Austin and his wife are worried about moving to a single-income household while supporting two kids. Should they free up cash flow by paying off a car loan, or tighten up and stay the course?
Paul has been retired for seven years, but still can’t shake his anxiety about not having enough. Is there a good way to know when he’s finally escaped the dreaded sequence of returns risk?
Jonathan wants to build up his taxable brokerage account, but he’s having trouble letting go of the tax benefits of a Roth IRA. How does he get past his psychological hurdles?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Austin asks (at 01:45 minutes): We’re at a big transition point—our second child just arrived, and we’re moving to a single income. What are your thoughts on our plan to free up some much-needed cash flow as we make this move?
I’m 31, my wife is 29, and we have two kids. We’ll earn $150,000 plus a $20,000 bonus on our single income. Transitioning to a single income household is a big adjustment, and we want to make sure we’re managing it wisely. We have $52,000 in emergency and sinking funds, and our monthly spending is $7,000.
Our investments include $500,000 in retirement accounts, $150,000 in a taxable brokerage account, and $12,000 split between two 529s.
Our home is worth between $560,000 and $575,000. We owe $390,000 on a 5.07 percent ARM, which won’t adjust until late 2029. We also have $20,000 in federal student loans at 4 percent and a $16,000 car loan at 5.97 percent, with a $570 monthly payment.
We’re expecting a $5,000 windfall from a vacation payout and some bonuses, which leads to my question: Should we put that toward paying off the car loan to improve monthly cash flow? That $570/month would go a long way during this transition.
The complication is that we have another car. It’s fully paid off and running strong at 260,000 miles. I love this car and hope it makes it to 300,000, but realistically, we’ll need to replace it in the not-too-distant future.
We’d likely spend $18,000 to $27,000 on the next vehicle. So, should we keep managing the current car loan while saving for the next car? Or even dip into taxable investments to pay this one off?
The thought of selling from our taxable brokerage is the part that stings the most. But it feels like we wouldn’t get another used car loan below 6 percent in today’s market. Would it be smarter to free up the $570 now and start rebuilding savings for the next car purchase, or just ride this out?
Paul asks (at 25:19 minutes): We often talk about sequence of returns risk, but how do you know when you’ve escaped it? I’m 59, and my wife is 52. I’ll turn 59½ this July and get full access to my retirement accounts without penalty.
We have $3.3 million across our accounts: my traditional IRA has $1.6 million, my Roth IRA has $700,000, my wife’s Roth IRA holds $384,000, and her SEP IRA has $480,000. We also have $54,000 in a brokerage account, $61,000 in cash, and we own our home outright.
I left work in 2018 at age 52, when we had $1.7 million between investments and cash. My wife no longer works either. Our annual spending is $70,000.
So, how do we know when we’re safely past the point of worrying about sequence of returns risk? When can we just exhale and know that we’ll be okay?
Jonathan asks (at 41:34 minutes): How do I decide between making the more mathematically sound decision and the more psychologically comfortable one?
I’ve contributed enough to my Roth and pre-tax retirement accounts that, based on growth projections, I won’t need to add anything else. This frees me up to invest $7,000 a year for at least the next decade, with the goal of accessing that money before 59½.
I have two main options: Contribute to a Roth IRA and later withdraw the contributions tax-free, or invest in a taxable brokerage account. From a pure tax perspective, the Roth is better.
But psychologically, I know I’ll struggle with pulling money out of it. Even if I’m just withdrawing contributions, it just feels wrong to touch it.
So, do I go the taxable route, accept the slightly higher tax bill, and avoid the mental hurdle? Or do I use the Roth and reframe how I think about those dollars? How should I approach this tradeoff between psychological comfort and tax efficiency in a single income household?
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