Is the Middle-Class Trap Something to Worry About? | Ep 543
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Hello and welcome to choose a pie today in the show. We have a really fun one. So mini and Scott over at bigger pockets money coined the phrase, the middle-class trap recently. And this is something that has really struck a chord with people. And I think whenever that happens, you need to stand up and pay attention.

And this is a really interesting concept of people who look wealthy on paper, but don't feel wealthy. Maybe their money is stuck in their home equity or in retirement accounts as they view it stuck. Again, they look at their net worth and they feel wealthy, but what can they do from there? Are they actually fi? How can they access this money? Are they stuck? Are they stuck in this trap? And this really has struck a chord with people. So

I brought on Mindy to talk us through this and to really talk about what she's hearing from people. And Chris from caniretireyet.com is here as well because he actually wrote a nice, very well-intentioned rebuttal article to the middle-class chap as he understands it. So I think this is going to be a really interesting conversation. There's no ill will here, certainly. This is three friends just talking through an issue. And I think that's what's so beautiful about people who are open-minded

and the FI community in general is we can look at things based on how you feel, but also based on the facts and things that really are available to you. I think you're really going to enjoy this. And with that, welcome to Choose FI.

Chris and Mindy, it is so good to see both of you. Thanks for coming back on the show. I'm excited to hang out with both of you. I am so excited to talk to you guys today. Yeah, this should be great. And I am super excited. So, okay, Mindy, we're going to start with you because you and Scott over at BiggerPocketsMoneyPodcast have...

I guess coined a new phrase in the fight community that has taken off to the point where I was blissfully unaware. So someone actually mentioned it. Bill Powell mentioned it in my episode 537. And I was, again, blissfully unaware that the middle class trap was an actual phrase.

Then Sean Mulaney actually reached out to me with an email saying, oh, you actually unintentionally waded into something that's become a bit of an issue here in the FI community that people are talking about. So, Mindy, you and Scott originated this phrase. What is the middle class trap as you see it?

The middle class trap applies to early retirees and fire adherents who are doing everything right. They are dutifully paying off their house or paying their mortgage every month, gaining home equity. They are contributing to their pre-tax finances.

401k and IRA accounts, they might be maxing out their Roth and their HSA, but we all know that those have much lower contribution limits than the 401k. They are doing what they can to reduce their taxable income while growing their 401k for a

the future. But what happens is you reach age 40, 45, you are a millionaire on paper. But once you discover all of your money is tied up in these pre-tax accounts that you can't access until age 59 and a half, or you've paid off your mortgage because that's what you're supposed to do. And then you're like, oh man, I can't access that money without paying 8%, 9%, 10%

in HELOC or refinancing my house to an 8% mortgage, a 7% mortgage, whatever mortgage rates are right now. They're not the 3% that we've had. So they get to early retirement and they're like, well, I don't really have any money. I can't access this money. So we talk to people all the time on the podcast and we're looking at their numbers on our episodes that come out on Friday called Finance Friday. We're looking at

all of their numbers were like, all of your money is inaccessible unless you want to pay penalties and fees. And I think in this community, fees and penalties have such a negative connotation. People are going to do anything they can to avoid that. I mean, I don't want to pay fees. Nobody else wants to pay fees. And Chris actually wrote a really great article about this and kind of broke down the 10% penalty that you have to pay when you access your retirement funds

early. And he broke it down. He's like, you're not paying 10% on top of all your other income. You don't have any other income or you might have a nominal amount of income. So that's a way to look at it and rephrase it that I think a lot of people aren't even thinking about. Yeah, I definitely hear you. And what's interesting about this. So first off, I want to take a step back just for the whole tone of this conversation.

All three of us are great friends. This is going to be fun. There's no contention here. We're ultimately trying to come up with what's best for the fight community. And I think many...

What's so interesting to me is that this phrase, the middle-class trap has really struck a chord with people. I've heard it now from at least two people minimum that I can name specifically right now that are just, they feel this, they feel like they're stuck in this after they learned about it on, on your show. It's, it's putting voice and putting a phrase to something that people are feeling. And now what's interesting as we know,

about personal finance is that the actual nuts and bolts of the money and the FI journey is maybe 5% or 10% of this. And the psychological aspect is 90%. Whereas I suspect on this episode, and I also want to say, I'm not like a neutral arbiter here. I'm not acting as like, we're just having a conversation. There's no debate. I'm not going to be the moderator. I will let it be well known that I don't

agree in principle with the nuts and bolts of the middle-class trap. But I think what's important is people are feeling this. And that to me is what's so fascinating. So I give my email address out on the show all the time, and I just searched middle-class trap in my email. I have 103 emails from people saying, I am in the middle-class trap. What am I going to do?

So I completely agree with your point of view, Brad. But also, this is real to people, the normies, not us. We talk about money all the time. We think about money all the time. Literally, I don't have a money meeting with my husband. It's every day. It's literally every day we are talking about money in some form, investing in some form, because we're weirdos like all the other five content creators. But the normal people are like,

oh my goodness, I didn't realize this was going to be an issue. So Scott and I brought this up to make people aware of it because if you're five years from five, you can make changes that aren't really going to affect your life now, but they will affect your retirement life. If you're already retired and you're like, oh, where do I get my money? Now you have to make different choices than you could have if you were thinking about this five years ago. Yeah.

So, Chris, you wrote an article called How to Avoid the Middle Class Trap on your website, caniretireyet.com. And I thought it was just a really good, just maybe rebuttal might be a bit strong, but we'll say just an overview of, hey, this thing is out there. This phrase is out there and people are feeling this.

let's maybe go through the points one by one and see where I come down on it. And I'd love for you to give just like a really high level overview. So as I understand, as you know, many described it, it's basically the middle-class trap as we're describing as people are on the five path who are maybe in their forties thereabouts. I think as I've heard Scott and many say, like, it's probably people with like a million to a million and a half dollars in net worth. They have all of their money tied up in, uh,

home equity and traditional retirement accounts. That's kind of how it's been defined. How do you look at this? Do you look at this as a trap? Like when you hear that, when you first heard it, what was your visceral response to that? Yeah, I think the first, the visceral response, the thing that made me choose to write a rebuttal to this was just the idea of being trapped. There's something about that word that didn't sit well with me. And I think a lot of people in the FIRE community,

I think they start with this idea like they're escaping from something, which is why they feel trapped in their current thing. And so I wanted to kind of really kind of make that clear that I think a lot of the idea of being trapped is really in your head that like you feel like you have to stick on some path or do something. But like once you start to realize like,

Financial independence is not like this zero or one, like you are or you aren't, and you're building power along the way. And you have so many options, whether that means downshifting to a less lucrative career, whether that means just staying in your career and working part-time, so many different things that you could do. You have a lot of options. And so one of my options since...

being financially independent, I do a little bit of financial planning on the side as a second career. And I work with real people. Again, not people who are necessarily by adherence. And I don't feel anybody's trap. I always look at these things as every decision is a trade-off. But I was thinking about the most challenging household that I have

And I'm not going to say anything that's going to obviously identify anybody, but it's like people that came to me like they're in their 50s. They don't have any home equity because they're renters. They live in a high cost of living area and they've lived there for a long time and they're kind of living to their means. So I think like we could talk about renting versus buying. We could talk about like, should we pay the house off or invest or like all these things? But the fact is they don't have any home equity and they're still living to their means and it's

preventing them from saving. So that's a really tough situation. And then this couple, they were not using retirement accounts at all. So like, because they're in this kind of affluent area and around people, like they had this opportunity outside of their accounts to invest in a friend's business. And so the little bit of savings they had was, you know, roughly let's call it $50,000. By the time that I saw them, this was now worth about $2,000.

They interacted with the traditional financial advice professionals. So they were super underinsured. This is a couple that really needs life insurance and stuff that would happen. They did have life insurance, but of course it was a whole life policy with a death benefit of $50,000. So again, not trapped. They can make changes, but man, that's a tough situation. And that's why I think the standard advice is actually really good for most people. And even people on the fire path, we can dive into that.

it's not trapping you. It's, it's kind of working in your advantage. So we can go wherever you want with that. Yeah. So it's interesting that you looked at that. So the middle class trap, because trap and mini talk about branding, right? Like that phrase is so beautiful because you can look at it two ways, right? That you're actually trapped and also that you fell into a trap, like you fell into the wrong strategy. Like that's actually interestingly, Chris, that's how I looked at it. So it, to me, it's,

And Mindy, we talked about this. I wrote about this in my newsletter in March and just kind of talked about my high level thoughts on the middle class trap. And what's so interesting, and again, we texted about this a lot, is I feel the exact opposite, like the polar opposite. And to the point where I would argue my entire eight years here at Choose a Vi has been setting up that you should be doing exactly the things that get you into this supposed middle class trap, because that's where you have

all these amazing five strategies. Like to me, this is the goal, not a trap. So I guess my kind of real high level overview points would be, and again, to be entirely clear, it

If the feeling is real, which it obviously has struck a chord with the 103 people that emailed you, the many people that I've spoken to already about this, it has struck a chord to whether I agree that technically it's accurate or not. It's real because people feel it's real. So let's be entirely clear. This is a big issue.

And I think that's what's most important about an episode like this and people of good faith like us who want to educate is we need to make sure people understand like they actually have options, which I think they really do. So I guess my, again, high level points would be a, your home equity actually really doesn't count into your fine number.

So while it counts in your net worth, and if somebody has, let's say they have a million dollar net worth, and maybe as you're saying, like on paper, that person's fairly wealthy, but maybe their home equity has gone crazy. And 400,000 of that is home equity. And they have 600,000 in 401ks and IRAs and things.

and let's say their fine number was actually a million dollars, right? So they have $40,000 of expenses. Now for everybody out there who doesn't know the exact calculation, we basically take, what does my life cost for a year? And we multiply by 25 and that goes to your fine number. Okay. So in this case, 40,000 times 25 is a million dollars. Now this person has a net worth of a million dollars. Okay. But I would argue they are not fine.

Because we've said 400,000 of that in my hypothetical is home equity. Sure, that's in your net worth, but that's not part of your investable assets because you can't pull that money out. You can't pull 4% of that out every year.

to live off of. This is literally that equity is stuck in the four walls of your house. Okay. So it's part of your net worth, but from my opinion, the way I've, I've always described it, that's not part of your, your investable assets to reach five. So in this case, I would argue they need $1.4 million to

if we assume that the equity stays at about 400,000 to reach FI under any definition that I've ever heard of. I think that's a really great point that you're separating your net worth from your FI number. And I think there's a lot of people who don't make that distinction. Yes, the 400,000 in equity is part of your net worth, but you're right. And you made this point in your newsletter, which by the way, anybody listening, if you do not subscribe to Brad's newsletter, this is my favorite newsletter out of

all the newsletters that I get, and I get a lot, go to choosefi.com slash newsletter to subscribe because it's so awesome. And Brad didn't even ask me to say that. I just love his newsletter so much. So anyway, in your newsletter, you make this point that your equity isn't part of your FI number. And I thought-

I didn't even think about that. I include my equity in my net worth. My net worth has far exceeded my fine number just from strategic investing, a very good piece of luck in the stock market and time. I'm still working. So I'm still generating more than enough income for us to live off of. So we haven't touched it since Carl left his job seven or eight years ago. And I should really figure out if it was seven or eight years because he's saying, I don't know.

But that's a really great point. Your home equity is not part of your fine number unless you're planning on selling your house and taking that money and doing something with it other than putting it into another house. There's lots of nomads out there.

more nomad want-to-be's who will be traveling around. I have my friends, Dan and Cindy, never have a house. They are just driving around, flying around. They're all over the world, literally. So any equity that they did have in their house when they sold it, that just got added to the pot. So think about what you're going to do with that house. If you're going to continue to live there, I'm going to

continue to live here in Longmont, I'm going to need a house to do so. So my home equity should not be part of my FI number. And I think that's a really great point that you make. Yeah. If I could just kind of jump in on this. So I 100% agree with everything that you both just said, but just to, again, just add a little bit of nuance. Like I think people like, so all or none, like you should rent or you should buy. When you own a house, yes, I would agree. Like that shouldn't be part of your money. You're

considering that you could tap in your like FI number. But what I would say is when you have home equity, it does give you options. So like depending where you are in the life cycle, like you can take money out, whether, I mean, not in today's necessarily interest environment, but you could potentially refinance and take money out of a house. You could use a HELOC. If you're older, you could use a reverse mortgage. If you have home equity, like again, compared to this couple that I referenced that

has no home equity. If you want it to downsize, then you could take that home equity and then invest it or use it to live off for a few years. Whereas if you've forever been a renter and you don't have that home equity, it takes away that option. In today's environment, a lot of people in the FI community, they want to maybe travel. You could rent your home out as an Airbnb for short-term or for long-term. You just have so many options when you own your house. And I'm not arguing that this is a great investment by any means. Again, it's a lifestyle choice.

But as opposed to like something that traps you, again, a lot of that trap is I think in your mind versus in reality where you have a lot of options if you have that equity.

I want to push back on this. You said if you want to downsize, I know a lot of people who have owned their house for five or 10 years. And in order to downsize, because you don't need 3000 square feet when it's just the two of you and you're traveling or whatever, in order to downsize, you're actually going to sell your house and probably pay the same for the next house. If you're getting a mortgage, your mortgage payment is going to go up.

because house prices have just gone up. The spring of 2022 was like the craziest house market I've ever seen. I was writing like 10 offers a weekend. I'm a real estate agent too. I was writing like 10 offers a weekend, losing a lot of them just because I was one of 15 offers, one of 27 offers. One time I was one of 38 offers on a house. This is ridiculous. So house prices have gone up so much that it kind of doesn't make sense anymore.

to downsize anymore because you've got the 3% mortgage. And this is only for the people with the 3% mortgage. If you have a 7% mortgage, I'm sorry, you could downsize because maybe your price does go down. Maybe your interest rate goes down. But it's kind of a trap there too.

So I love the idea of renting out your property when you're going away. Airbnb and VRBO are great facilitators of that transaction. I have a house right now that we are renting out on Airbnb and Furnish Finder and a bunch of different ones that helps generate enough income to cover that mortgage and then some while we are waiting to move into it down the road.

Yeah, I think for me, where I come down on this home equity thing is there's an interesting interplay between while I said it doesn't count in your five number as I describe it. I think there's an interplay between clearly your expenses and the equity and where you live and such. So there is nuance just like everything. There's nuance to everything. Right.

right? So let's say for argument's sake, you have a paid off house, right? So now obviously we know you have to pay real estate taxes and insurance if you decide, I guess at that point, but your living expenses are dramatically reduced, right? So very clearly then your fine number would be dramatically less than if you were still paying a mortgage or you were paying rent because your expenses are much lower. So it's not to say there's no impact because clearly there is. And then right in Mindy, in your case of your friends who

let's say they did have home equity and then they decided to be nomads in some sense. Well, okay. They sold their place and I'm making this up of course, but they sold their place and now they have a couple hundred thousand dollars that they added to their investable net worth that they can pull whatever amount, let's say 4% out per year. So to conclude that it's not relevant at all is clearly not what I'm trying to say. But I think for a lot of people who have a 30 year mortgage and haven't paid it off, um,

The money, well, it's not inaccessible because like Chris said, there are ways to access it. But in this interest rate environment, I think we all know like it's mostly stuck there to some degree, but not truly. You can access it, but at a higher cost than we would have been able to five years ago. But yeah, if you are looking for more interesting five strategies or you're looking to travel abroad or you're maybe, maybe, maybe you're in,

a metro area or a local town where the actual rent

on homes or apartments might be dramatically less than what you're paying in mortgage. Well, that's a factor too, right? You could sell your house, you can pocket all that equity. And then who knows, maybe 4% of that equity might pay for your rent and then your expenses go down. So again, there are so many examples. We couldn't possibly cover them on one podcast and I'm just kind of spitballing all this, but it is important to know that it does factor in, but I think there's nuance to this that we need to be mindful of.

Yeah. And in the article I wrote, again, I didn't listen to the episode totally blindly. Mindy, I know you're in Carl's backstory and I know Scott's backstory. And so I give you guys credit. I think a lot of personal finance is like, well, I just did this, so just do the same thing. And I mean, Scott was a house hacker. You guys were living flippers. So yeah, those are techniques. And the technique's going to be individual to your personal circumstances, interest rate environments, where you live, all this stuff. But I do think the principle kind of

So you have like the principle, which is like you have to limit your housing costs so they're not so big and they're not so out of control so you can save. But like the techniques are always going to vary. And even things that may have worked for you in the past, you may not be willing to do anymore or things that worked three years ago when interest rates were 3% may not work now when they're 7% or whatever. So those are the techniques and they're always going to change. But I'll just point that out. But I think the principle still is solid.

Yeah. And Brad, you said something really interesting. You said you can access the equity, but at a higher cost than a few years ago. And I think this goes against the mindset of so many people in the FI community. We had ridiculously unsustainable low rates for so long that the mindset was just, oh, if I want to tap into this home equity, I'll just refinance my mortgage.

I'll get a new mortgage. I will get a HELOC and pay a nominal rate of like 4 whole percent. And now there's this real block that interest rates are 6, 7, 8 percent. And on a HELOC, they're even higher. They're like 7, 8, 9 percent. And these are historically average rates.

And I love the people that make that argument. I'm like, yeah, but in the 70s, in the 80s, in the 90s, I was paying like $100,000 for a house. And now I'm paying $700,000 for a house. So not only am I at 7% instead of 3%, but I'm paying 7% on $700,000. That's a big mortgage payment. I mean, my mortgage payment right now is $1,300 a month.

Wow. I'm not real anxious to get rid of that. No. And that's, yeah, this is, I'm glad we spent a lot of time on, on this portion of it because it is important, but let's not move on to what I think is the crux of the situation, which is my money is trapped in pre-tax retirement vehicles or any type of retirement vehicles. Basically like how people look at it is, oh man, I can't touch this stuff until 59 and a half at the absolute earliest. So I

I think now there are two distinct points around this that I think we need to unpack both of them. Two distinct sections, let's say. So clearly it's, is my money stuck? So I have all of this money. Let's even suspend disbelief for a second and just say like they have no taxable brokerage. They have essentially no savings other than some, maybe some small emergency fund. And they plowed every single thing into this, these retirement vehicles. Is the money actually stuck? So that is like,

the main point. And then I guess my secondary way that I would look at this also the overall construct of the middle-class trap. And now this is a little counter to what I just set up is I don't think mathematically that it's highly likely for most people who have reached five in their forties, as we're defining, you know, many as, as you and Scott have defined the middle-class trap, I don't think it's mathematically likely that it's

They were able to reach fi at such a young age, which would then suggest a massive savings rate to get to fire at 40, a significant savings rate. And they've,

only plowed the money into retirement vehicles. To me that, that it seems less likely than not that they were able to max out all of these accounts and they had essentially nothing left to put into taxable brokerages or emergency funds, high yield savings, et cetera. So like, and, and

obviously we could run scenario after scenario, which would actually be fun. I suspect we could get Chris or Sean Malini or Cody Garrett to run us some fun scenarios to see that because my intuition might be wrong. But again, I don't think it's highly likely that people have access to all of these pre-tax retirement accounts and they

They just snuck right in there up to the limit and didn't have any money in the taxable brokerage. I think somebody who's saving 40 to 60% of their income from the time they were 22 to 42, I suspect very strongly that they have a decent bit of money in the taxable brokerage, which then kind of negates the whole overall construct of the middle-class trap. Well, again, being mindful that this is a feeling as much as anything, but I'm just looking at the math.

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Okay. So Brad, I disagree with that statement because I have spoken with so many people on our Finance Friday episodes where we are looking at their actual real numbers or what they claim to be their actual real numbers. And they are saying things, I've got one pulled up right now. This person had $106,000 in cash.

$268,000 in a 401k, $18,000 in a Roth IRA. And their brokerage account is 187,000, but they have 268,000 in their 401k. This is actually one of the healthier brokerage account options.

net worth sheets that I have seen. Now, here's another person who is different. Her entire net worth is $750,000. She is 119 in cash, 101 in her Roth 401k, 24,000 in a Roth, 36,000 in a SEP IRA, and 306,000 in a brokerage account. She is an anomaly in the people that we are speaking to. And

The 103 emails that I have that I still have to read because it's 103 people that have said this show that there's a lot of people who aren't thinking about their brokerage account. Carla and I have had an after-tax brokerage account with investments since before we were married. But that's really an anomaly in this whole FI community, I would think. And I am happy to be wrong about that. I just don't think I am.

I was just kind of trying to do math while you were talking, which is not easy for me to do on the fly. But what I've seen working with clients, a lot of people who are at that border, they're wanting to make a transition and looking for a second opinion. I've not come across ever anybody that doesn't have substantial Roth in taxable in addition to tax deferred. So I've just not seen it. And

And so I kind of tend to more agree with Brad. I mean, I'm trying to just make the scenario in my head like you would have to be living on a very small amount of money, like a very frugal lifestyle. And in which case, even if it's, again, like all tax deferred, a lot of that's going to be under the standard deduction, which is not taxed and then maybe into the 10% tax bracket. So you're still going to be paying a low rate tax.

But I'm trying to really paint the picture, and I've just not seen anybody actually who is in that position where they don't have assets outside of a tax deferred, and they're able to be reasonably financially independent. I just found a really good one. Now, this person has $3.8 million in net worth. Cash is $225,000. HSA is $35,000. 401k is $1.2 million.

no brokerage account. They have $3 million in their primary house. In fact, I think this is the one that inspired the idea of the middle-class trap. I believe she lives in California. She has a $3 million in her primary residence that she's owned for like 20 years. She bought it way early or way lower than

So she has all of this money and not any way to really access it. She doesn't want to sell her house. She loves her house. But $1.2 million in her 401k, she's going to have to tap into that. And yes, Brad, you included the link to the Mad Scientist article, How to Access Retirement Funds Early. This is a really great article. It's kind of the article about accessing retirement funds early and everything.

He says the early penalty withdrawal might just be the option to go. Go the Roth conversion ladder, do a 72T, substantially equal periodic payments, or just pay the penalty. Yeah, that was an interesting analysis. So right, I would say that article is clearly the gold standard. And I would follow that up with ChooseFI episode 475, where I had Sean Mullaney on, and it was how to access your retirement accounts before 59 and a half. And

Same. We go through all the different options and there are an extraordinary range of options of how to access this money, including the 72T, the substantially equal periodic payments. That's something that wasn't actually in that episode. He opened my eyes to

that really wasn't a viable strategy for most people prior to, I think 2022 is when the rules changed, but now it's actually an exceedingly viable strategy. I know our friend Eric Cooper from the Louisville choose a by group uses that. And I think he might've talked about it on your episode, many, but that was a

really wonderful, wonderful episode. And so we actually have more options now, which is really great. And because I want to, I want you to talk about this, but for the longest time on choose a buy, we've always talked about the Roth IRA conversion ladder. So basically you don't need to have an equal amount in your brokerage account and your 401ks or IRAs, not at all. Like what you actually need to do the Roth IRA conversion ladder is basically five years of expenses.

in either your cash accounts, your taxable brokerage. I think frankly, even Chris, I would say Roth IRA, actual contributions that you've made, you could pull those out at any point. There's probably others that you can fill in that I'm not thinking of right off the top of my head. But basically this is not a matter of,

oh, I need to have all my money into taxable brokerage. No, I mean, there are massive advanced five strategies that we literally have been screaming from the hilltops for the last eight years that you should be using because

We are the smartest people in the world in the FI community. That's what I've seen. And we have such advanced strategies. And this is why I said the middle class trap is the polar opposite of what I've been espousing on Choose a Vibe for so long because we get to use all these amazing strategies. When you have this stuff, you have some taxable brokerage.

Because of the wonderful benefits of our tax code, we can do tax gain harvesting, as I talked about with Cody Garrett on the podcast, and pay a 0% tax up to, I think it was in 2024, is $94,050, which is astonishing. That's the gain. That's not the proceeds. That's the gain. And then...

we have this massive standard deduction that is fairly new in our tax code over the last, I don't know, handful of years, eight years, whatever it is. And that allows you to do these Roth conversions up to, I think the standard deduction somewhere right around $30,000 now for married filing joint in 2025. And it's like, that is free.

There's 0%. You basically say to the government, Hey, I've got all this money in my traditional IRA. I want to take 30,000 of it out, goes on the tax return. It looks taxable and you pay a whopping $0. So like, this is literally what we want to do. This is the greatest thing ever. You can put the money into these traditional accounts for one case and IRAs at your highest marginal rate when you're working. Right.

when you're making a lot of money. And then because we are in the FI community and we have our expenses under control, we're not spending hundreds of thousands of dollars a year. You're spending, you might have a paid off mortgage. Your life might cost 40, 50, $60,000, which might sound crazy. But when you think about it, like even if you made 150 grand at your highest working years,

You have taxes on that and you have all those savings. If you're really honest with yourself, your yearly expenses are probably half that or less just by virtue of having to have gotten to FI. Your savings rate had to be massive, right? So like, especially in your early forties, as we're defining this middle-class job. So it just suspends disbelief that like this person who has done all these things right by putting in controlling what they can control, which is I want to get the tax deduction now when I'm paying so much.

And then I'm going to reap all the benefits of probably getting this money out at a 0% tax rate or a very low, Chris, probably a sub 5% effective tax rate when it comes to it. It's like, this is the dream. This is not a trap as far as I'm concerned. This has literally been my dream for almost a decade now. Yeah. But I would just kind of add, so I agree. Like I think most people like, cause I get a lot of tax questions and I think most people overestimate what's

whether in FIRE or traditional retirement, what their tax rate is going to be in retirement. I think people assume the goal is like, again, because I think it comes from that idea of escape. Like, I don't like where I'm at now, so I want to escape. And people think just never working again is the goal. But like, clearly, all three people on this call, like we're

by all metrics financially independent we're all still earning money and like again people say oh yeah like you're podcasters or bloggers and you're like whatever but like again i work with real people real clients and like i had two meetings this week with two separate people who are clearly if you look at their projections they're a hundred percent and i'm actually encouraging them like you can spend more money but they're like telling me like they have different jobs and like we're planning for their income this year that's the norm and so like when you're assuming you

you know, I want to have this money in my taxable account so I can access it. But a lot of times people don't need it anyway. So worst case scenario, you pay the 10% or you have to go through the effort to set up like the SEPs. But a lot of times people don't need it. And now it's like creating this tax drag when they, it'd be nice to have that tax shelter because they use those accounts. And once you miss that opportunity, like you have limits every year. So if you don't put money into your 401k or your HSA this year, you can't go back and say, well, I wish I would have did it in 2024. I'm going to just do it now.

Once that year ends or the tax deadline for like HSAs or IRAs, once that tax deadline ends, you can't go back. Whereas, you know, you might pay a little penalty in a worst case scenario, but a lot of times I'm just not seeing that. Whereas a lot of people would be benefiting from having the tax shelter.

And I think that's a great point. One of the things that Scott and I really wanted to bring to everybody's, the forefront of everybody's mind is you don't know what you don't know. And you, I would hate for somebody to have read The Simple Path to Wealth or worse, have heard about The Simple Path to Wealth, throw everything in there.

VTSAX in their retirement accounts, set it and forget it and never look at it again, have this idea that I'm going to retire based on my 4% rule number, which is 2.5 million. And then they get there and they're like, oh, where do I go now? So I found one more instance that really highlights what I'm talking about. This person has an 800,000 home equity, $69,000 in cash, 2%.

$234,000 in a traditional IRA and $60,000 in after-tax brokerage. And how long is your after-tax brokerage going to be able to fund your lifestyle? It's $60,000. So I just, I want people to start thinking about this, especially in the

middle of their FI journey as opposed to the end. But Chris, you're absolutely right. You can't go back. I missed an HSA contribution like three years ago. That's $7,000 or $6,000 that I could not put into my HSA and I can't go back and put it in there now. So you're absolutely right. All I can do is take advantage of what I've got now. I want people to be making decisions on their investments based on

information and education, not just because they heard from their best friend's sister's boyfriend's brother's girlfriend that JL Collins wrote this book that said, put it all in VTSAX, then you don't have to do anything anymore. What I would just respond to that is like, I'm trying to, again, listen and process the numbers that you're doing in real time. And I struggle with that. I need to see things written. But like what I'm sensing from all these examples is again,

I still don't think it's a problem with using the tax advantage accounts. I think a lot of people are house poor. That's a real issue. And that's something that, again, with clients, that is absolutely something I see. And we just talk through it. And again, like I don't view that as being trapped, but you're making a choice. Like I don't judge anybody. If you want to own a $3 million house,

What I see more often where people have made really big changes, I've had multiple clients own two homes, like a second home, like a vacation home, or like they think they want to snowboard. When you show them like the impact of owning that, like that's the way people are house poor, that they're much more willing to say, okay, I don't need two houses. Like when they see the numbers, but even, you know, it's the same as true. Like the person with a $3 million house, they're making a lifestyle decision and that's their choice.

But that's why I think they're stuck is that they're making that choice and that's their choice to make. But I don't think it's an issue of retirement accounts or not retirement accounts personally. Chris, it's funny because you literally beat me to it. As you said that, I was going to say these examples are actually kind of wacky in the sense that, again, with the caveat that it's a feeling. And I think let's be clear, if these people have the feeling, then it's real to them. And I'm not trying to denigrate that in any way. But yeah, like

These are typical house, poor people. And they're every day you don't sell that house. And I'm not arguing they should sell the house. They're making a decision that that's the most important thing for them. And so somebody it's very hard to look at somebody who really won the lottery in California and has $3 million of equity and basically has nothing else left. Like

Well, that person probably didn't save that very much over the years. Like they probably really weren't on the path to fi. They more or less won the lottery and have $3 million of home equity because they only had a couple hundred thousand dollars of net worth. Otherwise, like it's hard to look at that person as a five person and be like, oh, my net worth is 3.6 million. You know? Yeah. But 3 million of it is stuck in these walls. So you're making a decision like that person could be fi anywhere else in the world.

literally anywhere else, like tomorrow. So they didn't make a bad decision by putting money in brokerage or 401ks, not at all. They won the lottery and they're not cashing in on it. They're sitting on their ticket. Right. And it's the same, you know, with the most recent, with the 800,000 of equity, it's like, it's the same deal. Like you're house poor.

but you're making an overt decision to be house poor. And that's fine. But like, you can't lament and cry about it that like I made the wrong decision to put my money in a 401k when the actual burden decision here is that,

You're not selling your house when you're sitting on – that's where most of your net worth is. So I think we're conflating things. And we're conflating things based on emotion. And when we try to give advice to people on, like, what's the actual right decision, like, that's what I found so fascinating. And, Mindy, I know obviously you love the – Brandon, the math scientist, the how to access retirement funds. He –

as we know, Brandon is smarter than I'm going to just say myself here, but I don't want to say anybody else, but Brandon is brilliant. Let's be clear. And his surprising conclusions. And he said, there are a few surprising conclusions here. The first is that even if you don't want to mess with things like the Roth conversion ladder or the 72 T it still makes sense to max out your pretext retirement accounts and then just pay the early withdrawal penalty, which we know is 10%. And he has all these scenarios and, and,

Like that to me is literally the most conclusive proof. So Brandon went through all these examples in his Brandon style and did a ton of analysis and actually came to the conclusion. Like it's still the right decision, even in the worst case scenario, which is.

which is I'm getting paying this 10% penalty, which again, many, you said earlier, like none of us want to pay penalty, like in an ideal world, it doesn't feel right. But what's so important about personal finance at the end of the day is like, we look with eyes wide open at like, what are our array of options? And if this is the worst option, then,

And Brandon has concluded that it still makes sense to put money in your pretext vehicles. I'm inclined to believe him, you know, and then we have a whole range of better options, which I think you can do and pay almost no tax on. So like, to me, the worst case scenario is still better than putting in your brokerage account. And then all the other options we have that Brandon and Sean Mulaney laid out are better in

many, many, many cases. So it's like, to me, this is like a non, it's not a thing. It really is not a thing at all. I want to throw out a challenge then, Brad. I'm going to give your email address and mine. Oh my.

brad at choosefi.com or mindy at biggerpockets.com. We're going to send you a very quick down and dirty net worth sheet for you to list your assets. You don't have to put your name on it. You just have to make a copy because it's like, it's a Google sheet. So everybody will see your numbers if you don't make a copy first and then email it back to us. Email us for the sheet, email it back to us. And I would love to see in a couple of weeks, but I don't know.

Brad, how many people have submitted it and how many people are saying, oh, I really do feel like I fall into the middle class trap. Or you know what? Brad's right. Chris is right. I love these tax advantage accounts and I'm going to use this mad scientist article to help me decide how I'm going to do it. And I've already thought of it in advance, not I'm retired and oh no, I don't know what to do. I love the challenge, Mindy.

And I guess, and Chris, I'll let you jump in here because I'm yapping a little too much. But I wonder how many of these people, again, because it's a feeling, I wonder how many of them with a straight face would actually say they are five. Because I think that's what we're saying. It's like, you know, net worth of one to two million thereabouts. And like, I think the vast majority of people, maybe I'm leading the witness here, but are going to look at these numbers when they actually put it on paper and say, oh man, I'm actually...

I'm house poor and I'm not going to send these numbers in because I don't think we're going to find that many people who are in a scenario that we... I can't even concoct a scenario, essentially, where if they're not including home equity and they're just looking at the remaining money they have in their brokerage and in their 401ks where they are in dire straits. I don't think it

essentially mathematically exists. And I know Sean Mullaney is going to write an article on this. He came up with a couple of different scenarios and he's like, oh yeah, the effective tax rate is 5% on this. Or even the worst case, it was a single person was paying 8.79% in one scenario. Yeah. And in both of his scenarios. So it's like, again, it's a feeling, which I think is important. And I'm not trying to diminish that in any way, because I think for a lot of these people who look like they're rich on

on paper, but they have made a concrete decision to leave their money in their house. I think we need to be clear that that is a decision and it doesn't negate a decade's worth of five strategies because you, in your random little situation where maybe you won a lottery in a hot housing market, that you've decided to keep that house. You should be doing cartwheels. Like Chris said, you have so many options. You should be doing cartwheels that you won a lottery

But I mean, really, if that is more than half your net worth, or in some of these cases, 60, 70, 80% of their net worth, you're still on the path to FI. You need to be clear about that. Because if you only have a couple hundred thousand dollars saved, you're not even close to FI. So you're still on the path, unless you decide to sell the house, move somewhere else. But again, that's a decision, and we're not telling you to make that decision. But

I think it's important to get all these things straight. So, okay, Chris, I will let you jump in. Now, I was just going to actually argue against myself a little bit and against Brandon a little bit because one thing he doesn't, I went back and looked at that article too. He doesn't really talk about ACA subsidy. So a lot of people, once you leave the workforce, you do have to buy insurance. So even if you're in low tax brackets, if you're paying a penalty plus you're paying every dollar

even if it's under the standard deduction, so you're not really paying tax on it, it's counting as income against your ACA subsidy. So it's certainly not optimal to have 100% of your dollars in tax deferred. I get that. But again, I just keep coming back to, if you are in that position, you probably aren't

financially independent. You're probably house poor. And so you're going to end up, if you are truly having a high savings rate, you're going to naturally end up with some tax diversification, which I think where everybody ultimately should be. And if you're not able to do that, then I think using your tax advantage accounts first is the optimal choice. And Mindy, this is one thing I love about really the underlying point of what you and Scott are getting at is taxable brokerage accounts are really important.

They really aren't because of that diversification. Like we want to have the entire array of five options. I think that's, what's so beautiful, like tax gain harvesting on, Hey, I put all this money in my taxable brokerage and now I have all these unrealized gains that when I sell, if I've owned them for more than a year, I'm going to have to pay most likely 15% tax on, which is still great. It's a preferential rate. So let's be clear. Like the government again is showering benefits on the five community and investors alike.

But yeah, you have this tax gain harvesting strategy where, again, because we're five people and because we have our expenses under control, there's a real chance where you could do a little bit of that where you get some money out because you need money to live on, right? So you could pay almost 0% tax on tax gain harvesting, basically selling at a gain, all these unrealized gains and realizing the gains, which means, hey, this goes on my tax return. But because...

there's this astonishingly high 0% long-term cap gains bracket. The likelihood of you paying more than 0% on that is very, very, very slim, exceedingly slim. So most of us at FI are going to pay 0% on long-term cap gains. And then again, you want to do a little bit of all of it, right? You want to be able to pull some money out of your 401ks and tax-deferred amounts, which...

You have this standard deduction. Maybe you still have a child tax credit. Who knows? You might be able to pull even more out, right? And then as Chris said, and I know Sean Mulaney talked about this, like the ACA subsidy is like, we need to be mindful of that. So this is what's so beautiful about diversification. And Mindy, I think to me, the most important point of what you and Scott brought up is you don't want to be

a one-trick pony. You don't want to just put all your money in 401ks because we get a lot of benefit being able to thread this needle of we want our taxable income to be high enough so that we qualify. I think it's what, 400% of poverty level or something like that. So

We needed to be over that. But there are these different things to thread here. But having these options, having some Roth, having some taxable brokerage, having some traditional accounts, that gives us all this array of options that we should, again, be doing cartwheels about. Yeah. There were a couple more points I wanted to make before we're done. Chris's article said something very interesting. I have nearly half of my savings in taxable investments.

That's awesome. That means that, you know, a little bit more than half is in pre-tax, but he's got the taxable investments. And then he went on to say, in contrast, I've never encountered someone who couldn't do anything they wanted because their money was trapped in retirement accounts once they understood their options themselves.

to access those funds. And that's the whole point that Scott and I were trying to make is we wanted people to be making conscious investment decisions, not I heard investment decisions. And we wanted them to realize this investment decision has this kind of consequence and this kind of benefit and just continue to make decisions based on your end goals, your end goals, not somebody else's end goals or some book that you read one time.

So, yeah, I just wanted to make that. And again, I want to reiterate that challenge. Reach out to Brad at twosfi.com or Mindy at biggerpockets.com and we will send you this document. I just would love to see what people's net worths are and where is that?

If I could just chime in with one thing real quick, I know I've shared my backstory on ChooseFI and I may have talked about it when we were on BiggerPocketsMoney, but the reason I have half of my money in taxable, that was not a conscious choice. It's because I was working with a quote unquote advisor who like had access to better funds out of my retirement account. So I was missing all of those tax deductions and all that tax advantage growth. And he absolutely had better

options. They were just better for him, not for me. So I wish I did not have half of my money in taxable.

Again, it's good to have some, but yeah, the proportion was not at all intentional. Oh, and Brad, since we're talking taxable and pre-tax, where would you say your net worth is? Yeah, I would say because again, and this goes to my contention of, I find it hard to believe somebody with a high savings rate would have all of their money in retirement accounts. Yeah. I mean, we filled up those buckets a lot of years, most years, and

had money left over to save to put in taxable accounts. So it's probably, I would say at least a third of my assets are in taxable brokerage accounts. It might be higher, frankly. But yeah, I mean, I think that's the natural consequence of having a high savings rate and having limited amounts to put in retirement accounts, which yeah, to me is why, again, I don't think the middle class trap, aside from people who are house poor, I don't think it's that plausible just to

I know Chris said he's seen that in most of his clients. So yeah, I think I totally agree with you, Manny. And I'm thrilled about it, frankly, because I did the best I could. I wanted to put as much as I could in retirement vehicles because I always want to control what I can control, which is getting that tax deduction at my highest rate because I'm pretty darn sure that I'm going to be able to pull that money out.

in my 50s and 60s and beyond at essentially a 0% tax rate. So I wanted the money in those retirement accounts, frankly, but because I was a diligent saver, it overflowed and I needed to put it in taxable records, which again, I'm not unhappy about because

The government showers benefits on me and allows me to tax gain harvest. So I still think I'm going to, well, I didn't get the tax deduction upfront. I don't think I'm going to have to pay tax again on those unrealized gains. So yeah, I definitely, to your point though, it's a significant percentage. No question.

Yeah. And we are so in love. Carl and I are so in love with the concept of the pre-tax. My goal right now is to reduce my taxable income. I'm in my highest earning years and I want to reduce my taxable income. I am putting a lot of money into my 401k and I'll go you one further. I'm self-employed as a real estate agent. So I have a self-directed solo 401k, which allows me to put even more money into my

retirement pre-tax accounts. And I do that. I don't think we've ever maxed it because Carl is an employee of mine. So he has the same benefits because we're married. Lots of nuances with the self-directed solo 401k, but it is working for us right now. So I'm definitely not dogging the pre-tax accounts. I just want people to be really conscious of what they're doing.

Yeah. And like for us, even now, like post five. So my entire a bundle pay goes to my tax deferred account. My wife uses her tax deferred. We're maxing out our Roths and then we're spending down that taxable account again, because we want to get rid of the income that we don't need. That's kind of costing us when it comes to health insurance time. Cause we do like

We're very limited and we buy our own insurance. So yeah, we're trying to basically take money out of one pocket and put it into another to lower that taxable account. Because we, in retrospect, we wouldn't have done it this way, but that's where we are. So we're just kind of playing the hand we're dealt now. Nice.

All right. Well, Mindy and Chris, this has genuinely been a lot of fun. I think this is a really, really important concept. And Mindy, I give you and Scott, obviously, you know, I love you both. I give you a ton of credit for coining this phrase because it has struck a chord with people. And I think...

the best that we can do is continue to talk about it. I don't think this is the conclusive episode forever on the middle-class trap. I think we're going to be talking about this for a while because again, most of personal finance and FI is psychological. So if people are feeling this, and again, I know people in my life who feel this way. And I think it's important that

No matter where we come down on this, we need to educate people, right? And I think there are a ton of ways to access money early. I think a lot of people just say, oh, I can't touch my money until 59 and a half. Well, again, listen to episode 475 with Sean Mulaney. It's extraordinary. Read the article. We'll have it in the show notes that how to access retirement funds early by Brandon, the med scientist. It's really great. Okay. Yeah. Maybe you're not going to take action on that tomorrow.

Or five years from now, depending on where you are on your path to fight. But at least you know it's there. And maybe you're not quite as stressed anymore. Maybe you're not so stressed that all my money is locked up in this. You could make an argument after reading those and listening, wow, I'm thrilled that my money is there. And I just need to have different strategies. Go back and listen to way back at the beginning of Chooseify, the Roth IRA conversion ladder. Just Google that. We had a couple episodes on that. And it was like,

Oh, this is a really cool strategy. And now again, we have more strategies. We have this 72 T we even have again in the worst case scenario, and there are plenty of strategies, but worst case scenario, just pay the penalty and you're still coming out ahead. So again, none of us are trying to convince you to feel a different way today, but like you have to educate yourself. And that's the important thing. There are a lot of strategies. The five community is,

really, in my estimation, the smartest people around. And we've come up with these extraordinary ways to really win, okay? But that said, it's not to negate your feeling, how you're feeling today.

But I think as you learn more, I think you're going to start feeling better about this. I think you're going to realize like, I have a ton of ways to win at this game and I'm doing great. Like, that's the thing. Like these people who, even the people who are house poor, and I hope we didn't overly castigate them in any way. Like they're still doing great. They have a ton of options. They have so many options. This is wonderful. The woman who won the lottery in California with the $3 million of equity, like she's doing incredibly well.

Yeah, like she might not have a ton of brokerage accounts or 401ks to access right now, but she still has options. And I think that's what we all want in life. That's the point of FI is to accrue more of that power on our side of the court. And I think that's what we're all trying to do. So to me,

This was a really fun episode. I cannot wait to get some of those emails. I want to hear your questions. All three of us do. We can come back on. We can do a follow-up episode to this really easily. We can have some of our friends run scenarios on very precise examples where maybe someone is trapped. Maybe there's an example that I just don't know about.

where they had an exact amount of income and they maxed out their 401ks and they had nothing left over. Like we could probably come up with some, some crazy examples, but like maybe there are strategies still, and that'll, that'll be fun to work through. So this is a really important topic. Both of you, thank you for being here. And Mindy, thank you and Scott for, for really raising this. I think it's really critical.

Thank you for having me, Brad. It's always lovely to talk to you. And Chris, I really enjoyed our conversation. Yeah. And thank you both. And I think like what my closing thought here is like this conversation kind of highlights the best, but maybe also the worst thing about the five community. Like the best thing is just like, we can disagree. Like we have all these strategies that are amazing and we can disagree. I don't even know how much disagreement there was, but we could have a respectful conversation, but maybe like,

a takeaway is like the downside is like you can start to compare yourself to other people and you feel trapped and yeah, just realize that you have so many options and you're doing a good thing and you're improving your situation every day if you're on this path. Love it.

Before we leave, Mindy, obviously BiggerPockets money. Where else can people find you? I am all over the BiggerPockets website, but Twitter is my social media of choice just because when I started out, Instagram couldn't be done on your computer and I have terrible eyesight. So I'm on Instagram and Twitter at Mindy at BP, BP like BiggerPockets, or you can email Mindy at BiggerPockets.com. Wonderful. And Chris?

as we said earlier, can I retire yet.com. And you are the lead author on choose a fi, your blueprint to financial independence, the book, which is absolutely marvelous. It's amazing how long ago we, you, but slash we wrote that, but, uh,

any other ways for people to reach out? Yeah. I'm not much for social media, but yeah, caniretireyet.com is my home on the web. And I mentioned I've been doing some financial planning with Abundo Wealth and I'm personally not taking clients, but it's a pretty cool model that I really believe in. So yeah, I'd love if people check that out. Nice. All right, friends. Well, again, thank you for listening. Really appreciate your time. And this is an important one. If you have questions, comments, follow-ups,

send it in. Like Mindy said, go on my newsletter, choosify.com slash newsletter or slash subscribe and just hit reply to any of those emails. Just let me know what you think. And we'd love to do a follow-up on this. So until next time, thanks for listening to Choosify.

Thank you for listening to today's show and for being part of the Chooseify community. If you haven't already, the best ways to get involved are first, subscribe to the podcast. So you're listening to this on a podcast player, just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand.

And I send it out Tuesday morning. So just head over to choosefi.com slash subscribe. And it's really, really easy to get on the newsletter list right there. And I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox. So that's the way that I keep a pulse of the community.

How We Keep This, the Ultimate Crowdsource Personal Finance Show. And finally, if you're looking to join an in-real-life community, we have Chooseify local groups in 300-plus cities all around the world. So head to chooseify.com slash local, and you'll find a list of all of those cities in 20-plus countries all across the world.

And if you're just getting started with FI or you have a family member or a friend who you think would be interested, two easy ways. Choose a FI episode 100 is kind of our welcome to the FI community. And even though it's a couple years old at this point, it still stands up and it's a really great just starting point to get an understanding of what is financial independence? What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life?

And then Choose a Vi created a financial independence 101 course that's entirely free. Just head to choose a vi.com slash fi 101. And again, thanks for listening.