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November 21, 2019
Rob Berger is a lawyer by trade and personal finance expert who achieved financial independence the “normal” way – working, saving and investing, then achieved it again when he built and then sold his Dough Roller site. He’s also a Deputy Editor at Forbes.
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Steve: Welcome to the NewRetirement Podcast. Today we’re going to be talking with Rob Berger, a Lawyer by trade, and Personal Finance Expert about his top financial lessons, and his new book, Retire Before Mom and Dad: The Simple Numbers Behind A Lifetime of Financial Freedom. Rob achieved financial independence the “normal.” way, working, saving and investing, then achieved it again when he built, and then sold his Dough Roller site. He’s also a Deputy Editor at Forbes. With that, Rob, welcome to our show. It’s great to have you join us.
Bob Hey, Steve, good to be here. Thank you.
Steve: I’d like to dive in, and just have you share your background. We met face to face at FinCon a couple of years ago, and you’ve always impressed me as a very thoughtful person, and obviously, you’ve had a lot of success, and you’ve built several things that are impressive. I just wanted to kind of have you share how you learned about financial independence, got motivated, and about that journey?
Rob: Sure. Well, I grew up pretty much middle class in Ohio. I’m a Buckeye fan. Sorry to disappoint your Michigan listeners, and both parents worked for the most part, and we didn’t have a lot of money. I start there because growing up for me to have any money to spend, I had to have a job. I got a job as soon as I could, delivered papers at 5:00 in the morning, and then, you know the fast food thing, and it kind of instilled in me a work ethic that hasn’t left me, but then, you fast forward to college and law school, and it was pretty much, sort of the plan was the 45 year career practicing law. That was what I thought I’d be doing.
Rob: I did that for a couple of decades, 20, 25 years. I guess it was 2005 I had a bit of an epiphany, and that was a couple things really. One was, I decided I didn’t want to practice law the rest of my life, so I had to figure out something else, but also, that I was spending money in foolish ways and trying to live the lawyer lifestyle, and so, I just one day decided I had enough, and changed.
Steve: Now, did some event trigger that assessment?
Rob: People ask me that. I wish I had some brilliant, some great story, some near death experience or something, but no. Not really, it wasn’t any one thing. I think it had been building up over three or four years. I’ve made partner at a big firm, and after about two years of being partner realized that’s not really what I wanted, so I quit and took a huge pay cut to do something else in the law, and that kind of started the process, but it took me… I’m a slow learner, so some people might have an overnight epiphany. Mine was more like a three or four year epiphany, but that kind of started it, and I just came to believe that really we think about what money can buy us beyond the necessities and whatever your passions are, it could be world travel, it could be fancy cars, if you’re into cars, whatever. What I found for me was what I wanted to buy was my freedom. That’s what I want.
Steve: Yeah, so it sounds to a certain degree like you got triggered by some work that you didn’t love once you made partner, you were kind of like, “Is this what I really want to be doing? Spending my time on?”
Rob: It’s funny, I had decided to be a trial lawyer in the eighth grade. Who does that, right? That’s just absurd. I really did like my time as a lawyer, but yeah, I kind of came to the conclusion that I don’t want to do this for the rest of my life, and I certainly don’t want to be trapped into a sort of a lawyer lifestyle.
Steve: You mean like a high spending lifestyle?
Rob: Yeah, I looked at the lawyers that were 10 or 20 years older than I was, and they had sort of, as their incomes went up so did their lifestyle, and they had the golden handcuffs. Yeah, they were living a nice lifestyle, but they were kind of stuck to the, practicing law isn’t, if you watch it on TV that’s not reality, and so, they were kind of stuck billing 2000, 2200 hours a year just to keep pace with the lifestyle they’d created and I did not want to get on that hamster wheel.
Steve: I think that happens on a lot of industries, consulting, sales, people, they elevate themselves, and then, they’re like, “I got to pay for all this stuff.” Quick side note, I remember when I was in college I was an engineer, and then, someone mentioned, “Oh, maybe you should consider being a patent lawyer.” I started looking at that, and then, I was also a resident assistant to help pay for college, and one of my fellow RAs was getting his law degree. I’m talking with him, and then, just looking at all these books he was reading, and what his work was like just to prepare to become a lawyer, and I was like, I don’t know if I want to spend three years doing all this stuff, and then, what’s the actual work like, and it didn’t seem that compelling. I feel like that was a good decision.
Rob: I enjoyed it while there was a challenge involved, and I was learning, but honestly, making partner almost for me, almost took the fun out of it. It’s like, now what’s the goal? I mean, making partner it takes about eight years, and it’s like being in an eight year pie eating contest, and when you win you learn that first prize is more pie, and I’d had enough of it. I needed a new mountain to climb. I needed a new challenge.
Steve: That’s cool, that’s good to get that back story. All right, well, let’s move on to Dough Roller. You started Dough Roller in 2007?
Steve: I guess a couple years after you had this epiphany, and would love to kind of hear kind of the highs and lows as you built that, and then, ultimately sold it last year.
Rob: I started Dough Roller just really as a hobby. I wasn’t thinking of business, I wasn’t ever thinking this would be something I would do full-time, and I didn’t know a thing about how to build a website, how to get traffic to a website, how to monetize it. I didn’t know a thing, but I don’t know, I found it motivating. I just loved doing it. I was up at 5:00 AM, seven days a week for the first couple of years, building this thing on my own, and I’d meet other bloggers, I’d learn, and over time you start to get traffic to your website, you start to learn how to make money from it, you start to learn what kind of information people need to make smart financial decisions so your content improves.
Rob: By 2000 and… I don’t know, a few years after I’d started it was making enough for us to live on, and I didn’t quit the law right away. Over time, I went part-time, I ended up retiring from law in 2016, but it turned into this full-fledged business. I bought some other sites, and yeah, it surprised me as much as it surprised anyone, and then, I sold it in 2018. I kind of retired from law in 2016, then I retired from that in 2018. Now I’m a Forbes Deputy Editor. I don’t know when I will be going to retire from that. I’m not sure. I’ve got a few ideas of what’s next, but in any event, the whole website thing, and that whole online business piece of my story was truly life changing, and I’ll continue to do things in that space at least for the foreseeable future.
Steve: Yeah, well, it’s impressive what you built. I was looking at the site. I know it’s been sold, and maybe they’ve amplified things a little bit, but it’s getting a million visitors a month it looks like, you’ve got this podcast as well, which you’re continuing to do, and that has big audience, and you’ve got a Facebook group that’s active, which I’m also part of that’s been, you can definitely tell there’s a lot of power years that are highly engaged.
Rob: There are, yeah, and I’m starting to meet with folks not one on one, but in groups, particularly here in Northern Virginia, which is a fun part of all that.
Steve: Yeah, I was talking to JD Roth about that, he goes traveling, and he’s got some worldwide audience, and he’s like, “Oh, yeah, I’m going to be in Amsterdam, and then, so and so wants to meet up.” Then they’ll meet up, and they’ll show him around their city, and they’ll talk about personal finance, purpose, and stuff like that, but that’s got to be pretty rewarding to kind of have these people out there that are engaging with you directly.
Rob: It’s funny because it all starts all by yourself in your home as you publish your first article 10, 15 years ago when you think, it’s just impossible to imagine that it would turn into all of this. I’ve been to Israel for this company. I’ve traveled all over the country, and I’ve just published the book, which opens up other doors. Who would have thought.
Steve: It’s been interesting watching the FinCon bloggers. It feels like there’s a story arc of many of them started with, “Hey, I’m in a lot of debt.” They’re writing about that, and then, they’re writing about, “Oh, now I’m getting out of debt, and I’m starting to save invest.” And now, they’re like, “Oh, now I’m getting to be financially independent.” And then, they’re selling their companies, and like this whole group is going through this waltz journey together. It’s cool.
Rob: It surprises people, but I know countless bloggers that have sold their blogs for seven figures, and people hear that they’re like, “What?” How’s that? What world do you guys live in?” Yeah.
Steve: Yeah, but I don’t know, sometimes for me I think of, kind of a commercial real estate analogy where, hey, you get a chunk of land, your domain, and your blog, and you kind build it up, you’re making it better, and better start to make more and more money, and then, it’s like a thing that’s like spinning up income, and people will buy that. It’s just a virtual piece of property that you’ve built, except it’s personal it’s your thing, and you can do it for almost nothing unlike real estate investing.
Rob: Yeah, there’s no capital. You can invest capital, but you don’t need to.
Steve: Yeah, you don’t need to. You just got to put your time and energy into it.
Rob: Just time.
Steve: Cool, and one of the tools that I saw on your site that I liked a lot is this Blue Binder idea which I read a post that you had about that. I’d love to hear you describe that for our audience.
Rob: Yeah, I call it the, I Just Got Hit By A Truck Binder. I think this is true in a lot of relationships, where one person is sort of focused on the finances and investing, and the significant other or spouse doesn’t even have any interest in it, and that started to worry me, because I’m the one who has an interest in it. My wife, not really, and I thought, “Well, what if something happens to me? How is she going to know what to do with our 401ks, our IRAs, our taxable accounts? And, will she even know where everything is?” I put together a binder, and I talk about this in a couple of episodes on the podcast, but I put together, I call it The Blue Binder, which is blue because that’s the color of the binder, that’s what the blue’s for. I should have called it The Green Binder.
Rob: But, it starts off with a net worth statement that I update once a year, and then, below it simply has all of the documents, all of the brokerage statements, 401k statements, all of the bank accounts, a copy of our will, some financial information for our children, and I also sort of personalize it, so I have a letter that kind of walks through. Here’s what I would… I’ve told my wife, “Look, if I get hit by a truck go hire Vanguard Advisor Services.” I don’t do that, because I don’t need to, and why pay the 30 basis points? But, she’s not going to want to do this on her own, so that’s fine, higher Vanguard, pay the 30 basis points, they will invest the money in a way that I think is reasonable, and walks through all this in the letter, and it’s a binder that I update once a year.
Rob: We were having like quarterly meetings, we’ve sort of fallen out of that habit, and so, we’re going to have a fall meeting. She doesn’t know that yet though, so she’s in the other room. I better quiet down. I mean, she doesn’t mind that, and she’s great. She doesn’t want to talk about it all the time. Like I’m in there saying, “Hey, we can shave two basis points off of our weighted average expense ratio.” She’s like-
Rob: “Shut up. Would you?” Actually, she wouldn’t say that, she’s a keeper, but-.
Rob: She tolerates me.
Steve: Good job Rob, good job of getting.
Rob: That’s right, so that’s The Blue Binder, and you can really customize it however you want, but the point of the binder is if something happens to me, it’s like a playbook, it’s a blueprint. Renders everything we have and what you should do. By the way, it has a list of all of our accountant, our trust and estates lawyer. I mean, she knows these people, but I’m the one that really deals with them, so here it all mapped out.
Steve: I think that idea resonated a lot, and I sort of have that digitally, but not to the degree you have it, and it’s something that is important to build.
Rob: Let me just throw one other thing in there that people don’t think about, you think about passwords to your online things, and people immediately think, investment accounts, bank accounts. Your significant other doesn’t need those passwords. My wife will be able to reach out to Vanguard, and deal with the accounts without a password, but what about Facebook? What about email? What about Gmail? Because you ain’t going to get those passwords from those companies, so that’s something to think about in terms of The Blue Binder, how are your significant others going to get passwords? And, it’s not the passwords you think they need.
Steve: Yeah, I had a good talk with Cameron Huddleston, about talking to your parents about this stuff and just getting everything organized, and-
Rob: She wrote a great book on that.
Steve: Right, and power attorney, and all that stuff, and definitely, if you don’t take care of this stuff it can get really messy and friction-full for years, and expensive. You can be spending 10, 000 bucks on this or that or getting stuff through the state, so that’s awesome. All right, I want to talk about your book in a sec, but for our audience who’s kind of 50 to 65, they’ve been saving, they’re working on our site to kind of build plans and think about all their assets, and how to draw it down, and manage healthcare and stuff like that, but a lot of them are, they’re approaching retirement, any kind of insights that you have based on Dough Roller and your own experience, like things to pay attention to or look out for?
Rob: Well, for me the biggest challenge, and I’m 52. When I sold my business, I thought I would be transitioning into spending down my nest egg. For a variety of reasons I haven’t had to do that yet, but at some point not too far down the road that will happen, and that transition, I think, from working and saving, to spending what you’ve saved, there’s both a psychological component to that transition, and sort of a mechanical one. The psychological one is, at least for me, it’s very hard to start spending your money. You don’t want to see your balances going down. You know that’s how it kind of works, that’s what you’ve been saving for, but I found it to be a pretty big psychological barrier, and it can cause us I think a lot of angst. At least it does for me.
Rob: By the way, I don’t have an easy answer to that other than I think it’s good to know in advance that, that’s going to happen, and one of the ways I prepared for it, in my case, it kind of moves us to the mechanical side, the drill down, how do you do that? Was to think in terms of buckets, and this is, I think, a fairly common strategy, but the bucket strategy, and the reason I like it was because, if you imagine taking whatever, say two years of expenses, and you put it in a savings account, and years three through whatever seven, maybe going intermediate term bond fund, and then, beyond that it can be in equities, that helped me sleep at night, because of, okay, worst case, even if the stock market just crashes, and we have another ’08, ’09 I’ve got two years of cash, another five years of relatively short duration bonds that I can live off of.
Rob: Now, there’s no guarantee that the next bear market won’t go longer than seven years, and I don’t mean literally every year down 20% that the odds of that are pretty unlikely, but you could have some really bad years, maybe a good year, followed by some more bad years, and the net effect of that could be a difficult decade, so there’s no guarantee that, that difficult period won’t last more than seven years, but I think somewhere in that range of cash, and relatively short duration, bonds, it is a pretty good interest rate. No guarantees, we all know that, but to me there’s a lot of other issues, insurance, health insurance, particularly if you retire before you’re 65, and can get Medicare, so depending on your specific circumstances there could be a host of other issues.
Rob: But for me, it was that transition from working, earning an income and saving, on the one hand to how do I then start spending what I’ve saved? And, that was my approach, and then, it turned out, at least for the time being, because of my work at Forbes, and some other things I haven’t started to spend it down, so I’ve delayed the inevitable, we’ll see for how long.
Steve: I think the bucket strategy resonates with a lot of people, it resonates with me, and I was talking to Fritz Gilbert about this, actually had a three F.I.R.E people on kind of a panel, like one year in retirement what have they learned? And, Fritz was talking about how he essentially he’s deployed this, and he likes the idea of just having that visibility for two, three years. He doesn’t have to worry about it, and so then he can take more risk with his longer duration investments.
Rob: The one thing I haven’t solved though there is part of this that I think is not clear, and that is, at what point do you take from your equity holdings, and move that either into your bond, or your cash buckets? Because, a year from now you’ve spent one year of cash. Well, do you just take some equities every year, and fill that bucket back up? Well, what if, part of this whole system is so that if the market crashes you can avoid selling your stock, during the down market. Well then, how long do you wait for the market to go up? And, how do you even think about that? Do you have some sort of valuation metric that triggers a buy or sell given current valuations now? Should you have more in your cash bucket?
Rob: I probably would by the way if I were using it now, I might have three or four years in cash given the market, but again, even that is not exactly scientific. I mean, it’s not like I’ve got some algorithm that’s doing this. The bucket strategy doesn’t solve all your problems, but I think at least gives you a decent framework to think about the issues.
Steve: Yeah, it’s a great question, and like Karsten Jeske from Early Retirement Now, his view is, keep the whole thing in your optimal portfolio for your risk that you can handle, and just draw it down, and even if the market tanks, and instead of going from a 4%, you have to take it up to a 6% draw down rate to hit your income needs, assuming the market recovers, like he’s pretty confident like, “Oh, I’ll still be okay.” I know it can deplete your assets earlier, but that’s not kind of his point of view.
Rob: Well, part of that equation is for your 4%, which I know is the rule of thumb, how much of that spending is discretionary? Like, is your 4% cutting everything to the bone and you’ve got no wiggle room? Or, is 2% necessities, and 2% is discretionary, which is kind of where I want to be, and if that’s the case, sure, I could arch it up to 6% in a bad market if my portfolio dropped, and that’s what I needed to hit the number, or I could just for a couple years cut my discretionary spending, which is more what I would probably do.
Steve: Yeah. Well, we’re trying to do some of that stuff in our tool and and back to this point, Doug Norman said the same thing where he’s like, “We try to have some flux in there, in the expenses side.” And also, he keeps in mind, “I could go back to work like in a worst case. I don’t have to go back to work to say if I made 100, 000 to make 100, 000 again, I can go back to work, and make 25, 000 bucks, and there’s lots of ways to make 25, 000 bucks.” That’s game changing, so having that approach. Now, he’s granted younger, if you’re 75 years old, I think that your capabilities, or not capabilities, but.
Rob: He could go back as a surfing instructor, riding at his thing, surfing.
Steve: Yeah, totally. He’s probably thought about that, and then, real quick, last question, healthcare, and is that an issue for you at all, and how do you deal with it?
Rob: It’s not an issue if I don’t get sick, no. Well, at the moment, I have health insurance through Forbes, but it’s actually a great question. When I was going to buy it on my own, and for a while I did, so I don’t qualify for subsidies, so I was going to, the Affordable Care Act, what a great thing. I can go right on to the government website, and I can get a high deductible plan for $2, 000 a month. Isn’t that wonderful? And so, much for the Affordable Care Act, and it turns out though, when I priced this, the company that was gracious enough to offer me this wonderful insurance was leaving the exchange at the end of the year, and so, the broker I was working with said, “But not to worry. Someone else can fill it, but the downside is, starting in January that’ll cost you 2, 500.” I’m like, you know, “What?”
Rob: By the way, that’s the reality that most people don’t see about the Affordable Care Act, because most people don’t buy the insurance on their own, through the exchanges they end also without subsidies, but for that group of people it’s a nightmare. It’s like the worst possible set of circumstances. What I ended up doing was getting a business policy. This is when I still had my websites, and this is the insanity of it all, that policy that would have cost me two grand, and then, 2, 500, I paid 1600 dollars for it. By the way, still not cheap, but a heck of a lot better than 2, 000, and 2, 500. What’s the takeaway for those listening? Well, I guess one is, don’t assume that the insurance under the Affordable Care Act is actually going to be affordable. If you’re thinking about quitting your job early, before you hit 65 you need to have a solution for your insurance first.
Rob: If you can buy… Even small companies in Virginia, you can have a company it’s just you, I think you have to make I think it’s $12, 000 a year. You can qualify for a business plan, and the exact same insurance as a business plan is going to be better than if you buy it as an individual or a family. There’s a reason for it. The reason is the risk profile changes. The absolute most expensive risk pool is those individuals in the exchanges. I don’t know why, but it is, and small business owners not as risky. Now, it’s going to vary from state to state, this is probably already more information that people don’t want to hear, but yeah, if you can get a business policy it’s cheaper.
Steve: Yeah, no, I actually have been thinking about this, and I think for our audience, many of them do create sole proprietorship’s, small businesses, they’re consulting, whatever it is, so they can say, “Hey, I’m actually creating a business.” They have to go through the mechanical part of creating it, but their state like in California, you can file and create an LLC for like 50 bucks. I mean, there’s an $800 a year LLC fee, but there’s other ways to do sole proprietorship’s, and then, you can get health care from as a small business, so.
Rob: Here’s one thing. I’m 52, I don’t know when I’ll leave Forbes, but I certainly won’t be there until I’m 65, and so, I’ve already thought through this. One thing I’ve learned, you can get COBRA for a year and a half, but a business plan maybe every time, but nine times out of 10 is going to be cheaper than COBRA, right?
Rob: And, leaving your job is a triggering event that allows you to get insurance, so my plan when I do leave Forbes is to immediately get a business insurance, a business policy, because I still have my business, and it still makes enough income for me to qualify for a business policy in Virginia.
Steve: Nice, good, yeah. Well, I think that tip on really being thoughtful about insurance and where it’s going to come from makes a lot of sense.
Rob: Absolutely. Don’t assume it’s going to be affordable just because of the Affordable Care Act. Well, I don’t want to get into politics, but really what the Affordable Care Act was, was the Medicaid expansion act. I mean, that’s the vast majority of people. It helped a lot of people. There’s no question, but the majority of them are people that weren’t able to be on Medicaid, and now they are. That’s the majority of what the Affordable Care Act did, but for a lot of people it really is a nightmare.
Steve: Yeah, no, I agree. It doesn’t work for a lot of folks. All right, awesome. Well, this is super helpful. Let’s talk about your book Retire Before Mom and Dad. Why did you write it and what are you hoping to accomplish with this?
Rob: I wrote it for two reasons. I’ve talked to a lot of folks about finances really at any age, and I’ll ask them what I think are basic questions, and these are people that want to share information with me. I don’t just go to strangers and ask, “What’s your net worth?” But, I’ll say, “What’s your net worth?” “Well, I don’t really know.” “All right, are you investing?” “Oh, yeah, I’ve got a 401k.” “Okay, what are you investing in?” “I’m not sure I could look.” “What’s the cost? What are your expense ratios?” “What’s an expense ratio?” “Well, do you have index funds or actively managed funds?” “Well, what’s an index fund?”
Rob: The first reason I wrote this book was to basically give everything they need in a single book to do smart things with their money, so that they can achieve financial freedom in a reasonable amount of time. That was the first reason, and the second reason was, I think there’s sort of a growing voice, or a viewpoint in our country that concerns me, and that is that the average person just can’t do it. If you’re on an average income, whatever that is in your area, you can’t really achieve financial freedom. It’s not going to happen for you unless you’re whatever, extremely wealthy unless you make six figures, and certainly you can’t and shouldn’t even think about investing on your own, because you just can’t do that now. I just think that’s a bunch of nonsense.
Rob: I wanted to show people a lot of wealth even with you can build far more wealth than you might imagine, and in fact, If I kept the assumptions that what I thought were sort of reasonable, average middle kind of how I grew up kind of numbers, and I walk through and show them step by step here’s how compounding works, and here’s how you can use it to your advantage, and we go through investing, and different approaches to investing that are simple and straightforward, and so, that was the goal, was to give them basically the information tools and strategies to go from a beginner to someone on their way to financial freedom. Well, by the way, I called it Retire Before Mom and Dad because I want 20 year olds to read this, but it really is applicable to anyone who is either just starting out or frustrated with where things are?
Steve: Yeah, I think it’s a great idea. One of the challenges is that, so the financial service’s industry helps you if you have money. There’s plenty of people that will help you, and if you have money maybe you’re a little bit smarter about how not to lose it. When you don’t have money, the people that are helping you are credit card companies, high transaction sale, financial product sales people that are loading you up with all kinds of fees that you don’t understand, and they’re not really to helping you, there’s a lot of money made by financial services on people that don’t have money, payday loans, credit card companies, whatever, and you’re fighting against that whole tide to try to get to these folks when they’re young.
Steve: One of the things that I talk about still on the podcast that I really think should be happening is that there should be required personal finance education in high schools. Just teach people balancing a checkbook, how credit works, how credit cards make money, how investing works, like your book. Have every kid read your book, change America.
Rob: I like the way you’re thinking.
Steve: So yeah, go talk to Next Generation Personal Finance. They’re a group doing this, advocating… A nonprofit, teaching teachers and getting it in high schools. It’s available in 60% of high schools now, but only required in 20% across the country, but yeah, that’s what it’s going to take, or that’s part of what it’s going to take.
Rob: Well, part of the thinking on this book, though, I do think you’re right, that there’re certainly a lot of financial services that take advantage of people, but at the end of the day we don’t have excuses. We need to be responsible and accountable for the decisions we make, and the money that comes into our lives, and we can do that, and we’ve got this. We don’t need to pay a broker or an advisor a lot of money to stick our money in three or four mutual funds, and we don’t need to pay a lot of interest on credit cards. We can pay our balances in full every month. Yes, there’s a lot of people out there and companies that might take advantage of us, but we also shouldn’t use that as an excuse to bury our heads in the sand, and yeah.
Steve: Yeah, right, we don’t want to have kind of a victim mentality like, hey, this just happened to me. I totally get that as well.
Rob: But, the thing is I think there’s a growing voice in this country that thinks there is a victim mentality, and I’m not suggesting that we don’t have challenges and obstacles to get over, and I’m not suggesting that there aren’t systemic issues that we all face, depending on our particular situation, but I think everyone can make positive steps to improve their financial lives, not withstanding those challenges, and so, I think there are some that all they want to talk about are the challenges. I’d rather talk about how to overcome them.
Steve: Totally, no. Right before this, I was actually having coffee with an entrepreneur 28 years old, and I was listening to the story, he’s out here, trying to run up some seed capital, building his business, and it’s good. In a way I was like, “In America it’s good. You can still go for it.” And, part of his backstory was same thing, middle class background. He told me how he got his first idea. He was working as a security guard at a residential building, and just kind of feel like this terrible job, but he’s like, looking at the data about how people get in other buildings. He’s like, “Oh, yeah, I came with this idea to do like RFIDs, and entry cards to track all this stuff, and automate all this stuff, and automate my job.”
Steve: And, it’s like, “Good. If you’re thinking about it, and innovative, you’re going to see ideas and opportunities everywhere around.” And so, it is definitely possible in this country to do great things, and if you get educated take advantage or use the system to your advantage.
Rob: Well, you can, but at the same time I’d say, my mom’s a teacher. Teachers can become millionaires. It’s not hard, and it doesn’t even require the sacrifice that I think a lot of people in their minds think it does, and my mom was a teacher, my stepfather worked at the gas company. I know folks that have earned very average salaries and built million, $2 million portfolios with their homes paid off when they retired. I mean, that is a great thing about our country, you can start whatever business you want, and all that sort of thing, but you can also work a career that you just are passionate about, like teaching, for example, and still achieve financial freedom.
Steve: You do have to know how the system works, invest appropriately and watch. One thing about teachers is, and some public service folks is they will get amazing pensions if they are thoughtful about it, make sure they hit the right gates, but also in some of these programs there’re ridiculous fees, so they got to pay attention to that stuff, and also work through representatives to like make sure, hey, we’re not getting loaded up with some kind of insane fees.
Rob: So, yeah, two things there. One, in the book, I walked through exactly how to find your fees. It’s not hard. You could use morningstar.com but I walk through examples, but with respect to teachers specifically, and others in the nonprofit like 403(b)s as opposed to 401ks, because of their history 403(b)s can have really expensive investment. I mean, 401ks can too, but for 403(b)s you’ve really got to watch the expense ratios of your investments. They can get quite high. Basically, certainly for an index fund you don’t want to be over 25 basis points. I don’t think, quarter of 1%, and frankly 15, or 10, or less is better.
Steve: What kind of fees have you seen in for index funds inside of 403(b)s?
Rob: Well, the problem that I’ve seen is not index funds, but it’s annuity type of products, or that were born out of the insurance industry, and so, you’ll see actively managed funds. They’re incredibly expensive.
Steve: Like, 100, 200 basis points something like that?
Rob: Oh, I see. They certainly seem over 1%. I don’t know if I’ve ever seen, they definitely exist funds over 2%. I don’t know that I’ve seen one of those in a 403(b) but my wife worked at a adoption agency for a while part-time, it’s a nonprofit for 403(b) and some of her investment options were well over 1%. It’s terrible.
Steve: I think, at least when I was kind of coming up, and I worked in financial services, it’s position like 1%. Well, okay, fine. I’m hundred bucks, I’ll pay $1 a year to manage my money. That sounds not that bad, but then, when you look at it, you’re like, oh, well, what’s your average term? Well, maybe it’s four to 7%, so if it’s on the downside I’d lower into that. It starts to be a big piece of 25% of your returns or whatever, so it’s 15 to 20% of your returns for that year, plus, you lose that money, you’re compounding on that money, so it can end up being 20 to 25% of your portfolio over a 30 year time horizon.
Rob: It’s enormous, and another way to look at it, we talk about the 4% rule or guideline, I prefer to call it, but when the studies are done to calculate that they’re not factoring in a 1% investment fee. They’re looking at market returns, and so, one way to look at it for those nearing retirement is as effectively you might have to be living off 3% instead of four, or put differently, you might be living off four in your one, and then, adjusting for inflation, but because of that 1% fee your odds of, effectively the goal is to die before your money runs out. I mean, just to put it bluntly, but with that 1% fee your odds of dying before your money runs out go down.
Steve: Yeah, in a huge way.
Rob: Yeah, another way to put it is your money can run out before you do. It’s a bad thing by the way.
Steve: Yeah, that would not be good.
Rob: To die young or anything, but yeah.
Steve: From your book, any particular things, like I was looking at kind of the things you cover, the five money myths that are keeping you from a life of financial freedom, and kind of a step by step approach to kind of saving without conquering too much hardship. Any kind of main rules that you think we should apply, especially to our audience, kind of the 50 plus audience?
Rob: Well, the 50 plus audience, hopefully, they are well on their way to saving, but I will say this. I walk through the math of early retirement, and I think of early retirement as if you start with zero retiring in 20 to 30 years. There’s certainly people to do it in 10 to 15, that’s a very extreme. The thing about that is if someone is 50 listening to your show, and they either haven’t gotten to start, or they’ve gotten a very slow start, maybe they’ve gone through a divorce, and they’re sort of starting over, of course, they’re not thinking early retirement. They’re thinking, “Oh, goodness, I just want to retire on time.” But, here’s the thing. For that kind of person you need to adopt the mentality of early retirement, because you’ve only got 15, 20, 25 years left.
Rob: Now, there is a silver lining. For someone that’s going to do that they’re presumably going to have Social Security when they do retire. Someone’s that’s going to retire in their 40s or 50s is not going to have Social Security. Someone that’s 50 now, and is trying to retire on time, or maybe by the time they’re 70, they are going to have some advantages. Social Security is one, Medicare’s another, and those are significant, but you’re still going to need a nest egg unless you’re going to try to live off Social Security, which is not easy to do, and so, the mentality of the early retirement crowd can help someone in that situation cover what they need to cover in that relatively short period of time, so in that sense you’ve got to sort of adopt that early retirement mentality.
Rob: One of the things I cover in the book is, and I think it’s a sticking point for a lot of people is how do you reduce your spending? And, when we think about that, most people immediately think about sacrifice, “I can not eat out, I can never go on a vacation again, I’ll wear the same clothes five days in a row.” Whatever, and so, what I did in the book, I said, “Look, let’s break it in two. Let’s first start with ways to reduce your spending that don’t change your lifestyle at all.” And, those are significant, and we walk through a whole process of how to reduce your spending on things that won’t change your lifestyle at all, like reducing the cost of car insurance. It’s just a simple example, or your cell phone, and these amounts at first might not seem like a lot, save 25 bucks a month here, 50 bucks a month there, but if you take all that money, and you save and invest it even over a relatively short period of time, take 20 years, as you know, you’re looking at hundreds of thousands of dollars, and possibly a million or more. It really has a huge impact.
Rob: We cover that, and it’s a mentality that I think it’s important. Forget all the lifestyle changes you can make first, I call it a money audit. Look at all of your monthly bills and figure out how you can reduce them, and I walk through some ideas in the book, and then, on the lifestyle changes I kind of think a good way to approach it is a combination of asking what if questions, and then experimenting, so what I mean by that is, I’ll give you a perfect example of my life. The what if question I recently asked was, what if I got rid of my car? Now, for a lot of people, myself included, you immediately have an objection. Well, how am I going to get to work? How am I going to get to the grocery store? But, what if you didn’t? What would you do? I started asking those what if questions, and we kind of configured things in our home, I bike a lot, my wife has a car that I can use if I need to, but the long and short of it is we decided to experiment.
Rob: I got rid of my car about two months ago, so far, I don’t miss it at all. Now, it may fail. I may decide three months from now, yeah, I do want a car, and okay, I’ve tried it. It didn’t work out, but I like to apply this sort of what if followed by an experiment, and it can be on big things like a car, it can be on small things like your daily latte, or eating out five times a week, or whatever your spending habits are. I think we get locked into a certain routine, and we think any changes to it will be painful, and will sort of diminish the quality of life, and what I found is yes, sometimes that’s true, and it’s good to know when that’s the case, but many times it’s not true, and what you thought you had to have to be happy when you go without it for three or four weeks, about that, that really wasn’t making me as happy as I thought it was.
Steve: I like the money idea. Anyway, that definitely resonated. One thing I just did was I took my credit card and I just changed. I went and said, I want to kill all recurrent charges, and then, have the companies contact me, and then I’ll decide if I want to keep doing some of this stuff. I like credit monitoring stuff like that. I was like, you know what? Instead of trying to do this one at a time, I’m just going to do everything, and well just…
Rob: Hope you weren’t paying your power bill with that?
Steve: No, I wasn’t. I mean I had.
Rob: Paying electricity.
Steve: No, I don’t. I electronically pay bills, but I don’t automate any bill.
Rob: I think that’s a great idea. How many subscription services did you end up killing?
Steve: Well, I just fired this off last week. It’s also on the business, essentially, it’s forcing them in the business as well, so I’m dividing it a little bit more cleanly. Cool, well, another thing I’d love to ask about real quick is the seven levels of financial freedom. For our audience, I think this is important, because like this idea of like, hey, what those are, and kind of where you are in that can change your mindset a little bit.
Rob: Yeah, the idea here, there’s a couple ideas. I have seven levels. The first level is when you’ve saved one month worth of expenses, and the seventh level is when you’ve got 25 years worth of annual expenses, and then everything in between it goes from one, to three, to six, to one year, to five year, to 10 years, and then, to 25, and there’s a couple of things about it. First of all, it’s always in a relation to your spending, it’s not in relation to how much you make, and the key here is your saving rate. Obviously, the higher your saving rate, the faster you’ll go through these levels, but the key is to always define financial freedom in relation to what you spend, which I think is very powerful, because it gives you far more control over your journey and financial freedom.
Rob: I mean, we can’t always control what we make, obviously, we can to some extent, and we can influence it, and hopefully, our income grows, but usually we have more control over our spending, so that’s the first thing, and then, the second thing is by breaking it up into levels it gives you nearer term goals to try to reach rather than trying to think 20, 30, 40 years down the road. It’s kind of hard to really embrace that kind of goal, and then, the third thing is, at the beginning the differences don’t seem that great. Level one to two is one to three months of spending, but level six to seven is 10 years to 25, and it’s like, why? What? But, the thing is by the time you get to about level four, what starts to kick in is the power of compounding.
Rob: What gets you from level six to seven is not additional money you’re saving, I’m sure that helps a little. What actually gets you over the hump is all the compounding that’s occurring, because of all of the money you’ve saved and invested to that point. At some point, compounding takes over and builds far more wealth than your actual amount that you’ve saved, and this whole sort of seven levels really kind of gives you a framework to see that in action.
Steve: I love it. I kind of want to take your book, and we’re kind of evolving a method here over at NewRetirement, and one of the things I thought it was like all right, karate belts, what are the different ways-
Rob: That’s exactly right.
Steve: We can kind of measure people’s progression? JD Roth had an article about like, hey, you’re dependent on other people, you have some agency, there’s levels of control. I really like your just time. I was like, “How much…?” And, I think about this all the time? “How much of visibility do I have?” It started with this FQ money concept, but then it became like just visibility, and I like to walk around with some amount of visibility, so I’d be like, hey, you know, worst case scenario, this is what it looks like, and if it’s good then I’m not going to freak out, and also, understanding what are those levers that you can pull if things do go sideways, and if you have a good understanding of like, the dashboard in front of you and like what you can pull, then it also kind of lowers down that.
Rob: Well, and that’s right. When you think about levers, one of the examples I give, you’ve heard of the latte factor. People love to hate the latte factor, and I get that, but one question to ask is, well, if I give up something, it doesn’t have to be a latte, but let’s say I give up something, and I can save an extra five or 10 bucks a day, so it’s a couple hundred bucks a month. How does that affect my journey to level seven? I walk through in the book how to do that. The thing that’s amazing is, even small savings like that can shave a year or two off your journey. Now, you may or may not choose to give up whatever it is and save that extra 10 bucks, but you can at least now make an informed decision. You now can see, all right, if I make these changes here I can shorten my journey to financial freedom by five years or whatever the number is. Now, do I want to do that or not?
Steve: Right, yeah. Awesome. This is super helpful. Okay, so I know we’re running out of time here. Just a couple of thoughts before I wrap up, for you what’s next? This is definitely so I’m 50, you’re 52, and I’ve interviewed all these power guys that were 40, mid 40s to like 50, and-
Rob: Younger kids?
Steve: Yeah, hopefully we live a long time. Another quick story here is a dad that I mountain bike here, and was part of mountain bike team here. I saw him in the store parking lot, and he’s like, “Yeah, we just dropped off kid in college.” He’s like, “I just feel so young.” He’s like, “This is so strange.” I was like, “What are you going to do?” He said, “Well, we have bought an Airstream, and we didn’t want to make a change, so we’re just going, we’ll rent our house out, and we’re going to drive around the country for a year.” Hauling their Airstream, which is ginormous, he bought this big truck too, which is ridiculous, because he’s going from a Prius to a big truck, but it just kind of resonated like okay, you’re facing this big window of time, and you don’t have to work he’s going to work, but we’d love to kind of hear how you’re thinking about it.
Rob: What my future looks like, well in six minutes I’ll be on my bike going to the gym. I got that going for me. I’m working at Forbes now, work from home it’s very sort of a lifestyle friendly thing, and I’ll do that for a little while. I will be building out more websites for sure, because I enjoy it. I continue to do the Dough Roller Money Podcast, the book Retire Before Mom and Dad, at some point I’m going to build out the website for the retirebeforemomanddad.com. I want to write more books. I want to become a chess grandmaster. To put that in perspective, I’m like a benchwarmer on a high school team, and I want to become an NBA superstar.
Rob: I kind of have a long way to go, and at my age it’s almost impossible. Just like it would be in the NBA same, believe it or not, you age out in chess as well, and so, my odds are probably not that good, but that’s one of my goals, and I want to write some fiction. I’ve got filling my day.
Steve: That’s nice. That’s awesome. I kind of saw the article about these guys getting in shape for chess, how they’re running, and how chess guys are burning 5, 000 calories a day, or 6, 000 calories a day. That was an eye opener.
Rob: For the attorneys that are in your audience, I always found taking or even defending a deposition, which I’ve done, I don’t know, hundreds and hundreds, thousands of hours exhausting. After day of a deposition, it seems silly, you’re sitting in a chair drinking coffee all day. It is mentally and physically exhausting, and the attorneys in your audience understands that. Chess is the exact same way. You’re hunched over a board for a five hour game. It’s exhausting.
Steve: I think people underestimate, well, so your brain is 5% of your body weight, but burns like 20% of the calories, and I find the same thing. If I’m really concentrated on a hard problem, or I sit down with our team, I think that they’re torturing calories in a way that you didn’t think you would be doing when you’re kind of like feel, “sedentary.” All right, well look four minutes, let’s wrap this up. I want to get you on your bike. .
Steve: Get your workout, and I’m jealous. Okay, so thanks Rob for being on our show. Thanks Davorin Robison for being our sound engineer. Anyone listening thanks for listening. Hopefully, you found this useful. Our goal at NewRetirement is to help anyone plan and manage their retirement so they can make the most of their money in time, and if you made it this far, I encourage you to, one, check out Retire Before Mom and Dad, Rob’s site, and also his new book that you’ll find on Amazon by the same title, and his Dough Roller Podcast. Also, hopefully check out our site, and the planning tool where you can build your own plan for free, or take advantage of our premium tools.
Steve: You can join our private Facebook group, or Rob’s Dough Roller, and follow us on Twitter @NewRetirement, and finally we’re trying to build the audience for this podcast, so if you could leave us a review on iTunes or Stitcher, anywhere, that’s super appreciated. We read those and try to improve the show. That’s it, so thanks again, Rob, and everyone for listening.
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