Ep #110: Can You Have Your Goose & Eat it Too?

Benjamin Haas | Jan 26, 2024

Listen on Spotify:

Watch the Full Video on YouTube:

Full Transcript:

Benjamin Haas 00:04

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Adam, happy workiversary, happy new year, happy all wonderful things that are to be said to kick off the podcast.

Adam Werner 00:40

Yeah, doing just fine. How about you?

Benjamin Haas 00:42

Winter in Pennsylvania, not my favorite time of the year.

Adam Werner 00:46

Yeah. As each passing year goes, I feel much the same.

Benjamin Haas 00:50

That's cause we're getting old and crotchet. Here we go. We're going to be talking about an awesome topic today and I'll turn it over to you to introduce it.

Adam Werner 01:00

Yeah, it's the concept of the golden goose and I know we've talked about this. We've probably met if we've done a hundred plus podcasts, we've probably mentioned the golden goose, at least 50 of those episodes, but it's something that comes up over and over and we get this, it's a similar type question, you know, comes in different forms with different clients and different people that we talk to. The concept doesn't necessarily change and we'll get into what that actually looks like. But I'll give some examples of like the different forms that it's kind of posed to us, you know, just broad retirement planning. I have these savings. What can I reasonably live off of? Insert the 4 percent withdrawal rule, which is also kind of the idea of the golden goose. I want to buy a car, or should I pay off my car loan? Should I pay off the mortgage? I have, you know, should I take a chunk of money out of my savings and help my kid with their student loans. Buying a second home, doing the project on the house, life insurance proceeds that you receive. Now you have this lump sum. What can I reasonably take from this and supplement my lifestyle? Different approaches, but the concept to get to that end result of here's what we think you should do is very similar.

Benjamin Haas 02:07

Yeah. Cause it's, you do what you can to save. If you set the side, set aside money or maybe to one of the examples you gave, you got this windfall. It's this finite, like, chunk of money, and it's supposed to serve a purpose for you now. Investments are to produce income. The point that we would make in kind of describing now that as a golden goose for you is, you can either live off of the interest and income, right, you can eat the eggs that the goose is producing, or you can eat the goose. But recognize that as soon as you do that, you are forever foregoing the eggs that goose would have potentially produced for you. So in all of these different client scenarios, we're using that as an illustrative way to say, what is the best way to go about your resources and recognize the decision you make today clearly has future implications if we're moving beyond just talking about spending from income.

Adam Werner 03:26

Yeah. it's interesting too, because even though the concept I don't think necessarily changes from situation to situation or from person to person, their approach, their priorities can certainly impact the advice, right? The idea of saying, I want to go buy this car. I have my investments. Can I just take 50,000? Buy the car outright. Just, I'm just going to take this broad brush and just, yeah, I don't want paint. It's done. Then I don't have to worry about it.

Benjamin Haas 04:00

I don't want the payments. I don't want the interest.

Adam Werner 04:02

Yeah. That's a very there again there's different components to that mentally and, you know, emotionally that feels really good. Like you said, I don't have debt. I own this asset. Yes, I had to take some of my savings, but I had it. It's there. No big deal. I don't have to worry about it financially. That may not make the best sense in the long run. I think that's ultimately what a lot of this comes down to. It's delayed gratification, which as humans, we are not very good at. Yeah, that is a thing. So a lot of it is just giving the perspective or some additional context. For people to make whatever decision is going to fit best for them. Whether that's more focus on the emotional and the psychological, more so than the financial, and sometimes it's meeting in the middle, which maybe we'll talk a little bit about that.

Benjamin Haas 04:53

Yeah, because I think, we often default in our planning. So regardless of the client situation here, whether we're talking about debt, retirement planning, a windfall, life insurance, whatever the situation, we are trained and it is our responsibility to think out into the future. We can't know what's going to happen so we almost default to wanting flexibility and that's where we want to illustrate this, that. Once you kill that goose, it may taste really good, but at that point, we're removing a little bit of flexibility later in life. And we do the same thing. That's maybe most easily illustrated by talking about retirement planning, right? What is the goal once we retire? I've got this finite amount of money. Many people would say, I don't need to leave hundreds of thousands or millions of dollars to my kids, you know? I can eat some of the geese here, right? I just need to make sure I have one, one dollar left on the day that I pass away. Right. But we, can't know all the variables in between you saying that now, and when that day will come that you can't run out of money, right? So it's a little bit risky as soon as you start cutting into principle, because at that point you're kind of cascading down and not really being able to control how much truly is going to be left or time that perfectly. So, why does this matter? Why do we use this illustration? First and foremost, it's just to talk about keeping flexibility in your plan and you do that by keeping your asset and using more of the eggs, the income.

Adam Werner 06:25

Yeah it's so interesting to me just how many different directions that conversation can go.

You know, sitting across from somebody, but just that simple idea, and maybe I'll throw out an example here. The car purchase example, we all, for anybody that's been looking at purchasing a car these last, I'll say two years, I'm sure has been confronted with sticker shock over what new cars cost and now we're in an interest rate environment that's compounding. That cost problem for a lot of people. So the idea of paying, you know, six, seven plus percent in interest for people that may not necessarily really like debt in the first place. Yeah. Even if it was that, I mean, we had these conversations years ago and when you could get 0 percent on a car or, you know, a couple percent, two or 3%, it was still the same conversation, but now it's, I think it's a little bit more visceral the impact of interest that I'm going to be paying if it's getting closer to that 10 percent range that feels very painful. So just that idea of great. I have the savings and then I don't have to worry about paying interest, but where are you pulling your savings from does matter? Ultimately just from tax at least from our perspective taxation is a huge is a huge part The eggs and the goose, right? It's that future growth, future income. That's certainly a factor, but the scenario I'll kind of lay out. So you needed to purchase a car or the loan that you're going to take is 45,000. Maybe I'm being generous at a 6 percent interest rate right now. And so you spread that out over a five-year loan term. You would pay roughly 7,000 in interest. over that loan. If you needed to take that same $45,000 out of a retirement account, call it an IRA or a 401k, well, here's where it starts. If you need 45,000 to purchase the car, you're going to have to take out more than that from a retirement account because you have to factor in the taxes. Assuming someone's in the 22% bracket, which is kind of middle of the road tax bracket, 22%, you would need to take out almost 60,000, 58,000 from your retirement account to essentially net you that 45,000 in your pocket for you now to go out and pay cash for an automobile. So you'd be losing maybe 12, in taxes versus maybe the 7,000 that you owe in interest. And that's where, yes, it feels good to not pay interest, but you're still losing something along the way. It's now just which one feels better or which one feels worse and I'm going to avoid that one.

Benjamin Haas 09:16

I'm glad you went through the example and kind of put some numbers to this so that it's not just conceptual because I think whether we think that's a little bit smaller scale to me, this idea of like, hey, just go buy the car. We get that same variation in, hey, I'm retired now. Should I just take a chunk of money out of my retirement and pay off my mortgage? Especially when we think about interest rate environment. And I want to make a point on that in a second, but it's an easy thing for us to go back to somebody and right off the bat, go, look, if it's not coming from a checking or savings account, it's not coming from a non-retirement account. Then pretty much all bets are off for that exact reason that you gave because the taxes more often than not, the taxes you're going to pay are going to be greater than the interest that you would have paid on the loan, especially, I mean, I know we did a whole podcast on this, so we don't need to focus on this too much longer, but especially if you're getting near the end of a loan where the amortization, the interest that you're paying isn't really even that much, but I do understand there's very much a psychological element to this. People are emotional about debt. It's good. That, that, that emotion, I'm picturing the person that was in the conference room yesterday being like, I feel this weight on my chest, even just talking about it. Yeah. That, that emotion drives them usually to make responsible decisions, right, with debt? But at the same time, there's healthy debt and there's bad debt. 6 percent car loan. You know, 6 percent mortgage. I know maybe a little bit higher right now, that's collateralized. That's not bad debt and I think those that distinction is better than It's good to make the distinction between good and bad debt from an interest rate standpoint.

Adam Werner 11:11

Even from that perspective, it really does make the focus on the psychological component when it comes to making that decision because for any of these things, we could just it's the math problem. If you did take a loan, run the amortization schedule. How much interest would you pay? If you need to take a lump sum from a certain account, here's the taxes that will be owed, which one would you like to choose that I think is very straightforward. I think people, just generally speaking, want to try to maximize their savings or maximize their dollars. And if they could see that one's going to cost them more than the other, makes all the sense in the world to choose the right option for them. But there is that psychological component. There is the weight of feeling debt that for a lot of people is very visceral. And I think that's the biggest hurdle is a little bit of that shift in mindset that it's, it is okay to have some good debt, right? The collateralized debt and keep your asset working for you to help pay off said debt. But it is, I think that's the biggest hurdle, it's the mental hurdle.

Benjamin Haas 12:15

Yeah. Because I don't want the napkin math to lead someone astray here either. Going back to your example of, hey, it's 6%, hike it up. It's 8 percent interest on a car for five years. If my investments aren't going to make that same 8%, then, why wouldn't I just pay off the debt? Don't forget the time horizon here. You may have been paying on that loan for five years when we hope you have this asset for the rest of your life. So without having the math in front of me, five years at 8%, it's still going to be way less than hopefully 30 years at 4, at 2%, whatever that math is. So when we talk about future planning and flexibility, I'm always going to default to keep that asset and then let's work on the psychological side of the emotions of having debt or the emotions of trying to pay something off, which tee you up on this one remaining flexible. While also wanting to honor somebody's emotions with this, of course, right? Sometimes we would just walk them through hedging their bets.

Adam Werner 13:28

Yeah, so that would involve the idea of great you have an asset, an investment, right? That's kicking off income, dividends, interest growth. Rather than take a lump sum or eat too much into your principal, just start to use the income or the dividends that it's generating and you use that in any given quarter, month, year, your frequency, you decide. But you take that income that is generated from your principal and that's the funding that you use to accelerate the payoff of whatever project debt, loan, you name it. And then that can have that hedging effect of you're keeping your, investments pretty much intact. You're losing out on some of the potential compounding growth by using the dividends. But again, this is the compromise situation. But then you're also accelerating your payment and reducing the interest that you'll pay over time. So that's often where we end up with people. Who have these types of questions, because that doesn't. That feels like it's the best of both worlds where you're scratching the itch a little bit to reduce the interest, but you're keeping your investments as intact as possible. So that, yeah, once that car is paid off, you're going to have your investment still there, still producing still laying those eggs in the future that you can use again, or now you can start to reinvest and have that compounding growth once you get beyond whatever that time horizon is for a loan or a project or whatever that might be.

Benjamin Haas 15:00

I guess the other thing that comes into my mind in thinking about our responsibility to think ahead is to remind people when we're having this conversation now that this interest rate and environment is a point in time. You and I giving this presentation three, four years ago, we'd probably be sharing these same concepts, but maybe we weren't getting the questions as often because you had a 3 percent mortgage. You had home equity lines that were really low, like paying off that debt didn't feel as bad. We're in a more normalized interest rate environment. Who knows where we go from here. Be willing to bet that we will reduce those interest rates at some point here in the near to medium term, but that's going to that's going to mean again, not to make a snap decision right now to liquidate something that again, I would hope can keep you flexible and produce a lot of income compounding income later in life. just to get rid of this uglier interest rate number in an environment that I believe has interest rates a little more elevated.

Adam Werner 16:04

Yeah. And I think you said it earlier, you just said it there again it's that flexibility. If we've talked about the golden goose 50 times, we've probably talked about flexibility 75 times in our a hundred plus podcasts. It is so, so, so important from our standpoint because the more options you have at any given point in time, just the better off you are to be able to pick and choose which decision or which option fits best at any inflection point in life or in the markets, you name it. So, just being able to preserve that flexibility again, may not necessarily feel great in the short term if it means taking on that loan, but that is then puts the pressure on us to give that context, to give the perspective, to try to illustrate. Yes, we understand, but, or, yes and, here's why we think in the long run this will benefit you. Even though there may be a little bit of a cost in the short term, long term we are firm believers that you're better off having your goose than not.

Benjamin Haas 17:22

So, to have your goose and eat it too? Thank you, sir. I hope this is helpful. Like you said, I believe we have iterations of this conversation very frequently. So, for those that have been working with us, hopefully it's a good refresher, for those that haven't, it's a staple in planning.

Adam Werner 17:49

Yep, it is well said.

Benjamin Haas 17:50

Have a great rest of your day and a lovely weekend.

Adam Werner 17:53

All right. Bye.

Benjamin Haas 17:58

Hey, everyone out and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

Tracking # T006797

Ep #110: Can You Have Your Goose & Eat it Too?