Camilla: I don't think you need to work your whole life and then just die, which is what my dad did.
I would like to know if I have a sufficient amount of money to not have to work and still maintain this lifestyle that I have right now.
Jamie: Meet Camilla. She's a teacher in her late thirties who has embraced the FIRE mindset to become financially independent and retire early as she puts it. She's living her best life and wants to keep living it.
Camilla: I want to travel freely without having to worry about do I have enough money or I don't wanna have to budget travel all the time.
Jamie: Okay, so you're probably wondering how can a young teacher have enough to retire early?
Camilla: I always wanted to be a teacher actually, and I got a teaching job in Abu Dhabi where I stayed for four years, and then I went to Russia. And then Hong Kong and then Shanghai and then I came back here and taught for three years.
Jamie: So yes, when she was teaching overseas, Camilla's expenses were covered, so she was able to save her salary. But the thing is, when Camilla headed off to the Middle East, she had a massive student debt on her shoulders.
Camilla: The first thing I did, it took me one and a half years of living in Abu Dhabi making $4,000 a month and sending at least $3,500 every month to my loans., I paid off my student loans because having like debt just felt so heavy.
Jamie: Camilla has continued to save putting away an impressive $800,000 in investments, a considerable nest egg for anyone her age, but you need to know why Camilla is so focused on saving money.
Camilla: I think I have some money anxiety because I don't ever want to run out of money. Because we ran out of money a lot when I was a kid.
Jamie: A difficult childhood shaped Camilla's relationship with money.
Camilla: We did not have electricity all the time, and I had to do my homework with a flashlight, or sometimes there wasn't hot water, we actually ended up getting evicted from our apartment.
Jamie: And then a family tragedy was a key turning point in Camilla's life.
Camilla: My mom passed away when I was five years old, so I didn't, I guess have much time with her. My father, he worked a lot, so I didn't see him very much. And not long after my mom passed away, his girlfriend moved in with us. And then they had three more kids. So I was like always the left out one, kind of like a Cinderella story, which is what my family called me. They called me Cinderella.
Jamie: But in Camilla's story, there's no prince charming and there's no fairy godmother. There's just Camilla's strength and grit and determination. Plus she's more than happy to live frugally. She recently quit her job and only tutors part-time. Not much money's coming in, but she seems to have enough to do what she wants. Or does she?
Camilla: I want to know what strategies I can implement to receive income from, from my portfolio now while still ensuring that I have growth in my portfolio so that I can and really retire like as soon as possible.
Jamie: And that's where we'll start today. I'm Jamie Rowe and welcome to What Should I Do With My Money? An original podcast from Morgan Stanley. We match real people asking real questions about their money with experienced financial advisors, I. Here at Morgan Stanley, we work with a range of clients. Some are experienced investors, others are new to working with a financial advisor. On this show, you get a front row seat to hear what these initial conversations are like and get answers to some of the questions you might have yourself.
Camilla has adopted what some would call a fire mindset. Financial independence retire early. This is a growing movement where younger people are being very intentional about aggressively saving and investing early in life. The idea is to accumulate enough wealth to achieve a level of financial independence where they don't have to work. Combining investment accounts and retirement savings, Camilla has managed to save over $800,000. A nest egg big enough, she hopes that she can retire at least partially before the age of 40. But there are risks to a fire strategy. She's concerned about making her money last about not drawing too much from her investments and about taxes.
Does she have enough to even partially retire? Can she continue her passion of traveling around the world? And what does she need to do to achieve her goals? To help Camilla figure it all out, we have Crystal, a managing director and private wealth advisor at Morgan Stanley. Like Camilla, Crystal has also taken the path less traveled.
Crystal: So I was raised in Pasadena, California. The daughter of two immigrants, one from Hong Kong and one from China.
But I kind of disappointed my immigrant parents by studying art history instead and, and having a liberal arts background.
Jamie: But it turned out that the art world wasn't the place for Crystal. And since she didn't want to have to move back in with her parents after college, she took a job interning in wealth management in the mid 2000s.
Crystal: And it was really during the financial crisis when I was talking a lot more with clients and kind of walking them off the edge, that I found that I thought maybe I could attempt becoming a financial advisor.
Jamie: And like Camilla, Crystal's biggest lessons learned came from her family.
Crystal: My mother, she always taught me that you really, you can never spend more than you have. So if you need to tighten the belt, like you must tighten the belt. We were always sort of taught to think long term and that your short term actions could easily affect your long-term, um, results and, and future.
Jamie: but also like Camilla Crystal's ideas have evolved from those of previous generations.
Crystal: , I think my parents, they're boomers, so they work their entire lives for the retirement. And as a millennial, I don't want to, you know, live to work. I definitely see millennials and some of the younger generation focus more on, like, living a good life. Like they're, they're okay making a little less if they can have a more enjoyable life
Jamie: Exactly. And so our guest today, who I'm about to introduce you to, I would say, falls into that category.
So it'll be interesting to hear what kind of guidance you have for her and for others like her who seem to have gone through that mental shift and want to use their money as a means to an end. So Crystal here is Camilla.
Crystal: Camilla, thanks for taking the time, um, to chat today and really appreciate you being vulnerable with me because that is so brave and, uh, I don't know if I am as strong as you on that aspect. I just wanted to start off by saying that I think it's so cool that you decided to travel.
Camilla: Thank you.
Crystal: And one other thing that I, you know, when you were chatting, so you got out of student debt, that is incredibly impressive. Can you give me a little more information about how much you have invested in maybe what type of accounts they're in?
Camilla: Sure. Yep. So I have…
Jamie: To protect Camilla's privacy. I'm just fading her down while she discusses the details of her accounts. But I'll tell you that she has about $650,000 in various investment accounts and about $150,000 in retirement savings.
Crystal: You're actually doing so. Well, relative to your peer group millennials, uh, that are aged 35 to 44 on average, the average net worth for that age is about 550,000. So you're doing quite well relative to your peers. And the, the median for that age group is 136,000. So considering that you basically started it in a hole with your student loans and you're able to go abroad, really ramp up your income and pay that down. This is, you've just, you've really done a great job. So Camilla, you mentioned Jamie, that you want to retire. What does retirement look like for you?
Camilla: For me, retirement means that I don't have to work, but I'm not opposed to working. Like I think ideally I would like maybe a part-time job because I'm just too active. And I have too much energy and my mind is always going. So I think I need something. I just don't want to have to work to live or feel like if I lose my job, then ah, you know, everything's falling apart.
Crystal: No, I completely understand that. And, and I think that's, I think that's the purpose of investing is to help you create that life, right? So I wanna, I wanna pose the question. I think we talked about like previously, like our parents' generation, right? Like they work their entire lives, like they literally worked to live. You see them not enjoying life because they're so stressed about that next payment, right?
Camilla: Exactly that is not that. That's what I, I learned a whole lot of what I don't want and what not to do
Crystal: So on the retirement side, I think retirement's changed a lot. Like, I don't even think you would call it truly retirement. It's almost like a hybrid situation where I think that you can use your investments to live your life as, as long as you're willing or able to find income that maybe meets a purpose in something that you enjoy. What are some questions maybe you have for me on how you should be structuring your portfolio or, you know, what, what can what, what would be the most helpful to you?
Camilla: How I can, or what strategies I can implement to make the portfolio grow, but also draw from it if I need money, like if I don't tutor, so I would like to know how I can have my portfolio generate money and I can use the money, but it's still growing in the background and making money. And I also want to know how to be tax efficient
Crystal: Yeah, I would, I would say if your goal is to both grow your portfolio, install the flexibility to draw from it, you'll probably wanna use a combination of both growth and yield enhancing strategies. For the growth part of portfolio, I would invest the majority in growth equity, ETFs or large cap stocks that would compound in growth over time.
I would also include a second bucket that I would probably call the yield bucket. That would include dividend paying stocks or ETFs and perhaps some bond funds to help create a stream of income that could probably help cover expenses that you need to draw from. And then lastly, I'd probably create a reserve bucket of six to 12 months of expenses.
To cover that in a high yield savings account, which you can draw from in case of emergencies. Or maybe a last minute trip somewhere.
And I think that that reserve bucket really would act as a buffer. So you're not forced to sell anything if markets are incredibly volatile during dip periods. And then when your income is lower and you're not working, you can draw from your portfolio, from the cash or low volatility assets.
And then lastly, I think, um, if you're not drawing from that portfolio and, and it's a year that you don't really need extra cash, I'd recommend reinvesting any interest or dividends, um, or gains when you don't need the money.
You know, you, you mentioned like tax efficient savings or investing. Do you ever tax loss harvest during the year? And are you familiar with this terminology?
Camilla: I've heard of it. And, um, I know what it is essentially. I don't know how to do it.
Crystal: Do you wanna, let's you wanna walk through that? I can walk, I can walk you through that. This is a strategy that is really a very efficient way. Uh. To be used when markets are volatile. Investors use this to reduce their taxable capital gains by selling investments that have declined in value.
During the year, if you don't trade at all and there's no like sale of anything, you shouldn’t have any realized gains or losses, right? So if you sell something for a gain, that's a realized gain. If you sell something with a loss, it's a realized loss.
You might have some income from the dividends in that portfolio. They might be reinvesting. If you're not drawing from a portfolio, our recommendation is to reinvest dividends, and not to take the cash because again, it's the compounding growth of reinvesting in that stock. And, and it's a great way to not have to overly think about what to buy next if it's reinvesting in the existing stock. Now, if you have sold something during the year to take profit, if you have the ability to sell something with a loss in order to offset that gain, we often do this as a way to what we call harvest losses.
So at the end of the year, it's a good thing to look at the portfolio and see like, all right, are there any positions in my portfolio? That have losses that can offset gains you've taken in the year. So let's say in December you run a report and any of your online accounts should have the ability to show you what has been realized in terms of gains.
You can say like, okay, I'm running the report year to date I have $10,000 in realized gains. You should be looking through the positions in your portfolio and if you see something with an unrealized loss, it may make sense to sell that to offset the gain so you're not paying tax on the gain. So basically, they neutralize each other and it's a way for you to actively take charge of making sure that you don't have to take gains.
Now with the sale of the position, with the losses. You might just wanna add that to index fund, or you can hold it for 30 days and buy back the position so that you don't have a, what they call a wash sale, which disallows that loss.
Camilla: That does make sense.
Crystal: Now on a year, like this year, where it seems like everything is down for the year. And, and a lot of people might have losses, and during that year you may not have any gains, but that doesn't mean you still can't take the losses and roll them forward to the next year.
It's oftentimes smart to do that because you might have gains in the future and you can always roll, roll them forward and use those for that. So that, that's, that's helpful to a lot of people. So, I've done this for my own account where maybe I sold something and I was like, I don't really like this. This is kind of a loser stock or something like that. And I sold it and I had a loss and I didn't really take any gains that year, but I can use those in the future. So you're able to to use them. So it's a smart way to, to be tax efficient.
Camilla: Can you, can you keep rolling it like, indefinitely?
Crystal: Yeah, let’s say I have 10,000 in losses this year that I didn't use. Next year I have 5,000 in gains and I, I offset the 5,000 and then I can roll the other, that 5,000 of additional losses to the next year. And then if I don't use it, you can roll it again.
Camilla: Okay.
Jamie: Now that we've covered tax loss harvesting, Camilla's got questions about her retirement accounts.
Camilla: So I have money in the traditional IRA and um, I have a Roth. So when do you think would be the best time to do conversions?
Crystal: Well, Roth conversions can make a lot of sense, but it really depends on the right circumstances that you're trying to look at.
So what that means when we talk about Roth conversion, it involves moving money from an IRA, which is pre-tax dollars to a Roth IRA. Whereby you would actually pay taxes now to enjoy the tax free growth and withdrawals later. AKA, when you withdraw money from a Roth IRA in the future, it's not taxed.
Whereas in an IRA, you'd be taxed at an income level based upon where your federal tax bracket is. Now a Roth conversion might make sense now if you think you'll be in a higher tax bracket later, if you're temporarily in a lower income year working part-time or on sabbatical, it might be smart to convert some now at a lower rate.
And again to, you know, the reason we like Roth IRAs is because they grow tax free and the withdrawals are tax free. So if you, have very low income this year, you're paying a lower tax bracket, on the end, a lower tax rate on that income. Now, if, again, this is very much dependent on if you think you're gonna be in a higher tax bracket in the future, so. But it's, it's definitely something to consider. And now another caveat is that you need to make sure that your cash and liquidity is where you need it to be. So if you're low on cash, it may not make sense for that year to have to pay extra taxes.
Camilla: Yep, yep, yep. Okay. I think I have some tax saving inspiration. Thank you.
Crystal: I think you said you were doing dividend focused equities, is that correct?
Camilla: So before this year started, I was heavily dividend focused to, I don't know if it was smart or not, but to generate money to put it back into the portfolio. But now that I quit my job and I don't have that income anymore, I changed strategy to be more growth focused, but maintain about a $2,000 dividend income to cover my expenses. But then I also don't know if that's smart because. It's coming out as a dividend and I'm not using it, but so I have to pay taxes on it, like, so, I’m trying to balance.
Crystal: Yeah. No, I, I think, I think it's okay. I mean, you know. Your, your life is, is not steady in terms of income as we talked about, right. If you have the flexibility to increase tutoring or decrease and toggle on, toggle off that extra income, it can really, you know, be a good foundation for future growth in the portfolio if you're able to delay drawing from that portfolio.
Camilla: Mm-hmm.
Crystal: But you definitely wanna have, 'cause what if you see the stock market drop another 10%, like you're, and you need to sell to generate in, you know, generate.
You don't really wanna sell at the bottom. You don't have to be a forced seller, is what I'm trying to say. Right. So you wanna make sure you have that, that piece. That's the ballast, right? The steady piece that you don't have to stress about like, okay, the market could drop X amount and it's fine because I have that piece that I can draw from and I don't have to sell at a distressed time.
Camilla: Right, right, right. Yes. That's why I have that 2000 coming in. I always have to keep reminding myself why I do the things I do.
Crystal: Exactly. Just have it like ready, readily available if you need it. Or high yield savings.
So Camilla, there's, Morgan Stanley has a goals-based plan tool, I would recommend that you run some of these like scenarios, right? It's really good to model these kind of things out, right?
It's almost like a flight path for your financial security and what you're trying to meet. So what oftentimes with the goals-based plan is the following, right? So you write down your essential spending, like essential and discretionary spending, and you put into, the inputs are oftentimes, alright, I have X amount of assets, I have X amount of income for these many years and I need to draw X amount for the portfolio. And we can run a lot of different scenarios to say like, how long will your money last? You know, when should I retire? Things like that.
Just, for your sake, I ran a quick spend on your portfolio that, just to give you some numbers that I thought might be helpful to you so you can get an understanding.
Camilla: Great.
Crystal: So assuming you have 650,000 in your taxable account and 150,000 in your IRA, this is a tool that I submitted that information into to sort of see how long, um, your assets might last you.
Now this tool uses a Monte Carlo analysis, AKA, the probability of success. So the system will run a bunch of scenarios and it, and it runs sort of a probability of success rate. And, and, and based upon that a balanced growth portfolio, so, this would include both stocks and a little bit of fixed income with average returns of about 6%. If we assume a straight dollar, $36,000 annual withdrawal, so that's like $3,000 a month in average market conditions, your portfolio would probably last you a lifetime, but this is under the assumption that the dollar amount never changes. Right? So $36,000 today, $36,000 in 20 years, but that we realistically know that would not last you because inflation is a factor that we obviously take into consideration.
So what happens if we add an inflation adjusted number to this, uh, assuming 2% inflation, and again, these are just sample numbers. Under average market conditions, so around the 6% growth, your portfolio would be depleted in about 37 years.
And again, the inflation number is really important to think about. So, for example, in 10 years, $36,000, assuming a 2% inflation is about 44,000. In 20 years, that 36,000 in today's dollars at a 2% inflation rate is about 53,000. So again, the goal of investing and your portfolio is really to try to beat inflation. And time, you know, can clearly erode some of those, those dollar values.
Camilla: Hmm. It's good to know I have at least 25 years.
Crystal: Yeah, exactly. And the Exactly, and, and again, this is only if like you stop working, right? The this, so what it tells me is that your portfolio can assist you in enjoying your life and quote unquote, retirement is almost like this hybrid situation. Like maybe and during the year you're tutoring a couple times the week to supplement your income. You clearly have grit and know how to create income if you want to, but you also wanna enjoy your life. So it's okay to step back.
Camilla: Yeah, this just made me happier.
Crystal: Good, good.
Camilla: Yeah, I feel like, uh, I have some time to generate more income and then like more time to coast.
Crystal: Yeah. And, and, and I kind of, I actually like, thought about some action steps that I think can maybe help guide you overall in terms of what I, I think makes sense and hopefully this can be helpful to you. So assess your retirement readiness or, you know, I wouldn't even call it retirement, like, but maybe slow down readiness, right?
So that's an estimate on your, your essentials. That's housing and food. Healthcare. And then, you know, what are your discretionary things that bring you joy? Right? It's, you know, you said eat what you want, right? Is it, is it dining out? It's travel clearly that, that brings you so much joy. And it brings me joy too. So I love that we're on the same page on that.
Camilla: Travel and eating go together.
Crystal: Oh, heck yeah. Yeah. Gimme all the food. The second step or a second, you know, thing I sh I would probably want to you to do is to optimize your portfolio for your needs, right? So, you know, I would break it out into three pieces, right? So that retirement piece that we talked about, because you have a long runway and time and compounding are your friends, that should be full equity and set for growth.
And I think that's probably actually how you have it already.
Crystal: Yes.
Crystal: Two, that cash piece that we talked about, right? You need to make sure you have that cushion, that steadiness, for you that, that emergency fund, like when you aren't able to get a tutoring job, so like three months for you. But I think you have the flexibility to generate income if you need to. And then three on that brokerage taxable side. So, optimizing it means investing in equities. And for you, I think you are very comfortable with dividend stocks. I'm really comfortable with that. So probably a mix of dividend and growth in that makes the most sense for somebody your age, again, with a long runway. And then three. We've talked about this before, right? Develop your part-time work plan. You know, something that's flexible for you, that you enjoy that part-time work. You have the ability to ramp it up if you want and decrease it, right? Toggle back and forth. So you can, you're a, you have the ability to provide income, which a lot of other people like, don't quite have that flexibility and, determine how much work you wanna do, in order to delay drawing from that portfolio, or if you need to draw from it.
So it's okay to draw from the portfolio, but the recommendation is always to delay as, as much as possible.
Camilla: Right.
Crystal: And then I think lastly, make sure you're reassessing, checking, checking with yourself and adjusting regularly. Like again, looking at your goals. Like are you still on that path?
Like is travel, like are you sick of traveling this year? Like maybe it was too much or you know. Or maybe you have a new passion that you're into, and making sure you're checking that portfolio and that that portfolio makes sense for where you are at that time. But these are the kind of steps that make sense for your life.
Camilla: Those all make sense to me, and I am going to get right on that.
Crystal: I love it.
Camilla: Yes, I need to lessen all the money, anxiety that I have or will have or have had.
Crystal: Look, it's hard for us to turn off like reverting back to childhood anxiety and traumas because like as adults, like it just keeps surfacing back, right? It, it happens, but that doesn't mean we can't try to change that and learn from it and use it as a superpower.
Because I think some of the experiences you went through, like it created a superpower in you that became a saver, like you didn't repeat what your father did, in fact, like it helped you not do any of that. So I commend you for that.
Camilla: Thank you and thank you for all your advice.
Crystal: Yeah, absolutely.
Jamie: So Camilla, what did you think of your conversation with Crystal?
Camilla: I thought that she was very insightful. Her action plan is something that I'm going to get on right away. I need to definitely have three months of expenses, you know, sitting in my. What did she call it? The ballast, so that I can, um, have it when I need it. That actually would decrease my anxiety like a whole bunch.
I'd probably sleep better. And I think she was very clear. She answered all of my questions and her advice was really, really good.
Jamie: Was there anything surprising at all about what she said to you?
Camilla: Yes. I was most surprised when she told me that I could live my, uh, travel lifestyle for 25 years without having to work. So that gave me hope
Jamie: yeah, I would say, how would that make you feel?
Camilla: That made me feel so good, and it gave me hope that I could continue to. Do what I do and I feel inspired to ramp up my part-time jobiness right now so that I can just ride the waves later.
Jamie: Did the idea that you can kind of model this stuff out and run the numbers in different scenarios kind of relieve that anxiety that you were talking about a bit in the beginning.
Camilla: Yes, like it's very nice to see everything laid out and to like have a clear picture of what is and what could be in terms of how my money will serve me. So I, I really appreciated that tool and I think that it's something I'd probably use again.
Jamie: That's great. How do you feel now about the future?
Camilla: I see beaches, I see penguins, I wanna see polar bears. I wanna see everything. And that's what I envision in my future. Oh, and all the food that goes with all the places.
Jamie: Well, I hope you get to see all the sites and eat all the foods and do it all without an iota of anxiety to weigh you down and hold you back, Camilla, because you deserve it.
Camilla: Thank you. Can't wait.
Jamie: If you'd like a deeper dive on what was discussed today, like if you are considering a FIRE strategy or you're curious to know if you're tracking toward your goals, come see us at morganstanley dot com slash my money. I'm Jamie Rowe. Talk to you soon.
Crystal: I was gOnna ask you, did you have a favorite, food when you, when you're, when you're abroad, like a favorite type of cuisine?
Camilla: Um, I really like, Shalong Bao.
Crystal: Oh, Sheung Bao are the bomb. And, and, and the, the Denai Fun is the
Camilla: Oh, yeah, dint fun is so
Crystal: So good.
Camilla: So
Crystal: I could eat
Camilla: The ginger. The ginger that…
DISCLAIMER: This material has been prepared for general reference and educational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Please see our show notes for a full disclaimer on the information provided.
