Clay Finck (01:36):

Now, Jeremy, at the time of this recording, the S&P 500 is down around 15%, and I’m sure some people are worried, “Okay, what’s going to happen this year?” We got all these things with Russia and Ukraine, and we’re approaching bear market territory. When I log onto Twitter, all I see is very low investor sentiment with the expectation of things only going lower and potentially entering the next financial crisis. How are you handling this recent volatility in the stock market?

Jeremy Schneider (02:04):

I’ll tell you. I’ll list every single trade I’ve made in response to the rising rates and the falling market and the Ukraine and the investor uncertainty. Here’s the list, the entire list of trades I’ve made, none.

Jeremy Schneider (02:17):

I’m doing nothing because these types of market pullbacks are expected, they’re part of investing. If you want a guaranteed return, you can put your money in a savings account and get 0.5%, but if you want to be more aggressive and get 10% returns over long periods of time, you are signing up for these. But the deal is, you don’t get to pull out, you don’t get to cash out, and if you try to make tricky moves to avoid these macroeconomic situations, you’re much more likely to hurt yourself than help yourself.

Jeremy Schneider (02:44):

And so, since 1950, I think there’s been 37 market pullbacks of 10% or more, and the previous… there’s been 38, including this one, and the previous 37 have all resulted in the market breaking all time record highs. The average length of the crash from peak to trough has been about six months, and we’re four and a half months in. So, does that mean we’re one and a half months from being done? Nobody knows.

Jeremy Schneider (03:04):

In fact, like you said, we’re down 15%. We were actually down 18% three days ago, and the market’s up 3% in the last three days. And so, maybe the lowest the market will ever be again for the rest of time was three days ago. That’s possible. It happens all the time. The market is always hitting all time lows that we’ll never see again, because the market generally trends up, but we don’t know. It could keep going down for another year, it could be done today. We don’t know. But what I do know is, if you hold for decades, you’re going to see that massive power of compound growth. And if you start trying to time the market and jumping in and out, it’s much more likely to hurt you than help you.

Clay Finck (03:35):

In theory, I would expect an environment of rising rates to put downward pressure on the valuation of stocks as stocks are the present value of those earnings and free cash flows, but markets are fluid and they adjust to the expectations of what interest rates will be in the future as well. So with that, I’m curious if you know how stocks have performed in other periods of rising rates and if investors should be worried about this environment that we’re currently in?

Jeremy Schneider (04:03):

So that’s a very smart, detailed analysis of the value of stocks. And you’re right, when rates go up, then companies are less likely to be able to invest and they’re less likely to grow going forward or whatever. But the problem is, as soon as you know that, that has already been priced into the shared price of these stocks for at least as long as anyone else has known it and probably as long as anyone has predicted it, right? And so, one of those sayings is, “Buy on rumor, sell on news.” Because the price of the stocks today aren’t based on the value of the companies today, it’s based on the expectations of the sum total of public human knowledge going forward. And so, by the time we can make a statement like, with the rising rates is going to depress the price of stocks going forward, the prices are already at that point, lower. They’re already at that lower expectation which is what we’ve experienced.

Jeremy Schneider (04:50):

And you can see that in 2020, the most recent big market crash. If you think this 15% drop is bad, in 2020, we saw a 34% drop in a month. It was crazy. It was the sharpest and steepest drop in history. But when the market was dropping, COVID cases were virtually non-existent in the US, supply chains were fine. That was all an expectation. And then, when COVID got really, really bad, the market was super, super high, because the expectation was, “Okay, this is the worst of it. Now we’re going to get through it.” And so, if you were trying to buy and sell based on how bad COVID actually was, you would have sold super low and lost all your money and then waited and then you would’ve missed the entire run up as COVID got worse.

Jeremy Schneider (05:29):

The same thing is happening here. And if you go back and look over history at all the different periods of time, you can slice and dice in a million different ways. You can look at high rates and low rates, you can look at before the crash and after the crash. And the thing is, it’s basically random. There’s no system that you can put in place like, “Okay, every time the rates are low, buy. Every time the rates are high, sell.” There’s no such thing you can do. In fact, any random time you look forward 10 or 20 years, the returns are about 10% per year for the next couple of decades, as I expect it will this time.

Jeremy Schneider (05:54):

And if there ever is a pattern that emerges, sometimes I hear something like, “Oh, in September the market is low.” As soon as that pattern emerges, the market adjusts and then the pattern ceases to happen going forward because the efficiency of the market fills in. So, I know it’s like I’m the boring, index, fun, buy and hold guy, but I’m going to keep beating this drum because it keeps being true. Because when you try to get tricky, it’s more likely to hurt you than help you.

Clay Finck (06:16):

Are you only invested in stocks then? I know you talk about potentially allocating towards bonds as well, but do you just take the approach that stocks over the long run are the best performing asset class, so that’s what you stick to?

Jeremy Schneider (06:29):

I own some bonds too, 41. So, I’m on the older end of young still and I think in my portfolio it’s 10% bonds are now or something. Generally, from a very broad perspective, I invest in assets that appreciate and provide income and the two major classes are stocks and bonds as one and investment real estate as the other. And so, if you buy and hold those two things and they pay you income while you hold them and you hold them for long periods of time, you’ll be very wealthy. That’s the long and short of it. Everything else is fine tuning, what’s your asset allocation of stocks versus bonds, what kind of real estate you’re doing? And so, yeah, that’s why I do broad strokes right now. I’m 90% stocks, 10% bonds. And then, I have some passive real estate investing.

Clay Finck (07:10):

One idea I’ve grappled with is stock valuations. The S&P 500 has had an average annual return of over 13%, over the past 10 years which is quite remarkable and on the higher end of historical returns. So, I’m curious if there’s ever a point where you might consider other asset classes, call it bonds or maybe even commodities or even more real estate. In theory, your expected future returns are lower if you’re paying historically high valuation for those stocks, which means that there could be better opportunities elsewhere. So, I’m curious what your idea is around that.

Jeremy Schneider (07:47):

The 13 year thing is a cherry pick timeframe. If you do 20 years, it’s more like 9%. If you do 40 years, it’s like 11%. But these are all good numbers, right? Other than four months, you can’t pick a timeframe where the market returns a big negative number, right? Any 10 period or 10 year period or longer. And so, my answer to that is the same as the answer to the rising rates thing, which is we don’t know what if the value is too high or too low. Because any individual, you or me, or any person or our company, we’re all dealing with a subset of the total sum, total of public human knowledge and it’s really a difficult pill to swallow to admit that you say… I have to say like, “Based on my deep understanding of the markets and the research I’ve done and the books I’ve read and the analysis I’ve done, I’m operating at a disadvantage.” But we are, we all are because no one has as much as everyone combined and everyone combined is what’s pricing the market. That’s the efficient market theory.

Jeremy Schneider (08:36):

And so, when you say stock overvalued from your perspective maybe, but there might be someone else who’s done deep, deep research and has satellites rotating on planet Earth, taking pictures of Tesla factories, figuring out that there’s untold new resources of battery materials being discovered and Tesla is over producing cars and population is accelerating. 50,000,000 different things that could be impacting the outlook and that’s what pushed valuations high because now based on the new prices, we still think it’s going to return 10% per year or whatever. And so, no, I don’t stray for my strategy. I just stay the course and bonds have been really unpopular and they’re unpopular now. As soon as all of pop culture, I should say is sure that one thing is true. The opposite is about to be true.

Jeremy Schneider (09:19):

Few years ago, I remember gas or oil was extremely cheap. It was $30 a barrel. Russia had just discovered huge amounts of this before the Russia thing, obviously. Russia discovered huge amounts of new oil reserves. The US was doing fracking. It was suddenly going to be like oil independent in a response. Saudi were flooding the market with oil. Every single indication that there was oil, was just going to be just flooding the market and going to be cheap forever. And I was like, “You know what, when everyone’s so sure about something, the opposites found to be true.” And sure enough, I think at the time of I bought, this goes opposite to my index fund theory. But I bought some oil futures and just held them for like six months and sure enough, oil prices doubled the next six months because I’m really sure of something.

Jeremy Schneider (09:59):

So that said, that was a very rare speculative better mind. Mostly, I just say, “Hey, I’m going to buy broad markets, hold them for long, long periods and not try to get tricky, because it’s more likely to hurt myself than help.”

Clay Finck (10:11):

I like how you mentioned how you stick with your strategy. I think that’s one of the most important things, especially for younger investors or millennials is to just find your tried and true strategy and stick with it. Don’t try and chase one shiny object, then go chase another. If you’re going to chase multiple rabbits, you’re going to end up catching none of them.

Clay Finck (10:29):

So with that, I’m personally someone that likes to take a bit more risk than what others might be comfortable with as I’ve built a position in Bitcoin over the past few years, maybe that’s because I’m young and just so used to markets, always coming back in the federal reserve constantly providing liquidity into the markets. And I look at something like bonds today, which you mentioned. The 10 year treasury yield today is around 3% and inflation is currently much higher than that. So, anyone that’s holding bonds is almost guaranteeing the loss of their buying power currently. And that’s something I just tend to personally shy away from, which probably makes sense given my age. I’m curious what your thoughts are on the cases for holding bonds. Is it something that some investors should consider?

Jeremy Schneider (11:15):

If you’re under 30 or under 40 and you want to have 0% bonds in your portfolio, I’m fine with that. Bonds are historically a less volatile asset, so they’re not going to drop 50% invalid like the market could or like Bitcoin could and they provide income. And when I’m talking to millennials, millennials often feel exactly like you do, which is, let’s cowboy up here and go try hit a home run. But when I’m talking to 70 year olds, they very much don’t want the $2,000,000 that they’ve accumulated over the course of their career to turn into $1,000,000 because that would dramatically hurt themselves. And yeah, I get what you’re saying, at this weird moment and whatever is May of 2022, inflation over the 10 or 12 months looks very high and bond yields are very low. But I promise you, if we have this conversation 12 months from now, which invite me back, let’s do it, see if I’m right. That’s not going to be the case.

Jeremy Schneider (12:00):

In fact, like inflation in March was 1.2% for the month of March. And then, April is 0.3%. And so, there’s already indications that it’s on its way down. Also, rates are rising, so it’s already an indication that bond yields are probably going to be going up. And so, I think in the future, bonds are going to at least match inflation if not outperform it. So, if I’m talking to someone who’s 20, I’m like, “Yeah, no bonds like whatever.” But if I’m talking to someone who’s like 40, 50, 60, 70, I’d say, “Yeah, keep transitioning slowly towards bonds.” And so, when you are 65 or 70 and suddenly your risk tolerance is different because you are more concerned about capital preservation and income, having a very healthy portion of bonds in portfolio makes a lot of sense.

Clay Finck (12:39):

What would you tell someone like myself that loves studying the markets and loves to dive into different areas, not just the foundational pillars like index funds? Should these types of people only stick a small certain percentage of their portfolio in these other asset classes or individual stocks or whatever this person might be interested in or how should they approach that?

Jeremy Schneider (13:02):

So, I think what you’re describing is this FOMO, this risk of… it’s boring to be an index fund investor. Like I said, in this crazy market time, I’ve made zero trades. I never make a trade. I just buy and hold for decades. Over the course of time, it’s already made me millions of dollars and I think will make me many more millions of dollars. But over any given day or week or month, there’s zero chance for hitting a home run. Like it’s just, “I’m just going to get the market returns.” And releasing the pressure on that FOMO is a real concern. I think if I sit here wagging my finger saying, “Never make a spec of bad oil futures.” I did that one time, I would be being disingenuous. And so, I have what I call the 90, 10 drill, with 90% of your portfolio buy and hold index funds, mix of stocks and bonds based on your age.

Jeremy Schneider (13:45):

So, 90 or 100% stocks up until you’re 40 or so, and slowly transition towards bonds as you reach retirement or traditional retirement age. And then, with the other 10%, go nuts, whatever, crypto, trade options, Dogecoin, stock picking, whatever it is, oil futures, ARK ETF. I would encourage you if you do this is make a careful measurement of how your 10% performs compared to 90%. I’m sure at some point you’ll be up, like Vegas. They say, 93% of people are up at some point when they go to Vegas and 90% of people leave down.

Jeremy Schneider (14:17):

Because just due to the chaotic randomness of whether you’re clever or smart or just lucky, you’re going to beat the index funds for a little while, but over time, suddenly ARK ETF, when everyone got winners high is now down 78% or whatever. The pipe is going to come in. You’re glad that your 90% is still there chugging along, making it wealthy over time. And if you are the next Warren Buffett, if you are God’s gift to day trading or whatever, 10%’s going to be plenty or 10% will make you millions and millions. And then, you can donate your 90% to charity because you’re such a great trader.

Clay Finck (14:50):

One topic I wanted to discuss during this conversation is the topic of life insurance. It’s a very important decision that many millennials and listeners of this show is going to need to make at some point in their lives. How do you think about life insurance? Who needs it? Who maybe doesn’t need it?

Jeremy Schneider (15:08):

Insurance is such a scary word because it feels a high school homework assignment that was assigned that you never did and everyone’s need insurance. It’s like, “Oh, I don’t know what insurance is and I don’t know if I have the right amount and I just pay some for something. I don’t know what it does.” So, one thing I’d like to start with is, just first of all, give yourself a break. There’s no perfect insurance portfolio.

Jeremy Schneider (15:27):

I think in general you should follow a law. If you drive a car, you should have car insurance because that’s a law. And with regard to life insurance, it’s actually very simple. If no one depends on your work to survive, you don’t have kids or dependent or something like that, it doesn’t even necessarily need to be your financial job. If you’re staying at home, parent or something and your spouse works, you are part of that team that’s providing for those kids. So, if you have kids, you need life insurance because if you were to die, then as much of a tragedy as it would be to die earlier, it would also be a financial mess because your dependence, your kids or whoever would not have enough money to survive. And so, if you have kids, you need life insurance.

Jeremy Schneider (16:04):

If you don’t have kids and if no one depends on your income. So if you’re a 25 year old teacher and you have no kids and don’t have a sick brother or something who depends on your income to live, you don’t need life insurance. Because if you die, no one starves. You don’t need it. You just absolutely don’t. And for example, I don’t have kids, I don’t have life insurance. Even if I did have kids, I wouldn’t have life insurance because I have $4.5 million. If I were to die, my kid would have plenty enough money to make it till they’re 18 and 20. There’s no need.

Jeremy Schneider (16:29):

So, the only point of life insurance is to cover that gap until your dependents become no longer dependent and your death is no longer a financial tragedy. That said, if you do need life insurance, you should buy what’s called, term life insurance. Term life insurance covers you for a certain period of years, 10, 15, 20 years, and then during that time if you were to die, your beneficiaries get a big payout so you could buy like a half a million or a million dollars of term life insurance for 15 or 20 years. And then, when that 20 year period is up, you’re in a situation where you don’t need life insurance anymore because your dependents are grown and or you have been investing for 20 years and you’re wealthy and then you’re now self life insured where your dependents would just get your inheritance when you die. That said, I do want to talk about the other nasty insurance, which is permanent or whole life insurance, which I think you can ask about.

Clay Finck (17:19):

Yeah. Term life insurance and whole life is probably the two most popular options that I hear about. I used to work in the insurance industry and I’m pretty familiar with how they work. And from my understanding, a lot of people end up going with 10, 20, 30 year term life insurance policy, because with whole life, you’re going to receive that death benefit at some point. That means your premiums are going to be a lot higher. So, with term you’re only getting coverage for the period you need. And with that, it’s going to give you a much lower premium. So, is it the lower premium that really pushes you towards recommending term over whole life?

Jeremy Schneider (17:56):

Absolutely. So yeah, term is generally dramatically cheaper, 10 times cheaper. So, if you’re a young person getting half a million dollars of term insurance, it could be 30 bucks a month, but the other type of insurance, you call the whole life, but there’s 10 different names for it, but anything that is called like cash value, life insurance, permanent life insurance, index universal life insurance, variable universal life insurance, NPI, there’s like a dozen different names for this other type of insurance, which last year entire life has an internal cash value that accrues.

Jeremy Schneider (18:22):

And basically, in my opinion, all these types of insurances can generally be lumped together as like these tricky rules set by insurance companies to charge consumers a lot more money. And it’s true that your death benefit does last forever, but you don’t need that. Why would you be paying $500 a month as a young person? So, you get a death benefit when you’re 80. You don’t needed that benefit. You only need the death benefit when you’re young and if you are investing the difference in premium, you’ll be much, much more wealthy because these permanent life insurance policies are riddled with fees and expenses.

Jeremy Schneider (18:52):

And in fact, on TikTok right now, there is this like this army of insurance salesmen who are basically using this deceptive marketing technique to lie about the numbers and sell this permanent life insurance. And so, what I did is I went on TikTok, clicked on one of the linked in bios and bought the policy. I sat through a 90 minute sales pitch. The things that were sent, which I recorded with the agent’s permission, by the way. But every word out of his mouth was like just a strip, why it was crazy? He was saying that the insurance policy was going to return 12% per year, which is more than the underlying index returns. He didn’t mention the fees at all. And then when I did the math, 44% of my premium was immediately going to fees, the remaining half or so was then eaten up by underperforming returns. And when you extrapolate this over the course of 40 years, 82% of the premiums are… It underperformed 82% compared to the underlying index, if you were just to buy an index fund.

Jeremy Schneider (19:40):

And so, the insurance salesman out there are going to, whenever I say this, they come after me. They say, “Oh, it’s a different policy or you’d set it up wrong or you know, all this stuff. All I know is when I see people in the real world with these policies, they’re all bad, they’re all getting taken advantage of, they all have super high fees. And so, if you ever talk to a financial advisor who is recommending that you buy whole life insurance or permanent life insurance as an investment, you’re not talking to a financial advisor, you’re at an insurance company talking to an insurance salesman. And so you should, run, not walk out of there.

Jeremy Schneider (20:09):

And so, I only harp on this because I see so many people getting taken advantage of it. And so, and again, this is a very specific sales pitch of very specific kind of like deceptive marketing, but keep your insurance separate from your investing. Your investing should be real estate stocks and bonds. Your insurance should cover your actual insurance needs like car insurance, term life insurance, homeowner’s insurance. Just the stuff that if something bad were to happen, you’re covered, but you don’t need to invest in an insurance policy.

Clay Finck (20:34):

I like what you said there at the end to keep your insurance and your investments separate. It seems like these people will just over complicate things and package these things together and make it almost more complex that the person really can’t understand what they’re actually buying. And I’d encourage people to just try and look at the incentive structure. Someone might be really pushing some sort of life insurance policy, but you know, in reality, the reason they’re doing this is because they’re able to collect these very high fees. And another thing I’ve seen from these types of policies is that they’ll cherry pick data. They might pull the policies returns from the year 2000 when the stock market was at like a record high. So, it looks like, “Oh, this policy did like really, really well over this time period.” Well, that might be the one year out of the past 20 years, if you would’ve bought that policy where it might have actually outperformed but all the other years it was like abysmal.

Jeremy Schneider (21:26):

No, actually I wrote an article like the 10 lies told during these insurance sales pitches and one of them was cherry pick timeframes. And actually, I sat to be the sales pitch in 2022 and they showed me a chart from 1998 to 2012 or something like that. I’m like, “Why are you showing this 14 year old data?” And the chart he showed me wasn’t even true. It was a lie because it was omitting all the fees they charged. So, it showed that the life insurance was outperforming, but he failed to mention that 50% of my premium is immediately. So, he’s just showing after he takes his cut, what the remainder would do, but that’s not my perspective. I still lose the money to the fees.

Jeremy Schneider (21:57):

And so, if you observe there’s deceptive marketing that they do to make it look good, but it’s not true, it’s not what will happen. So, when you start putting money to this thing, and five years later, you check, you’re like, “I put $20,000 on this insurance policy and now it’s worth $10,000.” That’s a bad return. That’s not good. You lost half your money.

Clay Finck (22:13):

Yeah. From some of the people I’ve spoke with that I trust, a good rule of thumb is to just not mix your investments and your insurance policies. So, let’s transition to talk a little bit more about retirement and financial independence. The 4% role has been popularized in the five movement as playbook to retiring with the portfolio of stocks and bonds that you can live off of. It seems like stocks nowadays have increased uncertainty with things I was mentioning earlier, the higher interest rates and the higher inflation, and it can make me at least naturally feel a bit uneasy in regards to our finances in the near term at least. So I’m curious, what are some ways in which we can increase the certainty that we will have enough money come retirement time. Say if someone wants to retire one or two years from now, how might they be able to better prepare themselves to make sure they have enough money?

Jeremy Schneider (23:06):

So first of all, there is no certainty in this world. Every all seven or 8 billion of us are all marching forward without knowing what… An asteroid could hit the plant tomorrow and take it all out. 4% or 100%, it’s not going to be anything. So, we’re all just trying to learn lessons from the past to give us the best chance going forward. That said, earlier in our conversation you said, the market’s been returning 13% for 13 years or whatever. And now, you’re saying, “Oh, 4% seems risky.” And so, the reason the 4% rule exists is because it just looked at historical volatility of the markets, bond rates, inflation and said, “Okay.”

Jeremy Schneider (23:44):

You can’t depend on 10 or 13%, because in bad years you might go broke because the market might be down for a couple years now. If you’re taking 13% and the market’s flat for five years, you could bankrupt yourself. But also, 1% is too low. With 1%, you could just put it under your mattress, take out 1% per year and spend it for a hundred years. That’s annoying inflation, but more or less. And so they said, “Okay, what’s the number?” And the number is 4%. And so, you say, what can you do? I’d say, 4% is like a pretty good rule of thumb.” By the way, if you’re curious what the 4% rule is, it’s basically saying, what percent of your portfolio can you withdraw every year and even adjust up for inflation every year and be very unlikely to never actually bankrupt your nest egg. And again, if the next a hundred years of the market are dramatically worse than anything we’ve ever seen before, that’s not going to work, but nothing will work then, right? We’ve got a different set of problems.

Jeremy Schneider (24:32):

And the other thing I’d say is, retirement is… especially early retirement is never done in a vacuum. I think people early on have this idea that when I turn 45, I’m going to retire. My income is going to go to zero for the rest of my life. I’m going to start withdrawing money like a robot out of my account with my eyes and ears closed and I hope when I’m 65, I didn’t hit a brick wall. You’re going to live those years between 45 and 65. And you’re probably not going to have zero income because people who retire early, I retired at 36, a couple years later, I was like, “I’m bored out of my mind. I’m going to start a hobby.” And then, a year and a half after that, I was like, “This hobby is going really well, it’s going to become a business.” And then I’m like, “Oh, should I made more in the first week of my business than I made the first three years of my last career.”

Jeremy Schneider (25:14):

And you can react, if you were withdrawing a $100,000 a year and there’s been five years bad and five bad years in the market. And you’re like, “No, the 4% rule from seven years ago, said I can take 100,000.” Maybe going to take 90,000 that you maybe can take 80 or you’re going to be like, “Oh, my portfolio is up five X, 100,000 is easy. And so, it’s not done in a vacuum. I think 4% is conservative. Creators of that rule came out and said that like, “It’s actually more like 4.5 or 5%.” And the older you get the bigger the number gets, right? If you’re like 74%, you can start doing 10 or 15% like this. Even if you do 10%, it’s 10 more years plus the growth of market’s probably good for 20 years or something and that takes you to 90. So yeah, that’s what I’d say. I just say, if the 4% rule is designed to be a modest rule so that in the good years you’re not taking all 13%, in the bad years, you can live off of the last decade.

Clay Finck (26:03):

Yeah. We recently had Nick Maggiulli on our podcast. He had a book called, Just Keep Buying. And he mentioned that a lot of retirees that have these nest eggs saved up. They’re not even pulling the principle because their portfolios are doing so well. Now, in preparing for retirement, there are a number of different options or accounts that people can invest in. So, I’m curious if you could walk us through your steps or order of operations people should consider when they’re investing. As you know, there’s all these different types of accounts we can invest our money. What are the types of accounts we should look to invest in first?

Jeremy Schneider (26:38):

Sure. So, whenever I get technical, I always like to remind people of two things, the two rules of building wealth. Rule number one is live below your means and rule number two is invest early and often. And that’s it. If you spend less money than you make and you invest the difference over time, you’ll be wealthy. And all the specifics we get back into fine tuning space and that’s cool. People who are listening to this show are here for a reason because they probably like the stuff and they want to talk about the fine tuning. But it’s important to remember that there’s no perfect answer. No one out there is like, “I have never made a mistake with money.” And I am like, “Yeah.” Perfect investing would be like buying and selling options on every intraday dip and high and you’d be more rich than Jeff Bezos and three hours or something like that doesn’t exist.

Jeremy Schneider (27:17):

So, we just have to like go with these rules of thumbs. That said, my rule of thumb for investing accounts is the first thing you do, is you invest in your 401(k) up to your company match. If your company is giving you a match, that’s free money. It’s an instant 100% return over the matches. There’s no market conditions, there’s no debt situation, there’s no rising rates or anything that’s going to make 100% instant return a bad deal. Even if you were to turn around the next day and pay the tax and penalty and take it all out, you’d still get 50% free money. You’d always do that.

Jeremy Schneider (27:46):

So, the second best account is actually the HSA, the Health Saves Account. This is only assumed that you already have a health insurance plan, that is HSA compatible. But the reason is the HSA is the only account with the triple tax benefit, which is money goes into a tax free, money grows tax free, and you can actually spend money out of a tax free on qualified medical expenses, but no other tax advantage account has that triple tax benefit. And so, every single year I’m maxed on my HSA. I keep a few thousand bucks in cash and the rest I invest in at target date index fund and let it grow for decades.

Jeremy Schneider (28:14):

Number three is the Roth IRA. So, if you can do a Roth IRA or a backdoor Roth IRA, I like the Roth IRA before going to your 401(k) because it offers generally lower fees and unlimited investment options.

Jeremy Schneider (28:24):

Step number four is going back to your 401(k) and filling it up. By the way, the HSA, I think can put in 36, 50. As an individual Roth IRA, you can put in 6,000. So, this is like a waterfall. You just fill up piece accounts in order, and then your 401(k) or 403(b) or TSP or 457 or whatever your employer offers. If any, you can put up to $20,500 in. And again, if you can’t do any of these steps, you just skip it. And if you fill up that, then step number five is a good old fashioned tax brokerage account, which is just like a regular account, like your checking account or your savings account, except you invest inside of it. And sometimes people get so fixated on this like Roth IRA, fancy term. Because it sounds cool and it sounds complicated. And they ask me, “Can I invest more than $6,000?” And the answer is, Yeah, you can invest trillions of dollars. There’s no limit, you can invest unlimited money. But just how much you can fit into these special tax savings accounts is lower.

Jeremy Schneider (29:13):

And so, me personally, about 95% of my portfolio isn’t a regular taxable brokerage account. I wish I could put it all on the tax advantage accounts to save on taxes, but I sold a company when I was 34 and so I made two or 3,000,000 bucks all once. And so, I couldn’t fit it all in. And so therefore, most of it just sits in the taxable brokerage account, but that’s fine because it still grows. It still is relatively tax efficient as far as taxes go because you’re paying long term capital gains tax on index funds, which is actually zero for your first 80,000 or something like that. So yeah, that’s the steps, go through those, fill those accounts in order and don’t sleep on the taxable brokerage account.

Clay Finck (29:46):

I 100% agree. And I think another important thing that people should consider is that us millennials, we enjoy our freedom and flexibility and I just realize that you’re on the higher end of the millennial generations age range, and I’m actually on the lower end. And you know, if someone only has 10 or $20,000 they can invest, then following that formula, pretty much all of that would be going towards your retirement accounts and you wouldn’t be able to draw on those until you’re 59 and a half years old. So, I think that’s another thing that people should consider. Do they want to tie up all their money if that’s all they have to invest? Should they be tying that all that up into the tax, the retirement accounts? Or should they maybe allocate some portion of that to the taxable brokerage? Because that gives them a little bit more freedom and flexibility with their money and being able to pull from it if they maybe decide to prior to that age.

Jeremy Schneider (30:36):

So for what’s worth, I don’t blame someone for wanting to put somebody in the tax brokerage account ahead of schedule. But I don’t think that you should and I’ll tell you exactly why, because I get this question all the time. I don’t want to wait till I’m 59 a half. I want to retire early. I want more flexibility. I want to have so much money that I can retire and not wait, have not have it all locked up till I’m 59 and a half. And I love that question because it’s like ambitious people who probably are going to retire early, but here’s the thing I’ve never actually seen that problem in real life. I’ve never seen someone who’s 45 or 40 or 35 or whatever, and says, “I have so much money. I have millions of dollars that I can retire early, but now I have to keep slogging the work because it’s all in a taxed account.” That doesn’t happen.

Jeremy Schneider (31:17):

In real life, once people started advancing their careers and they make so much money, they naturally, that waterfall, naturally starts overflowing. Just like it did for me, obviously mine was a little bit weirder because I sold the company, but naturally starts overflowing into the taxable brokerage account. And so, you most likely have plenty of money in a taxable brokerage account later. So, when you’re young and have this massive power of compound growth ahead of you get that tax, cram as much as you can in those tax manage accounts. That said there’s five taxable brokerage accounts is one way you can access money early. There’s five other ways you can access money early. I’ll break them down right now.

Jeremy Schneider (31:46):

Number two is real estate. Most people who retire early in our rich have money in real estate. It’s generally not in a tax advantage account. So, there’s number two. Number three is Roth IRA principle. If you put money into a Roth IRA or a Roth 401(k), you can take that money you put in out whenever you want. That’s tax free penalty free. So for example, if you are putting 6,000 bucks a year in for 10 years, that’s 60,000 bucks, you can take all 60,000 bucks out and go buy yourself a Tesla or something. I don’t think you should, but you can. Number four is a Roth Conversion Ladder. And so, if you have a bunch of money, let’s say you have 2,000,000 bucks in a 401(k) and you’re like, “Oh no, I’m in money jail. My money is locked off.” You can convert that to a Roth IRA. And then five years later and everything that’s converted, you can take it all out tax penalty free and spend 100% of it.

Jeremy Schneider (32:28):

And so, on Ladder is what you do is five years before early retirement, you start converting a little bit each year and then that’s and you do just a little bit to minimize your taxes because there’s you pay tax when you go from traditional to Roth and then when that money converts, you can spend it. And then the next year you spend the next years. And so, this is just a way to access all of your money tax penalty free before you’re 59 and a half. Rule number four is the rule of 55. So, if you happen to retire at 55 instead 59, and you just want to quit your job, there’s just the government says, “All right, you quit your job at 55, you can have free access to your 401(k).”

Jeremy Schneider (32:56):

And way number six is what’s called the rule of 72t, which says, if you make equal periodic withdrawals from retirement accounts, you can retire early. And this is just literally a law that says, you can take your money out early as long as you do it in regular intervals and not just all it wants to buy a boat. And they do that to prevent people from squatting their retirement. And so basically, if I just talk too much and too fast, the point is there’s all sorts of way to get to this money. And so, I encourage young people. Yeah. Prioritize those tax advantage accounts because it could save you like hundreds of thousands or millions of dollars in taxes and the flexibility will be there when you need it.

Clay Finck (33:27):

I actually didn’t know about those last two rules. So, I’m really glad you mentioned that I’m going to have to go back to your articles and reread those and re-listen to this podcast to make sure it really soaks in and maybe up because I might-

Jeremy Schneider (33:37):

You should do a deep dive on rule 72t is. It’s just one of those rules that’s out there. And like I said, I think there’s this like fear of being locked up, but once you get there, you’re going to have a CPA because you’re going to be rich and he’s going to be like, “Oh yeah, here’s how I get your money.” It’s just really not that big of a deal.

Clay Finck (33:50):

I also wanted to discuss some of the things you’re up to today. In the past, you created and ran a software company for a number of years and then you ended up retiring, starting Personal Finance Club to help educate individuals on building wealth and improving their finances. So I’m curious, is your focus nowadays on Personal Finance Club or do you have other things in the works? You mentioned pre-show that you’re making the trip to Europe. So, obviously you’re doing some fun things as well.

Jeremy Schneider (34:17):

Yeah. I still primarily am trying to like maximize my life enjoyment. After I retired for a year, I played video games and traveled and just had fun and played StarCraft II. I am not good at StarCraft II. I got okay during that year. And basically after that year, rub my eyes, I was like, “What did I just do? What is it like? What am I now?” And you know, and when I sold my company and when I retired, it was this very exciting time and I was an important person and had a cool story. But then, I realized is that going to be my legacy forever? Am I going to just be a dude that sold a company in 30s and then this 50s is still playing video games or whatever. I got so lame and this is the nature of life is that if you’re not currently striving towards a goal, it feels very empty.

Jeremy Schneider (34:58):

And I think that’s why maybe you see a lot of like trust fund babies have depression or behavioral or drug problems or whatever because they… for whatever reason, they haven’t been having to struggle. And I don’t like mean to like idolize struggle or whatever or glorify struggle but there should be in my opinion, a tension in your life or a goal you’re working for towards. And so yeah, after I stopped playing video games, I started Personal Finance Club, just as a hobby. I just wanted just do it because I like it and then almost two years later it became a small business.

Jeremy Schneider (35:26):

I also have another side hustle tech company that my buddy and I started. I actually joined three friends last year to start another tech company, which is a machine learning tech company. And I was doing that for almost a year and it just ended up being too much and I just remember my friends would ask me to golf or hang out or play volleyball and I couldn’t because I was trying to start two companies at the same time. And I went to those guys and said like, I think this company is probably going to do really, really well, but it’s just not good for my life. And so I left, but I’m still an advisor and still in support.

Jeremy Schneider (35:54):

So, basically this was a very droning on answer, but I’m just trying to optimize my life happiness which involves fun things. I’m flying to Portugal tomorrow to hang out with a friend, but also I like working and I like building something, I like seeking a goal and so, and my just hobby, the fun thing that I like doing is helping people with personal finance and investing which is why I do this.

Clay Finck (36:14):

You mentioned that you have a net worth or portfolio of $4.5 million, which just running some quick math on the 4% role that’s approaching $200,000 per year in annual income if you were to pull 4% of your portfolio per year. So, being someone that’s still in the front end of my career and I recently just switched jobs from the insurance field to the podcasting education space. So, I’m curious how your money views have maybe changed over the years. Are you as strict now about budgeting and investing as you used to be? Because it doesn’t seem like that wouldn’t be as big of a priority for you now.

Jeremy Schneider (36:53):

Yeah. You know, I’m not, but it took several years to sink as a bit of background. When I was growing my company, my max take home salary was $36,000 a year. I was the lowest paid employee, that’s why I took home 3000 bucks a month. I lived in High Coast Link San Diego. I had roommates. I drove a 99 Ford Explorer that I paid $3,000 cash for. I was frugal by necessity because my company never took any venture capital and I was a software engineer and so, I was just trying to do all the technology to grow the company then hire people to fill in all the rest of the roles and eventually hire more engineers and stuff. And so then, when I became a multimillionaire literally in a moment when I like clicked to refresh my bank account, it looked like a big number and I should probably think of some specific examples. There’s a lot of examples. Like in the first couple years where I would not spend money.

Jeremy Schneider (37:39):

My entire life I had been doing that. Like I like a hundred dollars expense. I would like pains taking me do research for two weeks or if I should spend this $100 or whatever. I sold in 2014, now it’s 2022. So now, it’s eight years behind me and it’s starting to… it’s worn off basically. And I was like, “Oh, I could basically spend whatever I want and that doesn’t change number, a 1% change in the market cost me what, $45,000 or something like that. And so, if I spend a hundred dollars on dinner, can’t even see it in the turmoil of the market volatility. But over time the market keeps going up and spend it generally good last eight years, of course.

Jeremy Schneider (38:12):

And so, yeah, now I’m a little bit more chill. I think I spend 60,000 a year, so I’m not taking that 200,000 out, also because I think I could but I don’t need it and I don’t think that’s going to really make me any happier and I am still 41. So, I hope I’ve got another 41 or 50 years of life left. And so, I still consider myself in the wealth building portion of my career. So yeah, I’m a little more chill but I haven’t gone crazy. I drive a 2016 Mazda now. I live in a two bedroom condo which this is very, very nice. And I’d say, you know what, and you optimize for two things. I think this is where it gets cerebral. We always want to build wealth. And I think a lot of people think when you make a lot of money, you are automatically happy, but that’s not really true.

Jeremy Schneider (38:50):

I think life is all about being happy and helping people and that’s what I strive for. And when you have a lot of money, that doesn’t automatically happen, when you get a lot of money you’re not happy. If you have bad friends and bad relationships and you’re a depressed person then you get a lot of money, maybe you’ll be more depressed because you’ll realize, your friends weren’t really there for you or whatever. So, money can make you an exaggerated version of who you already were. And so, you have to like seek happiness on your own through your relationships and your activities and your health and all that stuff. And then, the other thing I try to do is help people and I just think that’s of what life is all about. And so, that’s what I try to optimize for these days.

Clay Finck (39:30):

I love that. And I remember seeing your post about your progression of the cars you owned over the years. And you also mentioned your two bedroom condo that you’re sitting in right now. I’m curious if you ended up just paying that off for the extra financial security or what path you went on with that?

Jeremy Schneider (39:48):

Well, so when I started my company, I was living in a one bedroom apartment that was a garage, a covered garage owned by my friends. And so, I was basically living in my friend’s garage. I lived there for six years, including four or five years after I sold the company and then I finally decided to upgrade and I found this place. So, my net worth around that time was I think 3.8 or 4,000,000 and I wanted to spend 600,000 on a place, which was 20% or something. And so, I found this place and it was 700,000, and I was like, “Oh, it’s a little bit over my budget, but whatever I can afford it.” So, I decided to go for it.

Jeremy Schneider (40:19):

And then I was like, “All right, how am I paying for this?” Am I going to get a mortgage? I could just sell some shares of stuff and buy it in cash or I could get a mortgage. And I struggled with that decision personally, and I decide finally to get a mortgage. I was like, “You know what, I’ll put 50% down and I’ll get a 50% mortgage, just as a way to kind of diversify my assets out of this single home.” If 20% of my whole assets are in one condo in San Diego, California, that’s like having a mortgage provides some leverage. I can use those very low interest rates at the time which are now rising and have some diversification.

Jeremy Schneider (40:50):

And so, it’s this guy who was like an acquaintance of mine who had been hounding me for years, trying to sell me a loan. He’s a friend of a friend. I was talking to at a party and he’s like every few months, he’s like, “Hey, go buy a place, whatever.” So, I finally try and email him and say, “Hey, quick guess what, I’m buying a place. It’s 700,000. I want to put 50% down. So, I need a loan for 350. My net worth is 3.8 million. I haven’t had a sub $100,000 tax year on my taxes in 10 years.” Because despite my take home being 36,000, my business has already had flow through profits under my taxes. So, from a tax perspective, I’d always been a very high income earner, especially the recent couple years when I had a real job after I sold my company.

Jeremy Schneider (41:27):

But at this point, I had quit my job. And so, then this guy asked me for like thousands of documents and I actually had already put the offer into the place. I put it as an all cash offer with the option to finance. And I was like, “Oh, I’ll just get it, go get a loan real quick in a week or two and then it’ll be fine.”

Jeremy Schneider (41:40):

So, two week drags on after he asked me for my documents and then he says, “Because you don’t have any income, you don’t qualify for any loan whatsoever.” And from that day until the current day, which was three years ago or something, dude has never talked to me again. And so, I was like, “What? You’re not going to give me a $350,000 loan into a 3.8 million net worth.” And so, I was like, “All right, I’m just writing a check.” And so I just wrote a check for $700,000 and just bought in the cash. And so I was like, “I don’t need these banks in my life.” It’s just such a funny view of the banking industry, because if I was a teacher making $80,000 a year in San Diego, which is what teachers make here 70 or 80,000? I’m sure they would’ve given me the loan. They would have loved to lock a teacher in that loan for the next 30 years and just suck them drive for 30 years of interest.

Jeremy Schneider (42:23):

But for a dude that could pay off in six months, which I probably would’ve done by the way, because probably six months later when all my stocks were way up, I was like, “Ooh, I just made that 350 in six months. I’m probably going to cash out and have no loan. They didn’t want to do business to me. So I bought in cash.”

Clay Finck (42:38):

Well, Jeremy, before I let you go, I wanted to give you a chance to give the handoff to our audience, let them know where they can find you and get connected with you.

Jeremy Schneider (42:48):

Yeah. So, the thing I do now is called, Personal Finance Club. I help people with personal finance and investing. Most of the action is currently happening at Instagram, @personalfinanceclub, where I have 380,000 followers. I also have a TikTok, Personal Finance Club, a website, personalfinanceclub.com and there’s a Start Here video series, that’s free, no email required. If you want to walk through the basics of index fund investing. Yeah, that’s where you find me.

Clay Finck (43:12):

Awesome. Thank you so much for joining me, Jeremy. I’ve really enjoyed the convo.

Jeremy Schneider (43:16):

Thanks, Clay. It was an honor.

Clay Finck (43:18):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it, if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm, so others can discover the show as well. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you will find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (43:54):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, We Study Billionaires and The Financial Markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.