Reaching FIRE was Easy — Not Running Out of Money is Hard | Afford Anything Video
Eva is finally closing in on her financial independence goals, but she’s grappling with how to make a smooth transition from accumulation to decumulation. What should she consider?
John has noticed a game-changing omission from recent discussions about traditional versus Roth IRAs. Is this as big of a deal as he thinks it is?
An anonymous caller is excited to convert his primary residence into a rental property. But he’ll only make a profit if he first sells some equities to pay down the mortgage. Is this a good idea?
Former financial planner Joe Saul-Sehy and I tackle these questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Eva asks (at 02:50 minutes): I recently attended your Purpose Code book launch event in New York City, and one of the audience questions really stuck with me. How much cash should we hold to reduce sequence-of-return risk as you approach financial independence (FI)?
That got me thinking: Many long-time listeners, myself included, have been on this FIRE journey since your podcast started. And with the strong market over the past several years, I suspect a lot of us are either nearing or crossing our FI goalposts.
How should someone transition their portfolio from accumulation to decumulation? And when is the right time to start making those changes?
From my research, two approaches seem relevant here:
• The efficient frontier model, which you covered recently, where investors gradually lower their risk tolerance as they approach FI.
• Risk parity models, which are often used for decumulation and can potentially support higher withdrawal rates, like 5 percent (as seen in strategies like the Golden Ratio model).
I don’t think I’ve heard you do a deep dive on risk parity models before, but I’d love to hear your thoughts. Assuming we're less worried about adding some complexity if it supports long-term success, what’s the best way to approach asset allocation in the decumulation phase?
Anonymous asks (at 31:14 minutes): My wife recently got a job in Cleveland, and we’re excited to make the move from Michigan. Now, we have to decide: should we sell our house or convert it into a rental property?
If we sell, we’ll likely break even. But I’ve been wanting to get into rental real estate, and this seems like a good opportunity to learn. That said, I could also just start fresh in Cleveland.
Our mortgage is a seven-year ARM at 4.875 percent with $0 down. It resets in 2030 to the one-year treasury rate plus 2.75 percent, capped at 9.875 percent. By the time we sell or rent it out, we’ll owe $421,000 on the loan.
I’ve run the numbers in Excel, and it looks like we’d be cash flow negative—somewhere between $5,000 and $15,000 per year—unless the property appreciates enough to make up for it. An alternative I’ve considered is selling some equities to recast the mortgage.
We have no debt, $105,000 in cash, $520,000 in tax-advantaged accounts, and $578,000 in taxable accounts. If I used $200,000 to pay down the mortgage, the property would likely turn cash flow positive. But I hesitate to do that for a few reasons:
1. I don’t love the idea of realizing capital gains taxes.
2. My wife and I just hit our Coast FIRE number, and I like keeping our investments intact.
At the same time, I wonder if I’m missing an opportunity here. What do you think? Should we sell or rent? And if we rent, should I pay down the mortgage first?
John asks (at 51:39 minutes): In your recent discussions about the pros and cons of traditional versus Roth IRAs, I was surprised that neither of you highlighted one major advantage of a Roth: the ability to grow tax-free for decades, even well past retirement.
I converted my traditional IRA to a Roth back in 1997 and retired in 2020. Now, at nearly 72, I have over $1 million in my Roth that I haven’t touched—and don’t foresee needing to anytime soon.
Because there are no required minimum distributions (RMDs), I can let it continue growing, possibly for decades, all tax-free. If I had left it in a traditional IRA, that tax-free compounding would be coming to an end right around now, and I’d be facing withdrawals and taxes.
So my question is: Isn’t this a significant long-term advantage of a Roth for those who can afford to keep the money invested? Or am I missing something?
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