Is Your FIRE Strategy Wrong? The Middle Class Trap Debate with Brad Barrett
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A topic we talk about a lot on the podcast is the middle-class trap. You've been making money on paper, you've been making smart financial decisions on paper, but you can't tap into your hard-earned money before retirement age. But is this an overhyped phenomenon? That's what we're going to debate today with Brad Barrett from Choose Five. ♪

Hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my middle class co-host Scott Trench. Thanks Mindy. As always coming in with a mean intro. BiggerPockets has a goal of creating 1 million millionaires and actually freeing them mentally from the dependence on their week-to-week paycheck or month-to-month paycheck here. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where you're starting as long as you can actually

actually spend the wealth that you accumulate. We are so excited to be joined once again by the one and only Brad Barrett. You know him from Choose FI, and I can't wait to debate this topic with him today. I think he's got some very strong feelings on this and does not believe in the middle class trap. And we are very privileged to get that perspective here today on the BiggerPocketsMoney podcast.

Brad, how'd I do? Welcome to the show. And did I preview the discussion reasonably there? You nailed it. So yeah, good to be here. Good to see you, Scott. Good to see you, Mindy, as always. And we're great friends here. This is going to be fun. But like you said, we do have strong opinions. And I think that's important. I know I've been coined the nicest guy of FI, maybe to my detriment. But anybody who knows me knows I have extremely strong opinions. And yeah, not planning on holding back today. So it should be fun. Well, you can simultaneously

be nice and have strong opinions. I don't want somebody who's like, yeah, Mindy, I totally agree with everything you say. Don't worry, that's not happening today. Let's set the stage here, right? So at BiggerPocketsMoney, we did not invent this term, by the way. I think you gave us credit for inventing this. I don't know who invented it. We didn't invent it. We just like at some point that was what it was called. And somehow this got attributed to BiggerPocketsMoney. But the middle class trap

as our audience understands it and as we discuss it here, Mindy and I on the show, is this concept of somebody with the borderline FI level of net worth. Let's call it $1.5 to $2.5 million, which seems to be about the lower to approaching midpoint of what most people who listen to the show think of as a FI number.

And that wealth is in the middle class trap trapped, quote unquote, in home equity. You know, let's say someone has an $800,000 home with a $400,000 mortgage that makes up a chunk of that wealth. Maybe there's a million or a million five in retirement accounts spread across tax deferred and post-tax accounts like traditional and Roth IRAs. And let's say there's another maybe because we're bigger pockets, you know, four or $500,000 in one to two rental properties that don't really produce any cashflow that they can rely on.

And so this person feels like they cannot leave their job without tapping into their home equity, which feels inaccessible, without putting into place a very long-term ladder to withdraw or Roth convert their 401k. And they're not really able to count yet on that rental property equity until the property is paid down or rents have a couple more years to go up with inflation. That's the stage. Brad, do you agree with that description of the middle class trap? Are we talking about the same thing here?

Yeah, I would say so. I definitely attributed this term to you. So I apologize to whoever actually coined it, but I'm going to probably continue to say it was you guys. But that is clearly how you set this up. So a significant amount of your net worth is in...

some type of real estate equity and some type of retirement account. So very clearly, that's how it's defined. We're on the same page. Awesome. So people seem to feel like they're stuck in this portfolio. And you're saying, I call BS. I don't think it's true. What's your thoughts on this? There's a bunch of different issues. It's hard to focus in on one in particular. But this person, you said they have roughly 2 million of net worth, Scott? Somewhere in the vicinity?

Let's put our fictional person with 500K in home equity, 1 million in retirement accounts and 500K and two rental properties of equity. And the rental properties are leveraged. We probably should have built this person more specifically before get into it. But that's fair. And that's easy. That's easy to remember. So do we have a sense of what their expenses are each year? Midpoint for BiggerPockets money listeners is 2.5 million for their FI number. So that would imply 80 to 100 thousand dollars in annual spending.

So this person that we're talking about in particular, I guess I would even just question the fundamental premise of are they FI? And I don't think this person is even close to FI. So let's just say very simply, they have a $2 million net worth, right? As we've said, 500K equity in their home, 500K in a rental property that has no cashflow. So we're assuming $0 of net income just as a back of the envelope. And they have about 1 million in...

retirement accounts. Okay. So the $2 million net worth would normally suggest that at 4% rule, and we'll use that rule of thumb, their five numbers, 80,000, right? So we'll use that. Okay. 80,000 is expenses. But I would say in this case, this person has $1 million in equity that I would not count towards their actual five number. They have $1 million of investable assets.

Okay. So that 1 million of investable assets happens to be in their retirement accounts. But I think frankly, it really doesn't even matter because they're halfway to FI. It's funny because we conflate net worth and FI number often. A lot of people do.

But I think most people who understand FI say it's investable assets. So this person has $1 million of investable assets times 0.04. They can cover $40,000. So their annual expenses are $80,000. They're halfway to FI. But people make choices, right? So it's interesting, Scott, and your bigger pockets, yada, yada, yada. We have to talk, you know, rental properties, right? But they've made a conscious choice to put FI

$500,000, a quarter of their net worth in a rental property that is essentially sitting there. Of course, they're paying down the mortgage. Of course, there might be some appreciation, but appreciation is speculation. So I'm not really counting that. Why is it speculation in real estate, but not in a stock portfolio inside of 401k? Well, okay, then let's even take that back. What is...

What would we say is an average appreciation? 2%? I would say the average historical appreciation of housing stock, existing housing stock in the United States per the Case-Shiller Index will be about 3.4% a year for both property prices and rents over long time horizons. Okay, fair. So that asset is appreciating. And at some point, it will be worth more than the $500,000 based on appreciation. And they are paying down the mortgage. But today, that $500,000 is essentially inert as far as their FI number is concerned.

So they've made a decision and that's perfectly fine. If that's their strategy, which again, real estate is a wonderful strategy. It really is, as you guys know much better than I do. But let's be clear, it is a choice. Okay. So had they put that in equities, I think it would more immediately impact their actual fine number. Let's say they sold that rental property.

Okay. And stuck it in the market. So then they have 1.5 million in investable assets. Okay. Well, now you're three quarters of the way to FI because now you have 1.5 times 0.04 is 60,000, right? But their actual needs are 80,000. So they're not at FI yet. And that's fine. They still have a ways to go. So now they have 1.5 in investable assets. They need another 500,000. Now that can either come from savings or they could just coast on in and let it grow. Hopefully at a...

six seven eight nine percent growth they'll get there in just three or four years and then they'll be at five but i think what's happening in a lot of cases and and mindy on episode 543 of choose a five you gave four examples and and most of these people they were nowhere near five they were doing great but they were just nowhere near five and that's fine but like i don't want people like sitting there thinking they've done something wrong when they haven't they're just not at five i've

I think that's a really important point. Something that came up on that episode is that your home equity is part of your net worth, but it is not part of your fine number. And I think for so long, people have just said your fine number and assumed that fine number and net worth are the same. So I think there's a need for people to shift their thinking a little bit. Yes, I still believe that you should count your equity in your net worth. But I think that's a really important point.

But your net worth and your FI number just are not the same number. And Brad, you said something just a moment ago. You said most people who understand FI will say investable assets. I'm going to push back on that and say most people who you said understand FI. I'm saying most people in the FI community are just equating these two numbers. And I think that really,

We need to do a better job of separating those numbers. So your FI number is not equal to your net worth unless you are planning to sell your house and travel the world and use that money as part of your spending money. And there's a lot of people in this community who like to travel, but I'm not one of them. If you're gonna keep your house or if you're gonna downsize and need a different house, you're still gonna need to pull some of that money out of your FI number and just have it in your net worth instead.

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All right, you're trapped. I mean, you're back here at BiggerPocketsMoney. I would love to just kind of jump in here and say, I'll meet you halfway on this argument. I think you're absolutely right to totally exclude the home equity from the FI number. Most people do not plan to sell their home, harvest the equity from that home sale, deploy it in investments, and live off the cash flow from that.

A small minority of people, you post about this on LinkedIn or whatever, two people out of 100 will say, oh, I do plan to do that. Okay, then count the portion of the downsize in there. Like if you live in a million dollar home today and you plan to downsize to a $600,000 home in a few years, count the 400.

count 400 towards your FI number because it's part of the plan here. But most people just don't plan to do that or it's so far off that it would be foolish of you to consider that as part of your FI number. Yes, it's part of your net worth. It's not part of your FI number. Most of the time, there are exceptions that are reasonable. You know if that exception like that applies to you. The rental property piece, I think there's a more fundamental issue and we're starting to circle around it here, which is you threw it out instinctively. You said the rental property is not part of your FI number.

And why is that? It's because it's hard to liquidate the property in chunks or pieces and then actually spend down or deploy it.

And so the feeling of its contribution defy will either come in lumps as you exit that portfolio or over a lengthy period of time, like 10 years down the road, as that mortgage stays flat, but the rents grow with inflation, yielding more and more cashflow. And then the big payoff, the big lump in cashflow, once it actually is completely paid off, right? And that's the challenge with rental property investing, that leverage inflates your returns.

That's why we do it. That's why we think we have a shot at the 15 to 17 percent returns, especially in those first years while it's highly levered. But don't get the cash flow. You can't count on that cash flow in the same way until later on when it actually underperforms the stock market. That comes back to, you know, that same mental problem that you're articulating that you immediately instinctively throw out. And I think a lot of people agree with you and do that the same thing with their portfolios. I think it also applies to that retirement account million bucks.

as part of that FI number. I think as many or more people will have that same block of dismissing that money, that million bucks in the retirement account that you take for granted as part of that FI number. And I think that's the fun psychological issue with the middle-class trap. It's a real problem for folks because it's a psychological problem.

There's no real mechanical issue. As a real estate investor, I can't access the 500K in that purchase, either tax advantaged or in a reasonably fast way, 30, 60, 90 days, depending on how I price the property and sell it.

And there's no real reason I can't access the million bucks in the retirement accounts as somebody who's been a student of financial independence for the last 10 years. But people don't. They can't. It's just out of their grasp. What's your reaction to that? Just like on most of this stuff, we agree on 90% of this easily. This is a psychological issue. I had multiple points, I think at least three to respond to there. And all of it does come down to psychology. I think that's the biggest thing we can agree on. And that's what we're here to do is to...

Help educate people. That's the most important part is most of the people, whether you think you're trapped or fell into a trap, however you define the middle class trap. In this case, this person with the $2 million net worth, you're doing wonderfully. You're doing absolutely wonderfully. Like, I think we all need to take a real deep breath. This doesn't mitigate the fact that we can still have this wonderful conversation and we can talk about the minutiae, but you need to take a deep breath.

Okay. You're doing great. You have options. You are making decisions. And I think even by virtue of not making a decision, in some cases, you're actually making a decision, right? So it's opportunity costs in the sense that I think the rental properties, Scott, that you talked about, like that's a decision to do that. But that decision, especially when there's not cashflow, that impacts your FI date. It just does. But you're doing that with eyes wide open, because like you said, with leverage, you expect, I think the numbers you said were 15, 17%.

annual return is not impossible. Hopefully I'm not putting words in your mouth. You should be averaging that in the first few years of a 30 year hold with rental property, real estate investing on an average conditions. Now you might get lucky if you're not expecting higher than average returns. What are you doing? Absolutely. And I think, and that's the cool part, right? So like these people, we're all making decisions, but we need to understand they come with trade-offs sometimes. Now, clearly, if you are getting 15 to 17%, you're

you're going to get to five pretty darn quickly, I would imagine. But these first years when your cashflow is minimal, it is what it is. But I think people just need to understand the nuts and bolts, right? So like I had, and I'm in the process of selling, but I had two rental properties in Georgia and they were paid off

I was netting, I think it was like $1,500 a month. Okay, so about $18,000 a year, pure net income. And we'll use me as this proxy example of this 2 million. These are not my numbers in any way. But in that case, okay, my life costs $80,000, but I have 18,000 coming in. Okay, so in this case, I had 80,000. I have 18,000 coming in. I just simply subtract. So in that case, I would need $62,000, right?

from my investable assets. Okay. Because I have this cashflow. It's akin to a pension. People ask like, Oh, I have a pension. How do I analyze that? How do I figure out what it's worth? Like in most cases, there isn't a lump sum value for a pension. It's just, this is what my pension is bringing in every year. This is wonderful. There's nothing to stress about. You just take, what does my life cost minus what my pension is. Okay. That's then what's remaining. And it

That then you multiply by 25 to figure out what are the investable assets I need. In this case, I would need $62,000. So I'd need a little more than what? 1.5 and a little bit of change million to reach five. But that's the beautiful part. Like, but I'm making a decision in my case. I didn't leverage sky. I just paid these things off. They were super inexpensive. That was just a decision I made. And I did that knowing I'm going to get probably suboptimal return. I could have done better, I suppose, but that passed the sleep well at night test for me.

So that was why I made that decision, but I made it with eyes wide open. These are fundamental concepts. Okay. And you might think you're trapped because that's the other Scott, your actual question was, okay, you've got all this money sitting in retirement accounts. Like, is that trapped? Like we all know it isn't trapped. That doesn't mean we don't have a sense. There's this important distinction between the felt sense and the psychological response to something versus the actual reality. And it's,

it would be very flippant of me to say like, oh, the felt sense doesn't matter. Because frankly, I've spent eight and a half years on Chooseify saying the nuts and bolts of money are about five or 10% of the game. And the psychology is about 90 to 95% of the game. Okay. So the psychology is critical. And I think that is why

I'm thrilled you guys hit on this middle-class trap thing, whether you invent it or not is irrelevant here, but because people have this felt sense, it's not our job. And I'm not putting words in your guys' mouth because you might genuinely believe that this is an actual problem. I do not believe this is an actual problem. I know this is not an actual problem.

But people still have that sense because you're getting emails, Mindy, by the hundred or 103, as it may be, as the last count, I suspect it's higher than that after our episode. And I know people who I met at FI events who came up to me and said, Brad, I heard this episode on BiggerPocketsMoney. I feel like I have the middle class trap too. And then I show them episode 475 of Choose a FI with Sean Mullaney on all the myriad ways that

to take money out before you're 59 and a half? Because I think that's Scott, that's your question, right? So this person has a million bucks in retirement accounts and all they've heard, not from choose a fi. And certainly I would imagine not from bigger bucks money, but all they've heard in real life is you can't get that money out until 59 and a half. But the three of us know there are a handful of ways to get it out. The three of us know that even worst case scenario, when you have somebody like Brandon, the mad scientist who I

I think is brilliant. Most people think are brilliant. And he comes up with his surprising conclusion on his how to access money. He basically said, the first thing is, even if you don't want to mess with the advanced strategies, like the Roth IRA conversion ladder or the SEP distribution, the 72 T it still makes sense to max out your pre-retirement accounts and then just pay the early withdrawal penalty. So,

Brandon, the mad scientist who most people consider one of the most brilliant minds in the fight community has said, not only are you not trapped, even under the worst case scenario of paying the early withdrawal penalty, you still come out ahead other than having put it in a taxable brokerage account. Now that's not to say taxable brokerage accounts are bad. I think a lot of us

because our money spills over because we filled up our retirement accounts and HSAs and things, we're going to put money in taxable brokerage, obviously, because we have money left over. But anybody who thinks that they're trapped in their retirement accounts, like,

you don't have to take my word for it. Take Brandon's word for it. Take when I brought this and, you know, I had Sean Mulaney, Cody Garrett, Chris Mamula, who are three really brilliant people, two CFPs and a CPA. Like they've run all the scenarios. And when they come up with it, the effective tax rate on pulling your money out early is, I think on Sean's examples, it was between four and 9%. So it's minuscule.

Brandon saying the worst case scenario is you just pay the penalty. You still come out ahead. So again, the three of our jobs, it's not to stoke fear. And obviously I'm not saying you guys are doing that in any way, shape or form. You're wonderful. You're two great friends of mine, but it's not to stoke fear. It's to say like, okay, look, you have this felt sense that your money is stuck. It's not, it's simply not, you're doing great.

You have plenty of ways to access this money. And that is, I think, the point that we had originally wanted to make because we have so many people in this community who are so reluctant to sell their stocks in retirement. They're so reluctant to believe that the 4% rule works. No, it's too high. You have to go lower because our timeline's longer.

yada, yada, yada. This felt sense that you're talking about is very real to a lot of people. There's a lot of people who agree with

what we're saying, we have this perception that we are trapped because we don't want to pay that 10% penalty. I love how you just flippantly say, oh, you just pay the 10% penalty. I don't want to pay 1% penalty. Well, sure. But that's an emotional response, right? There's a lot of emotions around money. It's like the people who don't want to pay their taxes. It's like, suck it up. You live in a society. Like you can think whatever you want to think, no matter how stupid or intelligent it is. But like, you know,

I don't want to give my money away, but it's similar to social security. Could I do better with my 15.3% that it goes into it on both sides? Yeah, of course I could. But I understand I live in a society, right? And this is the best for society. I don't want to pay the penalty, but my option isn't cry in my blankets that I don't want to pay it or pay it. My options are

okay, I can put it in my taxable brokerage from upfront and not get the tax deduction, or I can do what a lot of people think is optimal and put it in my tax deferred accounts. And then worst case scenario, Mindy, you know, I'm not saying I want to do this, obviously, just like you don't want to do it. Of course, like,

But that's the worst case scenario. And again, I didn't do the analysis. So I'm not trying to stand up here on a hilltop and say, look at how brilliant I am. I'm deferring to people who I think are smarter than me, frankly. And Brandon's analysis was, even under the worst case scenario,

You're still coming out ahead. So again, I'm going to defer to him. Of course, if you want to bring him on, that would be brilliant. I'm not trying to stand here as the expert on the numbers. Here's my challenge to that, because I completely agree. The math is the math. There is no doubt. There is no arguing, right? There are ways to access this money. It's there. It is not a real, if you want to call it in the sense that there's no true barrier to doing this that is not psychological. Now,

Now, let's talk about that psychological barrier because Mindy has never sold an investment position for personal consumption. I have never sold an investment position for personal consumption. We had Big Earn on this podcast a few weeks ago, thought leader and theorist in this space. He has never sold a investment position for consumption. 81% of BiggerPocketsMoney listeners per YouTube poll have never sold an

for consumption. I understand that a large chunk of those people are in the accumulation phase and will one day potentially. So I asked that question. We had Bill Bangan twice on this show. We've had Michael Kitsis. We've had you. We've had Big Earn. We've had JL Collins. We had the guys who actually did the fundamental research behind all of this and built the models with their bare hands or bare spreadsheets, whatever the appropriate phrase is there.

And people can't do it and I can't do it and Mindy can't do it. Brad, have you done it? Have you sold an investment position and used the proceeds of it for personal consumption in your life? No, I definitely have not. And I'd love to talk about that, but I think there's a fundamental distinction between can't

and haven't yet, right? And I think there's also somewhat of a selection bias in terms of bigger pockets listeners. And if we're talking cashflow, clearly selection bias does come into that. So I think again, everything comes down to choices, Scott, right? So if we need cashflow, then, or those, the 68% of people who said that, like,

they might need to redefine fi for them. And I think the other critical part, right, about psychology and fi and personal finance generally is like, you have to understand yourself, okay? So if you don't believe that you're going to be able to sell assets at some point, that they're just essentially going to accumulate forever until hopefully you pass away

let's say north of 100. And it's just going to, you know, tens of millions of dollars are going to go to your heirs. Like what's the opportunity cost of that? That they worked many years for more additional to get the cash flow to cover their assets when they had millions and millions of dollars in investable assets because they couldn't bear to sell it. Like that just seems silly to me, but silly or not, it's irrelevant. Don't invest then.

And just get real estate. Find things, buy businesses that have cash flow. Like, make decisions. If you don't genuinely believe that you can sell assets, the fundamental underpinning of the financial independence as most people define it. And it's not everyone, of course, because, Scott and many of you, of course, know this. Like, there's no one path to fi. There's a million paths to fi. If you wanted to have zero dollars in the stock market and just have businesses that you own or rental real estate,

That's wonderful. Do it. Laugh all the way to the bank. Laugh all the way to five, however long or short that is for you. That's great. I'm thrilled for you. I'm not trying to say one way is right. And that's the polar opposite of what I'm trying to say. I'm just saying, if you don't genuinely believe like the fundamental underpinning of your entire saving and investing strategy over 10 to 15 years is actually going to work for you because you can't bear to sell something, then you're probably on the wrong path.

You probably have done something fundamentally wrong for your own psychology. And that's fine. That's the next piece. Why is that a problem, right? Because these people have accumulated millions of dollars for the most part. They're approaching that two and a half million mark on the median point if they're having this problem. That's a good thing, right? The more I learn about this, the more I talk to hundreds of people in this community, the more I think that the 4% rule is the beginning of the end. How do I really want to think about this next wave here? And that's when the things open up. But to actually...

enjoy Tuesday, we at BiggerPocketsMoney have to do something else on top of that in essentially 100% of situations for us to actually fulfill our purpose here on the podcast and actually give people that freedom, that sense of freedom. So fulfill purpose. Tell me more about that, Scott. I believe that BiggerPocketsMoney, our job, Mindy and I, is to help people build a, at least one, but now we're circling around this two and a half million dollar net worth number

and then actually use that wealth to leave their job and do the next thing that's meaningful to them. They can stay at the job, whatever, but actually feel that freedom piece. And I feel like we're doing an increasingly good job of helping people actually achieve the numerical goal. And yet there's so many people that are just stuck despite having achieved that. That's the thing that's fascinating me and why we're talking about this today. Isn't that sad? Like words matter. And that's why like it does somewhat...

concern me that we're pointing this like a trap because again, like these people aren't trapped. They have investable assets. They have multiple ways to pull them out early before 59 and a half. Or if they have

assets in a taxable brokerage account, they could just sell that also at any time they want. And the actual issue here is the psychology, guys. Why are people not feeling good about this? And I see this all the time. People build layer upon layer upon layer of conservatism into their numbers, and they're still scared. And this is the last I heard, so you heard him more recently. And I'm setting these up as hypotheticals. Biggern says 3.25% is the safe withdrawal rate that's essentially almost zombie apocalypse proof,

Well, I don't believe Big Earn. I'm going to do 3% safe withdrawal, right? Like my expenses are actually $60,000. Well, I don't believe that either. I'm going to gross it up.

33% and make it 80,000, right? Like social security, every, every rational expert says, even in a worst case scenario, it's going to be 60 or 70% of payouts. I don't believe any of those experts. I'm going to count it as zero. It's like, we're doing stupid thing upon stupid thing and, and then still working extra years.

Like the only resource that we have that actually matters is our time because we can't get it back. So we're building conservative upon conservative upon conservative. And then we're still working more. It's like, it's the height of lunacy. This is what frustrates me. And like, I don't know, I put out 700 episodes. You guys have put out,

many, many, many hundreds of episodes, probably bordering on that number or maybe higher. What are we missing? I've spent most of my time on the psychology, not on the nuts and bolts of money. And still people are worried. We need to understand why. Is it just like humans are scarce or we're worried about scarcity? Like that's what it is. I don't know, but it's frustrating. All right. This is our final ad break and we'll be back with more early retirement after this.

Thank you.

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Thanks for sticking with us. Brad, I'm going to ask you a personal question. Did you grow up financially secure in your young formative years? Secure, yes. We certainly were nowhere near wealthy, but absolutely secure. Never questioned that you were going to have food on the table. It was never a question of, oh, is my electricity going to be on when I get home from school today? I think there's a lot of people who grew up

differently. All three of us grew up the same way. I didn't realize that there were some portions of my childhood where money was so tight we might have had to move in with my grandparents, but there were times like that. My parents never let me feel insecure financially. I think that, unfortunately, there's a lot of people who grew up very financially insecure. There's no amount of

reassurance and math and numbers and experts that we can give them that will overcome the financial insecurity that they grew up with that is such a deep part of themselves they can't get over. And I certainly get that and I'm deeply empathetic to it. Anybody who's listened to me on the podcast knows that I'm not someone who just...

flippantly dismisses people's backgrounds, the sense of where they are with their money or their own psychology. I'd like to believe people understand that for me. So anyone believes otherwise based on the last 30 some odd minutes, that is certainly not the case. And Mindy, I deeply understand that. I think that speaks to a portion, but Scott and the numbers we're seeing is like, this is the vast majority of people are worried that they're not going to be able to sell or that they're going to have to do something else. And

have to, have to being the operative word there, right? And Scott, I love the mission. Obviously, that's the same mission that I have. That's the same mission we all have, which is to help people feel secure. First off, the nuts and bolts to get to that, whatever that number is, we'll say 2.5 million is what you guys are having people shoot for. Then to feel confident to do what they want with their remaining precious life. Hopefully, it can mean earning money. And if you earn money, then that's wonderful, right?

Be happy with that. But the nice thing is you don't need to. And I think that opens up options for people that enables them to live a great life. So like my kind of take on the whole thing is what I, what I want people to do is to live into a wonderful life, to design a future that they want to live into. And I hope that people aren't unnecessarily getting stuck in a job that isn't serving them because they are under the,

basically misunderstanding that their money is trapped or they believe they're never going to be able to sell their assets. It's like, what are you doing this for them? Like find a different asset allocation, which again is, is wonderful. Get real estate that kicks off income by businesses that you'll get dividends from or, or net income as a, as a business owner, but don't keep plowing money into like many, you know, you said on, on our episode, like just because I heard jail Collins or, or I read a book that said, put it all in VTSAX.

You have to know yourself, right? Like that's the most important part of life is understanding yourself. Like if you believe that you will never be able to sell your assets, then you have a problem from the outset here in terms of reaching five, because you're always going to need income, probably from a job forever more. Or you're going to get stuck.

so wealthy that the one and a half percent dividend from VOL covers your expenses, right? That actually seems to be the solution that some percentage of people who face a situation actually go on ending up to achieve because it's, you know, after you double twice more after your fine number, it becomes, you know, that happens by definition. Right. But that's,

18 years down the road, doubling twice more. You're 18 years down the road in most cases, if you're talking like an 8% return using rule 72, right? And it's like, that's a lot of time. If we're lucky, we get eight, nine, maybe 10 decades with advances in health, like on this planet to throw 18 of those years. That seems, that's a bad trade to me. Here's how I frame it. Like if I take this to the problem here, right? And I say, okay, let's try to math this psychology, which doesn't really work, but let's try it for a second here.

We have the 4% rule as the premise for our calculation. Has anybody actually retired with the 4% rule? Then we get an answer from somebody and they're like, oh yeah, I also got a rental property and I also got this and I'm Wi-Fi at the same time. You know, so, okay, you're not really, like, that's not really the 4% rule here. Come on, guy. We'll occasionally get close, but we never really find that mythical, this person retired early in their 30s or 40s using the 4% rule with basically nothing else. We really, we haven't found that person. Maybe you have, Brad.

I know one person, precisely one. There you go, right? So they may exist, but they're so rare out there. And typically they even go on to earn more money with something after three or four years go by. So, okay, so we have that premise. We have the fact that I want to acknowledge the mathematical validity of selling equities instead of harvesting cashflow, right? So it is more efficient for the companies of the S&P 500, for example, to reinvest their own cashflows in growth, right?

or buy back shares or pay down debt that are on their balance sheets than to distribute it as a dividend to the holders of that. And that is your cash flow. It is an owner. It is still inside the pool of corporate equity in America or whatever index you're investing in. And there, it's not like it is not being distributed to you. It's not if that value is not going to you. It is there and is retained probably more efficiently than if it had been kicked out in a dividend.

And yet we also know that people just can't bring themselves to sell down these equities. And so I think that that comes back down. I agree with your conclusion here. How do you think about it? You build a portfolio that you will access early in life. I

I will not sell VTSAX at 35 and live off of the proceeds in there. I can't do it. I can't mentally bring myself to do it. You know, that's part of the reason. There's other reasons in there that this year I sold chunks of it and I bought paid off rental properties in there because I'll spend some fraction of the cash, a little bit more than half of the cash flow generated by my rental property portfolio before I would actually liquidate even my post-tax portfolio.

I don't have this 401k problem because I'm relatively young and I haven't had the extra decade of contributions to go by and have a double once or twice inside my tax advantage accounts. But I think that's the answer. I think it's got to build your portfolio. And that portfolio, I think, involves a hefty cash position.

I think it will involve a paid off primary home, then exclude from your FI number, but include in your net worth statement. And I think it will include a smattering of a diversified portfolio of assets, which for a lot of people will include real estate. Some people will include private lending. A lot of people, almost everyone listening to this will include some allocation to stocks. And then I think that there's a creative element to it. Like

It's like we have a couple who trains horses and sells them or whatever. But like everyone's got this like unique little thing that's relevant to their situation, a former house or a piece in a small business or that pension from the military or whatever. But it seems like everyone talked to has one ace in the hole that they that they work towards over some period of time. That's a little bit quirkier, unique.

Yeah, Scott, I think that's fine. Absolutely. Whatever works for you is what you have to figure out. That's what we spent the last 15 minutes talking about, certainly. But I do want to take a step back and just kind of give a little plus one for...

Just the standard method. Again, people are less inclined to sell equities because frankly, most of us have been saving. We are savers. We have been saving for our entire career and it is mentally challenging to sell. Well, there are plenty of things that are mentally challenging life that you just get over because you're an adult and you've set a plan and this is part of the deal. Okay. And I think one of the cool parts, like there are advanced five strategies that we all have spent years

nearly a decade talking about on our podcast that I think should not be overlooked. So we've been kind of saying like, okay, well, you don't feel like putting money in your retirement accounts. You don't have to. And that's true. You don't have to. But what I think is really cool is, okay, if you do decide to put a lot of money to, let's say, max out your 401k, max out your HSA, max out whatever pre-tax accounts you can, what you've done is you've gotten a tax deduction

in the current year. So in essence, that income that would have been income and taxed at your highest marginal rate is now 0% and $0 in tax currently. Now, the way that accounts for traditional 401 s and IRAs work is when you pull that money out at some point down the line, that is a taxable event. Dollar for dollar, what you've pulled out goes on your income tax return as taxable income in that current year.

But I think some of the cool things about the FI community. So, all right, let's look at somebody like you said, Scott, they've got a paid off mortgage, right? If you have a paid off mortgage, you have paid off cars. Most people's lives don't cost that much, right? So the real neat thing is, let's say your life costs this 80,000, okay? And

And we now have just purely $2 million in investable assets, all in IRAs or 401ks. Just for the ease of this example, we'll say they're 59 and a half and they can take it out without the penalty. But we can adjudicate that for sure. They pull out 80,000. And I know that's not the premise of early retirement, but I'm just trying to set up this as a simple example. So they pull out 80,000 from their...

IRA, their traditional IRA, right? So $80,000 goes on their tax return as ordinary income. But let's say this is a married couple and they just get the normal standard deduction. So they pulled out $80,000 and now that would go as taxable income on their tax return. But in this day and age, you get this massive standard deduction, right? So $30,000 for a married filing joint couple. So 30,000 of that is just $0.

Intox. Okay. Then we talk about the 10% bracket is the next 20, almost 24,000. This isn't 2025. It's 23,850. And then the remainder of that money gets taxed at 12%. So they had a full three eighths, 37.5% of that is taxed at zero. And then the remainder is taxed at 10 or 12%. So where I'm just making this up off the top of my head, but that's probably about a 7% of

effective tax rate. So effective tax rate is just the total tax paid divided by the total income amount in this case. Okay. So whatever that tax amount would come out to divided by 80,000, that's probably somewhere in the vicinity of 7%. If I'm doing my mental math, right. That's not too shabby guys. That's not too shabby at all. We got our tax deduction at our highest marginal rate when we were putting the money in and we just did the worst case scenario.

A full $80,000. I think, frankly, most people who have $80,000 of annual expenses in their normal lives, once they paid off their mortgage, that goes down a bit. They paid off their cars, that goes down a little bit. I don't think, frankly, most people.

after you exclude all those other things that most people's lives aren't costing $80,000 in the FI community, but that's neither here nor there. Because frankly, I think just the fundamental premise of like, okay, even somebody making $200,000, well, they're at their highest marginal rate. They're paying a significant amount in taxes to get to FI in 15 years or thereabouts, you have to save about 50% of your income. So just doing the real simple math, like your expenses are

by definition can't be much more than 80,000 on a roughly $200,000 income. If you're getting to find 15 years, it's just simple math. And people don't really think about that. They just think, oh, my income is so high. Like, of course my expenses are a lot, but like the math doesn't math, right? Like if you've gotten to find 15 years, you had to save 50% of your income and you have taxes on top. So, you know, just really simply, like, I think their expenses are actually going to be dramatically lower than that. But even just saying it's that high, the worst case scenario is like a 7% effective tax rate.

And that jives with Sean Mulaney's actual numbers that he did. And this is somebody who's making 200 grand. They'd be probably what in the 24, 32% effective bracket, the tax bracket on the front side. They just made out like bandits, absolute bandits. Guys, this is what we want in the fight community. We're really smart. We're really good at this. We're good at life. Like you just have to sell. Like you're doing great. You're not trapped. You are flying high. You're doing wonderfully. I promise you. I

I think our community just needs to realize that it will cost you something to access all of this money that it didn't cost you anything to put away in the first place. Deferred means, I looked up the definition, put off.

an action or event to a later time, postpone. It does not mean avoid altogether. And an effective 7% tax rate is higher than the 0% that we want to pay, but it's way lower than it was when you were putting it in there in the first place. I think that there's just a lot of reluctance, hesitancy,

this outright refusal to pay taxes or penalties on this money that they have put away. We as the educators, the content providers need to be doing a better job of saying, you know, you are going to have some tax burden in retirement and it's okay because it's going to be a lot less than you would have if you paid all the taxes when you were making the money.

I think that's really well put, Manny. I set up this worst case scenario. I think in most cases, people are going to pay 0% on the way out or pretty darn close to zero. Because again, this is the worst case that I could come up with just off the top of my head. But let's be clear. Most people who reach five, and it's funny, Scott, because you alluded to this before, people listening sometimes get it like we are talking to literally hundreds of thousands of people.

And when I say like declaratively, like most people are virtually all like, that doesn't mean in your anecdotal little case that like you're wrong. If you don't fit into what I'm saying, most people like that happens, that's life, right? Like, but when I say like the vast majority of people, like I think legitimately 90 plus percent of people are going to fall into this. Like if

If you have a high enough savings rate that you've reached fine 15 years, I think just looking at Mr. Money mustache is shockingly simple math article somewhere in the order of 50%. So 14 to 17 years is your path to fi in most cases, in the vast majority of cases, you're going to have assets in taxable brokerage accounts or in cash or cash equivalents. So this example, this worst case scenario of having all of your money, every dollar supposedly quote unquote trapped in your retirement accounts is

I just don't think that's practical for most people, the vast majority of people. We don't get any perfect examples out there, but we got hundreds of people talking about the spirit of that, like something along that ballpark of that. You know, 2 million would probably be in the little bit of the upper range of that, of what we got in there. But that 2 million net worth with 500, 500 and a million, 500 in home equity, 500 rentals, a million in advertising. I hear you, Scott. And let's come back to that in a minute because that's important.

But just to round up my example, it's like, I think in this case, so they need to cover 80,000, right? And we've said they get $30,000 just free, okay? You don't want to pay your taxes? That's great. The government just handed you $30,000 of free taxable income every year, okay? And then most people have some money in taxable brokerages. They put some money maybe into Roth IRAs along the way. They have tax diversification. Most people do. Then that's, again, advanced five strategies. This is not a trap. This is winning, right?

So you have multiple different ways. We know you can tax gain harvest. So I had Cody Garrett on the podcast to talk about tax gain harvesting because the government, again, in their infinite kindness to people like us and investors, they've given a 0% long-term capital gains tax bracket already.

up to, I think in 2024, it was $94,050. So it's probably been adjusted by maybe a couple thousand dollars in 2025. We can look that up, but it's largely irrelevant. But that's your taxable income up to 94,000. You pay 0% on long-term capital gains tax. That's on the gain, guys. This is the critical part. Let's say you bought securities for $20,000 and it has risen in value to 6%.

70,000. Okay. So when you sell that, you had a $50,000 unrealized capital gain. Now, if you've held it for more than one year, 366 days or more, it's long-term. Okay. And then you get these preferential rates. So again, the government showers benefits on investors wonderfully for us.

So this person had a $50,000 unrealized capital gain. So the current fair market value of 70,000 less the basis of that they purchased it for of 20,000. Okay. So the, the Delta there, the difference is 50,000. Now, when they sell that, they sold $70,000 from their taxable brokerage.

that had that 50,000 unrealized capital gain, and they took $10,000 out of their traditional IRA. Normally, these are taxable events, right? You're telling the government, please tax me. I just took 10,000 out of my IRA. Please tax me. I have a $50,000 capital gain. Please tax me.

Okay. Now I have $80,000 to cover my life expenses because I got the 70,000 proceeds and I got the $10,000 from the IRA distribution. Okay. So I can cover my life for this year. And now I have 60,000 that goes on my tax return as taxable income, right? Because I have the 10,000

And I have the 50,000 long-term capital gains that I have realized. They went from unrealized to realized. We just did a great episode on this with Mark Livingston, who provided a very detailed spreadsheet and presentation on marginal taxes and how until you get into the $20 million net worth and the implied distributions of that, the marginal taxes, it almost doesn't change the math at all.

on this front. So the tax problem is not really the issue. I think it's more, again, the psychology of selling assets and harvesting the liquidity in some sense. - And it shouldn't be, and that's the thing. In that case, this person, again, they have $60,000 of taxable income, supposedly on their tax return. Their tax liability is zero.

Because again, we get showered with benefits. So we need to look at this and say, guys, we're doing great. We have all these strategies. You are winning at life. But in order to do that, you have to sell some assets. I don't understand why we set a plan in motion for 15 years and then chicken out at the very end. Scott, to your point, that's the issue. But we can't then further double down and tell them they're trapped. And like Susie Orman style, like we're coming up with some bulls**t.

You're not trapped. You've just decided to be trapped for some psychological reason that's unbeknownst to anyone. Like you have won. You set a plan. You paid $0 in tax on the front side. You have won. You should be dancing daily from the time you wake up. You've won. We are at time here, Brad. That's a great parting remark there for this. Where can people find out more about you? If you want to follow me, I have a podcast, choose, like make a choice, choose FI. And

And yeah, I put out an episode every Monday. And Mindy, you were kind enough to plug my newsletter on my own podcast, which is great because I do a terrible job of this. So choosethevedacom slash subscribe, or I think choosethevedacom slash newsletter, whatever you want to get you there. I put it out every Tuesday. I personally write it. And yeah, it's pretty good. Yeah, it's great. I will again take over for the promotion because you stink at that, Brad. Like, oh, it's pretty good. No, it's great. It's my favorite newsletter. I read it every single time it comes out. I'm

sometimes we'll respond, Brad, here's a response to your thing. And you always answer me. And it's not just because it's Mindy. We've known each other forever, but you respond to everybody that sends you an email, which I think is really awesome. Thank you, Mindy.

I just subscribed. I wasn't subscribed before. I'm embarrassed to admit. Well, now you've got the best email on the planet. I'm going to send you lengthy arguments once a week, Brad. Hey, do it, my friend. I love it. I love it. Anytime. You know that. Awesome. Well, thank you so much for coming on today. Really appreciate it. True privilege to talk to you. I think it's about the third or fourth time now you've been on BiggerPocketsMoney. Yeah, it's been a while. So thank you guys for having me on. You know, I love you both. I love being here. So yeah, this is fun. This is awesome, Brad. Thank you so much for your time today. And we

Absolutely. We'll talk to you soon. All right. That was Brad Barrett from Choose FI. Mindy, what'd you think? I always love talking to Brad. I appreciate him talking about the felt sense, the idea that even if this...

isn't actually the huge problem that, you know, the word trap kind of indicates it is. It doesn't matter if that's what you're feeling. And that's what I am seeing in the community is people are feeling trapped. So I appreciate Brad coming in and sharing his point of view, but I still feel like we need to do a better job as a community of giving back with more information about your options. The 72T episode that we just released last week,

with John Bowen is episode 649. That's kind of a masterclass in 72Ts. And after recording that episode, I was so excited about the concept of potentially doing a 72T, even though right now I don't actually need to. That was an option for me when I was trying to fund a house

build. And I was really looking into that. Now I know that that's an option and it's not really that scary. It's not going to be this in perpetuity thing. You only have to do it for five years or until you turn 59 and a half. With that said, we also just recorded an episode that's coming out in a couple of weeks with John Bowen again about the Roth layer cake. And I would love for people who are feeling trapped to

to really listen to both of these episodes and see how those ideas can play into their financial strategy. Scott, that was kind of an advertisement for other episodes. What did you think of this episode with Brad? I remain convinced this is a real psychological issue facing our audience, facing the people in the BiggerPocketsMoney community and the financial independence space in a general sense. I

I believe that the typical person who pursues fire is a saver, is a producer, produces far more than they consume, does that for such a long period of time that their brain and their personality and their sense of self is identified with that aspect. And they will have a tremendous amount of difficulty selling off or harvesting assets. I believe that the remedy for that solution is not more math or

get over it and go and sell your stocks. I believe it is to build a portfolio that you can mentally actually draw down on. At some point, this is all mental, right? There is no real need in a lot of ways to spend more than five or $10,000 a year. If you want to live in a very rural area, be self-sufficient on there. And most people want more than that. And that's totally fine. We live in 2025. Let's enjoy the benefits of 2025 in order to get there.

which for most people will include a nice home and plenty of discretionary spending to eat how they want, including out a few times a week and travel on a regular basis. Some people don't want that. Most people do. You have to get to a certain level of comfort with your portfolio. And that means accessing it and spending it in a way that

that you can stomach. I do not think that more math and that more restatements of the 4% rule are actually gonna get people over that hump. I think that that will get them more and more comfortable that that's the beginning of the end. And from there, it's totally okay to start a business, do the extra side hustle work or build a portfolio that's not quote unquote textbook. And they're the stock bond portfolio that people again, like Brad,

think is the only, not the right answer, but it's like, it's so ingrained that that's the fire portfolio to the point where he even dismissed the real estate equity. Like that's a common thing for financial assets to not be in there. I think the community has to accept these alternatives and these other types of business, real estate and private lending or alternative assets that can actually enable financial independence. And I think that's what I'm going to explore for the next year here. That's how I feel personally. My portfolio has got to generate the cashflow for me to feel truly comfortable with.

I think that's an important point, Scott. I am a little more familiar with your financial situation than most people, and you're still not comfortable spending. That's an interesting take, and I don't think that's unusual at all. I'm comfortable spending. I spend a good amount.

I'm just not comfortable selling off portions of my portfolio and using the principle to then spend on my lifestyle. And I don't meet a lot of people who are. I don't think you're an outlier in this space. You save and invest to get here. And now flipping the switch to spending and drawing down is huge.

Remember when I was having a hard time spending money? Now you're selling stocks and you're selling your nest egg. You are presumably making your nest egg smaller and spending that. I can see how that would give people a lot of anxiety. And this is a common problem in financial planning circles. This is not new to you if you're listening to this and having trouble with that. You are in the majority where at least two thirds of BiggerPockets money listeners believe that they will have trouble or have to find out when they get there to see if they can actually sell off

equity positions to fund lifestyle and consumption on there, especially, and I think it's going to be a more acute problem for early retirees than it is with even more traditional retirees. So I think it's a real problem. I remain unconvinced that this is a get over it answer to it and that the mentality is there. I think the portfolio and specifically your liquidity position and the amount of cash flow your portfolio generates is what it will take to free mentally the

the minds of many people in this community, including myself. All right, Scott, on that note, should we get out of here? Let's do it. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench. I am Mindy Jensen saying later, skater.