot of sales through, uh, owner finance. I think we sold like 30 last year, and I like, oh, we went crazy. That that was a little too much. Like [00:32:00] we didn’t mean to sell. We were like, man, that’s a lot of money. We just, you know, a little pocket of change right there. So we kind of got gungho selling notes.

Quynh & Tri Vu: And then, uh, we recently started buying notes as well. Um, this year we picked up, I don’t even know, 20.

Nate Hedrick: that’s great.

Quynh & Tri Vu: But yeah, the notes, um, we haven’t played too much in it. Like we’re just kind of winging it, literally. Like it works, let’s just do more of it. And, uh, yeah, so we like notes, but, um, it’s great for cash flow. You’re just getting passive, kind of like passive money, right? You just, you know, they’re just making payments on it.

Quynh & Tri Vu: Um, but the big liquidity events of, uh, if you do a flip or a cash, uh, those are nice too. So I think we’re, our new focus is to balance that out more with more cash flips and, uh, where, um, cash retail prices as well. Yeah. Um, I kind of wanted to mention that because of the space that we’re in, [00:33:00] most people, they cannot go to a bank.

Quynh & Tri Vu: To get a loan. So we’re, we’re lending to them and you know, we’re not doing very many checks on like their credit and their how worthy they are to be a buyer. However, we’re holding onto the deed, we’re selling to them on contract. So if they stop paying us, we still hold the deed and we have the ability to remarket that property.

Quynh & Tri Vu: And it’s now at a lower cost base. There’s no process because. Never had title.

Nate Hedrick: Yeah.

Quynh & Tri Vu: So it’s a nice, it’s a weird way. There’s a, there’s a few nuances that you’re gonna have to undo. Uh, think about residential, like re residential. Like you have when you buy the house, you get a loan, you have the title to the house, right?

Quynh & Tri Vu: Like it’s in your name. And then if you stop paying the bank with foreclosed to get it back, not like that land in our situation. And, uh, there’s a few other like weird things, [00:34:00] residential.

Nate Hedrick: I think it, it’s funny you mentioned that because like one of the things I think about with residential especially is like if you buy a house and like even if it. It goes really sideways, right? Things, things are way more expensive than you thought. Like at least you still have a property that you can sell.

Nate Hedrick: Like in my head, my first thought is like, I bought this raw farmland from this guy and now nobody wants to live here, and I’m stuck with this big parcel of land. Like, what do I do? Like, do you guys go through that? Is that ever, like, is that a problem? Or are you just like, no, we find perfect land every time.

Quynh & Tri Vu: So what do you usually do, right? You find markets that, uh, do well? How do you do that? You run comped. What has sold in last six months, 12 months compared to what has listed days on market? You literally do the same thing. Uh, the only caveat is if I own finance it. It’s not recorded. The title doesn’t change, so you don’t know I sewed it at all.

Quynh & Tri Vu: So when you run comps, you may have to run comps on what’s listed versus what’s been sewed because it hasn’t been like recorded yet. So it’s a little bit of a [00:35:00] twist. Like you, you know, I don’t know how long it’s been listed. It’s still listed like, you know, as it been sewed. So you’re gonna have to kind of play with other investors in that market to figure out if they’re really selling it, if they’re not selling it or financing it, or, you know, they just, they don’t sell.

Quynh & Tri Vu: So that’s the tricky part.

David Bright: I, I feel like another thing I would have to undo. From the, the residential side is, I feel like from everything I’ve done on the residential side, the purpose of land is to put a residential structure on it. You know? So, and it sounds like not everything would, even in this world, would even, like, the purpose would be to build anything on it, residential, commercial, anything. It sounds like some of the, the land uses. Outside of that, can you help people kind of get outta this box of residential and think about what other land uses may be where someone would want to rent or buy land for, for different purposes?

Quynh & Tri Vu: Yeah. No, that’s, that’s such a good point because when I first thought about land too, I was thinking like [00:36:00] beautiful farmland. Right, like really green rolling hills, we don’t have that. We have mostly a, a lot of land that’s like in the desert and people who want land. Um, in some of those areas it’s like high desert, like higher elevation.

Quynh & Tri Vu: So they may want the land to go camping. They may bring out their RV there for, you know, a weekend, a long, like a week trip or something like that. But they just want land for that purpose. Or maybe they have dirt bikes or atv. And they want a place to kind of like romp around without being bothered by people.

Quynh & Tri Vu: Um, other people want land as like for off-grid living. They may be planning to build like a tiny home. They do not want to be on any type of public utilities. Like they want to be on septics solar. They don’t want to be, um, subject increases in. Like increases in rates, like, you know, your water bill, your [00:37:00] electricity bill, like as those rates increase, like they don’t wanna be to deal with that kind of thing.

Quynh & Tri Vu: They wanna live off grid. Um, the other type of person that might wanna buy land is someone who is thinking about doing homesteading. They’re really worried about where their food comes from and what’s going into that food. So they may want to, you know, just have land just to know where their food is coming from.

Quynh & Tri Vu: And then other people want land for legacy. We have a lot of grandparents that are getting land just to pass on to their kids, and they don’t really care what you can do with the land. They just wanna say like, Hey, I’m giving this to you when I pass away. And the costs, you know, it, it would be hard for a grandparent to give like.

Quynh & Tri Vu: 20 pieces, 20 properties, 20 houses away. But because like some of the properties that we do have in the vacant land space, I mean, we have properties that are two, [00:38:00] 2000 as low as 2000. And some of them, you know, like around 20,000. So there’s a huge range in terms of the cost of like the land. So it’s, for a lot of families it may be more like, like reachable for them.

Nate Hedrick: So if you’re out there, and I guarantee there’s somebody listening right now that’s like, okay, this sounds like my thing. I don’t want to deal with leaky roofs and tenants and stuff. Like I’m in, like I, you guys have sold me. Like how do you get. on this. How do you get started? Is like, like you said earlier, like is it all just education or do we like where, where, where’s the first step?

Quynh & Tri Vu: I mean to school for it. Like I signed up for like a.

Nate Hedrick: Mm-hmm.

Quynh & Tri Vu: Program. We went through flight school and then we did, that was like a 12 week program where we learned like kind of the basics about land investing. And then after that we signed up for a one year coaching [00:39:00] program where we had like a land investment expert kind of walk us through as we grew our inventory and portfolio.

Quynh & Tri Vu: We just wanted like a double check and guidance as to like where we should buy.

Nate Hedrick: I love that. I think that’s so relevant to so many people. Listening is like, you don’t, it doesn’t just magically show up in your head like, you have to go out and, and learn this stuff. Like, I think that’s super important. Yeah, I love that. it. Alright, well we wanna take you guys. This has been great.

Nate Hedrick: I wanna take you to our, our final infusion questions, three questions we ask all of our guests that come on the show. So a bit, bit of rapid fire here. Um, but if you, uh, could each, each respond we’ll have, we’ll have Quinn go first on each one of these. Just kinda give you your response. Um, so the first one is, what’s one tangible strategy that you used to make sure that your investing was working hand in hand with your career?

Quynh & Tri Vu: I. It [00:40:00] should match your lifestyle, right? So if you are at the point where you’re so busy, right, like you’re driving kids around and you’re working a ton of hours, evenings, weekends, holidays, it might not be a good idea to start flipping houses, right? Because, you know, like you have to, there’s a lot of like management.

Quynh & Tri Vu: And you, it’s hard for you to physically be there if you’re like at your other job, or even if you decide you wanna take on property management and you’re working like at the hospital or at a community pharmacy, that’s probably not a good idea either, because you’re gonna keep getting interrupted. So I would say whatever you’re deciding to invest in, I would say to see if it aligns with your lifestyle.

Nate Hedrick: I like that.

Quynh & Tri Vu: Yeah, I, I would build on that and say, you gotta know yourself too. So if you’re anxious and you’re, uh, you get nervous, like, and you’re indecisive, right? And then you need like [00:41:00] the black or white answer, maybe not entrepreneurship right? Is a thing for you. Maybe give the money to do it passively. So know your, uh, know your personality.

Quynh & Tri Vu: And, uh, the second part is like, do it with, do it with the community or tribe, whatever that looks like to you. Right? So if you have a friend that’s doing it, or you could join a, a mastermind group, like do it, like, don’t, you don’t, you don’t have to suffer alone. Uh, if you’re still gonna make the plunge and decide to go that route anyhow, and, you know, start investing actively, like do it with some, some friends or NA community to, to help guide you along that journey.

Nate Hedrick: I like

David Bright: Yeah, I love the team sport mentality ’cause there’s so much of that in healthcare that we’re all used to and uh, as you mentioned on your IT team, like how much fun that can be to do this, to do whatever you do with a team. So finding that same in real estate, I think that’s powerful. second question is, what’s one resource that’s been most helpful to you in your [00:42:00] real estate journey, whether that’s a book, podcast person, author, website, whatever that would be?

Quynh & Tri Vu: Um, I would say for me. I think it was bigger pockets when I first, um, when TRI started listening to it, and then I started listening to it. I think the stories that really resonated the most with me were when someone was still working their regular job and they could still do something on the sides.

Quynh & Tri Vu: Like there were stories about bakers that were, you know, doing like rehabs and. I don’t know. The more similar that person was to me, like if they had a family, if they had kids and they were working and they could still invest in real estate, I felt like that really made me feel like it’s possible for a regular person to learn this, uh, for me and my latest craze is, um, podcast this guy.

Quynh & Tri Vu: He reads these fat [00:43:00] biographies of these greats, these legends, right? It could be, uh, new people like Elon and, and Bezos, but it could be like OGs, like old presidents and stuff. So he reads like a ton of these books and dissects it for you. So you’re getting like free mentorship cliff note version with a guy that knows a bunch of adjectives.

Quynh & Tri Vu: So it’s super like, you know, just fun and like, man, that, that wow me. So I.

Quynh & Tri Vu: All the little thing nuances. You know, in the classroom someone raises their hand, they have a question. Yeah, that’s a great question. That’s what’s doing.

David Bright: Yeah.

Nate Hedrick: That’s a great tip. We’ve not had that on the show, so that’s awesome. Alright, and then you guys have already dropped a bunch of this, but I’ll ask it anyway. What if you had to give one piece of advice to somebody just starting out in real estate investing, what would be that one piece of advice?

Quynh & Tri Vu: For me, it would be just learning. Like, don’t [00:44:00] feel like it’s too much to take on. Um, you know, it’s okay to be a beginner and just like, enjoy being a beginner part of, um, part of it’s just learning and making mistakes. Making mistakes, and I feel like, um. Being an expert is someone who has made the most mistakes in an area.

Quynh & Tri Vu: So learning about other people’s mistakes and you know, just learning, always keep learning. I feel like that’s the best way for you to feel better about what type of investment makes sense for you. Yeah, for me, um, you are the average of the five closest people you time with. Man, when you’re flipping the switch and you’re investing and you’re pulling out money outta your heat, like you’re taking a second loan and all that stuff, you’re gonna have family and friends that are like, you’re nuts.

Quynh & Tri Vu: So you gotta protect yourself and surround yourself with people that, you know what? I’ve done it and yeah, let me double check you. It looks good. So I wouldn’t say I had a lot of that in my [00:45:00] life. I was like, don’t. Um. Your target shouldn’t be, your goal shouldn’t be to avoid people like that. Your goal should be going towards people or doing what you wanna do, right?

Quynh & Tri Vu: So, um, you know, we were just looking forward towards like, man, this guy did like all these guests that you guys have on your show. Like, lemme talk to them and then next thing you know, you have a little local chapter meetup or something, or remote chapter meetup. And you get that inspiration, passion up early

Quynh & Tri Vu: versus avoiding, you know what away.

David Bright: I love it. I love it. If people wanna reach out, learn more about y’all, find you, where can they find you?

Quynh & Tri Vu: Okay, so they can, you guys can find us on Instagram. We’re secure Landco, we we’re also on YouTube at Secure Landco. Um, we’re also on Facebook, uh, or you can find [00:46:00] [email protected]. So we’re, if you start us, I think you’ll find us.

Nate Hedrick: Perfect. Well guys, thank you so much for coming on the show, sharing all your knowledge. I, uh, as usual when we have a really good guest, my head is spinning with new ideas and now I’m gonna like go out and send mailers to go buy raw land. Like I just, this has been great. So thank you guys so much for coming on and sharing all this with us.

Nate Hedrick: I.

Quynh & Tri Vu: Oh.

David Bright: Thanks so much.

[END]

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YFP 407: Ask YFP: Using 529s for Student Loans & Buying Bitcoin Efficiently

Posted on by Caitlin Boyle

Tim Ulbrich and Tim Baker answer two questions from the YFP community on using 529 funds for student loans and the most cost-efficient ways to invest in digital assets like Bitcoin.

Episode Summary

In this episode, YFP Co-Founder & CEO Tim Ulbrich, PharmD, is joined by YFP Co-Founder & COO Tim Baker, CFP®, RLP®, RICP®, to answer two insightful financial questions from the YFP community.

First, they explore whether it makes sense to use 529 plan funds to pay off student loans. Tim and Tim break down the relevant provisions of the SECURE Act, highlight key limitations and tax implications, and discuss scenarios where this strategy could be beneficial—or not.

Next, they tackle a question about buying Bitcoin efficiently. They compare the most cost-efficient ways to invest, including using various platforms, ETFs, and tax-advantaged accounts like IRAs. They also weigh the pros and cons of each approach, including fee structures, accessibility, and long-term considerations.

Whether you’re considering how to best use your 529 funds or exploring your first steps into cryptocurrency, this episode provides practical, pharmacist-specific guidance to help you make informed financial decisions.

Key Points from the Episode

00:00 Welcome to the YFP Podcast
00:42 Question 1: Using 529 Funds to Pay Off Student Loans
03:35 Options for Overfunded 529 Plans
16:56 Question 2: Buying Bitcoin and Digital Assets
33:24 Conclusion and Listener Reminder

Episode Highlights

”This is not your dad’s 529 plan anymore. What I mean by that is that they continue to make these, I think, more favorable. You have more exit opportunities, if you will, right, in terms of how these funds might be used if you run into a situation like an oversave situation, which I would argue is a good problem, right?” – Tim Ulbrich [11:40]

”When you buy a spot Bitcoin ETF, you don’t hold the Bitcoin directly.

You just have shares of that fund. But the fund essentially owns it and you have a partial ownership of the fund. So when you buy it on Coinbase or Robinhood, you’re an owner, right? Your keys are on that ledger. And it’s there for public consumption.” – Tim Baker [19:44]

“ I own Bitcoin both ways. I own it through an ETF, and I own it directly. And part of me is worried that one day I’ll wake up and I’ll hear a story that X, Y, Z was hacked, and all of my Bitcoin is gone. It’s just the reality, right? And that’s one of the downsides of digital assets.” – Tim Baker [20:48]

Mentioned in Today’s Episode

Episode Transcript

[00:00:00]

Tim Ulbrich: Hey everybody. Tim Ulbrich here and welcome to this week’s episode of the YFP podcast where we strive to inspire and encourage you on your path towards achieving financial freedom. YFP co-founder, COO and Certified Financial Planner, Tim Baker joins me to answer two questions. I. Came in from the YFP community one on whether or not it makes sense to use 5 29 funds to pay off student loans. And another question on the most cost efficient way to buy digital assets like Bitcoin. you have a question that you’d like us to feature on an upcoming episode, head on over to your financial pharmacist.com/ask yfp to record your question or send us an email [email protected]. Alright, let’s take our first question from the YFP community, which came to us via email. Tim, what are your [00:01:00] thoughts on using 5 29 savings as a vehicle to pay off student loan debt? Tim, we were talking before the show, maybe a couple different ways to interpret this question. So what? What are your thoughts?

Tim Ulbrich: I.

Tim Baker: Yeah, and we actually interpret it differently. So, um, you know, I. You know, I, I think I, I was looking at this question as almost like, um, using the 5 29 as like a pass through. So like I, I’m a student loan borrower and I have, you know, let’s just say I have $50,000 left to pay off. You know, one of the things that you could do is I could open a 5 29 and I’ll use State of Ohio, which was where we lived, Tim.

Tim Baker: I could put in for this year, $4,000 in my own name, get a state tax deduction for that, and then, you know, if it grows, great, if not, but I can basically just take that $4,000 out and then pay off, you know, 4,000 out of the 50,000 that I still have, [00:02:00] you know, left to pay. So. That is an option, right? That you, you can, you can absolutely do.

Tim Baker: Um, I think the way that you interpreted, and correct me if I’m wrong, it’s like, you know, you were thinking about it from the, the standpoint of like, Hey, I have student loans, but I’m also saving for my kids’ education. Could I potentially use some of what I, you know, am put in towards the boys’ education for my own student loans?

Tim Baker: And I think that is actually an option as well. Now, the big thing, this was one of the, the big things that. Um, either the Secure Act, uh, in 2020 basically allows for, you can now use up to $10,000 lifetime per beneficiary from a 5 29 to pay qualified student loans. So I, I’ve kind of been on record like to say like, I don’t love the the 10,000 lifetime beneficiary ’cause it’s such a drop in the bucket, especially with the kind of loans that we see, but.

Tim Baker: You know, I think that, I think that cap should be higher, but I would imagine that like [00:03:00] lawmakers are trying to preserve the intended use of the 5 29 and not turn it into like a tax loophole or safe haven for like wealthy families. So I would imagine that’s why, um, it just feels like it’s very inconsequential.

Tim Baker: Um, but yeah, so I think you, I think both of those scenarios, Tim can actually. Like happen, right? So you could say, you know, you, you could say, Hey, this, this, you know, maybe you, maybe, you know, your, your youngest has like the least amount. You could say, Hey, this is now my 5 29. You know, I peel off the 10,000 lifetime amount.

Tim Baker: Apply that to my, um. My own loans and then maybe, you know, recategorize that 5 29 back to your youngest. So I think that’s an option. I, I think what I, what the way I want to answer this question, you know, it’s kind of similar to like, you know, when you leave an employer, like what do you do with your 401k and there’s like a, a myriad of options.

Tim Baker: Like you can leave it, you [00:04:00] can cash it out, you can transfer it to an IRA, you can, you know, roll it over to your current employer. So I kind of wanna look at that. This question this way. So like what are the options if you’ve overfunded a 5 29, um, and let’s us just assume, Tim, that there’s no more school for your child, right?

Tim Baker: So I’m gonna use Olivia as an example. Olivia Baker, great student, great swimmer, she’s a junior Olympian. And the breaststroke great kid. But like, I think the way that I would look at this is, um, if she goes to school. And let’s say, you know, she has money left over to me. The, the, the, the, the number that I’m looking at right now is the magic number for Overfunded five 20 nines is 45,000.

Tim Baker: And I’ll kind of break that down here in a second. So the options that we have with Olivia, so let’s assume she goes through school and maybe she gets scholarships or whatever. What do we do with that Overfund at 5 29? The, the one thing that you [00:05:00] could do is you could change the beneficiary, which is kinda what we just talked about.

Tim Baker: Like, yeah, I could change, you could change it in your name, pay off your student loans, and then change it back so you could change the beneficiary to siblings. So I could, I could change it to Liam. I could change it to Zoe. I could change it. To, uh, grandchildren that might not be here. I could change it to aunts and uncles, my parents, nieces and nephews.

Tim Baker: I could change it to Shea if you decide to go back to school or even myself, like we talked about that. So there’s a lot of, there’s a lot of flexibility. What, what to do with that. Um, this, the second option, which we just talked about is what you, you can use $10,000 to pay down student loans. So this applies to the original beneficiary and each of the symbol.

Tim Baker: And so I, this is one of the things I have to clarify. It’s like I, I think I would be able to use it for myself, but I’m not clear on that. You know, one of the, one of the things I was recent researching it says is fors. So if we look at it from that perspective, then for the Baker family, I see this as like a $30,000 benefit, right?

Tim Baker: 10,000 for Olivia, 10,000 for Liam’s student loans, 10,000 [00:06:00] for Zoe student loans. The other option that also opened up in the Secure Act was. The rollover to a Roth IRA that started in 2024. So you can now roll up to 35,000 lifetime from a 5 29 to a Roth. Um, and there’s some contingence, but that’s where I get the, the 45,000.

Tim Baker: So in my mind, those dollars in all intents and purposes are for Olivia’s education. However, to me, if she has. $50,000 in that account when she’s kind of through school, then I think I would probably leave 40, 45, 10 for potential student loans if that were to pop up. And then 35 to roll over to kind of get started on her retirement saving.

Tim Baker: And then I might take that five. And apply it for Liam or Zoe or something like that. The big conditions here, Tim, is that the, the five 20 for us to be able to roll over to a Roth, the 5 29 has to be open for at least 15 years. So we’re thinking like a long-term play. The rollover is limited to the [00:07:00] annual Roth IRA contribution each year.

Tim Baker: So right now that’s seven. Thousand dollars. So you’d have to do it, you know, um, over basically a five year period, seven time, 7,000 times, five years. Now, those, those limits will be different in the future. And the beneficiary of the Roth IRA must be the same as the 5 29. So there’s some hoops that you have to jump through.

Tim Baker: Um, but outside of that, the two other options that I see, and we kind of talked about this. Um, is you can save for future generations. So there’s no time limit on when the funds must be used. So I’ve always looked at this as like the last resort. So like if we, you know, and that’s one of the big fears, people like, I know about five 20 nines ’cause it’s limited in use, blah, blah, blah.

Tim Baker: In my mind, like if I’m given money to grandkids in the future, I’m good with that, right? Like. It’s a good problem to have. Right? And it’s a great tool for multi-generation wealth transfer for the purposes of education. And then the last one that, which I know you’ve brought up that’s like it’s not the end of the world, is like you can always make a non-qualified [00:08:00] withdrawal and pay taxes and penalty, the 10% penalty.

Tim Baker: You typically pay ordinary income tax on the earnings, plus a 10% penalty on the earnings, um, which is not, again, the end of the world. So to me, like the 5 29 as a. Tool to pay off student loans. Yes. Like you can do that. The, the problem is, is that it’s a $10,000 lifetime limit, but I’m also looking at these other avenues potentially, you know, and, and again, like the 45,000, you know, dollar limit.

Tim Baker: Like I’m, I’m thinking of this as like, if there is money left over. It’s probably because Olivia did something that allowed her to kind of not pay as much for, you know, like, I’m thinking like scholarships, right? So I don’t wanna, I still would wanna reward her. So like, you know, I was just kind of checking our numbers of like what we will project to have for her.

Tim Baker: Um, I think we did this exercise in a previous episode. Um, so I just updated those [00:09:00] numbers and, you know, we’re, we’re about 60, you know, we talked about the one third rule. Right now we’re on track to save about 60%. Um, so for her, the future value of her four year education, um, so she’s 10 and a half now. So really in seven and and a half years, we’ll pay about 175,000.

Tim Baker: We’re on track to save about a hundred, we’ll call it 105. Um. So, but we could, we could get there and she could get a swim scholarship and now we have 105,000. And we’re like, what do we do with that? You know? And I think that’s when we start kind of going down that decision tree of like, let’s, you know, let’s keep that 45 for her for potential 10,000 student loans for, you know, 35,000 in Roth.

Tim Baker: And then potentially peel some of that money off for Liam, for Zoe, for whatever. Um, so I think it’s a great question and kind of, you know, again, we interpret it very differently, but I think there’s, I think one of the, the, the feelings for a lot of parents is like, am I locked into this? And I think there’s just a lot [00:10:00] of wiggle room of what you could do with those dollars.

Tim Baker: Um, and I think we’ll continue to be, you know, opened up and, and flexible. But at the end of the day, I think the very last thing that you could do is just pay the 10% penalty. It’s not the end of the world.

Tim Ulbrich: Yeah, and I think, um, a couple things of reference. Great stuff, Tim. Um, you know, as you were walking through your example calculations for Olivia.

Tim Baker: Yeah.

Tim Ulbrich: reminded me of that episode we did previously, which I wanna make sure we have reference. So that was 360 8. How much is enough for kids college and and the premise of that was we talk all the time about saving for retirement, determining your nest egg. I remember one day, a couple years ago, you had this aha of like, why don’t we apply this same mindset to kids college, right? We have

Tim Baker: Right.

Tim Ulbrich: of thumb framework, the third, a third, a third. We’ve talked about that on this show before, Same for kids. College is a mathematical set of assumptions.

Tim Ulbrich: Just like we think about retirement, sure things may change, will change. Markets will kind of do their thing depending on how we have those invested, but we should be able [00:11:00] to plan. In a similar fashion, especially if we’re looking at this over a long period of time, you know, 15, 18 years that we’re, we’re saving.

Tim Ulbrich: So, um, I wanna make sure we reference that episode as well as two 11 when we talked about the ins and outs of the 5 2 9 college savings plan. So I know some of our listeners, especially may, maybe mid, mid-career pharmacists that have some kids that are in high school, a little bit older, getting ready to go to college, perhaps well versed in this topic, but for others that. Maybe younger kids are wanting to learn more about what, what is the 5, 2 9 and, and how might it fit as a priority of investing in the financial plan given all these other things I have going on, right? Whether it be just starting a family, buying a home, saving for retirement, student loans that are hanging around, how might this fit in as a priority with other. Investments and other things, other goals. So make sure to check out that episode as well. you know, one of the thoughts that came to mind as you were talking is like, thi this is not your dad’s 5, 2, 9 plan anymore. What, what I mean by that is we’ve talked at length the show [00:12:00] that they continue as you highlighted just a few moments ago, to make these, I think, more favorable.

Tim Ulbrich: You, you have more exit. Opportunities, if you will, right? In terms of how these funds might be used if you run into a situation like an over save situation, which I would argue is, is a good problem, right? Whether it be because, hey, my kid got a scholarship, they didn’t think they were gonna get a scholarship or, you know, perhaps they decided that it was a different career path than than college and, and now we’ve got funds, we gotta figure out what to do it.

Tim Ulbrich: There are more exit opportunities now than ever, including some of the most recent ones you mentioned, like the Roth. Conversions, and we’ve got a plan and, and there’s certain details that we’ve gotta think about in doing that. Um, but there are more options than we’ve had before in terms of how these funds can be used.

Tim Ulbrich: And of course, everyone’s situation is different. You know, I’m thinking about parents that might have larger families where there’s multiple kids, or the likelihood of more grandkids versus a single child and what that might look like. So everyone’s [00:13:00] situation, of course, is different, but. I wanna reemphasize that because I, I had a conversation just last week, Tim, with a faculty member at a college who was given advice by a non fee only financial planner.

Tim Ulbrich: And so a shout out to the most recent episode we did on five questions Ask when Hiring a financial planner. the advice was, Hey, you work at a university. Your kids could go to the university of which you work and, and go there for free, which could happen and that’s an awesome benefit, but also may not happen. Um, and therefore like, don’t put money in a 5 2 9 and instead buy a whole life insurance policy. And you know, I,

Tim Baker: I’m shaking my for. Yeah, for, for those that are not watching the video, I’m shaking my head. I, I had a, I had a similar conversation where, you know, somebody was talking about a 5 29 and the advisor was saying, um. They were saying two things. They were saying, don’t put money in a 5, 2, 9, and actually don’t put money into your 401k, [00:14:00] put it in a brokerage account.

Tim Baker: Um, or like an IRA and, and I was like, I was asking the, I know this is the tangent, but I was asking the question. I’m like, you know why they said that, right? Like, not to put money in the four five, the 401k, and not to put money in a 5 29. They’re like, no, why? And I’m like, because they don’t get paid on those accounts.

Tim Baker: So you get. Yeah, like they’re held away accounts, you don’t get paid. I mean, advisors can get paid on a 5 29. Um, like when I was prac, when I was practicing my first, you know, job in financial services, there was a Maryland 5 29, but we used the Virginia 5 29 for most of our, our clients. And you know why that was, Tim, is because Virginia 5 29, at least at the time, like it was open to advisors to get to, to set up and get paid.

Tim Baker: So even though the Maryland. Uh, clients weren’t getting the state benefit like we were. We were be, we were benefiting because we could like earn commissions on that. So like, yeah. I mean, [00:15:00] yeah. Not to cut you off, but like, it’s that, that kind of stuff just like makes me angry.

Tim Ulbrich: Yeah, and what was frustrating about that is, you know, we talked about this when we did the episode on five key key questions to ask for hiring a financial planner is, you know, there’s some half truth slash good

Tim Baker: I.

Tim Ulbrich: in there. Like of course, you know, if I were to still be working at Ohio State, my kids can go to Ohio State.

Tim Ulbrich: Awesome. Like, that’s a great benefit, but one that may not happen. You know, they might say, Hey dad, by the way, like. not cool. I don’t want to go to Ohio State

Tim Baker: Right.

Tim Ulbrich: or, you know, whatever would be the scenario. Um, then also, like that doesn’t just mean like, okay, go, go buy a whole life insurance policy instead because I’m gonna earn a commission off of that.

Tim Ulbrich: So, you know, I, I think it was one of those things that there’s still a lot of advice out there that I hear in talking with pharmacists. I know you hear as well, not, not just that related to the example I gave, but that are operating under. of the older rules in construct and framework around 5, 2, 9 plans.

Tim Ulbrich: [00:16:00] It didn’t have the flexibility and options that it might have today.

Tim Baker: Yeah.

Tim Ulbrich: and so, you know, I think that’s something to be aware with.

Tim Baker: Yeah. And I think the last thing that I would, I would just interject here that I didn’t say is that like. You know, if your student gets a scholarship, you can withdraw up to the amount of the scholarship without penalty. You’ll still owe income tax on the earnings. But like, you know, like if, if your, if your kid gets a, you know, a $30,000 a year scholarship to go to x, y, Z school, like, you can take out $30,000 a year without, you know, without, you know, paying that 10% penalty.

Tim Baker: So, again, like it just, you know, there’s just lots of different avenues. To go down to potentially, um, you know, exhaust those funds before you, you know, you get to the point of like, with, you know, making a non-qualified, you know, withdrawal. So, but it’s, it’s a preference, right? Like, you know, I’m just thinking about this whole like, you know, buy a whole life policy.

Tim Baker: It’s, you know, like, Hey, you don’t have to worry about education ’cause you, you know, you work at the university, it’s almost like don’t save [00:17:00] for retirement ’cause you know you’re gonna get an inheritance or something. I don’t know, just it, it’s kind of silly to me.

Tim Ulbrich: All right. Great stuff. I’m sure we’ll talk about kids college more. Um, second question, but, and before I go into this second question, which is around digital assets and, and buying Bitcoin, I wanna reference people, we did a two part podcast series on this topic, so especially for, for folks that. Cryptocurrency digital assets might be more introductory to where this does or does not fit into their financial plan. Make sure to check out those episodes. 3 86 3 87. We’ll link to those in the show notes. We talked about definitions of cryptocurrency, digital assets, some of the origins risks, investment considerations, tax implications, really good comprehensive overview of cryptocurrency, digital assets.

Tim Ulbrich: So great background information. Check out those episodes. Tim, with that backdrop, the question is. What is the best way to buy Bitcoin? What are the pros and cons of using a tax sheltered account versus a brokerage account? And what is a cost efficient way to buy Bitcoin [00:18:00] in a brokerage account using Robinhood versus an ETF?

Tim Ulbrich: What? What are your thoughts here? I.

Tim Baker: Yeah, so very three very different questions, so I’ll kind of unpack them in turn. So the best way to buy Bitcoin, I think this is kind of somewhat analogous to. Like real estate. So like if I’m a real estate investor, you know, I can be a direct owner where I buy a property, let’s say a single family home, and I’m dealing with all of the things, right?

Tim Baker: I have to deal with tenants repairs, contractors taxes, HOAs agreements, things like that, versus the other end of the spectrum, I can just buy. A reit, you know, a real estate investment trust, and that’s probably the most passive way to own a real estate. So a lot of listeners, if you’re not familiar with a reit, you actually might be an investor in a reit, you know, in your 401k or an IRA.

Tim Baker: It’s, it’s a, it’s a very, um. Popular way to invest in, in real estate passively. So if I, if I apply that analogy to [00:19:00] say Bitcoin, you know, purchasing a property directly is kind of like pur purchasing, you know, Bitcoin directly on a platform like Robinhood or Coinbase, Kraken, Gemini. But you’re dealing with a lot of the things and it’s private keys, hot and cold wallets, tax reporting, maybe some worry over, you know, a partial or.

Tim Baker: Permanent loss. So just, just a lot more, even though you’re a direct, you know, owner and there’s benefits of it for that to that like you just have more worry versus like you could just buy the spot. Bitcoin ETF, which launched, I think that was the beginning of last year and it’s probably the most passive way to own Bitcoin.

Tim Baker: So I don’t know if there is a best way. I think if you are more of the keep it simple stupid type of approach, like the spot Bitcoin, ETF is probably the better way. Um. If you like a little bit more of the hands-on then buying it directly I think is. Probably better, right? So when you buy a spot, Bitcoin, ETF, you don’t hold the [00:20:00] Bitcoin directly.

Tim Baker: You just buy sh you have shares or of like, of that fund. But the fund essentially owns it and you have, you know, a partial, uh, ownership of the fund. So when you buy it on Coinbase or, or Robinhood, you’re, you’re an owner, right? Your, your, your keys are on that, on that ledger. And, and it’s, you know, there for public consumption.

Tim Baker: So. Again, like when I talk about real estate, there’s often people that are like, oh yeah, I’m all about it. And then when, when we kind of get into the, the nitty gritty of it and I, I get to the end of like, my presentation, I’m like, if all of this is kind of overwhelming, and we kind of talk about like, you know, um.

Tim Baker: Different, different types of real estate investment. It’s not just like a single family home. There’s hacking and um, just different ways that you can invest in real estate. If you get to the end of that presentation, you’re overwhelmed. I’m like, just buy a reit. And actually, like most of our portfolios, we we’re in real estate.

Tim Baker: Um. I think it’s the, kind of the same, the same way. Because you know, I own Bitcoin both ways. I own it through an ETF and I own it [00:21:00] directly. And part of me is worried that one day I’ll wake up and I’ll hear a story that X, Y, Z, um, was hacked. And like all of my Bitcoin is gone. It’s just something that’s, it’s the reality, right?

Tim Baker: And that’s one of the, that’s one of the downsides of digital assets. So, um.

Tim Ulbrich: a thought here real quick to, to tack on what you’re saying. Um, and not, not an investment advice by any means, but, you know, I look at my portfolio, I’m, I’m interested in some exposure for the reasons that we talked about on previous episodes, but

Tim Baker: Yeah.

Tim Ulbrich: I. I have zero interest in, you know, kind of maintaining that myself, but I respect the people where this is partly a hobby, you know, like they, some people just geek out on like going through the transactions and, you know, dealing with the wallet, you know, stuff and figuring out how all of that, uh, fits in.

Tim Ulbrich: Just like, you know, sometimes people like to take a small percentage of their portfolio and do some individual stock type of trading and track that. So I, I think it’s a little bit of like, know thyself in terms of, [00:22:00] first where does this, might it fit overall in your, your financial plan. And I think, you know, for, for our clients, speaking about them in particular, it’s a great conversation to have your financial planner, with the financial planning team of like, is this something I want exposure to in my portfolio?

Tim Ulbrich: And then if yes, does that look like? Right. And I know you’re gonna continue on in terms of some of the types of accounts as well.

Tim Baker: Yeah. Yeah. I mean, it, it, it definitely is that there’s a lot of people that are like, you know, I’m, I’m at a point now where this is not a gimmick. I think, you know, digital assets are here to stay and, and I think the, the advent of the spot Bitcoin spot, Ethereum, ETFs, that launch is. A logical next step for them.

Tim Baker: Like they don’t necessarily have to be wanting to, you know, they don’t wanna deal with hot and cold wallets and private keys. And I completely understand that part of me, what you described is that nerd of like, you know, building, you know, I was invested in digital assets before the, the spot Bitcoin ets, but you know, even, even now, I’m like, eh, should I be doing that [00:23:00] a hundred percent there?

Tim Baker: Now I won’t sell my, I won’t sell my directly held coins, but like I know that there’s risk. If I continue to buy or if I continue to hold them, you know, because of what I just described. So, yeah, just it’s kind of understanding where, where you’re at in that spectrum. So the second question, you know, that was asked is like, what are the pros and cons of using a tax sheltered account versus like a brokerage account?

Tim Baker: And I would just answer, this is like any other investment, right? So like, well, let me just say this, like to, in most cases, the IRA. Um, are, unless, unless it’s a self-directed IRA, you’re typically not holding Bitcoin directly in those IRAs. It wasn’t until, again, the spot Bitcoin. That’s why Ethereum, I. Came out that, you know, the, the general, you know, the broad, um, based investor had access to that.

Tim Baker: So [00:24:00] once those happened, then it really opened up kind of the three main options for tech sheltered versus brokerage account. So the tax sheltered being the tax deferred, which is traditional gross tax free. It’s text coming out. After tax or Roth is tax going in, but you know, gross, tax free, um, and then not tax coming out.

Tim Baker: And then the taxable or brokerage account, which you’re gonna pay capital gains on, right? So, you know, short-term capital gains, if it’s, you know, bought, you know, bought and sold inside of a year and then long-term capital gains if it’s, um, held for longer than a year. So, you know, with an asset that is, that is potentially, um.

Tim Baker: Very much appreciable. I think that’s a word, meaning you buy it and then your hoping that, you know, what’s Bitcoin priced at it right now? Like 93. 93,000 per per Bitcoin. You know, there are some that believe. That, you know, [00:25:00] that it could go up to 250, 400 50,000 per coin, right? So in that case, like something like a Roth would be very, very attractive, if not a traditional.

Tim Baker: And then probably last but not least, the taxable. Now the, the problem with the, the tax sheltered accounts is that for you to access that, do those dollars. And actually spend and consume them. You typically have to be 59 and a half, or there’s a slew of other exceptions, whereas a taxable account, you can access that today.

Tim Baker: Right? So I would just answer this as like any other, um, any other investment. However, if you think that Bitcoin. Will continue to go up and it’s, you view it as a very appreciable asset and something like a Roth is probably the best thing to potentially, you know, pay the tax now, but that asset grows tax free.

Tim Baker: And then when you pour it out potentially in retirement, you know, you’re not having to worry about, you know, taxes then. Um. And then the last part of the question, Tim, was what is the co [00:26:00] the most cost efficient way to buy Bitcoin? So if we go back to the, the, the two best ways to buy Bitcoin, which is the spot, Bitcoin, ET, F, or directly on a PAT platform like Robinhood, Coinbase, Kraken, Gemini, I would say that probably the most cost efficient way would be the spot, Bitcoin, ETF, the expense ratios.

Tim Baker: For those ETFs that are out there, and I think there are, I don’t know, maybe a dozen or so, they range from 0.15% to one point a half percent. So, um, in terms of expense ratio, so this is what the fund takes the et f takes to basically pay their expenses to, to be profitable. So. If you have a hundred thousand dollars in a spot, Bitcoin, e, t, F, and I would say not to have that unless you are very, very, very wealthy.

Tim Baker: Um, you know, a hundred thousand dollars if you’re [00:27:00] paid paying 15 basis points or 0.15%, that’s $150 per year versus a. On the, on the higher end, one, one and a half percent is $1,500 per year that that fund takes, um, to essentially, you know, uh, allow you to have exposure to Bitcoin. Um, if you compare that to platforms like, um, the ones I mentioned, typically the way and every platform has a different price strategy, but typically the way that they price for kind of the smaller trades of said coin is that they charge a spread.

Tim Baker: Um, so, so if you’re buy-in, typically the spread is, um, what the coin is priced at, plus maybe half a percent. And it varies from platform to platform of what you actually buy it at. Um, so if, if, if Bitcoin is, is selling at. You know, 93,000, I might be buying it for 94,000. So you, you, you, you [00:28:00] purchase it on a spread, and then you also sell it on a spread.

Tim Baker: So again, the, the, the, the counter of that is, is true, but then you’ll also also pay typically a transaction fee, or it’s kind of like a commission. So on top of the spread, you’ll pay a, a flat fee. So that can be as little as like a dollar to $2, $3, or it can also be a percentage of what you buy. Um, like I said, every platform is gonna be different.

Tim Baker: Some are gonna be a little bit better than others. Um, you can actually like pay a membership fee, you know, at, at some of ’em to like get better pricing, but you’re paying a membership fee, right? So, um, there’s lots. So I would say just in, in general, even though you’re not holding the coin directly, it’s probably more cost efficient to hold it in a spot.

Tim Baker: Bitcoin, ETF. Than paying the transaction fees of holding the coins directly and the, and the, and the spread. Um, now the greater the volume, so if you’re, if you’re trading [00:29:00] many, many thousands, if not hundreds of thousands. That decision gets, you know, it’s a little bit ’cause because the big difference between like an expense ratio, you pay like an ongoing, like every year you’re paying that with a commission or a spread fee, you pay that one time.

Tim Baker: Right? So that’s, that’s a big difference. Um, so that’s something to consider as you’re thinking about cost efficiency.

Tim Ulbrich: Tim, I’m looking at, uh, the fees for some of the spot Bitcoin ETFs, to your point, ranging from 0.15. So I’m looking at. Options like, uh, the Bitcoin MIDI trust, um, I see some in the 0.2, 0.25 range. Point two, something like the Bitwise, Bitcoin, ETF, all the way up to 1.5, the grayscale Bitcoin trust. That’s a huge range. what is it No different than any other? Range that we look at when we talked about before on the show is, is does the same apply here? That you know, you’re gonna see a big range of fees and, and there’s a question that we have to assess [00:30:00] of like, what am I

Tim Baker: Okay

Tim Ulbrich: fees?

Tim Ulbrich: Why, why such a big spread on these, on these Bitcoin

Tim Baker: It’s a good question. The gray, the grayscale, um, from what I understand has been around even before like the, the grayscale Bitcoin trust that’s priced, its, uh, ticker symbol GBTC and non-investment advice. Um, my belief is that that was around even before the spot Bitcoin ETFs. Um, so I think they changed something when the.

Tim Baker: Like those came online, um, to kind of be like in the same bucket. But those were a thing. I don’t know if they were a mutual fund before, but they were, they were a thing before, like all of these other options came on, and I’m not sure why they’re priced so high. I, I, you could make a case that these types of funds, you know, and then Grayscale came out with the Bitcoin mini trusts, which I didn’t even know.

Tim Baker: Like that was a thing, like when these first launched, you know, the, the spot [00:31:00] Bitcoin, that wasn’t, that’s a newer fund. So I think they’re trying to be more competitive in the space, and I completely honest, I don’t know what the difference is between those two. Um, you know, we, we used two of these in our portfolios.

Tim Baker: Um, and part of it is because, like the, the one company we use is because that’s is all they do. Like they’re experts in digital assets. And I’m not saying like iShares or Fidelity are not. Um, but this is, you know what, this is their main, you know, um, business. This is the remain offer. And so, um, I’m not sure, but I, I, I think you could make a case because of how specialized and really how new these are that.

Tim Baker: You know, these are a, a bargain, and I’m not saying the one and a half, but I’m saying, you know, the 0.15 to, I’d say, you know, 25 basis points. Yeah. And I think, again, it’s competitive market. There’s lots of dollars that float into ’em, especially in the, you know, when they first launched, um, [00:32:00] you know, our expense ratios.

Tim Baker: Um, you know, even with some of these in our portfolios, typically 0.0 5.06. So super competitive and I think super low cost. Um, so I think something special. Typically, the more specialized the fund, typically the higher it is. And this is pretty, pretty dang specialized. So I, I view this as, even though it’s an ongoing cost, it, it gives you all of the things that we talked about that, you know, like you don’t, if I’m, if I hold one of these, like I’m, I’m not having to worry about.

Tim Baker: Cold wallets and security and things like that. This company, and they typically have themselves, and then there’s, they, they typically partner, like I know one of these funds actually partners with Coinbase to kind of do the, the verifying and all the things that they, they have to do per, I believe the SEC, um, and everything, from what I understand from most of these funds, all of these, all of the Bitcoin that they hold is in a cold wallet, meaning it’s off the internet, you know, it’s kind of in cold [00:33:00] storage, you know, which, which really, really.

Tim Baker: Lessens the, or eliminates the ability to like hack it, you know, to like, for someone to get in and steal it. Um, so all of that kind of worry and things that I have with the coins I hold directly, I don’t have that with, with these funds. So I would say for what you get for the price, I think it’s, it’s pretty good.

Tim Baker: Um, so yep.

Tim Ulbrich: Great stuff, Tim. And again, to the listeners episodes 3 86 3 87, we did a broad overview of cryptocurrency, digital assets. Make sure to check those two episodes out. We’ll link to those in the show notes. Thanks so much for listening. Have a great rest of your week.

[END]

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YFP 406: Should You Pay Off Your House Early?

Posted on by Caitlin Boyle

Should you pay off your mortgage early? YFP Co-Founder & CEO, Tim Ulbrich, PharmD, unpacks the math, emotions, and big-picture factors in the mortgage payoff debate—plus 5 reasons when it may or may not make sense to pay extra on your mortgage.

Episode Summary

Should you pay off your mortgage early? It’s a question that comes up often in personal finance—and the answer isn’t always as straightforward as the math suggests.

In this episode, YFP Co-Founder and CEO Tim Ulbrich, PharmD, unpacks the numbers, the emotions, and the bigger picture behind this important decision. Using a real-life example and the YFP Early Payoff Calculator, Tim walks through how even small extra payments can shave years off your loan term and save you thousands in interest.

But here’s the twist: despite the financial benefits, Tim has personally decided not to pay off his mortgage early. He shares his thought process along with five compelling reasons why making extra mortgage payments might make sense for others.

Whether you’re deep into your mortgage or just getting started, this episode will help you evaluate your options and make a decision that aligns with your long-term goals.

Key Points from the Episode

00:00 Introduction and Episode Overview
00:12 The Big Question: Should You Pay Off Your Mortgage Early?
01:41 Factors to Consider: Math and Emotions
03:59 Using the YFP Early Payoff Calculator
04:45 Real-Life Example: Mortgage Payoff Scenarios
08:00 Opportunity Cost and Financial Decisions
10:29 Personal Decision: Why I’m Not Paying Off My Mortgage Early
11:39 Five Reasons to Consider Paying Extra on Your Mortgage
22:00 Listener Engagement and Conclusion

Episode Highlights

“ But as with many financial decisions that we make, there’s the math, there’s the emotions, and there are other goals that we have to consider in the financial plan. We don’t want to fall into the trap of making decisions in a silo.” – Tim Ulbrich [3:46]

“ We have to zoom out and always ask ourselves, what is the opportunity cost of making that financial decision of extra payments? Because anytime you make a financial decision, there’s always an opportunity cost that we have to weigh that against, and we have to consider the math of that opportunity cost as well as the emotions.” – Tim Ulbrich [8:04]

“ The emotional relief here is what we’re talking about where some people say, ‘Hey, that’s important to me. I want head into retirement with no mortgage,’ and that might be a trade off that’s worth considering.” – Tim Ulbrich [19:35]

Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: Hey guys, so today I’m tackling a common question that I get and one that I’ve thought a lot about in my own financial situation, and admittedly one that I’ve gone back and forth on throughout the years, which is, should I pay off the house early by making extra mortgage payments? So, what’s the answer, right?

Tim Ulbrich: As I alluded to in the introduction, is it really depends. It depends on a lot of different factors in one’s personal financial situation, and we’re gonna unpack those individual factors today. And there’s both mathematical considerations as there always is, and there’s emotional considerations that we have to factor in when we’re making this decision.

Tim Ulbrich: I think sometimes in personal finance when it comes to topics like paying off debt versus investing, right? These, should I [00:01:00] do this or should I do that? Sometimes we can make these black and white when in fact there are a lot of iterations that we have to consider. And it’s my partner to make often says on the show, you are a unique snowflake.

Tim Ulbrich: Your financial situation is unique, right? And as we’re gonna talk about today, when it comes to paying off the house early, we have to factor in a lot of different things. Whether it be the interest rate, other goals that are going on, what’s the term of the loan? What’s the purchase price of the the house?

Tim Ulbrich: How much did you put as a down payment? All of these things are gonna impact, along with the emotions, how we’re going to approach this decision, and there is no one right answer, right? Because of everyone’s emotions can be different because of how the math can be different based on your individual situation.

Tim Ulbrich: So let’s start with the math. Okay. The, the math doesn’t lie. Making extra payments on your mortgage can cut off a significant amount of time from. [00:02:00] The amount of years you’re gonna be paying off this debt, right? From the term of the loan, especially if you have a 30 year term loan, which is probably for most listening, uh, is is the case.

Tim Ulbrich: Some of you might have a 20 or a 15, 20, not so common. Maybe more. More so on the 15 year side. And we’ve probably all heard something along the lines of, Hey, if you make an extra payment per year, if you make one extra payment per year, it can cut off so many years, right? You might hear four years, five years, six years, seven years off your mortgage.

Tim Ulbrich: We hear that and we’re like, wow, if I could have this paid off in 23, 24, 25 years instead of 30 years, that is significant, right? But as with many financial decisions that we make, there’s the math, there’s the emotions, and there’s other I. Goals that we have to consider in the financial plan. We, we don’t wanna fall into the trap of making decisions in a silo.

Tim Ulbrich: Now, if you use the YFP Early Payoff calculator, we’ll, we’ll make a link to that in our show notes. If you’re not already aware, if you go to our homepage, your financial pharmacist.com, [00:03:00] you’ll see a section that we have a bunch of different calculators that you can use in your own financial plan. And one of those is an early payoff calculator.

Tim Ulbrich: You can use that to run some numbers on your own, and whether it’s a mortgage like we’re talking about today, whether it’s student loans, whether it’s a car loan, any debt that you have, you can run some simulations to say, Hey, if I make an extra lump sum payment, or I add to my monthly payment, or whatever is the frequency of your payment, you can see what that will change in terms of the, the loan term, when you’ll have that paid off, as well as how much interest you’ll say save by making extra payments.

Tim Ulbrich: So let’s, let’s look at an example. If, let’s say that you bought a $350,000 house. Now I know for those of you that heard that, and you’re on the west coast, you’re in the northeast, you’re in the dc, Virginia area, you’re like, Tim, you’re out of touch. You live in Ohio, right? I get it. Walk, walk with me through this example.

Tim Ulbrich: So let’s say you bought a 350,000 house back in 2018, and between the down payment and about [00:04:00] seven years worth of payments that you’ve been making. You now have a balance due of $230,000. Okay? So you bought a $350,000 house. That was the original, uh, mortgage that you have. We had a little bit of a down payment.

Tim Ulbrich: You’ve been making payments over seven years, and now we’ve got a balance due of 233, 200 $30,000. Now, if we assume a 3% 30 year fixed interest rate, now some of you’re like, Tim, what in what world does a 3% interest rate? Where does that come from? Well before the pandemic, that was a pretty common interest rate and a lot of you listening probably locked in your mortgage at that rate.

Tim Ulbrich: And that’s why we have in part, uh, a challenge for many first time home buyers being able to get into homes because existing home buyers with low interest rates don’t wanna move out of their house and give up that interest rate. Now stay with me because if you’re in today’s market of buying a home or you’ve recently bought a home, you know that those days of 3% are long gone.

Tim Ulbrich: And now we’re looking at six to 7%. But stay with me just for this example in [00:05:00] math. So again, $350,000 house 2018. Between the down payment and some payments that we make, we now owe $230,000 and we have a 3% 30 year fixed interest rate. Now, if you were to make an extra $100 per month. Payment on top of the minimum payment that’s due at the end of the loan.

Tim Ulbrich: If we fast forward to when it’s all said and done, you would save about $11,000 of interest and pay off that house about 2.6 years early. Okay, so we turn a 30 year fixed. Loan into just over 27 years. Okay? That’s an extra a hundred dollars a month. If you were to put an extra $200 per month on top of the minimum payment, you would save about $19,000 of interest.

Tim Ulbrich: And now we’re gonna cut off about 4.6 years. Pretty significant, right? 30 years. Now we’re looking at about 25 to 26 years. If you put an extra $300 a month. Or $3,600 a year on top of [00:06:00] the minimum payment, that would now save $26,000 of interest, and we’d pay it off about 6.3 years early. And finally, an extra $400 per month, $4,800 per year.

Tim Ulbrich: We’d save about $31,000 of interest, and that would pay off about 7.6 years early again. 3% interest rate, right? So you get the point extra payments, and you can run these O your own numbers. Again, using the YFP early payoff calculator, we’ll link to that in the show notes, but extra payments, even small, relatively small, a hundred dollars a month.

Tim Ulbrich: Obviously. As that goes up, we see greater savings can lead to significant savings, both in the interest. That we’re gonna save as well as the shaving of some years off of the mortgage. Now if we just stop there, right, and we zoom in onto this one area of the financial plan, and we look at the math. If we make a decision only on that information, I think we’re making a mistake.

Tim Ulbrich: I. Because even if you get to the same decision, we have to zoom out and always ask ourselves, [00:07:00] what is the opportunity cost of making that financial decision of extra payments? Because anytime you make a financial decision, there’s always an opportunity cost that we have to weigh that against, and we have to consider the math of that opportunity cost as well as the emotions.

Tim Ulbrich: That are involved in both the debt repayment here, we’re talking about extra debt on the mortgage and what else you could do with those funds, right? Because you could always do something else with the funds. And that’s true on the other side of the coin as well, if you were to, instead of paying extra on your mortgage, you were to spend that money, let’s say on life experiences, travel, vacation, whatever, there’s an opportunity cost that we have to consider there, uh, as well.

Tim Ulbrich: So the math is intriguing, right? But is it the right move? Again, it, it depends. It depends on a lot of variables. You know, what’s the balance of, of the mortgage, you know, was it a $350,000 house with two 30 left like you saw in this example? Or was it a million dollar home that has $950,000 left on the [00:08:00] loan?

Tim Ulbrich: What’s the interest rate? 3% versus today’s interest rate? Very different outcomes that we might get in terms of the opportunity cost question that I just posed. I’ll share here in, in, in a little bit that for us, in our own situation, when I look at 3% debt, and this is not advice of what you should or shouldn’t do, I look at that and say, Hey, I’m not ready to make extra payments on that because I.

Tim Ulbrich: We could have those dollars working elsewhere for us in the financial plan. Other variables. What are your feelings towards the debt? No right or wrong answer. There are some folks that regardless of the interest rate, there’s an aversion to the debt. And I’m not here to tell you that you’re right or wrong with that.

Tim Ulbrich: We have to acknowledge and understand what is the emotion that we feel towards the debt. What is the monthly cash flow look like? How much margin do we have in the budget? And if we were to put extra towards a mortgage payment. Is there still extra or is there not still extra to do? Other goals and other things that we’re trying to work on?

Tim Ulbrich: And of course, what else is going on in the [00:09:00] financial plan? We know that we’re not only focused on paying off a mortgage. What else is going on? Is there, is there student loan debt? Is there other debt such as credit card debt? Where are we at with the emergency fund? How are we doing with the retirement savings?

Tim Ulbrich: How are we doing with kids’ college savings? What about our experience? Types of things that are important in our financial plan, vacation, travel, et cetera. All of these things we have to look at together. As we try to evaluate how we’re gonna make a decision in one part of the financial plan now personally.

Tim Ulbrich: I’ve decided, we’ve decided, Jess and I, that we’re not going to be paying off the mortgage early. At least not yet. Now why? You, you, you probably can figure out why I just shared, you know, an example that is also true for us. We happen to buy our home in 2018, and I think at the time we bought it at 4.625, I think was the interest rate.

Tim Ulbrich: And we refinanced that in 2019 or 2020 down to 3%. So when I look at a 30 year fixed rate loan at 3%. To me the the math supports making other [00:10:00] financial moves in lieu of making extra mortgage payment. Now my interest rate, our interest rate and how we feel about that, it may be different than your situation and that’s okay.

Tim Ulbrich: Right? That’s okay. So I wanna walk through with that background of mine in mind. I wanna walk through five reasons. When it may make sense to pay extra on your debt, and of course with each one of these, you could apply the opposite to where it may not make sense to pay extra on your debt. So we’ll walk through five different reasons that I want you to be thinking through.

Tim Ulbrich: So number one is aversion to debt or the emotions surrounding the debt, right? All debt is not equal, and everyone’s debt tolerance is different. And as I’ve highlighted a couple times now, and I’m gonna continue to reiterate, the financial plan is not just about the math. Of course, we have to consider the math, we have to weigh the opportunity costs.

Tim Ulbrich: But if we make a decision. It flies in the face of considering the emotions, I think we’re missing, at [00:11:00] least in terms of looking at that decision holistically. And for some, the aversion to debt is strong enough that despite all the numbers screaming, don’t do it. It still might be the right move. In addition to peace of mind, there’s a tangible benefit that can come from a feeling of momentum and progress, and the calculator doesn’t yet have a function.

Tim Ulbrich: To factor in peace of mind and momentum, right? To factor in more the emotional side of this equation. And so I, I joke about that, but in all reality, that’s how we have to think about it. What, what is the mathematical opportunity cost, right? If we use my example of a 3% 30 or fixed rate loan, if I put an extra $200 per month onto that mortgage payment.

Tim Ulbrich: The opportunity cost, just as one example is that I could put $200 a month, let’s say in a Roth IRA or in a 401k or in another type of investment, and we can model that out and mathematically using historical rate of returns, it’s gonna [00:12:00] show that that money invested will be any savings I’m gonna have on the debt repayment.

Tim Ulbrich: However, if I were to have a strong aversion to debt, how do you factor that in, right? We have to be able to weigh that end. I think it would be cool if we had a calculator that could make some assumptions and adjustments accordingly. The number two reason when it may not make sense to pay on your mortgage, of course, would relate to the interest rate, right?

Tim Ulbrich: Having low interest rates. I mentioned that in our example the 3%, whether fixed or variable higher interest rates on homes have been around long enough that those that are holding onto a 3% mortgage are starting to sound a little bit old and and out of touch with reality. And again, mathematically speaking, the decision and opportunity cost of paying off 3% debt versus 7% debt, as we look at today’s interest rate environment is very, very different.

Tim Ulbrich: That said, one should also consider whether or not they’ll be able to refinance in the future [00:13:00] before you pay down that debt, right? We don’t know where interest rates are gonna go, but if you were to buy a home today, in today’s 7% environment. We may not stay at a 7%, we will probably not stay at a 7% environment forever.

Tim Ulbrich: May go up more. It could may go down more. I think probably it will, probably not to 3%, but I think we’ll probably see those come down. So there is an opportunity to refinance, meaning that the way you look at it today at that rate and how you pay down that debt, that might look different if you’re able to refi, say from a 7% down to a 5% or four point a half percent in the future.

Tim Ulbrich: So the higher the interest rate, the more the math favors extra payments. The less convincing the argument becomes that these dollars could be used elsewhere in the financial plan. I say this all the time with student loans, right? Not all student loans are created equal. If you have a private student loan that’s at 8, 9, 10, 11, 12%, we might look at that very differently than you would have say, a federal loan at four or 5% is one example.

Tim Ulbrich: [00:14:00] So not all loans are created equal and the interest rate, and therefore the opportunity cost decision changes. As the interest rate, uh, changes for that loan. Number three relates to building up equity to have options. Because mortgages are front loaded with interest. For those of you that have a have a home, you know this all too well.

Tim Ulbrich: Hopefully you’ve looked at the amateurization table before. If not, you should pull a statement and check it out. But essentially, these loans are front loaded, meaning that the majority of your payment upfront is going toward interest and every payment that you make a little bit more might just be a few dollars, but a little bit more per month is going towards principal or the original cost of borrowing and a little bit less is going towards interest.

Tim Ulbrich: Eventually you start to flip that payment where a majority goes toward principal and a minority goes toward interest right as you pay off the debt. So because the mortgages are front loaded with interest, if you had a very small down payment. There is a potential that you could find [00:15:00] yourself in an equity buying.

Tim Ulbrich: Well, what do I mean by that? When you have a very small down payment, right? There are loans out there, we talk about them on the show here, they certainly can be a good fit, such as the pharmacist home loan, where you may have 3% down. Some doctor loans out there might even be a little bit less. With a small down payment, there’s always the potential risk of the market.

Tim Ulbrich: Downturn, meaning that house values go the opposite direction of what they have been doing, and that could leave someone what’s known as being underwater on a loan, right? Owing more than the home is worth. Now I think in today’s market that’s probably not likely. Every micro market is very different, but it’s always a possibility.

Tim Ulbrich: And as long as you stay in the market long enough for home values to do what they’ve done historically, that risk is, is fairly small, and that’s why we can often feel comfortable using some of those products out there that have a lower down payment. The other risk to consider is if you find yourself unexpectedly moving, so you buy, you think you’re gonna be there for a long [00:16:00] time.

Tim Ulbrich: Job, family, something comes up, you move one or two years later, and you don’t have enough equity in the home to cover the transaction costs and the down payment on the new home. Now we have ourselves in a potential cash bind, right? And we have to kind of figure that out and work through it. One argument to pay off your home early would be is that as you’re making extra payments, you’re building up the amount of equity that you have in the home, so that if you were to have to move or sell the home, you can be able to use that equity to help you, whether it be with a transaction cost, or putting a new down payment on the home that you move into.

Tim Ulbrich: Now that said, there’s another side of this coin, right? You could also argue that any extra payments that you make. To build up more equity, you could simply just set aside in an investment account or even more conservative, something like a high yield savings account for that purpose if it were to arise, if you were to move.

Tim Ulbrich: And that certainly does make sense and can afford you more [00:17:00] flexibility. But behaviorally, we all know that it’s hard to hold muddy aside for a maybe situation. When you have other expenses that are in front of you right now, of today, right? So equity and paying down your mortgage early to build up equity, it’s kind of that forced position that unless you have a debt vehicle where you’re drawing off of that equity, something like a HELOC for example, it’s kind of there and you’re not thinking about it, versus money that would be sitting in a high-yield savings account, so that that’s the third potential option where it might make sense to make extra payments, maybe at a low down payment.

Tim Ulbrich: You’re trying to build up your equity position in the home. Number four is working towards a milestone, working towards a milestone. So similar to number one, right? Which was that aversion I talked to, to that more, that emotional component. This one working towards a milestone is more about peace of mind than it is the numbers.

Tim Ulbrich: So the most common example I I hear as it relates to this one, working towards a milestone would be entering [00:18:00] retirement without a mortgage payment. This concept of, Hey, I wanna get to retirement and I don’t wanna have to think about this mortgage payment, even if there’s. Funds that are available throughout the retirement plan when you build your retirement paycheck, even if that were to be the case, there’s this mental clarity that many people describe of, Hey, I don’t wanna have a mortgage when I enter retirement.

Tim Ulbrich: So even when the math might say, Hey, you could invest that extra cash, you could do other things, you might be able to get better returns. The emotional relief here is what we’re talking about where some people say, Hey, that that’s important to me. I wanna head into retirement with no mortgage, and that might be a trade off that’s worth considering.

Tim Ulbrich: I. It’s a personal decision, obviously, as, as all of this is for many, but it aligns with the larger goal of financial freedom and security in retirement. And again, back to the, the joke I made about, hey, where do we hit the function on the calculator to add the emotional piece? This would be another example of that.

Tim Ulbrich: Number five, on this list, as we look at some reasons, it [00:19:00] may make sense, and again, the opposite could be true or it may not make sense. Number five is, are your other goals on track? And I mentioned this earlier, but often when we talk about any part of the financial plan here, we’re talking about paying off your house early.

Tim Ulbrich: It could be should I pay extra on my student loan debt? It could be, should I put more towards my investment and retirement? Should I put more in my kids’ 5 29 account? Any one of these we, we can get into the trap and tendency of thinking in a silo. We have to zoom out to look at all of the other pieces of the financial puzzle.

Tim Ulbrich: What else is going on with the financial plan? And again, as we think about opportunity costs, how might those dollars be used elsewhere? Even if we still get to the same decision, yes, I want to, or I don’t want to pay extra on my mortgage. We wanna know that we’ve considered it in the context of other things that are happening in the financial plan.

Tim Ulbrich: So again. It could be emergency fund, it could be student loans, could be kids’ college, could be retirement. All these other things that we’re trying to prioritize and balance. [00:20:00] And if you’re listening and you’re thinking about this decision, should I pay extra on my mortgage or not? If you’re someone who is checking all the boxes, right?

Tim Ulbrich: You’ve built a strong foundation, you’re saving for retirement, you’re on track, kids’ college funding, all the goals are moving where you want them to move and you have extra cash available to pay off extra or put extra towards the mortgage. That’s a very different conversation. Someone who’s asking themselves, Hey, should I pay extra on the mortgage?

Tim Ulbrich: And those other boxes are not checked. So the fifth item we’re looking at here today is what else is going on in the financial plan? Are we on track? Essentially, are we not? And then how we make this decision, whether we’re on track or whether or not might sway us as to whether or not those dollars could be used elsewhere.

Tim Ulbrich: So there you have it, five different factors to think about, or five reasons where it may make sense to pay extra on your mortgage. And I’m really curious to hear your thoughts. So for those that are currently making extra payments, I know several people that might. [00:21:00] Start with a 30 year term and go down to a 15 year term or leave it at a 30, but pay extra on the payments.

Tim Ulbrich: Why have you made that decision? What was it about your personal situation that led you down the path to making extra mortgage payments? Was it the math? Was it feelings? Was it something else? A milestone like I talked about on today’s show, for those that are not paying extra on your mortgage, why have you made that decision?

Tim Ulbrich: Why have you made the decision to let your debt and the term of the loan go out to the life of the loan and focus on other financial goals? Love to hear from you. Send us an email [email protected]. You can also record a voice [email protected] slash ask yfp. Well, thanks so much for joining me today and listening to this week’s episode of the YP Podcast.

Tim Ulbrich: If you like what you heard, do us a favor and leave us a rating and review on Apple Podcasts or Google reviews, which will help other pharmacists find the show. And finally, an important reminder that the content in this podcast is [00:22:00] provided for informational purposes only and should not be relied on.

Tim Ulbrich: For investment or any other advice, information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related product. For more information on this, you can visit your financial pharmacist.com/disclaimer. Thanks so much for listening.

Tim Ulbrich: Have a great rest of your week.

[END]

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YFP 405: Navigating Retirement Income: How to Turn Assets into a Paycheck

Posted on by Caitlin Boyle

How do you turn your retirement savings into a reliable paycheck? In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, and YFP Co-Founder & COO, Tim Baker, CFP®, RLP®, RICP®, break down three common strategies for building a retirement paycheck — including how each works, who they’re best for, and the pros and cons to consider.

Episode Summary

How do you turn your retirement savings into a reliable paycheck? In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & COO, Tim Baker, CFP®, RLP®, RICP®, to explore three common retirement income strategies: the flooring strategy, bucket strategy, and systematic withdrawal strategy.

Together, they break down how each approach works, who they’re best suited for, and the pros and cons you should consider. You’ll also hear insights on the emotional and psychological shifts that come with leaving behind a steady paycheck and the importance of building flexibility into your retirement plan.

Whether you’re approaching retirement or just starting to think about your long-term goals, this episode will help you better understand how to create an income stream from your hard-earned assets.

📅 Ready to work one-on-one with a fee-only financial planner? Schedule a free discovery call at yourfinancialpharmacist.com to learn how our team can help.

Key Points from the Episode

00:00 Introduction and Episode Overview
00:39 The Importance of Withdrawal Strategies
02:18 Building a Retirement Paycheck
04:29 Emotional and Behavioral Aspects of Retirement
05:02 The FIRE Movement and Balance in Retirement
06:32 The Role of Financial Planning Credentials
09:52 Three Key Withdrawal Strategies
11:03 Understanding the Flooring Strategy
24:56 Understanding Risk Tolerance Over Time
27:10 The Bucket Strategy Explained
29:55 Advantages and Disadvantages of the Bucket Strategy
34:45 The Systematic Withdrawal Strategy
45:27 Flexibility in Retirement Planning
46:23 The Importance of Professional Financial Advice

Episode Highlights

“It is a shift because for 30, 40, maybe 50 years, if you’re an overachiever and you’ve saved very, very early in your career, you’ve been socking money away for future you. And now future you is here and it’s like, okay, what do we do? ” – Tim Baker [6:28]

“ One of the cardinal beliefs in retirement, and this can sometimes be hard to swallow, is be flexible. The more flexible that you can be when you retire – how much you spend in retirement, all that stuff – the odds increase of a successful retirement. And I define a successful retirement, at least at a baseline state of you don’t run outta money.” – Tim Baker [39:54]

“ Will we work part-time? Will we not? What’s the market doing? What are the goals that we have in retirement? All these things are a good reminder that whether it’s in the accumulation stage or in the withdrawal stage, this is not a set it and forget it, right? This isn’t the strategic plan that we forget about for five years of the organization. We’ve gotta set this plan intentionally. Then we want to be revisiting this because there’s going to be internal and external things that are going to be moving and changing over time.” – Tim Ulbrich [45:54]

“ Your balance sheet and your goals are going to be unique to you and what you’re trying to accomplish. So, I think it takes a tailored approach to get you to where you want to go.” – Tim Baker [48:01]

Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: Tim Baker, back to back. Good to have you on the show.

Tim Baker: Good to be back, Tim. What’s good?

Tim Ulbrich: You know this, this episode is, is one I’ve been looking forward to because over the past seven plus years of the podcast, we’ve talked at length about the accumulation side of the equation, right? When it comes to

Tim Ulbrich: saving for retirement, we’ve talked about things like how do you determine how much is enough and what are some strategies. For investing when it comes to traditional retirement accounts. Think 401k, 4 0 3 B IRAs. We’ve talked about options for investing when you’ve already maxed out these accounts and, and we’re gonna link to those episodes in the show notes for folks that want to learn more about the accumulation stage.

Tim Ulbrich: But this episode is really about the other side of the equation, which is one that I don’t think we give e enough attention to, which is the withdrawal strategy. [00:01:00] Hey, we finally get to. This point in the future of retirement and whatever that may look like. And we’ve gotta be able to produce an income for ourselves in retirement that otherwise was provided to us by our employer throughout our career.

Tim Ulbrich: And as obvious as that sounds, I think it’s something we don’t think enough about. And I love how you frame this as a concept of, of building a retirement paycheck. So paint a picture for us of, of what you mean by that.

Tim Baker: Yeah. And, and I think even before I get into that, Tim, like I, I, I don’t think that we’re alone in kind of our ignoring the, you know, kind of the withdrawal phase. I, you know, one of the, one of the things in the CFP curriculum, I. Certified financial planning curriculum is, they don’t really talk about this too much.

Tim Baker: And I think there’s a gap. You know, it’s, it’s all about, hey, amass wealth as much as you can and you know, we’ll get these buckets of money and then when, when we retire, then what? Right. And I even remember the first firm that I ever worked with, it was almost like our clients were driving those decisions, which is not [00:02:00] a bad thing, but we would basically say like, how much do you need this year?

Tim Baker: And then we would, you know. Basically send that to them, distribute those assets in the most efficient way possible. But it wasn’t really us doing analysis of like, okay, what do we need to, you know, what can we spend? Or, you know, how, how do we make this, um, nest egg last us for time? Unknown, right? So. To me, the, there’s, there’s a gap there and I think it’s really important for us to understand that.

Tim Baker: So when, when I think about this, like re like building a retirement paycheck, you know, I, I really think of this as like a multifaceted thing. There’s so many things, you know, just think about it from the accumulation side. You know, we all the different things that go on, like obviously we get a paycheck, but we also have.

Tim Baker: Benefits from our employer, like health insurance. You know, we’re saving for retirement, which is not something we typically do in retirement, but it’s, it’s, you know, it’s the paycheck itself and how do we access these [00:03:00] buckets of money and spend them down in an efficient, a tax efficient way possible, but also like efficient in terms of like your life.

Tim Baker: I finally started reading the book, um, die With Zero, Tim, so I’m, I’m in the beginning parts of that and it’s such a different. Thought process of like, Hey, you get dividends to go on a tangent here. You get dividends from life experiences. So like if you, you know, one of the things I did after I got in the Army is I backpack Europe for, I.

Tim Baker: Four months, right? Just kind of went to the wind and like, this is awesome. You know, kind of a YOLO experience. And what he says in those types of things is like those dividends have paid you back in terms of memories over decades of your life. If you wait to do that when you’re in six, your sixties or seventies, and then you pass away at 90, you have a couple decades but not a lifetime.

Tim Baker: So it’s also spending down. The portfolio in a way that maximizes those types of things. So, you [00:04:00] know, it’s, it’s housing decisions, it’s long-term care planning. All all of those, it’s estate planning. All of these things are, are really important as we transition from accumulation to decumulation. But just in a different way.

Tim Baker: Everything’s still happening very similarly. It’s just, you know, instead of the employer giving you a check, you have to kind of figure that out yourself.

Tim Ulbrich: I am so glad you mentioned Die With Zero. We, we should probably do a whole, a whole separate episode on that. You know, I, I often tell people like, if you read Die With Zero, don’t only read Die With Zero ’cause you’re gonna like drain all your bank accounts.

Tim Ulbrich: Right. But it’s such, it’s such a different concept.

Tim Ulbrich: It’s, it’s so refreshing. Um, and to your point. There’s that dividend component, but it’s also a learned behavior. You know, we start to talk about the tactical side of withdrawals. We have to remember there’s a big emotional piece here. So we can talk about, you know, what’s the best tax efficient way and is it this strategy?

Tim Ulbrich: Is it that strategy and actually getting money outta your account? But that is a mental shift when for [00:05:00] decades. You’ve been putting money in, seeing those accounts grow outside of the, some of the volatility of the market, and all of a sudden we’re making a conscious choice to take money out and see those accounts go down. That’s a piece that gets left out so often as well.

Tim Baker: And, and I don’t, I don’t know why Tim, but for whatever reason, I feel like on my YouTube feed I’m getting a lot of like videos about like the fire movement and people abandoning the fire movement. And, and, and part of the, the struggle with the fire movement, and again, no hate on the fire movement, but is exactly what you’re talking about, but like two extremes.

Tim Baker: Where, you know, I am, I’m saving and saving and saving, and then I get to my freedom number or whatever, and then I’m like expected to be, behave, you know, the shift, be the behavior and spend down. And it’s like, uh, I, I don’t want to, so just like everything in life, it’s about balance, right? And you can’t, you know, we kind of talk about.

Tim Baker: You can’t, you know, do this your whole life. So, you know, listeners can’t see this, but I have an open [00:06:00] hand where you’re, where you spend, spend, spend, and you can’t do this necessarily your whole life where it’s a closed hand and you save, save, save. Because what’s the point, right? So to me, it’s really about finding the balance.

Tim Baker: And this again goes back to the idea, not necessarily of a plan, but planning. With the g on the end planning Corey, uh, Jenks out there. So to, to me, that’s, that’s what this is all about. And again, it is a, you know, it is a shift because for 30, 40, maybe 50 years, if you’re an overachiever and you’ve saved, you know, very, very early in your career, you’ve been, you know, socking money away for, for the, for for future You.

Tim Baker: And now Future You is here and it’s like, okay, what do we do?

Tim Ulbrich: Tim, I remember it’s probably maybe two, three years ago we, we did a retirement series and part of that, and again, we’ll link to some of those episodes in the show notes, but part of the motivation for that was you going through the RICP training. I. And, you know, we talk about [00:07:00] the alphabet soup of credentials behind

Tim Ulbrich: pharmacists.

Tim Ulbrich: I think you’re starting to compete with some pharmacists out there,

Tim Ulbrich: right? With the, the CFP, the RICP and the, the life planning.

Tim Ulbrich: Um, but I remember you going through that certification and despite the experience that you had, obviously the CFP credential, which we feel like has a ton of weight and value in how comprehensive it is in both the education and the experience. It really felt like the RICP for you unlocked. Some other resources, information that perhaps weren’t covered in the same level of detail with the CFP te. Tell us about that.

Tim Baker: Yeah. And, and to go to the CFP, like, like there is a retirement section in the CFP, but a lot of that I think is geared more towards, um, like retirement plans. Like what’s an IRA? What’s a Roth? IRA? What’s a simple, when do you use a defined benefit, you know, for like self-employed people defined benefit or defined contribution plan.

Tim Baker: So it’s, it’s very plan driven. So almost like product driven versus like. [00:08:00] What do we do when we get to the end here? And it’s like I, you know, and for me it was like, I want to be able to answer that question of, Hey, I’m 65, I wanna retire next year. Like, what does that look like? So the R-I-R-I-C-P really focuses on the transition from the accumulation to the de de accumulation phase in retirement and.

Tim Baker: It, it’s really trying to figure how to turn your savings into a retirement income for stream, for time, unknown, right? And the things that’s covered is obviously like rebuilding the retirement paycheck, retirement income planning, but it’s social security and Medicare. It’s tax efficient withdrawal strategies, um, annuities and guaranteed income, long-term care planning, estate and legacy planning and housing decisions, which is gonna be one of the biggest expenses for retirees.

Tim Baker: Um. You know, especially early, early on. So to, to me, it’s really, really important for, it was really important for me to do a deep dive in those things because again, I, I [00:09:00] think the CFP, which is great, and they can’t be, you can’t do a deep dive in everything. It’s almost like, um, you know, a PGY one is what, like a general residency to like a PGY two where you’re, you’re, you’re more specialization.

Tim Baker: I think this is more of the, the PGY two. So my, my belief is, is that if you’re working with a financial planner. They darn well, sure better be a CFP, but I think if you’re in that retirement, you know, close to retirement or in retirement, I, I would say RICP is, is something that they absolutely need to do.

Tim Baker: And some of the strategies that we’ll talk about really cover a lot of the things that I listed that, you know, the RICP goes through.

Tim Ulbrich: Yeah. And retirement income certified professionals. So that’s what the RICP stands for. For folks that are, are curious about that and, and it’s a timely discussion, Tim, because last week on episode 4 0 4, when we were talking about questions to consider when you’re evaluating hiring a financial planner, one of those big questions was, you know, what’s included in the plan and the planning process, and is there alignment with your.

Tim Ulbrich: Planning needs and the experiences [00:10:00] and credentials and education of the people that are leading those services. So before we jump into the three strategies, two important disclaimers. All right. First and foremost. When we talk about withdrawal strategies and approaches, of course there’s some foundational work that has to be done that will be critical to knowing which of these approaches may make the most sense, right?

Tim Ulbrich: So obviously, how much do we have saved? What buckets are those funds in? What are the retirement goals? What are the potential risks? How might social security fit in? So lots of work to be done before implementing a withdrawal strategy. The second thing that. Of course has to be said is, is every one situation is different.

Tim Ulbrich: Of course, there’s more than three strategies, and this is not intended to be advice. You know, we really feel like the work that we do, our team does one-on-one when we’re doing financial planning with clients. That’s where the application and the implementation of these strategies would come. Again, curious to learn more about their services, go to your financial pharmacist.com.

Tim Ulbrich: Book a discovery call. We’d love to have a conversation. [00:11:00] So, Tim, let’s jump into these three strategies, and with each one you’ll provide a, a high level overview of, of exactly what is the strategy, and then some of the advantages, disadvantages, considerations, and who it may be best for. So let, let’s start with the flooring strategy, which our first of the three strategies tell us about what the flooring strategy is.

Tim Baker: Yeah, so the flooring strategy is probably the most conservative, and it’s probably the most. Neglected is probably not the you use, but I would say one that’s, it’s probably more on the shelf collecting dust for a lot of people. And I, and, and we’ll go through why that is, but it’s a conservative approach, um, that involves creating a layer of guaranteed income, which we call the floor, to cover the essentials that the essential expenses.

Tim Baker: So we’re talking about housing, food, utilities. Healthcare, the things that are gonna go out the door regardless of, of anything. Right? And usually what, what we [00:12:00] use to build the floor are things that provide guarantee, hopefully lifetime income. So that’s typically social security, a pension, if you still have those from your employer or an annuity that you purchase on the market.

Tim Baker: So. This is the best solution to, to mitigate the risk of running out of money. Um, so you essentially, and it, and it, and it’s essentially using like obviously social security and a pension, you know, is something, a benefit, you know, that you, you basically bought into during your career and it’s provided by the US government and or a company.

Tim Baker: An annuity is typically where you’re working with an insurance company to say, Hey, here’s a chunk of money. I want this over my life, you know, over the extent of my lifetime. They don’t know how long you’re gonna live, but they use, you know, tables to kind of figure that out. How much do I get for this chunk of money?

Tim Baker: Um. So the discretionary expenses are then, so once we, once we, once we figure out, okay, these [00:13:00] are the essentials for me to live, then anything above that, the discretionary expenses typically are funded from your remaining investments. So it would be, okay, I still have some money in my 401k or my Roth IRA or a brokerage account.

Tim Baker: Um. So, you know, converting these assets, um, to an income stream, IE like an annuity, eliminates the possibility of like, you withdrawing too much, right? So one might be saying, Hey, this sounds great, what you know, so let’s talk about advantages, but we’ll talk about disadvantages. So the advantages here is that if you can create this floor, it guarantees basic living expenses for life.

Tim Baker: So if you think about that like that. To me, when I hear that is super like peace of mind,

Tim Ulbrich: Warm blanket.

Tim Baker: yeah. It’s the, it’s the warm blanket, right? It reduces the, the anxiety about market volatility. So right now, like if you had a floor in place and you know [00:14:00] that a check was coming from an annuity, a pension, and a social security, I.

Tim Baker: To pay the, pay the mortgage if you still have it or you know, all the buy food like you’re, you are inoculated from the craziness that is the market. Right. And that’s the psychological thing, I think is the biggest advantage because I always make this joke. I. You know, I think sometimes my dad thinks I like day trade.

Tim Baker: He is like, oh, what about the market? Every time I see him and I’m like, I don’t know. I don’t, I haven’t even looked at it. You know? And I think he’s kind of preoccupied by that. Right? And, and if you are retired, you’re like, you wanna live, right? You don’t wanna have to worry about the market and, and like where the next paycheck, you know, you know, figuratively speaking is

Tim Ulbrich: yeah. There can become an obsession with, with

Tim Ulbrich: tracking the market. Yeah, for

Tim Baker: Yes. Um, I think the other thing is that it reduce, it, it simplifies cashflow management. Um. And it actually, it, it actually also reduces the. The, um, risk for like elder care abuse. So sometimes, you know, if you’ve ever, it’s like, Hey, Mrs. [00:15:00] Jones, why are you getting, you know, why are you redoing your kitchen?

Tim Baker: Or, you know, why are you having solar panels, panels put on your house? Sometimes older people, I. Um, can be at risk for people to defraud them or to, or to sell them things that you don’t need. So if, if, if there’s less money available and, and your money’s coming from a, it’s just less to take, so to speak.

Tim Baker: So one of the things that we, we train on as financial planners is to kind of be aware of some of these things. So if I have a million dollars versus I have 200,000, because I, I, I put a, a large chunk into an annuity, that’s harder for someone to get to. Um. And then, you know, it’s, it’s the custom flexibility.

Tim Baker: You can com, you can pair this with, typically you pair the, you still pair this with a bucket strategy or systemic withdrawal strategy, which we’ll talk about. Um, so those are the big advantages and for a lot of people, you know, that peace of mind and not having to worry about the market. Is why they do this.

Tim Baker: Um, from a disadvantaged [00:16:00] perspective, Tim, it’s redu. It’s, it’s, it can severely reduce your liquidity. So once you purchase that annuity, you’ve taken a chunk out of your IRA or your 401k and given them that to an insurance company. Now what they give back to you is a steady stream of checks for the rest of your life.

Tim Baker: But in the event of emergency or things like that, like that money is not accessible.

Tim Ulbrich: So, uh, uh, a quick, for instance, Tim,

Tim Ulbrich: I, I might have say a million dollars round numbers, a million dollars in my IRA. And depending on, and we’ve talked about annuities on the show so people can, can check that out and lots of different things to think about there. But I might take or peel off, say, $300,000 of that IRA or 400 or 200, whatever the number is, and convert that to a guaranteed monthly paycheck essentially.

Tim Ulbrich: And we would know what that dollar amount is. And, and then you’re, you’re kind of looking at, uh, you know, what’s the opportunity cost there is what you’re referring to that. Hey, if I don’t have these dollars now, kind of investing and growing, because we’re not just gonna stop [00:17:00] investing our money when we get to retirement, we’re still gonna have some of those dollars

Tim Ulbrich: that hopefully are in a growth phase as well.

Tim Ulbrich: But we’re taking those dollars off the table and saying, Hey, instead, we wanna have this, this guaranteed in income stream.

Tim Baker: Yeah, so it’s really twofold. It’s, it’s the opportunity cost, um, and potentially lower returns. So, you know, what else, you know, how else could that money have grown outside of it just kind of coming to me in the form of a check, but it’s also like, hey, we have a flood or something goes out on the house and I don’t have enough liquid set aside to account for that.

Tim Baker: So now I’m dipping into. Maybe some of my more riskier, volatile investments to cover that. So it’s, it’s both the opportunity cost and then, you know, kind of the, the risk that you need liquidity to. Now again, I would, I would make sure that we have an emergency, you know, the emergency fund never goes away, but sometimes you know, that, you know, you’re an emergency can kind of outpace you know, what, um, what you have liquid.

Tim Baker: The other is inflation risk. So I would say. I don’t know [00:18:00] if it’s all, but I would say most annuities that you’re gonna purchase don’t include a cola, a cost of living adjustment. So if out, if inflation outpaces the growth of the grant, guaranteed income, um, purchase and power may erode. And this is why social security is so powerful.

Tim Baker: And one of the biggest decisions that you make is because every year it kind of keeps pace with inflation. Retirees would argue maybe not as much as it should, but. You know, the, the one of the biggest expense or riders that you could have in an annuity purchase is like some type of in, in adjustment that the, the, or the rate goes up and it’s typically not pegged to cola.

Tim Baker: It’s typically like, Hey, I want a 1% or a 2%, um, kind of arbitrary adjustment every year. And, and that’s expensive. So, you know, this, that’s a big thing is in inflation risk. The other big thing is loss of control. You know, it can feel restrictive. It’s like, hey, I was looking at a million dollars, now I’m looking at half a million dollars, or whatever the case is.

Tim Baker: Um, complexity and cost. So, [00:19:00] um, there’s lots of different flavors of annuities. I kind of believe if you buy an annuity, keep it simple. Um, so there are ones that are more, but you know, you’re gonna have complexity. You’re gonna have costs associated with that, just like you have in investments. Um. And probably the last thing is just kind of dependence on the insurance company and, and their solvency.

Tim Baker: So, and you know, social security backed by the full faith and credit of the US government. So you can argue how, how stable that is. But you know, the insurance company, you know, they’re typically a for-profit. You know, they’re, they’re not the federal government. And while most, um, you know, insurance companies have, you know, state guarantee associations and protections there, there’s limits there.

Tim Baker: So those are the big disadvantages.

Tim Ulbrich: So, Tim, if we just zoom out for a moment. I’m, I’m oversimplifying to kind of make the point here with the flooring strategy, and I thought you said something real important is to not think about these as necessarily three discreet strategies. Often we may have more than one approach, right? So as we talk about these, these three individually, but let’s say I evaluate my monthly [00:20:00] expenses and you know, I determine, hey, it’s gonna be $10,000 for Jess and I in retirement and of that.

Tim Ulbrich: Let’s say $5,000 are essential expenses, the ones you talked about, uh, housing, utilities, food, healthcare, et cetera. And the other five is discretionary things that we wanna be able to do. Grandkids, travel, whatever, right? Eating out, those kinds of things. So with the flooring strategy, the idea would be either between social security, a pension, which maybe some of our listeners might have, but many, many not, and or an annuity. I would try to replace that 5,000. Um, and then as you mentioned, through other assets we would account for, for the other 5,000.

Tim Baker: Yeah, so to kind of take that example, let’s say the, let’s say the floor that we have to set is five grand. So those are for the essential expenses, housing, food, gas, utilities, medical stuff, insurance, all that stuff. So let’s say it’s five. Let’s say social security covers three of that. Then we have a gap in the floor of $2,000.[00:21:00]

Tim Baker: Now. And this, I ran this example a while ago, so I don’t know if this holds true, but let’s say you’re a 65-year-old male in Ohio and you purchase a SPI a, which is a single premium income annuity. So basically that money, um, gets sent to the, that chunk of money gets sent to the insurance company, and then within a year, you, you can direct how this is, but at least within the, the years, um, you know, you start getting a check back.

Tim Baker: So if we were to, if we were to say, Hey, we, we need $2,000. Um, now this would just be for, if we use you as an example, this would just be for your life. We would probably want to set this up for, you know, basically second to die. So if you were to pass away, Jess would still get this. But for the purposes of this, let’s just say we want $2,000, uh, a month for the rest of your life, um, that would cost you about three, $310,000.

Tim Baker: So that means that we, out of your traditional, or Roth or whatever, your, um, your 401k, we would peel those dollars [00:22:00] off. Um, basically give that to the insurance company. 3000 would come from, your per month would come from your, you know, social security. So you’d get a check for that, and then the, and then the insurance company would send you a $2,000 check for the rest of your life, and then the other 5,000, um, per month or $60,000 a year.

Tim Baker: Would come from what’s left of your traditional portfolio or, you know, if you had other, you know, uh, real estate or things like that. So in that, in that case, those discretionary expenses, you might use some, some version of the bucket strategy and or the systemic withdrawal strategy.

Tim Ulbrich: I’m tracking, and since we’ve talked about annuities now a few times, uh, this was episode 3 0 5, we talked about understanding annuities, a primer for pharmacists. Check that out. Lots of good information in that show. So, Tim, as we, we put a bow on the flooring strategy, we started with the most conservative approach.

Tim Ulbrich: You mentioned that you talked through the the concept of, of essentially being able to replace, create a floor of those fixed [00:23:00] expenses. You mentioned the advantages, disadvantages. And clearly it feels like this would be best for those individuals that are on the more risk averse side of things. And there’s a prioritization over of security potentially over growth.

Tim Baker: Security overgrowth. Yeah. So if you’re, if you’re somebody that’s like, give me all the insurances. You’re probab. This might be more in your camp if you’re like, uh, I want to self-insure, or, I don’t want that much life insurance. Or, you know, I’m, I’m kind of using, you know, an analogy here, but like, this might not be best for you because you, you want more, you know, you’re, you’re more, you know, risk, uh, tolerant.

Tim Baker: So this is someone that doesn’t necessarily worry about, wanna worry about the market and just wants that steady check coming in, you know, for the rest of their life. And, um, you know, yeah.

Tim Ulbrich: Great. So, and I think, you know, I’m, I’m projecting a little bit, but I could see that a lot of pharmacists may, may like that concept or at least a portion of it. Um, I.

Tim Baker: Yeah. And I, I would say I have a pretty, pretty big appetite for risk, but part of me is like, man, if [00:24:00] I give up three 10 and I get 2000 for the rest of my life, just clockwork, and I know that combined with my social security is gonna pay the essentials. I’m not mad at that. You know, I know there’s some people that are like, well, what happens if like, I give three 10 and then I die the next day?

Tim Baker: You know, there, there are cer there, there are certain things where you can get like return of premium or, or different riders. Now everything, all these riders cost money. So, you know, if you add every rider that 2000 might be 1200. So, but there’s, there’s more protection there. But that’s, that’s the kind of the, the push and pull of this.

Tim Baker: So, um. I mean, I, I can see that and, and I’m trying to like project my, like my older self here, you know? ’cause right now I’m just like running gun and, you know, I’m, I’m, I’m more like risk, you know, Hey, all the risk and things like that, I have more appetite for it. But again, in our job is not to project our own risk tolerance on clients, right?

Tim Baker: We need to, you know,

Tim Ulbrich: Yeah, that’s, right.

Tim Baker: that’s best suited for them. But I, [00:25:00] part of me can kind of see the appeal of this now while I. You know, push that button to move hundreds of thousand dollars of over for that. I don’t know. I don’t know if I would do that.

Tim Ulbrich: I’m, I’m glad you said projecting your older self though. Right? Because this is important that I know. My tendency and I suspect maybe for others is, is we tend to think that our current. Risk tolerance, risk capacity is what we’re going to do also in the future. And may not, or in some cases should not always be the case.

Tim Ulbrich: Right. I’m thinking about, you know, as we’re working on our own individual financial plans and we’re taking a more aggressive investing approach, and perhaps there’s, you know, as we think about our, our plans, there’s some investment in real estate, there’s building to the business. If those things continue to, to grow and there’s fruit from the risks that we took, at some point you wanna really lock in. To some degree lock in the, the gains that have had. Uh, and there’s a different level of risk that I probably should be, will be thinking about at 60, 65 than we are at this phase of life in, in [00:26:00] early forties.

Tim Baker: Yeah, and I kind of think about it like. I used to be able to like, drive, take a road trip and drive for 12 hours and like not blink. And now I’m like, nah, nah, I’m good. Or even like playing basketball with Liam, like, I’m not, I’m not dunking on his head or anything like that. I’m like, I, I’ll shoot the j You know what I mean?

Tim Baker: Like, I like I, because I, I don’t wanna. Get hurt or do something dumb, which I got, I sound so old right now, but like, like I’m just projecting that out, you know, when I’m in my fifties, sixties, seventies, and you know, from a, you know, there might become a time where I’m just like, man, like let’s keep it simple.

Tim Baker: Gimme my check and I can like, you know, just chill and not have to worry about the market or things. I don’t have to worry about the hustle, you know? But I could also see on the other side of that, like we talk about identity and role like. You know, so much of, so some people get in trouble with during retirement because so much of their identity is, is wrapped up in the, in the role that they play.

Tim Baker: And, and, you know, professionally, whether that’s a pharmacist, uh, a financial planner. [00:27:00] So, you know, maybe part of that is still being plugged into the markets or the economy or things like that. But I think that, that, that, that’s a razor’s edge, right? ’cause you can become obsessive about it. Um, so, but obviously I work in this, that I might get to the point where I’m like, I just want to like.

Tim Baker: Flip burgers and like, not have to worry about that stuff. So, um, yeah.

Tim Ulbrich: Good stuff. Let’s shift to the second, uh, withdrawal strategy, which is the bucket strategy. Tell, tell us more about this one.

Tim Baker: Yeah. So, so the bucket strategy is essentially where you divide up your assets into buckets. Um, so the, your funds are segmented into time-based buckets, each with its own investment profile. So. If you look at bucket one, this might be for, you know, your next zero to five years worth of expenses. So these, this is the, the lowest risks.

Tim Baker: It’s basically cash and cash like investments, so might be cash, I bonds, [00:28:00] um, bonds in general money market. Um, think things like that, right? So if the market does what it it’s doing now, it’s not gonna affect, you know, what, what’s going on the second bucket. Bucket two is typically, you know, maybe six to 15 years out.

Tim Baker: So this is more moderate risk. You have more of a, a balanced, uh, um, asset allocation. So maybe like a 60 40, 50 50, um, uh, equity to, to fixed income. Maybe some dividend paying stocks where there’s, it’s, you know, the portfolio’s producing some income. So more volatility. A little bit more return though, um, but not.

Tim Baker: You know, not those huge swings that you’re gonna see, which you typ. They’ll typically get in bucket three, which is typically, you know, 15 plus years out. So this is where you put your higher risk, um, you know, equities, uh, stocks, that type of thing. So I. For, for a lot of people. Um, from an understanding, the big advantages here is that [00:29:00] it helps retirees mentally separate funds.

Tim Baker: So you’re kind of matching investments to the time horizons, time horizon, and this is, this is, I look at this, it’s like purpose-based investing. So we talk about purpose-based savings, like, Hey, what’s that money for? Like tie a purpose to it. Same with investing. Mo, it’s a little bit easier with investing because most of the time it’s in a 401k or an IRA.

Tim Baker: We know that purpose is for retirement. Like if we have a brokerage account that has $50,000 in it, I’m like, Tim, what’s that money for? And a lot of people are like, I don’t know, sometimes. And that could be for early retirement, it could be for the down payment on a, you know, a property in the, in the, in the future.

Tim Baker: So it allows people to kind of, it, it enhances their understanding, um, and increases their peace of mind. So as an example, um. Like if the market goes down, like it’s been going down lately and I have three years of expenses of cash for expenses, like in my mind, you know what the market is already is typically done, is that it, it bounces back [00:30:00] right in, in, in 2, 3, 4 years.

Tim Baker: So I’m inoculated to that, right? So I’m not, I’m not necessarily worried about it. Um, this, the, another advantage of this, it kind of encourages discipline withdrawals and. One of the disadvantages is kind of how you refill the buckets, which I’ll talk about here in a second. But it has, there’s a system for which you follow, um, the withdrawal, uh, uh, phase.

Tim Baker: Um, it reduces the need to sell volatile inve investments, uh, or volatile assets during market downturns, which mitigates sequence of return risk, which we’ve talked about in previous episodes. Um. Some say it supports higher equity, Al Al allocation. I don’t know if I necessarily agree with that, um, but potentially.

Tim Baker: That 15 year bucket should be pretty, you know, pretty, um, you know, uh, risk, you know, risk heavy for, for larger returns and, you know, it can kind of provide a built-in rebalances system. The, the, the disadvantage I would say to this is that it’s complex. It can be complex to [00:31:00] manage, so the rules for refill in your buckets can get confusing.

Tim Baker: And there’s the delayed, there’s the delayed approach, which, you know, basically nothing happens until the first bucket. Um, that that liquid bucket is completely depleted. The problem with that, Tim, is like, if that is now, like you’re, you have market risks, um, and sequence of return risk, like the timing of that can be tough.

Tim Baker: Another approach to refill in the buckets is the, um, automatic approach. So you refill the buckets, re regard, you know, each year regardless of what’s happening in the market. So again, it’s pretty rigid, so you’re just like, this is what I do. Right. Even if I’m going off a cliff. Um. The other, the other approach is the market-based approach, which the bucket is refilled based on what the market does.

Tim Baker: So you have a set of rules that says, if this happens, I do this. If that happens, I do that.

Tim Ulbrich: Mm-hmm.

Tim Baker: And then the last one that you typically follow or could follow is the capital needs approach, which you need to determine kind of what your critical path or how much wealth should remain in each year of [00:32:00] retirement to meet lifetime financial goals based on the the portfolio return.

Tim Baker: So it’s kind of like a plan backwards approach. So some of this, you know, you could be in a trough right now, which is kind of where we’re at, and you’re like. What do I do like this? This doesn’t seem like I should be selling, you know, some of my equities or even moderate, um, base, you know, I’m selling low.

Tim Baker: Um, so that can be, that can be tough. The, the, another disadvantage I would say is the potential cash drag. So if you’re, if you have, if you amass. One to three, one to five years of cash that could be harmful during inflationary periods because, um, that money, you know, inflation is, is eaten away at that. Um, and, and it can reduce the overall, um, portfolio efficiency.

Tim Baker: Um, another and others argue, argue that the time se segmentation is straight up arbitrary. So, um, if there’s a poor market or spending increase, the buckets may not hold up. There’s no guaranteed income in this. So you [00:33:00] have social security, obviously, but you don’t have a floor. So gu you know, your, your social security might cover.

Tim Baker: You know, a portion of your essential expenses, but it’s not gonna cover everything. So that’s a problem. And then I would say the sequence of return risk still exists and it can be challenging to rebalance just in volatile market. So it’s, you know, you could be doing things that you know you shouldn’t be doing, but it’s like, Hey, I gotta fill the buckets.

Tim Baker: I gotta make sure that the, the, the, the, the money cascades throughout the bucket system.

Tim Ulbrich: Tim, as you were talking about this, I sense that my, my feelings, and I suspect maybe others listening are is, is you describe the three buckets. It’s like, okay, I get it. That all makes sense. And then you start to think about some of the management of it and the different ways that you could do it. And, and it could be, as you mentioned.

Tim Ulbrich: More administratively complex, you know, especially if somebody’s trying to DIY it, or even if they’re working with an advisor, you know, there need to be some communication. Are we establishing rules? You know, what exactly are we doing? How are we doing it? Um, and for some there may be a comfort level of, of that, that may not be for others, which [00:34:00] is why this lives in the middle, not as conservative as, as the first, not as, uh, more dynamic as we’ll talk about with the third. But the example you gave is a good one when, when you said, Hey. I’m in a trough, like we’re we’re now, what should I do? What came up for me there is when you said that is how important it is to think through those things in advance of actually being in the trough and asking the question, what should I do? Right. So actually stress testing some of this of, hey, when the down market comes, not if, but when the down market comes. What are we gonna do? How are we gonna react to that? Are we gonna hold true to these real? And, and this is both numbers and feelings. Um, but I think a lot of the, the literature in our experience would tell us that it’s not in the moments of the market kind of falling out in the situations we’re having now where we wanna really put the test, what are we actually gonna be doing?

Tim Ulbrich: But can we work through that in advance or at least do the best that we can? Of course, reality, you know, may, may present itself to be a little bit different. All right. Let’s move on to the third strategy, which is the systemic [00:35:00] withdrawal strategy. Tell us more about this one, Tim.

Tim Baker: Yeah, so I would say this is probably the most popular, um. Strategy for, at least for financial planners. I think probably even for, for people that do it themselves, um, I would say the bucket strategy is probably the second most popular. Um, this was kind of made, um, popular, I guess, or or known by the, the 4% role.

Tim Baker: So. Um, it’s often associated with a 4% rule. And, and this method really involves withdrawn, uh, a fixed percentage from the portfolio annually adjusted for, potentially adjusted for inflation and market performance. So the, the 4% rule kind of came, um, from a study. It was, it, it was based on. 30 year, 30 year time period.

Tim Baker: So kind of rolling 30 year periods in the market’s history, determine, you know, in the worst 30 year, you know, rolling period. What was the safe withdrawal rate for, [00:36:00] um, an, an investor to withdraw so the money wouldn’t run out at the, you know, basically at the end. So from, from someone who was age 65 to say 95.

Tim Baker: In the study, the worst 30 years, and I think the study goes back to 1926, Tim, but in the study, basically the worst 30 year period was 1966 to 1995, which I guess at the end of that, I don’t know if that was like the, the.com bubble on 95. Yeah. So that was the worst Roland 30 year period. And what the study said was that the The safe, the safe maximum withdrawal rate.

Tim Baker: Of that portfolio, the worst one was 4.15%, and this, they used a

Tim Ulbrich: Adjusted for inflation,

Tim Baker: Correct. And, and they use, they use the, um, the 50 50 kind of stocks to bonds allocation, which I think most people would agree now that that’s not necessarily a great allocation over the course of your, of your retirement. [00:37:00] So what people, people saw that number and they’re like, great.

Tim Baker: 4%. So if I have a million dollars, I can withdraw 40 grand, um, for the rest of my life, you know, typically 30, 20, 30 years. And I, and I’m not gonna run outta money. Um. The, the problem with that is typically the, so the problem with the 4% rule is it’s, it’s rigid. Um, the allocation with 50 50 between stocks and bonds, I don’t think is, is great.

Tim Baker: Um, the, it’s, it’s very much focused on US stocks and a lot of people don’t think that US talks will perform as well as they did, you know, um, in the future, as they did in the past. Um, the, the longevity is a problem because, um. You know, he, the study says that retirement will last 30 years. And I think there’s gonna be a lot of people that follow this are gonna live a lot longer.

Tim Baker: Um, because, you know, life expectancies have risen and it didn’t really, um, the, the, the inflation [00:38:00] averaged a modest 2% in the study. So we saw it in 2022 as 8.3, and that can throw a major wrench. Um, the other thing that’s, that that’s problematic is that spending is not linear. Often we talk about spending in retirement as like a smile.

Tim Baker: So in your early retirement you’re like, okay, you know, yolo, I don’t have to punch the clock anymore. I’m traveling, I’m doing all the things. And then. Spending typically dips as you’re kind of more, you know, Hey, I don’t want to travel as much, I wanna be home. And then it typically goes up when, you know, medical expenses start to start to rise.

Tim Baker: So spending is not linear. So you, you should adjust like what, what, what a lot of, um, people that would say against the 4% rule is like, you should probably be spending a lot more in the beginning. Um, because, you know, spending’s gonna come down and then make sure we have enough, you know, and, and be, you know, more aggressive outside of a 50 50 allocation for, for later life.

Tim Baker: So, um, spending fluctuates, it’s not a straight line and [00:39:00] doesn’t account for taxes, doesn’t account for fees and things like that, which can also be, you know, uh, a major part of this. So. Proponents of the withdrawal, uh, systemic withdrawal strategy would say, Hey, the 4%, that’s cute. That’s a good place to start, but it, it actually needs to benu more nuanced to that.

Tim Baker: So guiding Clinger, um, two gentlemen basically did a study that, that, that, that, that established kind of more, um. Responsive withdrawal rules. So the, the one withdrawal rule, they, they basically said is like, Hey, we’ll start with four or 5%, whatever, wherever it is. And then each subsequent year, the withdrawal amount is increased by the prior year inflation rate.

Tim Baker: Unless the prior year investment return was negative and the New Year’s withdrawal rate would be above the initial withdrawal rate. So it’s, that’s a lot to kind of unpack. But the idea is that you, in this withdrawal rule, you are kind of, um, [00:40:00] flexible to what’s going on in the market, not just from an, not just market returns, but also inflation and probably one of the cardinal, um, beliefs.

Tim Baker: In retirement, and this is, can, can sometimes be hard to swallow, is be flexible. The more flexible that you can be with when you retire, how much you spend in retirement, all that, you know, all that stuff. The more success that the, the odds increase of a successful retirement, and I define a successful retirement, at least at a, at a baseline state of you don’t run outta money.

Tim Baker: You know, I don’t, obviously we want to thrive, not survive, but that to me is like, you don’t, we don’t run outta money. I. So flexibility here is key. The other one that they looked at was the capital preservation rule. So you kind of start at 4%. And then if the current year withdrawal amount is more than 20% above the initial withdrawal rate, you reduce the withdrawal, the withdrawal rate by 10%.

Tim Baker: So it kind of, so this reduces spending when the market returns are [00:41:00] poor. And typically once you get to a certain age, IE 80 or 85, like the, the role no longer applies. ’cause there’s, they’re, they’re assuming that. There’s such a, there’s a shorter window of time that you’re fine. And then the last one that they talk about is kind of the prosperity rule.

Tim Baker: So if the current year withdrawal amount is less than 80% of the initial withdrawal rate, um, so basically what happens then is that the increases, we increase the withdrawal rate, calculate it, um, by about like 10%. So this allows an increase in spending when the markets have done well. So, so you might listen to this and be like, Tim, what are you talking about?

Tim Baker: But what we’re doing, and it’s similar to the bucket rule, but what we’re doing is essentially we’re not, we’re not on a conveyor belt with a 4% rule, which is kind of like, okay, $1 million, 40 grand, you know, adjusted for inflation crate. But if the market is, you know, if the market tanks for three, four years in a row, that that could break.

Tim Baker: Right. [00:42:00] What we’re doing is that

Tim Ulbrich: Or you start working part-time or like all the things, right?

Tim Baker: So, so we’re looking at. We’re looking at the market returns or we’re looking at it inflation, and we’re making tweaks and adjusting your, your paycheck accordingly, right? So again, like it for, so I’ll, I’ll talk about advantages. So the advantages here, um, it, it can be somewhat straightforward to implement once you get your system down, right?

Tim Baker: So every, everyone is easy for us to understand. I have a million dollars, it’s 4%, or maybe I start at 5%. That’s kind of my baseline. And again, 40 or 50 grand, you might be thinking, Hey Tim, that’s not, that’s not a ton. But we’re also gonna make sure that, you know, social, like we, we make a really good decision from a social security, uh, claiming strategy.

Tim Baker: Um, you know, we’re looking at other streams of income, whether that’s part-time work or in, um, you know, income from an, an investment like a business or a real estate. All that stuff kind of plays into this, but. You know, we’re gonna take that 40, 50, 60, [00:43:00] 80 grand, whatever it is from the portfolio, and then in subsequent years, make decisions on, on how that, how that, um, fluctuates.

Tim Baker: Um, probably the biggest reason that people do this, because it does maximize flexibility in asset growth. So here. You’re, you’re looking, you’re really looking at, like to total portfolio return, right? You get a similar result in the bucket strategy, but you’re kind of looking at it in tranches, whereas this is, I have a million dollars, I’m trying to get the most return as I possibly can.

Tim Baker: Um, so you’re not an annuitizing assets, so that keep, that allows you to keep control. And there’s not that, um, irrevocable commitment of like, once I send that check to the insurance company, I don’t necessarily get it back out outside of the, the check that I get from them, um, from an income stream. So there’s potential for higher returns.

Tim Baker: Probably the biggest thing is tax efficiency. So if it’s managed well, um. You know, the, the, the location of [00:44:00] assets, how you pull from them, how you fill up tax brackets, capital gains, harvesting, Roth conversions, all of these things that can extend your portfolio. Um, that is part of this whole strategy. Um, it’s, it’s, you retain full estate value.

Tim Baker: So, you know, if I cut a check for $500,000 and that to an annuity company and that. Check turns off when I die, my kids don’t get that money unless I put that rider in that, um, and I get a reduced check. So this basically, I pass away, that money goes to Shea, she passes away, that money goes to my kids or whoever my beneficiaries are.

Tim Baker: Um, and it, and it’s really designed to kind of tailor to your risk. So advantages, the disadvantages, no guaranteed income outside of Social Security. Um, you still have market and sequence risk, so you’re still kind of playing that game, although the decisions you make. Kind of, kind of mitigate that a bit.

Tim Baker: It does require active monitor monitoring. I would say at least once a [00:45:00] year to kind of figure out, okay, what are we doing for this year? Um, there’s some psychology here. Again, you can be over, over. Um, uh. Attentive to the market because again, that that’s where the next paychecks come in. You still have inflation risks, although I think that’s mitigated if you’re, if you’re looking for total return.

Tim Baker: Um, and there’s potential tax complexity if you, you know, if you don’t do it. Uh, right. So, so this one I, I think, is the most popular. But, and there’s lots of advantages, but there’s also lots of disadvantages and I think the potential pitfalls for inefficiency and lack of optimization with regard to how best to build the, the paycheck.

Tim Ulbrich: Great summary, Tim. And then the thing that jumped off the page to me, which applies across the retirement planning and, and regardless of withdrawal strategy, although more important here as you mentioned, is the flexibility piece. Flexibility, flexibility, flexibility. And this is in part what makes, makes the planning a little bit difficult is we may in our mind say, Hey, I’m gonna retire at the age of 65 and we’re gonna stop working all together. Who [00:46:00] knows, right? What, what will happen in terms of, of health. And obviously as we get closer, things become a little bit more known. But will we work part-time? Will we not? What’s the market doing? What are the goals, you know, that we have in retirement? All these things are a good reminder that whether it’s in the accumulation stage, stage or in the withdrawal stage, this is not a set it and forget it, right?

Tim Ulbrich: This isn’t the strategic plan that we forget about for five years of the organization. We, we’ve gotta set this plan attentionally. Then we wanna be revisiting this because there’s gonna be internal and external things that are going to be moving and changing over time.

Tim Baker: Yeah, and I think, I think what I said last episode, um, about questions to ask your, your financial planner. You know, I, I, I believe that, you know, if you are a seven figure pharmacist like this requires I think professional attention. There’s just so many moving pieces with regard to, you know, how do [00:47:00] I spend down the seventh figure sum of money in a way that meets my goals and what do I’m trying to achieve, not just from a money perspective, but from a, from a life perspective, from a legacy perspective.

Tim Baker: Um, you know, there’s so many different things to kind of be aware of and, you know, I think, again, having that outside. Third party opinion that has your best interest in mind is critical. Now, again, I am biased, Tim. This is what we do. Um, but you know, I always make the joke, like when I first lived in Ohio, I file my own taxes and I lived in like a, like a Rita area.

Tim Baker: And for those that are outside of Ohio, they’re like, Tim, what are you talking about? I’m like, there’s no freaking way I did that correctly, Tim. There’s no way. There is no way

Tim Ulbrich: well re Rita will become, come knocking in like 2030 ’cause

Tim Ulbrich: they’re like three years behind

Tim Baker: Yeah, but like, this is kind of the same thing, right? Like, like hire a professional to [00:48:00] do these things because there’s just so much nuance and you know, I, I often hear like, uh, like, you know, my colleague’s doing this, or my uncle’s doing this, or my brother’s doing this, you are a unique snowflake.

Tim Baker: Your, your, your balance sheet and your goals are gonna be unique to you and what you’re trying to accomplish. So. I think it takes a tailored approach to get you to where you want to go. Right? And, and that would just be my, my soapbox, uh, for the, for this episode.

Tim Ulbrich: Tim, I, I couldn’t agree more. And, and I’m not shy about saying we’re biased because we, we see the benefit that this has in, in clients that are intentionally planning over a long period of time. You know, we know it in our own plans. I, I work with the team at, at YFP planning. Like there is real value there in a long term engagement.

Tim Ulbrich: And, and to your point, everyone’s situation plan different and we often wanna apply. General advice, and you know, here we’re talking again, withdrawal strategies. It’s not a one size fit. Fit fits all, and there’s so many conversations, as I mentioned at the beginning of [00:49:00] the episode. There’s so many conversations, yes, financially, but also about goals and emotions and all types of that need to happen. That inform the strategy

Tim Ulbrich: and why we’re gonna be doing what we’re gonna be doing from a strategy standpoint. So, you know, whether you’re hearing this and you, you lean towards the security of the flooring strategy or maybe some of the structure of the bucketing strategy or some of the flexibility of the systemic withdrawal strategy. The key again, is finding a strategy that lines with your goals and risk tolerance. And we believe working alongside a third party can be incredibly helpful. In doing that, we’d love to have an opportunity to talk with you more about your individual financial plan and your retirement plan. Uh, to learn more about our one-on-one fee only virtual financial planning services and our team of certified financial planners. Go to your financial pharmacist.com, you can book a free discovery call, that’s a 45 to 60 minute meeting, uh, with Tim Baker. We can learn more about your situation. Uh, you can learn more about our services and, and together we can determine whether or not it’s the right fit. And you know, for [00:50:00] some of you, if you’re currently working with an advisor and having that feeling of, Hey, I’m not sure it’s the best fit, we’d love to have an opportunity to talk with you as well, uh, to do a second opinion analysis and, and see whether or not the current situation is the right fit.

Tim Ulbrich: Or perhaps a move does make sense. Again, you’re financial pharmacist.com. Book a discovery call. Tim, great stuff. Thanks so much for joining today.

[END]

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