Episode Transcript
Doug: Hey, what's going on? It's Doug here. I want to give you two quick announcements before I send it to the episode. Number one, you might hear some squeaky noises in the recording here. It's the table and Pete is an animated gentleman. Really, the table just was making a little noise that day. So if you hear it, it's not some squeaking in your environment. It's actually on the recording, and we're working on resolving that in the future. But if you hear it, that's what it is. And the other is the normal disclaimer so that this is not advice. Seek your own financial, legal, other advice, but I want to make sure it's really clear.
Doug: And that's it for me. Thanks a lot. Let's go to the episode.
Doug: Hey, what's going on? Welcome to the Mile Hi-Fi Podcast. I'm Doug Cunnington, and Mr. Money Mustache is hanging out with me again. How are you doing today?
Mr. Money Mustache: I'm so good today, as I always am on the Mile Hi-Fi.
Doug: I have a few questions for us today, and if other people want to have their questions featured, you can send an email to Doug at milehi-fi.com or a voice memo if you want to have the voice version. Before we get to those topics today... I want to talk about, in air quotes, like being a productive member of society. And we recorded an episode a little while back. And, you know, it kind of, it came up organically. And I hear people say, well, if I retire, I don't want to be unproductive. I want to be a productive member, blah, blah, blah. And I guess I take it personally because I feel like I'm not overly productive.
Doug: And I, in fact, now that these days, I take a little bit of pride in being like anti-productive. lazy
Mr. Money Mustache: Embracing being a slacker in fact i saw somewhere on the internet you were taking shit for that where you're like yeah just you know these corporations treat you poorly so just relax on your job a little bit and you'll be fine.
Doug: Yeah and i think um it actually someone did mention in the facebook group which i'll i'll have a uh more proper response but but it basically i think someone was like i stopped listening to the show when you guys did the quiet quitting episode because I think that's a little bit irresponsible. And I'm paraphrasing, but I think he had valid points. And I'm not trying, if everyone was like me, this country would be a huge train wreck of a mess. So I'm not suggesting the people, everyone should do it. It's just my warped sense of self and things that have worked for me. It's how I insulate myself from the world or something like that.
Mr. Money Mustache: Yeah, but when you retire, it's a whole different thing, right? Because you're not drawing a paycheck anymore.
Doug: Totally.
Mr. Money Mustache: So where could be the shame in that?
Doug: Yeah. And I think we often have great conversations off air. So this triggered the idea in your mind about what does it mean to be like a productive member of society if you don't have maybe a corporate job? Because you and I have had a corporate job and you're going two decades, I'm about a decade. And, you know, we're probably, hopefully, productive in our own ways, but it looks much different than what our previous peers maybe would have thought as productive. So you broke it down in a pretty cool way, and I want you to share that.
Mr. Money Mustache: Yeah. So the big thing is there's a bit of a stereotype or like a criticism of early retirees or maybe all retirees, if you want to be fair, that if you're just living off your investments, you're a sponge on society and you're not really contributing anything, you're just extracting. But I think that represents a pretty fundamental misunderstanding of economics. You know, if people went back to school and took some economics classes or actually just watch some videos nowadays, they might see what's really going on. So if you have, let's say $2 million of investments and you're living off a 4% rule, so you have $80,000 to work with.
Mr. Money Mustache: Your contribution to society is just about the same or maybe even better than someone who's working every day to make an $80,000 salary. And that's because you are an investor. You're not actually just a bum. You are providing capital. Even though it seems very passive, you're actually providing capital that's funding new businesses or it's lending. It's providing loans through bonds to cities so they can build new airports or companies so they can expand or even to mortgage companies so they can issue mortgages and have people buy houses and houses get built because of your money. So you're actually, you know, capital,
Mr. Money Mustache: which is just money, is a valid and important part of the economy. So by keeping your capital invested, you're, you're, you know, boosting everything, you're helping people get employed. So you may not feel like you're contributing, but you really are. It's interesting, though, if you're holding cash, or, you know, and just spending that, then you're not an investor. So your capital isn't helping to boost the economy only your incremental spending is helping as you spend it and similarly i would argue if you're holding like a bitcoin or other like things that aren't investing in companies, then or gold too you're not actually boosting the economy you're you're hoarding
Mr. Money Mustache: money you know it might go up it might go down whatever and you might be happy with the results we won't even judge it here i'm just saying like from a purely economics 101 perspective, being an investor and holding index funds or bonds or other types of things that generate a return in the real economy is a form of contribution. So if you like being kind of just an economics professor and sitting back and being like, I'm doing some good today, even while I watch, sit back and watch this river flow, then yeah, you can do that.
Doug: Yeah, and you brought up the point of just being, a consumer in society you know we're just talking about uh you're looking for a new backpack and i was like ah i have a couple and i mentioned this uh we have no affiliation but it's a nice backpack company called mystery branch they make the the backpacks in uh bozeman montana and there's some other stuff where i'm like oh i'm trying to get like sort of locally made stuff so there's like the melanzana hoodies which i have several of they make them in leadville like just a couple hours away here and spending money is uh also a very important part of like being a productive member
Doug: and every you know i'm not suggesting we become like crazy consumers although i have no issue with it i it looks like my amps are having babies around here if you look um if you look around the room but i i think it's um again i'm all for anti-productivity and it's like if we need to decompress for a couple years like i feel like i'm in that stage like i worked pretty hard for a few years i'm sure i'll have some more motivation in the future for something but if i don't i mean i'm not trying to force it i'm just letting it come naturally
Mr. Money Mustache: Yeah that's great so it's always fun to have battles with the internet uh retirement police or the critics of various things because they bring new ideas into the, you know for us to talk about sometimes, they're worthwhile at the times you can just kind of laugh at criticisms like oh you shouldn't be yeah doing this with your life but um yeah I happen to just be such an economics fan like, people think it's funny but my idea of goofing off is reading economics books and stories like even to this day just hours of sometimes hours per day like when I'm doing construction I'll just listen to economics podcasts yeah so I
Mr. Money Mustache: find it to be an interesting field and, And it helps the world make more sense.
Doug: Do you, so just curious of like the textbooks or are they textbooks or is it more like historical accounts of like whatever, the crash of such and such?
Mr. Money Mustache: Yeah, sometimes it's historical ones. One of the craziest ones is written by like the former treasury secretary that went through the 2008 crisis. I forget what the book is called, but we might be able to add it to the notes. But it was like a very long, like 700 page book that was just talked in technical terms, but with like a lot of drama too. He had like a professional author help him write it. So it had a bit more flow to it, but it went through all the details of what happened in the financial system for that crash and how the central bank of the United States helped to patch it up and do all these like emergency things and how it eventually worked.
Doug: Was there anything like super You were like, oh, I didn't know that actually happened.
Mr. Money Mustache: The biggest surprise for me was just how made up everything is. It was like, Because the financial system itself is really just a bunch of humans who made up numbers and they start talking about them. Just imagine monkeys trading coins back and forth and then just kind of scale that up. And at a certain level of sophistication, you get to what we have. But it's still monkeys trading back in corns, just pretending that it's serious. So because of that, the governments can invent these complex things and like, okay, you give us money and we'll lend that and we'll put a loan on it and we'll multiply it by that number.
Mr. Money Mustache: And as long as you have some credibility then the rest of the financial system just goes right along with it because they're just monkeys playing with coins as well, and it's remarkable like it makes everybody work and that's its job and that's why i don't really have a lot of fear about like oh there's going to be an economic collapse, with the financial system or the debt or whatever i'm like yeah but it's just monkeys trading coins what really matters is, do we have the knowledge to continue with all these inventions and like the tools that we have already invented they're still going to be there rather even
Mr. Money Mustache: if there's this market crash you know we still have the ability to produce, stuff like food and houses and whatever else more efficiently than ever before so um, yeah so i really don't worry about anything because of that.
Doug: As long as the monkeys believe yeah we're gonna be
Mr. Money Mustache: All right but even if they don't believe then some other monkeys will be like well guess what guys i'm gonna keep doing some work over here and they're like okay well we're gonna do that too it's like the productivity is never gonna go away like the only thing that can really ruin and it is wars. So like if you have world wars, like where the superpowers are actually bombing each other, That's pretty much the only thing that can derail the train of productivity. And so far, we've managed even like 60 years. How long is it? 80 years since the atomic bombs were invented. We still haven't used them very much.
Mr. Money Mustache: Yeah. So that's a good thing. And that allows our lives to continue to be better and better.
Doug: All right. First question is from Sophia. And thanks for sending this in. do you have any asset protections in place, such as a trust in LLC for rental properties? Why or why not? And I will, I'll go ahead and say, Pete doesn't have any rental properties and I don't either. So we're not super qualified to answer this, but we'll, we'll, um, we'll talk about our thoughts.
Mr. Money Mustache: Yeah. I've had rental properties in the past and I remember looking to that and thinking, huh, that sounds like a good idea. I should do that sometime. And then and I just didn't. I just ended up like not having rental houses afterwards. And technically we do have the headquarters building, which I co-own with friends. And we do have that held in by an LLC. For bookkeeping purposes, it makes it easier. It makes it easy to show it's a legitimate business. And we figure it also has a bit of protection. If somebody got really litigious and wanted to sue us over some made-up thing, then at least the LLC only owns the building.
Mr. Money Mustache: So if you're a real landlord and you're going to have multiple properties, though, I think you should talk to people that aren't us, people who really understand landlording. And I would say my first source would be Coach Carson. Chad carson who's easy to look up he's written some really easy to understand books on this and he always gives away like a lot of really really good free content because he's also financially independent he's kind of just doing it for fun, so he's got great instagram and youtube stuff and you could probably even just like search on google or ask your favorite ai what does coach carson say about
Mr. Money Mustache: holding your properties in an llc versus in your own name that kind of thing, and that'll get you some answers but it's a very common like common question um unfortunately we're just not qualified to have a great opinion on it.
Doug: Yeah and yeah chad is awesome he's been on the show it's been a little while but yeah great guy and if you check out what he mentions i think you'll be moving in the right direction
Mr. Money Mustache: Yeah i trust his way of doing uh railhouses because he seems very sophisticated. He's got things so streamlined and like very ethical too. So the Carson way is probably the way to do it.
Doug: And then further, just like you mentioned, so I've had a company and I created it for, you know, some light liability protection. But I mean, basically when I talk to other people, they're like, if someone wants to sue you, they will figure out a way to sue you regardless of like what structure you have.
Mr. Money Mustache: Yeah.
Doug: And I mean, I'm not, I wasn't doing anything. It was an online business. So it's like a pretty low risk factor overall versus if you, if I ran like a doctor's office or something, that would be much higher. But I have talked to people that, you know, they have set up an LLC and just everything is sort of segmented out and maybe they fall under some other larger corporation and it owns all the others. And all that can be a great way to set things up if it fits what you're trying to do. However, there's admin in that. So you have to file taxes for every single one and it becomes, I mean, it's a whole thing. So you need a pretty good reason to do it.
Mr. Money Mustache: Yeah, it's very expensive. Just for reference, even with a friendly accounting situation, I have, two LSEs and so I have to file a tax return for each one each year and just that is like an extra $900, to generate that tax return for very small simple businesses it would be a lot more if there was anything else and I do the books too so like the accountant is just doing the taxes yep and then each of those LSEs generates a k1 a schedule k1 that goes to me and because I'm receiving k1s I have to pay more to have my personal income taxes prepared as well or I have to do more work if I'm doing it all by myself.
Mr. Money Mustache: So it's like if you had a bunch of rental houses, like you'd very quickly suck up a lot of your profits on just a huge tax bill every year. So you might want to figure out how to savvy landlords handle that. Is there a better way?
Doug: Next question here is about tax gain harvesting. When you sell at the end of every year and immediately rebuy the same or essentially the same fund, potentially forever and over and over again, to avoid capital gains taxes by continuously upping your cost basis, right? So that's the general idea. So tax gain harvesting feels against the, quote, spirit of the law. Obviously, the government does not intend people to do this and forever avoid capital gains taxes. It seems like a loophole or a trick. Do you have any thoughts on the morality of tax gain harvesting?
Mr. Money Mustache: It's funny because i do tax loss harvesting mainly through my, account at betterment which does it automatically for me so i just get like a nice tax deduction each year because of their automatically they automatically make a few transactions when the market is volatile, and that's good if you have an income high enough that you have significant tax brackets or if you're generating capital gains in other parts of your life like selling a house at a profit or selling shares at a profit from anything else. So I've never heard of deliberate tax gain harvesting, but I can imagine why you'd want to do that. You'd want to do it if you're in a low tax bracket or
Mr. Money Mustache: maybe even a zero tax bracket. And like an early retiree, for example, might have that. And there is such thing as the 0% capital gains tax bracket, where if you make less than $50,000 for an individual, I just looked this up, or a higher amount for a couple, it might even be double that. Then you can sell up to something like $20,000 a year of capital gains with no tax on that. So in that case, it would be a great, it'd be a great strategy, because you would just do enough to take advantage of the free, tax free gain harvesting each year, and not go over. And then you'd be locking in higher tax basis.
Mr. Money Mustache: And then when you eventually, the funny part is, if you can do it now, you'll probably going to be able to do that forever. Because. If your income's low now, like, are you ever going to need to be declaring more taxable income in the future? So it might be like a fun game, like monopoly money that you're not actually ever going to benefit from. Unless you're foreseeing that like sometime in the future, you're going to sell a million dollars of shares and buy a house or something. And then you'll be glad that you have a higher cost basis in those shares, so that the eventual tax bill is lower. Anyway, to answer the question, though, like the rest of the question,
Mr. Money Mustache: do we think it's more immoral or against the tax code. I don't think so. I think it's very much just following what they put in there for a reason. And to be fair, I think the tax code is kind of designed specifically to help rich people. I heard this long explanation of how the United States kind of has an unspoken, semi-secret that it's always going to be lots of loopholes for rich people because of the way The capital gains are set up and capital ownership. So if you're in, if you're planning by those rules, it's going to benefit you. And yeah, if you don't like it, then donate some of your proceeds to things
Mr. Money Mustache: that you care about. And then you're, you know, you're actually doing even better than paying taxes.
Doug: Right. And I'm just curious, so you do tax loss harvesting with betterments, you mentioned, and that's just like one of the features, it's one of the big selling points, right? Do you have any idea of the scope of like how much money that is annually? Because we don't do any loss or gain harvesting on any regular basis. I don't know if we ever have intentionally, but my overall impression without doing any research is um that's like eking out the one percent more kind of thing and i'm like ah i got 80 of this kind of set so i don't want to fuck around too much more
Mr. Money Mustache: It's actually super valuable okay especially in a volatile market, so just for comparison i have a betterment account and that i started as kind of like a blog experiment i i started with a hundred thousand dollars i've been putting in a thousand dollars a month reliably since 2014 and then, now that account is up to like six hundred and something thousand dollars and, But it has also generated, even while it went up, it has generated a hundred and something thousand of tax loss harvesting events for me. So I've deducted those over the years right off my taxes. And so that saved me, you know, 30,000 of taxes, which is sort of like the Betterment
Mr. Money Mustache: account and making that much more money because of it. If I was in a 30% tax bracket, which including state and federal, it seems like quite possible because some years I've had higher incomes. So I think it's super cool. there's actually a little bit of um a timing situation so what happened for me is like i put a bunch of money in initially and then i think there was some market volatility back then in the in the late 2010s, and so like the sooner a drop happens right after you put a bunch of money in, the better it is for tax loss.
Doug: Harvesting because it's like
Mr. Money Mustache: Yeah because like it goes to your your purchase prices here and then if it dips here then betterment's going to capture it and you're going to get this delta right here as a tax deduction. Whereas if the first year happens and it goes way up and you purchase it down here and then it dips a bunch, you're still above your purchase price. So you'll get some tax loss harvesting on the incremental purchases you made at the higher prices. But with a lump sum, it kind of actually dulls the pain of if you do a lump sum investment and then a big market drop happens right afterwards, a lot of people are afraid of.
Mr. Money Mustache: If you have a company or an account that you do it yourself because you can do tax loss harvesting yourself if you want. But if you do that, then you're like, well, at least I got a big tax deduction for it and reset my basis. And that's kind of neat. That is neat. And that also feels like a loophole. And I do feel like the IRS, if they were really on it, they could close that because when toxic loss harvesting was first in you know the concept came up it was before this whole idea of like robo advisors and automated algorithms that do it for you, so because of that people didn't do it very much but now everybody who gets
Mr. Money Mustache: a robo advisor account has, just got happening automatically so the irs is probably losing a lot of money now because a lot of people are taking deductions that they would have otherwise missed yeah that was a fun like double tangent discussion but stuff that i find interesting yeah.
Doug: Well and i I want to go even deeper on this. So you said you made about an extra 100K because of the tax loss harvesting?
Mr. Money Mustache: Well, I got a 100K deduction. So I got an extra maybe 30,000.
Doug: Okay. So 30,000 over 12 years?
Mr. Money Mustache: Yeah.
Doug: And I'm like, who cares? That's not very much money. Yeah. Right?
Mr. Money Mustache: It's like an extra 5% of the balance that I have. Okay.
Doug: But just on that portion. so yeah i guess percentage
Mr. Money Mustache: Wise yeah like it boosted my returns by five percent because six hundred thousand dollars now thirty thousand is five percent of that, okay so like basically the way i think of it is it more than pays for betterment's fees because some people are like oh betterment charges i think it's 0.25 percent annually whereas a pure index fund is a fraction of you know fraction of that right but as long as betterment can deliver some services that i wouldn't otherwise do, which in this case, tax-less harvesting, then I'm getting the account, I'm getting their services for free. Gotcha. Okay.
Doug: And you're getting like 2% or 2.5% just shorthand.
Mr. Money Mustache: Okay. Yeah. Like certainly more than 0.25%, um, the benefits of tax loss harvesting.
Doug: And then, okay. And then as a conclusion, so the, um, if someone is a quite an optimizer, they'd be like, yeah, it's a no brainer to do tax loss harvesting or gain or gain harvesting,
Mr. Money Mustache: Whatever you like.
Doug: But then if you're giving advice to someone, so I'm telling you like, I don't do it. Are you like, you should really check it out. Like it's, it's worthwhile or you're like, whatever.
Mr. Money Mustache: No because i mean the whole reason i only do it in the betterment account is because it's automatic i don't do it for any of my own other shares that i hold or index funds, even though i could right and that just shows how much i really care about optimizing stuff which is the next question yeah yeah i like things that are optimized but automatic so i don't have to think about them right and that applies to like everything in my life, i feel i like to focus on the things i'm interested in so if i was a tax enthusiast i would do it all the time but i'm not really interested in tax yeah.
Doug: Gotcha yeah and a lot of people i mean a lot of people are very interested in taxes like how they get optimized that yeah in respect to those folks it's just not yeah we don't you and i don't get too excited about it
Mr. Money Mustache: Yeah so.
Doug: All right cool and then uh anything else for the tax gain harvesting is it something that you would you know look at if there was an automatic way to do it i mean if betterment added that
Mr. Money Mustache: Yeah i think maybe they should do that actually for For people who are retired, yeah, maybe there should be a setting that's like you can say my income is really low now outside of the Spetterman account. So please treat my thing account accordingly because, yeah, I wouldn't be surprised. They probably have the way to do that because everything's all software driven.
Doug: All right, cool. That's all for us today. Anything coming up for you in the next little bit? Any exciting plans?
Mr. Money Mustache: Not for me. I just got back from some travels at Camp Fi, so I am going to be hanging around in Colorado and doing local stuff.
Doug: Chilling out. All right. Thanks, man.
