On this episode, Michael and Matt break out their magnifying glasses and plaid Sherlock Holmes caps as they launch a live investigation into how speakers and entrepreneurs like you should think about additional savings.
This is one of those drinking-water-out-of-a-firehose episodes that’ll make you say, “Oh, wow, there’s so much I didn’t know I needed to know.” Michael and Matt uncover and share a ton of useful information that will open your eyes to new ways to make financial decisions and think about your money.
How you can Steal the Show
- Assess your present position to determine which financial products are best for you.
- Become clear-eyed and confident when interfacing with financial advisors and exploring investment vehicles.
- Anticipate (and price in) the only thing in life that’s certain other and death and taxes.
Listen to more episodes of Steal the Show from this season and previous ones at https://stealtheshow.com/podcast/.
Learn more about Michael’s public speaking training company, Heroic Public Speaking, at https://heroicpublicspeaking.com/.
Learn more about Matt’s specialized financial services firm, Valley Oak, at https://www.valleyoakcpa.com/.
Companies, people, and resources mentioned in this episode…
- BlockFi credit card (6:30)
- Clint Pulver (8:10)
- Garrett Gunderson (18:06)
- Trinity Study (20:50)
- Fidelity (40:33)
- Vanguard (40:33)
Related episodes of Steal the Show…
S4E2 How to Speak the Secret Language of Business Jargon
Transcript
Michael Port (00:00:05):
Hello, and welcome to Steal the Show with Michael Port, a podcast from Heroic Public Speaking. I’m your host, Michael Port. This season’s theme is Speakers with Money. I am joined by my very good friend, Matt Rzepka, the Owner and Chief Wealth Strategist at Valley Oak, a specialized financial services firm. Together we’re exploring some of the most common and daunting challenges facing speakers, entrepreneurs, and small business owners when it comes to finance. Now to be crystal clear, I have no conflicts of interest here. I don’t stand to make any money at all from you following any of the advice you hear on this podcast, and you shouldn’t really take it as advice, just take it as an educational experience, and then you make your own choices guided by a financial professional at the appropriate time. But it’s important that you know that my company, Heroic Public Speaking, which I co-founded with my wife, Amy Port, are public speaking institution based in Lambertville, New Jersey. And we provide world-class training to aspiring and working professional speakers around the world. I don’t sell anything related to financial services, Matt, however does, because he’s a professional and you are welcome to hire him. I will not be compensated in any way at all if you do. I’m doing this purely because I love this topic and I think everyone in our industry can benefit from learning more about business and personal finance. That’s it. Alright, today, we are discussing what to do with additional savings. So let’s get right to it. Matt, I wanna approach this episode a little differently.
Matt Rzepka (00:01:48):
Oh boy.
Michael Port (00:01:49):
What’s the problem?
Matt Rzepka (00:01:50):
Well, the last time you said that you called me snooty and tried to buzzer me into silence.
Michael Port (00:01:56):
Yeah, but I was completely justified at the time, but I promised this will be different. No buzzer from me. No snootiness from you. What I want to do is treat this episode like a live investigation.
Matt Rzepka (00:02:09):
Okay.
Michael Port (00:02:09):
So a live investigation into how we should think about additional savings and how we should determine what to do with them. And I’m sure you, of all people know there is an endless variety of investment vehicles and financal products out there and an endless number of so-called experts pedaling them. What I wanna do is investigate which ones are best for whom, because the best for one person is not the best for somebody else. It’s just like relationships. So where would you start, Matt?
Matt Rzepka (00:02:43):
Yes. The individualization of this is so critical, but the best place to start is really with where you are now. What is your, what I would call present position? There are tons of different ideas, investment vehicles, strategies out there. And it’s not that there’s a one size fits all, but we’ll get to that later. You want to investigate what to do with your additional savings. You first have to know where you stand now and what your current savings are.
Michael Port (00:03:11):
So like a full picture.
Matt Rzepka (00:03:12):
Full picture.
Michael Port (00:03:13):
See, I think this makes people a bit anxious. Sometimes
Matt Rzepka (00:03:16):
It does.
Michael Port (00:03:16):
I even just took a deep breath and I love of looking at the full picture. We did it yesterday. We’re actually in-person today, we’re sitting across the table from each other. Matt comes out once a year to do our tax planning for the following year. You know how usually when you do your taxes, you just give your information to an accountant. Then they look at what you did in the previous year. And then they come up with how much you have to pay. Well, Matt does it the opposite way. We sit down at the end of the year and say, alright, what are our plans for next year to put ourselves in the best tax favored position? And then we’ve made our choices in advance and it’s a lovely thing to do. And we moved through it in a couple hours yesterday, because everybody knows what they’re doing at this point. I mean, Matt always knew what he was doing, but now we know what we’re doing too. So I mentioned this because even when I just said, take a look at everything that’s going on, I kinda took a deep breath and I thought maybe other people feel that same way. They get a tightness in their chest.
Matt Rzepka (00:04:12):
For sure.
Michael Port (00:04:12):
Because they may feel some shame around some of the choices they’ve made
Matt Rzepka (00:04:17):
Shame or that judgment’s coming. You know we try to make it a shame-free, judgment-free zone. The best way to take action is to figure out where you’re at.
Matt Rzepka (00:04:26):
Yeah.
Matt Rzepka (00:04:26):
And that usually freezes people. That’s one of the things that stops ’em from taking action and moving forward is not looking at where it’s at. So there’s, there’s nothing wrong. You just have to look at where you’re at and understand why you’re doing what you’re doing.
Michael Port (00:04:39):
Hmm. You know, father sends me funny, not funny jokes all day long over email. Uh, he sent me one day that wasn’t a joke because he also sends me quotes that he likes and it was a Will Rogers quote.
Matt Rzepka (00:04:50):
Okay.
Michael Port (00:04:51):
And I didn’t memorize it because I just saw it earlier today, but I got the gist of it. And if I paraphrase it, it was something like people who have wise judgment do so because of all of the bad judgment they’ve had in the past. So essentially you only learn this stuff because you broke something.
Matt Rzepka (00:05:10):
Yeah.
Michael Port (00:05:10):
And then, okay, now what, I didn’t do it. Right. So how do you do it? Right. And that’s when you start investigating it, it’s the same way you learn how to use a computer. First time I got a tablet or a smartphone or the first time I saw and working on a Windows platform, I’m like, how does this work? And you just kind of go around and break things, go oh, that didn’t work. I gotta try this. That didn’t work. Try to… So that’s the approach that I’ve taken and it helps me feel less shame or blame around the things that I’ve done in the past that I now wish I had done differently because it would of put me, you know, even farther ahead. So we gotta let that go at some point
Matt Rzepka (00:05:45):
You absolutely do. And there’s so many money truths that we think we know are true and sometimes they’re not and you just have to let yourself embrace that process and say, okay, here’s where I’m at. I know I want to do things different and better going forward.
Michael Port (00:05:57):
Yeah, nice. It reminds me of something that we were talking about yesterday, the concept of how money is fungible. So, you know, sometimes we categorize money. Well that’s my party money. That’s my clothes money. And when you’re doing it in a budget, that makes a lot of sense because then you can keep to that budget. You can account for it. You can see, oh, I’m spending like a lot more on takeout than I really would like to because I’m not getting the value from that. But sometimes we do it in weird ways. Like I was looking at this credit card offer from BlockFi, which is a crypto exchange. And they said our credit card gives 2.5% back in crypto. So, you know, if I spent a hundred thousand dollars on the card, I’d get $2,500 worth of Bitcoin. And that could be nothing on that day or it could be a lot.
Michael Port (00:06:46):
And I was thinking, oh, that sounds fun. That’s a fun thing. And of course immediately I realized, oh, well that is the silliest thing in the world. Because if I wouldn’t buy $2,500 worth of crypto, of Bitcoin right now, why on earth would I want a credit card that gives it to me? Because I was thinking about it, let go, it’s free. It’s free money. But why don’t I actually use a credit card that gives me back so that I’m actually spending less money or I’m taking the cash and then I can do whatever I want with that cash. And so if I wouldn’t have put it in there in the first place, I just actually wasted that money.
Matt Rzepka (00:07:16):
Yeah.
Michael Port (00:07:17):
But we sometimes compartmentalize and think of it as different.
Matt Rzepka (00:07:21):
Yeah and everyone has their own process or system for money. And you wanna make sure too that’s where the individualization of everything comes from. You have to not only know where you’re at, what’s your full picture, but what are your tendencies? What have you been doing? And do you want to keep doing that or what is gonna allow you to make good decisions as you move forward with your tendencies?
Michael Port (00:07:40):
Yeah.
Matt Rzepka (00:07:41):
Because decision making is critical to all of this stuff.
Michael Port (00:07:43):
Until you recognize what your patterns of behavior are, it’s hard to stop those patterns. Now I’ll give you another example of when that happened to me. Recently, I was asked to do a keynote it’s pretty big event, but since I’ve quote unquote retired from the traditional keying, the kind that they were asking me to do and instead focus just to my students at HPS, I said, well, let me refer you to a few people that I think would be great for this spot. And then hopefully you’ll pick one of them. So I referred a few people. One of them was Clint Pulver, who is a fantastic speaker. And a couple months after the event, he called me up and he is like, hey, I wanna get you a gift for referring that gig. To me, it was a big gig, I was like, oh, you don’t have to, but please feel free.
Michael Port (00:08:23):
So he said, here’s what I do. There’s a shoe company that I love and I think you’ll love it too. So I want you to go to the website and pick out a pair of shoes, tell me what it is in the size and I’ll get it for you. Like that’s incredible. So I’ve got these really cool blue leather boots now, which I might not have bought it on my own because it’s generally not where I put my money. But the reason I bring this up is because at the same time the shoes that I usually wear when I’m teaching had been washed away in the flood, they were at HQ. So I needed to replace those. And I thought, oh, I should replace those. And then, oh cool. I’ll also have these boots that I could wear too. But then I said, wait a minute, why am I wasting the money on the shoes when I got these? And I thought, well, I got them free. I didn’t pay for them, but what a waste of money to also have bought the other shoes, just because I thought this was free. Even this quote unquote free can add some value to our financial picture by allowing us to save somewhere else.
Matt Rzepka (00:09:20):
Yes.
Michael Port (00:09:21):
I wouldn’t have recognized that, I don’t know, five years ago maybe.
Matt Rzepka (00:09:25):
Yeah. And the same thing I can tell you I’ve experienced with that like credit card points.
Michael Port (00:09:28):
Yeah.
Matt Rzepka (00:09:29):
I can go buy stuff with my Capital One points on Amazon and it’s free using my air quotes, but it’s not free. So you still have to balance out those resources.
Michael Port (00:09:36):
Yeah.
Matt Rzepka (00:09:37):
And again, understand your tendencies and decisions. And once you get some clarity on that, it really puts you in the right direction.
Michael Port (00:09:43):
Yeah. I’m a big fan of the Amazon 5% back on Amazon card. Because we spent a lot of money on Amazon.
Matt Rzepka (00:09:49):
Yes.
Michael Port (00:09:49):
So 5% back is a big number, but don’t use the points they give you to buy any thing on Amazon because you don’t get 5% back when you use points.
Matt Rzepka (00:09:59):
Yep.
Michael Port (00:10:00):
I thought, oh, that’s actually really quite clever. Use them in other ways that actually give you the full value and then use your card to buy those things, to get the cheaper price for it.
Matt Rzepka (00:10:10):
Yep.
Michael Port (00:10:10):
Because money’s fungible. Great. It’s a great example. Okay. So what I’d like to do is create a decision tree that guides your path. Do you think we could do that?
Matt Rzepka (00:10:19):
Absolutely.
Michael Port (00:10:20):
Okay. So what would be first on this decision tree?
Matt Rzepka (00:10:24):
The first is really income dependent choices and decisions. And what do we have for income? What do we need for lifestyle expenses and also what tax bracket are we in and how do all of those things impact what we’re doing with our extra money?
Michael Port (00:10:38):
I was thinking about the tax bracket implication, even before you said it. And I was gonna ask you about that. How does the tax bracket you’re in influence this decision on your path to figuring out what to do with additional savings?
Matt Rzepka (00:10:53):
And this is why the present picture is so critical. What is the present picture look like? And this is where we would come in or somebody that you’re working with would come in and give you a forecast into the future of what will my quote unquote retirement income look like? Because the tax rate that I pay today could be very different from the tax rate that I’m paying then. And the decisions I’m making today are gonna impact what that’s gonna look like.
Michael Port (00:11:15):
Yeah.
Matt Rzepka (00:11:15):
Now a lot of variables whenever you look into the fee future. So you just have to be aware that that’s in a very unknown topic. You’re gonna have to make some assumptions, but you do wanna understand income today, income in the future, and the likelihood of what those tax brackets and tax rates could look like.
Michael Port (00:11:30):
Yeah. And interestingly enough, I don’t want to go down a rabbit hole of future taxes, but I think it’s important to consider because I’ve heard from a lot of people in the industry, this consistent argument that you will need less in retirement than you do now. And I’m not sure that that really jives for me.
Matt Rzepka (00:11:50):
Yeah.
Michael Port (00:11:50):
So I’d love to know why you think that’s problematic in terms of thinking about, well, I don’t need to save that much, because I’ll need less per year than I need now.
Matt Rzepka (00:12:00):
Again, personal decision, I have seen it where people are earning and saving at higher rates today and then definitely retire on a lower, less income. And you’re gonna have a different decision tree and different ideas around what to do with your money. But especially in the entrepreneur space, it seems like you’re always gonna have a lifestyle that you wanna maintain. So planning to live on less income is potentially setting you up for a problem when you get to retirement.
Michael Port (00:12:25):
Yeah.
Matt Rzepka (00:12:26):
Additionally, if you don’t have to live on less income, when you get to retirement, that would be the better plan. Like let’s not plan to reduce our standard of living- only if we are forced to reduce our standard of living. If we’re not going to be able to achieve our goals, then you’re gonna have to recognize that a change will be necessary if you wanna retire at this time or at this age to what you’re doing.
Michael Port (00:12:48):
Yeah. It’s interesting because you have different focuses in different time periods of your life. So first, third of your life, you tend to do a lot of learning. This is something that my father-in-law talks about. Something that he’s thought about a lot that you know, in the second third of your life, you do a lot of earning. And then hopefully in the last third of your life, you really focus on giving. Now obviously these things are happening along the way. I mean, you don’t stop learning after, you know, a third of your life and you don’t stop earning. You can give all the time.
Matt Rzepka (00:13:21):
Yeah.
Michael Port (00:13:22):
But I did think it was interesting because I’m 51, Amy just turned 49. And right now we’re very focused on the continued development of the business. We are very focused on managing our kids in are hopes and dreams and expectations through high school. And now then into college. So we’re about to hit that mark. But once kids are outta college and if we decide we wanna take a step back and start living differently, outside of college expenses, I don’t necessarily think we would spend less money because maybe we want to travel a lot. Maybe we wanna explore things that we haven’t explored before. Not saying we wanna do everything on a luxury type vacation, I’ll go live in the forest for a month just with my wife and the right tools. And…
Matt Rzepka (00:14:05):
Yeah. Yeah.
Michael Port (00:14:05):
You know, as long as I have someone who can come bring me snacks, that would be fine. But you know what I’m saying? It’s like, I just think it’s a little bit dangerous to make that expectation. And we don’t know what healthcare’s a gonna look like going forward. What kind of costs one would have associated with that and yeah, maybe in your nineties, your costs go down a bit because you’re just not moving around as much.
Matt Rzepka (00:14:25):
Yeah.
Michael Port (00:14:26):
So yeah, I get that. But especially for entrepreneurs who maybe don’t wanna retire before the typical of retirement age, standard retirement age, it’s a little bit of a different formula.
Matt Rzepka (00:14:35):
Yeah. You might have a trending down lifestyle expense as you get older, because you’re gonna not have the energy to do as much. Or again, healthcare is the big component. What I’ve seen a lot with baby boomers who are dealing with this now is they may no longer have a mortgage payment, but their healthcare expenses replaced what their mortgage payment was. So the cash outflow hasn’t changed. It’s just going to a different place. So everybody’s gonna have little different perspectives there, but you just want to be ready to try and maintain that standard of living if you can.
Michael Port (00:15:01):
Yeah. So it sounds like what you’re saying is in line with a philosophy at Heroic Public Speaking, which is there is no one way and one size does not fit all.
Matt Rzepka (00:15:10):
That is correct.
Michael Port (00:15:11):
Okay. So number one, some of the choices will be income dependent. So that’s important to consider. So what’s the second point in the decision tree?
Matt Rzepka (00:15:19):
We’ve kind of hit on this a little bit already, but again comes down to tax rates and whether rates stay the same, whether rates go up, some of that’s also age dependent, the younger you are, the more time your money has to compound and grow. You want to be conscious around what tax consequence, where you put your money and your extra savings is gonna have in the long run. If I’m gonna compound and grow my money, I wanna know what the tax results gonna be on the backend or how I want to make, you know, multiple tax decisions with some of those savings.
Michael Port (00:15:47):
Yeah. And you know, you said the second point in the decision tree is rising or falling tax rates, would you think it’d be fair to say that it’s your belief because of course we don’t know. I’ve certainly talked to a lot of insurance salesmen who tell you, I guarantee you taxes will never be this low again. Right?
Matt Rzepka (00:16:04):
Yeah.
Michael Port (00:16:04):
It’s you’re gonna be paying 90% by the time you retire. So you gotta put all your money into this vehicle over here. Right. So nobody knows.
Matt Rzepka (00:16:12):
Correct. Nobody knows. Nobody can predict the future.
Michael Port (00:16:14):
Yeah.
Matt Rzepka (00:16:14):
If you look at the historical tax rates, we are traditionally in a pretty low tax environment right now.
Michael Port (00:16:20):
Yep.
Matt Rzepka (00:16:21):
But the past is not a predictor of the future. You hear that in any investment disclosure that you’re ever gonna see with any investment that you make. You do have to look at the government and what they’re doing. And again, try to form your own belief about what you think.
Michael Port (00:16:33):
The thing that is really key here is to, to not make assumptions by yourself.
Matt Rzepka (00:16:37):
Yes.
Michael Port (00:16:37):
In this area. Like for example, one of the things that Matt and I did yesterday when Amy and Matt and Julianne, who is our finance director, were working on this is Matt started running down some of the proposals that are on the docket in the House or the Senate it right now to be considered from a tax legislation perspective. And we are not gonna make a choice based on something that somebody is talking about yet, because it they’re just talking about it. We don’t know that it’s actually gonna happen. But if you don’t have someone in your life who regularly talks to you about the types of things that may occur in the future, it’s much harder to make well inform decisions. Because even though we can’t predict the future, we can try to do some scenario planning so that if (A) happens, here’s what we would do. If (B) happens, here’s what we would do. If ()C happens, here’s what we would do. And to try to set up the different types of investment in saving vehicles that we use to be able to adapt to those different scenarios, as best as we can
Matt Rzepka (00:17:40):
Creating options. You want to have options to be able to change course or change directive around changes as they come. You know, everybody says death and taxes are the two certain things. Change is also certain. We’re gonna have change in the future and you want your savings and your strategy to be flexible enough to change with those changes.
Michael Port (00:18:00):
Yeah. It’s funny. You mentioned taxes. And I thought back to the comedy show that we went to last night. We went to see Garrett Gunderson do an hour long standup show at the Helium Comedy Club in Philly. And Garrett is a long-term client of mine. I’ve been working with him for, gosh, almost two years now. And I was so proud of him. He just fricking killed it. I mean, he just killed it. Going into comedy professionally at 43 is not something that is typically done. And man, it is impressive that he’s doing it. But he had one joke that was really, really funny. I mean, a lot of jokes are really, really funny, but one of ’em is just a quick one liner. He just threw out there. He’s like, you know, what’s funny about taxes, nothing.
Matt Rzepka (00:18:39):
Nothing.
Michael Port (00:18:40):
Nothing’s funny about taxes. There’s just absolutely nothing funny about taxes and the whole place just roared. It just was a great moment. He just nailed it, you know? Okay. So number one on it’s income dependent, your choice is influenced by your tax bracket, how much income you have coming in and what bracket, you know, that falls into number two, your belief in rising or falling or stagnant tax rates.
Matt Rzepka (00:19:01):
Yep.
Michael Port (00:19:02):
And number three is…
Matt Rzepka (00:19:03):
Your desired or expected income in retirement. So what income or resources are we gonna and a need to create to get you that retirement income that you want?
Michael Port (00:19:13):
Yeah. You know, it’s interesting. I hear a lot of people think about retirement income as a consistent income, like a salary. So they want a certain amount each month. And if you’re trying to live off a portfolio that you have to protect, meaning if you have $800 million in bank and you don’t buying a new yacht every day, you probably don’t have to worry too much about it. But if you have a $2 million portfolio and you’re trying to adhere to the 4% rule, well that would mean you’d have $80,000 a year to work with. And that might feel like that’s less than I would like, but instead of using same amount each month, you know, it scales. So that, for example, if the market’s going down, you say, we cut back on our spending during that time. If the market’s going up, we go, okay, we can spend a little bit more. The way that you spend money, doesn’t have to be the same every month. You could be more frugal for one quarter and then the next quarter you do a lot of traveling. So again, it’s not one size fits all.
Matt Rzepka (00:20:13):
No. And buckets become important in different types of strategies. And even now, as we’re talking about change in the future tax rates, there’s a lot of professionals that are coming out saying the 4% rule is now the 3.3% rule.
Michael Port (00:20:27):
Correct.
Matt Rzepka (00:20:28):
So you do have to be careful with the information that comes off the internet.
Michael Port (00:20:31):
Yeah.
Matt Rzepka (00:20:31):
But have somebody to talk to about it. What are we doing? What’s our strategy with this? What portion of this would the 4% rule apply? Because the number one fear we see is people don’t wanna run outta money and still be alive.
Michael Port (00:20:42):
Yeah.
Matt Rzepka (00:20:42):
That’s not a good scenario.
Michael Port (00:20:43):
Yeah, yeah. In fact, the 4% rule isn’t even a rule. It just was a prediction based on a study called the Trinity Study, it said most people will be able to outlive their portfolios if they take no more than 4% out per year. And there are many people who think that it’s risky over the next decade or so to take that 4% approach and three percent may even be better. So yeah, just even when you hear terms yeah…
Matt Rzepka (00:21:10):
Yeah.
Michael Port (00:21:11):
Oh, that’s not actually a rule because then it gets confusing because required withdrawals, minimum withdrawals, when you get to retirement age from those retirement accounts are in fact 4%.
Matt Rzepka (00:21:21):
Yeah.
Michael Port (00:21:21):
And that is a rule that is a rule. So then you think there is this rule that is associated with the 4% when in fact, yes, the government has a rule. You have to take it out, but there is no rule that your portfolio will outlast you if you take out no more than 4%.
Matt Rzepka (00:21:36):
Correct.
Michael Port (00:21:37):
Yeah. Okay. And then what’s the fourth point in the decision tree?
Matt Rzepka (00:21:41):
The last one is again, really the age at which you plan to retire or start drawing off your assets or resources for income. We have to figure out, okay, how much are we saving? What are we doing with that excess savings? And then when are we gonna have to put that money to work and at what age and at how much? And again, this is, uh, always when do I wanna retire? Well, yesterday is the most common answer, but mostly we have to say, okay, is it a traditional retirement age of 65 or 67? Or is it something before then? And if it’s before then there’s a lot of other factors, especially if you’ve got multiple accounts, like retirement accounts have a 59 and a half restriction age, there are ways around that. But you want to understand what that would look like if you’re gonna access some of those funds pre 59 and a half. So again, retirement age and what resource and income we’re gonna have to start creating is another critical piece.
Michael Port (00:22:29):
So overall we’re addressing, what do you do with additional savings in this episode. And we just went through a decision tree that you can use to start. So, you know, first it’s income independent, right? Your choice will be influenced by your tax bracket. Then your belief in whether taxes are gonna go up or down or stay the same. You’re not gonna know, but you may have some thoughts about that. What your expected or desired retirement income need will be from month to month or year to year. And then fourth, what your expected or desired retirement age is. So we’re not only talking about investing, we’re talking about what do we do with that extra capital or extra cash that’s coming in? Should we talk a little bit about where it goes first? Meaning if you’ve got no money put aside, but you’ve got extra money coming in, should you just take that and start investing it more? Or is there another avenue that should be considered?
Matt Rzepka (00:23:23):
Yeah. That full picture always comes back into play when it comes to your extra savings. And really what should I differently? Well, what if what you’re doing right now is okay? That’s why that full picture is so important. You have to then sit down. What we do is run a forecast. We say, okay, if you change nothing, how is this all gonna work? Now you have to answer our decision tree questions. You have to tell me what my retirement income, what I want it to be, what my retirement age is gonna be. And if we do those things and we use the most conservative growth estimates possible, how long is your money gonna last? You want to know that because if it already lasts to age a hundred, well, then you’re doing pretty good. Now you have to get a little bit more aggressive around what strategically we’re doing with our extra savings because you’re probably enough. The more common answer is people aren’t often saving enough. So we have to then identify what to do with it. And then how do we create more savings?
Michael Port (00:24:12):
Yeah. Should we start with cash savings for emergency purposes?
Matt Rzepka (00:24:17):
I think so. In creating that excess cash flow, making sure the excess cash is starting to accumulate.
Michael Port (00:24:23):
Yeah.
Matt Rzepka (00:24:23):
Because that’s where again you can get off track really quickly with your finances if you think that, okay, well I should be saving $3,000 a month, but I’m only saving a thousand. So I start saving $3,000 and then life happens and then I’ve gotta rob an account.
Michael Port (00:24:38):
Yeah.
New Speaker (00:24:38):
If I go into an account and I put it in the wrong place, then I’m creating chaos very quickly. So systematically creating some process is…
Michael Port (00:24:46):
It’s really interesting to me that you mentioned that robbing an account. I was talking to a guy about this who is pretty well off and has a lot saved. But most of what he has saved is in tax deferred retirement accounts. And he’s under the retirement age, but he said, I don’t keep a lot of cash. You know, he said, we’re in a high inflation period here. So I don’t like cash because my cash just loses value. I said, but what if you need access to cash for some reason, either a business reason or I don’t know, your wife gets kidnapped and you gotta give a half a million dollars to this, you know, kidnapping ring? I mean, who knows? I’ve seen it in the movies.
Matt Rzepka (00:25:22):
Yeah.
Michael Port (00:25:22):
That’s what happens all the time. Or I don’t know if somebody in your family needs something, you know what, if you have a health thing that’s not completely covered. What about access to extra cash? He said, that’s not a problem. I’ll just borrow from my 401K. I was like, well yes, some companies let you do that, but others don’t. And do you know that you can and do you know what the penalties are for that? And the costs associated with that? And like, did you know that if you borrow from your 401K at a company that you work for, and then they fire you for whatever reason or you leave and that loan is still out, that loan is then often, immediately repayable. Maybe they’ll give you 30 days or 60 days or maybe 90 days. But if you borrowed $30,000 or $40,000 from it, that means you don’t have $30,000 to give back in 30, 60 or 90 days.
Matt Rzepka (00:26:08):
Yeah.
Michael Port (00:26:09):
Then you’re now in a situation where all of a sudden you’re underwater in a big way. So we just need to be careful, especially in an environment like now where it seems like everything is going up.
Matt Rzepka (00:26:18):
Yeah.
Michael Port (00:26:19):
You can win everywhere. The market is up 35%. Cryptocurrencies are up 18 gazillion percent. The only place you can’t win is depositing your money in a bank. Right. Basically the bank doesn’t really have anything for you. But yeah, the point is we need to have a strategy say, okay, we always have access to at least this much cash.
Matt Rzepka (00:26:39):
Yeah.
Michael Port (00:26:39):
Like just for whatever reasons, uh, like, you know, keep a certain amount of cash in your safe, at home and a certain amount of cash in a bank account that’s easily accessible.
Matt Rzepka (00:26:48):
Yep.
Michael Port (00:26:48):
You can only pull out $5,000 a day, right. Something like that.
Matt Rzepka (00:26:51):
Yeah.
Michael Port (00:26:51):
You’re like, no, I need the cash now. Just, you know, plan for worst case scenarios.
Matt Rzepka (00:26:56):
Yeah. Access to capital is probably one of the key things that a lot of people overlook. They just don’t think something’s gonna go wrong or that they’re gonna need money for something. And it doesn’t always have to be a problem. It could be an opportunity. If something’s falling apart and somebody needs some help. And one of your goals is to get into some small business investing.
Michael Port (00:27:14):
Yep.
Matt Rzepka (00:27:14):
Usually the people with cash have the first opportunity or they can get their hands on cash quickly. So that decision is gonna be very unique to, it’s gonna be different for everyone as to what access to capital you’re gonna want to have. But you do want to understand what you think and what’s gonna help you feel comfortable and sleep good at night.
Michael Port (00:27:32):
I don’t keep as much cash on hand as I used to. Traditionally, I would keep two years of expenses on hand in cash, but we got to the point where our cash savings was sufficient. Our investments- we were maxing out all of our retirement investments and also contributing to our taxable accounts. And I realized I didn’t need to keep as much cash because once you have enough market exposure, you can borrow against your cash in the market. And as long as you’re doing it in a way that is very safe at an incredibly low interest rate, then you can quickly get access to a fair amount of cash. I wouldn’t recommend this strategy for everybody. We still do keep cash on hand and we even keep some cash in Stablecoin because we’re getting a 9% interest rate. I’m not a big crypto person. I think I own like $20 dollars worth of Bitcoin, something like that. But the point is, there’s so many different ways to do this. There isn’t really one right way, but you’ve gotta do it in a way that makes you feel like you can sleep at night.
Matt Rzepka (00:28:34):
Yes.
Michael Port (00:28:34):
That makes you feel comfortable.
Matt Rzepka (00:28:36):
And really, I think the mistake that gets made here a lot is people are anxious for rate of return. So they deplete their access or savings to capital too quickly and then something goes wrong. So you think about it. Well, I’ve got X amount of money in the bank and I’m not earning anything on that. But in order to be able to earn something on those dollars, you’ve gotta accumulate them. So once you start accumulating the dollars, you’re gonna start to flip that equation to your benefit, but just don’t rush. Don’t be in a hurry to do something for a rate of return only because that could work out to be bad timing. And then you won’t have what you need when you need it.
Michael Port (00:29:13):
Yeah. So you don’t time the market.
Matt Rzepka (00:29:15):
Oh no.
Michael Port (00:29:15):
Don’t time the market. So let’s go into the strategy. I know there are essentially two different phases that I hear you often talk about. You talk about a retirement income bucket strategy and then an investment deployment strategy.
Matt Rzepka (00:29:29):
Yep.
Michael Port (00:29:30):
If I have that, right.
Matt Rzepka (00:29:30):
Yep.
Michael Port (00:29:31):
So tell us what these are. What’s the retirement income bucket strategy and what’s an investment deployment strategy.
Matt Rzepka (00:29:38):
Yes. The retirement income bucket strategy is really, again, starting to have as many different accessible streams of income when you get to retirement. Both that have different investment strategy, but also have different tax strategy so that you can start to create your desired retirement income and engineer that income around what the tax laws are at that time to try and get your net pay as best as it can be for you. Because we want to try and pay the least amount of taxes that we can because in retirement, you actually can control that. Where right now, when you’re working and making money or running a business or, or speaking and getting income that way, you’ve got some decisions you can make, but you’re gonna pay taxes on all your earned income. Where you’re in retirement, the more places you have, your capital saved, you can start to deploy them. And I just use it from a bucket perspective. I’ve got a bucket over here, you know, six to seven buckets is often what we’ll see for different income sources in retirement. So you wanna understand what all of those are and if you’re only using one or two of them understand, okay, maybe that’s okay and that’s gonna work for you, but understand the risks associated with not diversifying those strategies.
Michael Port (00:30:46):
Yeah. I think there’s an assumption for retirees, and again, that means at any age that you’re pulling from your accounts, it doesn’t mean, you know, an old geezer sitting on a stoop, you know, in his rocking chair, which will definitely be me very soon. ‘Cause I don’t understand why we’re not all doing that all day long. ‘Cause that looks like a pretty darn and good life. But the idea you hear is usually okay, take first from the tax free accounts then from the taxable accounts and then from the tax deferred accounts, because you know, you pay the most tax and the tax deferred accounts, then next most on the taxable accounts. And then you pay nothing on the tax free accounts as if that’s the way everybody’s supposed to do it. And we are having a conversation about it. And you’re like, no, that’s not accurate. I mean, it could be that way for some people. But in fact it might not actually be that effective from a tax perspective to approach it from that perspective.
Matt Rzepka (00:31:45):
Yes, it could be short term tax effective and long term tax very inefficient. You know, we’ve already mentioned this on the show earlier about the required distributions, you know, right now current IRS rules require retirement accounts, tax deferred retirement accounts to start forcing distributions at age 72. So if you wait to take money out of that tax deferred account, that means your tax deferred account may be growing substantially and could make a distribution be even bigger than you expected. So let’s say you’re now forced by the IRS to take more money outta the account than you need to live. You don’t have a choice to take the money out. So now you’re paying taxes on money that you don’t even need and you’ve got then figure out how to deploy that differently. And it could really catch you by surprise if you’re not careful.
Michael Port (00:32:29):
Yeah, yeah. I mean, certainly you could reinvest it, but, but yeah, it could catch you by surprise, put you in an entirely different tax bracket as well. So that’s why the advanced planning is so important and it’s for everything. It’s like, whatever you wanna do, if you’re gonna take a road trip around the country, you could just drive and sort of figure out where gas is and hotels and things. And that could be really exciting if you’re 21. But if you wanna go on a trip that you know, you’re gonna be so safe, you know, you’re gonna have a nice place to stay. You’re gonna eat in the restaurants that are worth eating in. You’re not gonna lose your mind driving too long, you know, searching around for a place that is not roach-infested. Well then you probably would plan it in advance.
Matt Rzepka (00:33:11):
Think of your retirement as your dream vacation.
Michael Port (00:33:13):
Ah!
Matt Rzepka (00:33:15):
Plan for your dream vacation.
Michael Port (00:33:16):
Nice.
Matt Rzepka (00:33:17):
It’s your retirement.
Michael Port (00:33:18):
Nice.
Matt Rzepka (00:33:18):
You wanna to do some planning. You wanna understand what you’re gonna have and what the rules of the road look like.
Michael Port (00:33:23):
Nice. So in terms of the retirement income bucket strategy, your goal, it seems, is to try to defer, you know, as much taxes as you can at the beginning, along the way, don’t pay taxes just on money at the end. So you have to have multiple buckets that you’re working with. So you’ll have tax deferred, tax free, some of the accounts you’ll pay capital gains, some of you’ll pay earned income tax. So that’s what you’re talking about, the different buckets. Each of the bucket has a different tax exposure. And then you can pull from the buckets as is appropriate year by year by year.
Matt Rzepka (00:33:58):
Yes. And this is very important to understand when you’re first starting out versus being advanced and already running an existing successful business. One of the most common mistakes I see is a lot of even just employees who are first starting out, they defer tax immediately and they’re young and they’re probably making the least amount of money they’re ever gonna make their income’s only gonna go up. That would be the time to not defer the tax. Pay the tax. Now pay the tax on the seed, not on the harvest.
Michael Port (00:34:25):
Yeah.
Matt Rzepka (00:34:25):
Now when you get into the higher tax brackets, you can get a little bit more strategic with what tax we’re deferring and why, but you want to, again, just be conscious about what’s going on. Why am I deferring or why am I paying taxes? And what’s that gonna mean long term? And time. Time is one of your best friends when you’re talking about long term investing and compounded growth. So if I can compound tax free growth, I always want to try and do that versus anything else. And everybody always wants to be tax free. Well, you know, when we talk about the different buckets, well, I just want to be in the tax free bucket. Well that means you gotta pay a lot of taxes now.
Michael Port (00:34:58):
Yeah.
Matt Rzepka (00:34:58):
In order to get your money into that bucket and you kind of miss that realization.
Michael Port (00:35:01):
And it really is different for business owners and for employees in terms of how you approach this process. So for example, if you’re a business owner and most of our audience is one kind of business owner or another, they may put a lot into tax deferred accounts through a defined benefit plan because they have a C Corp. And any of the money that they’re putting into the plan is now deductible in the business. So they don’t have to pay the tax on that. They’re not paying income tax on it now. And as a result, they’re able to put so much more money away and pay much lower corporate and personal taxes. But that’s not necessarily gonna apply to someone who’s a W2 earner.
Matt Rzepka (00:35:46):
Correct.
Michael Port (00:35:47):
This is why you really gotta make sure that you’re not just trying to learn about finance. You’re trying to learn about what is most relevant and helpful for you, based on where you are now, where you wanna go, who you are, what you do and what life situations you’re in.
Matt Rzepka (00:36:02):
Yeah. If you’re doing something and you don’t know why you’re doing it, you must answer that question. Just that simple principle. Well, why are you doing this? Well, I don’t know. Well, that’s a problem.
Michael Port (00:36:11):
That is a problem.
Matt Rzepka (00:36:11):
We want figure out why we’re doing that and make sure it might be okay, but you want to know the answer. It comes to your money of why you’re doing something. And then you can be intentional about what you either want to keep doing, or if you want to change it.
Michael Port (00:36:23):
And just for the record, if someone says, why are you doing that? And you say, well, my guy told me to do it. That’s an even worse reason. Right? That’s an even worse reason. So if you don’t understand it, you can’t be sure that it’s actually in your best interest.
Matt Rzepka (00:36:38):
Yeah.
Michael Port (00:36:39):
Okay. So can we move into the investment deployment strategy because I also wanna get into investment accounts and all the different types of accounts that we’d use?
Matt Rzepka (00:36:47):
Yes, absolutely. So investment deployment strategy, again, really comes down to what are the goals of the money that you’re deploying, the savings that you’re putting to work? Do I want to have access to it again? Do I want to get cash flow from it or do I just want to try and grow the asset? And that’s really the three things to think about from a deployment perspective is what’s the intention. My personal growth goal with some of my assets is cash flow. I want money to be returned to me as I’m making investments, because I want to use that return cash flow to make additional investments. So you can kind of create your savings on your own. Or you can go into just a long term growth type strategy and, and get that money to grow and compound as fast as possible. You really want to, if you’re not sure, or haven’t gone down this path, just spend a little time getting some education with someone about what the different types could look like.
Michael Port (00:37:37):
Good. So I think Matt, that time has come to talk about the different type of accounts so that people can make a decision about what type of accounts are best for them.
Matt Rzepka (00:37:47):
Yes.
Michael Port (00:37:47):
To be investing in. So again, first we wanna make sure that we’ve got enough cash set aside. If there is a place you can put it where you don’t lose to inflation that’s wonderful. But in the short term, it’s, I think more important to have access to cash than worried about 4% or 5% inflation loss that you may have on that cash.
Matt Rzepka (00:38:08):
Yes. Yeah.
Michael Port (00:38:09):
Do you agree with that?
Matt Rzepka (00:38:10):
I do. Because if something goes wrong, you’re money usually fixes a problem.
Michael Port (00:38:14):
Yeah.
Matt Rzepka (00:38:14):
Or can help you fix a problem. And that can decimate you quickly. If you don’t have access to that cash.
Michael Port (00:38:19):
Good. Now one, you’ve got that set up. Let’s just talk about the different types of accounts. So there are taxable accounts and tax deferred accounts. Can you just quickly define the difference for folks that are new?
Matt Rzepka (00:38:30):
Yeah. Taxable accounts are something that invests and produces an income each calendar year and whatever the result of that income is shows up on your tax return, whether you want it to or not. You have to pay taxes on the performance of that account each and every year. And the key there is you have one of two choices on how you pay those taxes. You can pay the taxes from your budget, your lifestyle, or you can and pay the taxes from the account. You rarely ever see the taxes paid from the account because it would make the investment look worse on paper. You wanna let that money compound and grow in the account, but you do wanna recognize there’s real taxes being paid on that activity. So it shows up on your personal taxes each and every year, that’s the taxable account.
Michael Port (00:39:13):
You’re taxed at the capital gains rate.
Matt Rzepka (00:39:15):
It can be capital gains. So your three types of income from a taxable account are typically interest, dividends, both ordinary or qualified. And I’ll explain what those are. Or capital gains, both short and long term. So short term capital gains or ordinary income, meaning I bought and sold a stock and I didn’t hold it for 12 months or more. Qualified dividends is something that’s been around for quite a while. Now, if you own a stock for 60 days or more, and they pay a dividend, now you get a qualified dividend, which gets capital gains rates. An ordinary dividend is still at your ordinary income tax rate. So you don’t see that as much as you used to, but if you’re churning stocks that pay dividends, like sometimes people will go in and buy a stock before it declares a dividend and then sell it right after they get the dividend. That would be ordinary. So if you’re in the 37% tax bracket, you’re gonna pay 37% on that dividend. Where if it’s a qualified dividend, you’re only gonna pay 23.8% again at the worst that it could be.
Michael Port (00:40:10):
And we did a whole episode on terminology.
Matt Rzepka (00:40:12):
Yeah.
Michael Port (00:40:12):
So if you wanna refresher on any of these terms that Matt used, go back and listen to that because we did as much terminology as you could probably handle in a 60 minute session. Probably did more than you could handle in a 60 minute podcast session. But that episode is there for you at the beginning. And we’ll put the episode number with a link in the show notes as well.
Matt Rzepka (00:40:32):
Perfect.
Michael Port (00:40:33):
Okay. So those are your taxable accounts. That’s a brokerage account at any brokerage like Fidelity or Vanguard,
Matt Rzepka (00:40:41):
CDs…
Michael Port (00:40:42):
CDs.
Matt Rzepka (00:40:42):
Money markets, taxable bonds. Yeah, brokerage accounts, stuff like that.
Michael Port (00:40:46):
Right. Now tax deferred accounts are a little bit different.
Matt Rzepka (00:40:51):
Yes. So tax deferred can really be in one of two ways. You can put after tax money in an account that doesn’t pay taxes on the earnings as it happens until you access the money, often referred to as a tax deferred annuity. So I make a deposit and as long as I don’t touch the account, I don’t have to pay taxes until I touch the account. The other tax deferred, which is the most common is your traditional retirement type of accounts where we’ve got an IRA, a simple IRA, a 401K. We’re making a deposit into those accounts, getting a tax reduction for making that deposit. We’re deferring those taxes to the end. And then whatever happens inside the account while the money’s in there is also not taxable. So growth and loss and gains and dividends all just happen. And you have no tax consequence until the end. And the end usually is when you start taking a distribution. The distribution is the taxable event from a tax deferred retirement account. And it’s an ordinary income taxable event at that point.
Michael Port (00:41:53):
Yeah. And so those are higher tax rates.
Matt Rzepka (00:41:55):
Yeah. You’re subject to whatever the tax brackets are at that time. And if you want to ever do some research, you just Google tax brackets and they’ll show you the history of where the tax brackets have been, what the rates have been, how big the brackets are. And we live in this progressive tax bracket system, where as you make income, you go up the tax bracket rates and you start to make what we call an average rate or an effective rate of tax that you pay.
Michael Port (00:42:18):
Great. And again, those terms are in that earlier episode on terminology. So let’s talk about the types of accounts that fall under tax deferred accounts because there are many.
Matt Rzepka (00:42:28):
Yes.
Michael Port (00:42:28):
They all have funny little acronyms and they can be incredibly similar, but just slightly different or dramatically different.
Matt Rzepka (00:42:38):
Yep.
Michael Port (00:42:38):
And it is I think a little confusing to a lot of folks. And so let’s start with the IRA.
Matt Rzepka (00:42:43):
Individual retirement account. So this is just individuals choosing to put a deposit of their own personal savings or income into a retirement structure. And there’s an annual limit on how much each person can do. And there’s also income restrictions on what each person can do. So if you know an IRA or a Roth IRA…Roth IRA is different tax characterization, but they have the same deduction and contribution limits.
Michael Port (00:43:10):
Now somebody’s paying into a 401K plan at their company and they’re getting a match from their company or not either way they’re still paying into it, can they also have their own individual IRA account separately and max out during that same year?
Matt Rzepka (00:43:24):
Yes. Only if they’re at a certain income or less. And that number changes every year with inflation. So if you’re participating with an employer’s plan and wanting to do an IRA, you just have to make sure you qualify. There’s a rule restriction in anyone who’s, even if it’s TurboTax, doing your own return, it’s gonna walk you through that formula.
Michael Port (00:43:43):
Okay, great. So then what is a simple IRA? Is it for people who are simple?
Matt Rzepka (00:43:49):
Very simple people.
Michael Port (00:43:51):
Like me? I should have the simple one?
Matt Rzepka (00:43:52):
The simple, yeah. You just want no paperwork…
Michael Port (00:43:54):
Is it the non confusing one? That would be great. You could have all different ones. IRA and simple IRA, 401K and simple 401K. If you choose the simple ones, it’s really easy and everything works out great. Choose the other ones. It’s like a punch in the face every day. You have no idea what’s happening. So what is a simple IRA?
Matt Rzepka (00:44:10):
The simple IRA is actually an employer plan that allows you to simplify a retirement’s saving strategy for its employees without a lot of paperwork and without a lot of complexity. So it’s still an IRA type of structure. So it’s an individual basis, but you can contribute a lot more and it all is facilitated through the employer’s payroll. And then the simple IRA presented by the employer also has a matching component. So they’re gonna put some of the company money into your account on your behalf as well.
Michael Port (00:44:39):
So for a professional speaker who doesn’t have employees, maybe they just have a few contractors who help them out with different things, sounds like a simple IRA could be very for them.
Matt Rzepka (00:44:51):
Could be, it depends on how much you have available to save. Really with all of these options we’re going through. If you’re not able to fully fund one that would take you to the next option, then you just stick with that one until you are able to fully fund it. Because an IRA and a simple IRA, you’re not gonna have a lot of costs. But let’s say you were gonna move to a 401K, a traditional 401K, you’re gonna have costs there. So if you’re not gonna maximize what the 401K has to offer, then why pay the costs? So it always reverts back to how much do we have available to save? And then how are we gonna deploy those dollars?
Michael Port (00:45:25):
You mentioned 401K. That’s next on my list. We have 401K and a solo 401K. I mean, think about that. IRA, simple IRA, 401K, solo 401K. Then it’s the SEP-IRA, I mean, come on, this is ridiculous. Like number 1, 2, 3, 4.
Matt Rzepka (00:45:41):
You think they get paid by the acronym or the page to create all this stuff.
Michael Port (00:45:44):
Seriously. Seriously. I think they get paid by the page and then bonuses for the most confusing acronym.
Matt Rzepka (00:45:50):
Yes.
Michael Port (00:45:50):
Whoever can come up with something that will be really hard or really similar to something we already have, but different just to confuse them enough. You get a bonus.
Matt Rzepka (00:45:59):
Yes.
Michael Port (00:46:00):
So what is the 401K and the solo 401K. What’s the difference?
Matt Rzepka (00:46:04):
So that is a step up again, employer plans. So it has to be established by a business and it allows you to start defering a lot more into the plan and a lot more flexible for the employer in terms of what they do or don’t want to contribute. And additionally, about 10 to 12 years ago, I believe it was, they implemented the Roth component to a 401K. We’ll talk about Roth IRAs a little bit more, but I’ll maybe be hit on the Roth 401K then. But right now I believe IRA limits are around $6,000 to $7,000 a year depending on your age. Simple IRAs, you can do $13,500, depending on your age. 401Ks are up to $19,000 or $20,000. So you can see that contribution threshold keeps going up. So again, going back to your savings, if you’ve got enough to start doing some of those things, and maybe you wanna move into that next step. If you’re maxing ’em out, then it’s gonna cover the cost of running that plan.
Matt Rzepka (00:47:00):
And then you can do some really cool things inside of a 401K if you’re trying to create profit sharing or other incentives for your team.
Michael Port (00:47:09):
Yeah.
Matt Rzepka (00:47:09):
Now the solo 401K is for maybe a speaker who doesn’t have any of employees, but wants to try and save a lot of money into retirement plan. That is a very simplified version of the 401K. And it lets you put not only your employee portions that $19,000 to $20,000 number, but then the company can also match up to 25%. So there’s some really cool benefits that you can get and save a lot of money quickly into retirement plan.
Michael Port (00:47:34):
We had a SEP for a while. Maybe it was set up 15 years ago or so, but then we moved to a defined benefit plan as the company grew and as our ability to make larger contributions to the plan grew. And we wanted to design a plan that was very generous to the people who worked at the company. We moved to a defined benefit plan. So can you tell ’em a little bit about a defined benefit plan and maybe they’ve heard of a pension plan, you know, like if you worked at Ford Motor Company for 50 years, you get a pension for the rest of your life based on your salary when you left the company. A certain percentage of it. So what’s a defined benefit plan and who’s it good for?
Matt Rzepka (00:48:12):
So everything we’ve talked about before, this is a defined contribution plan. So that is a good distinction to make because they’re defining what you can contribute into the plan. How much the IRA can get, the simple IRA, the 401K. Defined benefit plan is truly a pension plan where you’re defining a retirement benefit in the future that that employee or that participant is going to be paid out. Now, when it’s a private company, you have a little bit of a quirk with the defined benefit plan because you’re still using the same formulas for a retirement benefit, but you don’t necessarily have to keep it and run it like a pension plan would. If you sell or decide to retire, you can transfer those funds out into your own individual account and manage them like any other investment account. Well, why would that be beneficial? So we talked about a 401K. If you’re under 50, at $19,000 to $20,000, well, a defined benefit, you could put $70K, $80K, $90K, a $100K $150,000. I think the limit right now is like $180,000 or $190,000 per participant into a defined benefit plan. So again, your contribution limits keep going up. So if you have income and free cash flow, you could really look at doing some pretty cool stuff and saving a lot of money quickly with some unique tax benefits.
Michael Port (00:49:27):
And if your partner, your spouse is in the business with you, this can be a really productive plan because, you know, you can even set it up a dollar for dollar. For every dollar you make a dollar contribution goes into the plan on your behalf. So something to look into if you’re at that stage, but I’m so thankful that we put one together and did it the right way.
Matt Rzepka (00:49:51):
And you have a 401K component and you have a profit sharing component.
New Speaker (00:49:55):
That’s right.
Matt Rzepka (00:49:55):
And we’ve got some Roth components.
Michael Port (00:49:56):
Yeah.
Matt Rzepka (00:49:56):
So we’ve got a lot of different pieces based on what our long term goals are. So again, that’s the importance of sitting down and saying, okay, where are we now? What buckets have what balances and where do we wanna start sending the others.
Michael Port (00:50:08):
One of the other reasons that I did this plan was because, especially for our younger employees, you know, a lot of them might not be focused on saving. You can do a match where you say, we’ll match whatever you put in up to this percentage or up to this number. But then, you know, it’s a kind of coercion. And I think it’s valuable to do it. For sure. If you have work somewhere where there’s a match, that’s free fricking money. So you gotta go get that, but we don’t do a match. So they actually don’t have to put money away themselves. We contribute the equivalent of about 10% of their salaries each year to this plan. And there’s even an interest credit on a portion of that that’s guaranteed every year, even if the market goes down. So that when they’re eligible for the plan and they’re vested and they see their balance, they go, holy cow, how did that happen? Well, we kind of did it for them and we still are, of course always encouraging them to do it themselves. What’s the expression: Don’t give someone a fish teach. ’em how to fish.
Matt Rzepka (00:51:08):
Yeah.
Michael Port (00:51:09):
And also sometimes I think it’s nice just to make sure things are well set up for the people that you care for.
Matt Rzepka (00:51:14):
Yeah.
Matt Rzepka (00:51:15):
And they’ll find their own way through the financial jungle, but at least we can get them set up straight.
Matt Rzepka (00:51:20):
Yeah. You know, you played a good role.
Michael Port (00:51:22):
Yeah, exactly. And it’s one of our values. So we want to try to extend it into the team. Okay. We focused first on taxable accounts.
Matt Rzepka (00:51:29):
Yes.
Michael Port (00:51:30):
And we focused on tax deferred accounts.
Matt Rzepka (00:51:32):
Yes.
Michael Port (00:51:32):
And now let’s hit the third type of account, the tax free growth. The after tax investment account.
Matt Rzepka (00:51:39):
Yes. And the two most common here that you hear a lot about, and especially today, if you’re doing any kind of research on your own, you’re hearing a lot about Roth IRA, Roth conversions, Roth 401K. So Roth are your stock based accounts that you put after tax money in, so I’ve gotta make the money today, pay the taxes today, and then what’s left over I can contribute to these accounts. Once I make that contribution to these accounts, then whatever happens in that account is also tax deferred. But when you pull the money out, it’s tax free if you meet some very basic requirements. So again, 59 and a half, the account’s gotta be open for at least five years and the Roth 401K, so similarly to the traditional IRA, the Roth IRA has an income limitation. So if you’re over a certain income, you are not going to be able to contribute to that account.
Matt Rzepka (00:52:31):
The Roth 401K, however, has a higher contribution amount and no income limitation. So if you are seeking Roth type dollars, a Roth 401 is one of the best places to start that conversation. And then lastly, I mentioned, it is Roth conversions. This is where you take a IRA or regular 401K and you move them over to a Roth IRA or a Roth 401K. But when you move them, you have to pay taxes on the amount of money that you move. So if I move $50,000, I’m gonna have an extra $50,000 of income on my personal income tax return. So I wanna be ready for that. And I wanna make sure that it makes sense and that it’s a smart move based on some assumptions. Again, you’re gonna be dealing in a world of assumptions a little bit, but you want to figure out, okay, what are my risks and what do I wanna combat against if something does change in the future?
Michael Port (00:53:21):
That’s fantastic. Thank you, Matt. I mean, this is a lot. We’re already at about an hour and we do have one more section to cover. And so I’d like to power on. You okay?
Matt Rzepka (00:53:30):
I’m good.
Michael Port (00:53:30):
You can hang?
Matt Rzepka (00:53:31):
I can hang.
Michael Port (00:53:32):
Alright. So look, if we’re gonna narrow it down a little bit, you know, most of the people listen to this podcast are speakers, but many of them also have consultancies or other types of companies. Uh, we have one guy who owns a bunch of companies in the Christmas light industry. It’s like the coolest thing. I had no idea. He’s doing very well. So we’ve got a lot of different types of owners and individuals here. So how would we start to evaluate which type of account you know, is right for us if we’re hearing all of these different things, like how what’s the filter we use?
Matt Rzepka (00:54:06):
Yes. Again, that present position or that full picture look to assess what balances you have right now. And balance, if you’re just trying to keep it very simple, if I’ve got taxable accounts, tax deferred accounts, and tax free accounts. Well, if I put one third of my money in each of those without a grand plan, that’s still gonna give me diversification and gonna give me options. So if you’re not ready to do a full forecast and plan, just splitting the money up into thirds where you can is a great place to start. But I do recommend getting somebody who can give you some vision about what that’s gonna look like with what your current allocations are.
Michael Port (00:54:43):
Okay, good. So let’s go into the last section then: asset diversification and savings and investment planning. Now, this is obviously a massive topic, asset diversification alone. There have been many, many books written on it and most of them wrong. There’s an old joke, how can you tell how much BS exists in any one particular field or industry?
Matt Rzepka (00:55:05):
How many books are written on it?
Michael Port (00:55:07):
Exactly. How many books have been written about it. So look at sales. Marketing.
Matt Rzepka (00:55:11):
Yes.
Michael Port (00:55:12):
Personal finance. Investing. Productivity. Et cetera. There’s a lot of BS. We have succumbed to that BS at times ourselves. And we have dished out that BS at times ourselves without meaning to our realizing it. You know, not everybody who is sharing ideas means to be BSing you. They may really believe it. Think it’s absolutely accurate. But then a couple years later they realize, oh, wow, wow. I was wrong about that.
Matt Rzepka (00:55:37):
Yeah. In finance, a lot of times that’s a hiring issue. They’re just hiring a sales force, not really training them. So people selling don’t really know any different because they themselves haven’t been educated.
Michael Port (00:55:47):
Right. Or they were trained 18 years ago.
Matt Rzepka (00:55:50):
Yeah.
Matt Rzepka (00:55:51):
But they don’t have a lot of continuing education because they haven’t taken it for themselves.
Matt Rzepka (00:55:55):
Yeah.
Michael Port (00:55:55):
And as a result, they’re operating in a different time. Really.
Matt Rzepka (00:55:58):
Yeah.
Michael Port (00:55:59):
Okay. So savings and investment planning. How should we think about it?
Matt Rzepka (00:56:04):
This is an area that we’ve kind of lumped together and I like to really keep distinctly separate. So savings is often associated with safe. So that means we think we’re not gonna lose. And then investing is often associated with risk and we have the potential to lose in the risk tanks. So we wanna make sure that we’re not lumping saving and investing together. And again, that goes back to having access to capital, having access to money that we know is not gonna go backwards. As you get more and more comfortable with your safe assets, it allows you to take different approaches on your risk assets to hopefully let those grow and compound to the maximum. So again, just making sure we’re not lumping together saving and investing into one.
Michael Port (00:56:46):
Interesting. I think that concept is gonna come up again in future episodes when we talk about other types of vehicles where they mix purposes yes. And sometimes can be really problematic. So that’s just a little curiosity gap for you for the future episodes. But I know where we’re gonna go with that. So what about asset diversification? That’s really the last thing that we wanna focus on. What is asset diversification? How should folks think about it and you know, what should they do about it?
Matt Rzepka (00:57:14):
There’s many types of asset diversification. You’ve got investing asset diversification and then you’ve got also segment asset diversification. So what I mean by that is, you know, maybe I’m investing in my own business. Small business could be an asset class. Then I’ve got maybe real estate that is related to my business. So real estate could be an asset class. And then the stock market could be an asset class. So there’s a lot of different places you can get different types of investments.
Michael Port (00:57:41):
And then inside the stock market, you have many different asset classes.
Matt Rzepka (00:57:43):
Many. Small, medium, large, foreign, domestic.
Michael Port (00:57:48):
Value. Growth.
Matt Rzepka (00:57:49):
The list gets longer and longer and you can get a little bit lost in the mystification of it. But you wanna understand and know what level of diversification you’re taking and have some strategy to why you’re doing what you’re doing.
Michael Port (00:58:04):
Yeah. You know, it’s interesting when I meet a lot of business owners…and one of the reasons I wanted to do the show is because most of the people I meet are business owners…
Matt Rzepka (00:58:12):
Yeah.
Michael Port (00:58:12):
One of the reasons I love business owners is the same reason I love speakers and actors because they’re often unusual. They don’t often take the same path that everybody takes.
Matt Rzepka (00:58:22):
Yeah.
Michael Port (00:58:22):
And they’re often extremists because they wanna do something so well that it changes the world in some way.
Matt Rzepka (00:58:30):
Yeah.
Michael Port (00:58:31):
I would often when I would just be sitting and chatting, you know, in the green room backstage with other speakers who are doing quite well, authors who were well known around the world. I would just bring up personal finance just for fun because usually they’re talking about, something’s a like really about the industry. I’m like, oh my God, we have this conversation every single time.
Michael Port (00:58:51):
So I think about what could I change the topic to that would make people uncomfortable? Oh, personal finance.
Matt Rzepka (00:58:56):
Yeah.
Michael Port (00:58:56):
Let’s go there. So I often bring it up. And what I have found many times is that many of them say, I don’t really know that much about that, which says a lot. And I really wanted to try to put together a show for a season that would just give people a doorway in. Even if everything we’re talking about right now, doesn’t make sense completely. If you get 20% of this show, that’s a win. Not gonna get all of it I don’t think. I don’t get all of it.
Matt Rzepka (00:59:23):
And you have to personally be invested in your version of it. You can take in somebody else’s personal finance journey, but until you personalize it.
Michael Port (00:59:30):
Correct.
Matt Rzepka (00:59:30):
You’re not gonna take all of it in. You’re never gonna get a hundred percent until you’re really bought into what you want.
Michael Port (00:59:36):
Yeah. I brought that up because when we’re looking at diversification, sometimes I also hear the business owners say, well, I’m not investing now because I’m really putting all my money into the business because that’s where I can get the biggest return. And I’ve heard this a lot pitched from people who sell courses on entrepreneurship.
Matt Rzepka (00:59:52):
Yeah.
Michael Port (00:59:52):
Maybe you’ll get 8% or 10% in the market over a long period of time, but if you just pour all your money into…but you can get like 18,000,000% growth. I don’t know why they have that voice. Apparently that’s the voice they have. Okay. Yeah. You might hit it outta the park. I certainly historically from the start of my business to now have earned more growth than I’ve done in the market, but I wouldn’t put all my eggs in that one basket.
Matt Rzepka (01:00:17):
Well and what if you can’t sell your business?
Michael Port (01:00:21):
Correct.
Matt Rzepka (01:00:21):
You know, your business is maybe an income machine while you’re running it.
Michael Port (01:00:24):
Yeah.
Matt Rzepka (01:00:24):
But if somebody else is running…think about the evolution of technology of Uber.
Michael Port (01:00:30):
Yeah.
New Speaker (01:00:30):
Let’s say I was a taxi cab company and thought I was gonna sell my company for millions of dollars. And then Uber came out and my taxi cab company is gone.
Michael Port (01:00:38):
I mean, there are people who bought medallions in New York City that are bankrupt now.
Matt Rzepka (01:00:41):
Yeah.
Michael Port (01:00:42):
Because they thought they had this asset that would last them a lifetime.
Matt Rzepka (01:00:45):
Yeah.
Michael Port (01:00:46):
I really do think of the small business as a bank to fund our long -erm security. If it covers our short-term needs and funds our long-term security, then it really makes a lot of sense because, yeah, maybe we sell our business. But in our business is pretty unique. I have yet to meet anyone in the world who can do what we do. So if we’re not involved in the business at all, could it work? Yeah. But would it be what it is now? I don’t know. Is there a way to sell it and still be involved in it? Absolutely. That path may be there, but I can’t do it an evaluation of my business to say, well, valuation of my business is, you know, $25 million.
Michael Port (01:01:27):
So I don’t have to worry about saving anything because I’ll be able to sell this business at that time. Like you have this dining room table that you love. I’m gonna put it on Facebook Marketplace and sell it and you don’t understand why nobody wants your table because it’s but. t ugly. And it’s horrible. Nobody wants it, but you love it. You so much invested and this why isn’t anybody buying it?
Matt Rzepka (01:01:45):
Yeah.
Michael Port (01:01:46):
And I think we gotta be really careful about our business from that perspective. Our business is just one vehicle to generate capital, to fuel our lives now and in the future. And hopefully we get to have a great time running this business and it’s meaningful and we’re doing great work. But at the end of the day, if it’s not making money, it’s not a business.
Matt Rzepka (01:02:06):
Make it the cherry on top of a really awesome Sunday. Not the whole Sunday.
Michael Port (01:02:09):
Yeah.
Matt Rzepka (01:02:10):
‘Cause your business value could change. Tax laws could change. There’s so many variables that could make putting all your eggs in just your business basket be very disappointing.
Michael Port (01:02:19):
We’re not saying have a job and have a business or do four businesses. That’s not what we’re saying. We’re just saying, be careful of that mantra that we hear about your business is gonna be your fastest growing asset. So put all your money into that. When I hear about that is when I hear someone who lost their business.
Matt Rzepka (01:02:35):
Yeah.
Michael Port (01:02:36):
They usually say, oh, had everything tied up in my business. You’ve heard that of course a lot, right?
Matt Rzepka (01:02:41):
Whether it’s at retirement, whether it’s something went wrong along the way, and if everything’s in there, then you’re starting from zero and…
Michael Port (01:02:48):
Yeah.
Matt Rzepka (01:02:48):
..things can go wrong. You just gotta be able to recover. And usually it’s reinvesting too much back into the business or consuming too much personal lifestyle from the business saying, I don’t need to save because I’m gonna to sell the business.
Michael Port (01:02:59):
Right.
Matt Rzepka (01:03:00):
And those are slippery slopes.
Michael Port (01:03:02):
Yeah. Okay. So what do you think the key takeaways are? We’ll go into in a different episode, more diversification with respect to actually buying stocks and bonds and things like that. We’re not gonna go deep into that now, but just to understand that considering asset diversification is important and understanding contextually what types of assets you currently have, what you might wanna add in to create a really solid, secure financial picture for yourself.
Matt Rzepka (01:03:35):
The key takeaways to me are knowing what you currently have and what that trajectory looks like if you don’t change. Or if we do make a change, you know, how could that improve the situation? You don’t wanna make changes that aren’t gonna improve where you’re going. And then additionally, something that’s worked great for me is I love my business. I love what I do. And I do invest a lot of time, energy, and resources into the at, but I have also made investments outside the business. So that my thing, if I don’t think it’ll ever happen, but what if they went to a flat tax. There’s things that can change industries. So be eyes wide open about what risks are out there. Don’t let, ’em scare you from taking action, but just be aware that, hey, I want to make sure that no matter what happens, I’m gonna get to the end game goal.
Michael Port (01:04:22):
Yeah. And like something like a pandemic will never happen. So you don’t have to worry about something like that, but just other things. Alright…
Matt Rzepka (01:04:29):
…like a flood, or a hurricane.
Michael Port (01:04:30):
Yeah. Like a flood or a hurricane that totally destroys your headquarters and everything in it and all your video equipment and audio equipment. And oh my gosh. I even just literally unpacked the boom microphones and the mic that Matt is using out of a box that we just ordered because everything has to be reordered. And no insurance does not cover it. So here’s the thing, next week’s topic is gonna be this: money advisors- the good, the bad, and the ugly. I’ve got a lot to say about money advisors and my close, dear friend, who is sitting across the table from me, is a money advisor. But he is one that I trust because I don’t trust most of them. Do you, Matt?
Matt Rzepka (01:05:11):
You have to be very, very careful. Anyone who’s in a hurry, be cautious. So you want somebody who’s gonna work at your side, understand what you want and help you get where you’re going. Don’t be in a rush.
Michael Port (01:05:21):
Yeah. And we’ll dig deep into that next week. But for now that is it. Keep thinking big about who you are, what you offer the world. This is Michael Port with
Matt Rzepka (01:05:33):
Matt Rzepka.
Michael Port (01:05:33):
Signing off for today.
