The bestselling author and financial advisor on why sabbaticals can be life-changing, why health matters more than money, a flat tax for IRAs, and more.
Our guest on the podcast today is David Bach. David is the author of 12 national bestselling books, including The Latte Factor; Smart Women Finish Rich; Start Late, Finish Rich; and The Automatic Millionaire. He just released the 20th anniversary edition of The Automatic Millionaire. David was a longtime contributor to NBC’s Today show and a featured guest on the Oprah Winfrey Show. He also produced and hosted two public television specials, Smart Women Finish Rich and The Automatic Millionaire. David started his career at Morgan Stanley where he was a senior vice president and partner of The Bach Group.
00:00:00 Moving Abroad, Early Retirement, and the Shifting Media Landscape
00:11:46 The Importance of Sabbaticals and Health Expectancy
00:19:39 Saving to Spending, New Tax on IRA Withdrawals, and Long-Term Effect of Deficits
00:34:39 Key Updates to The Automatic Millionaire and Automatic Contributions
00:37:59 Why Everyone Needs Access to Being an Investor
00:42:02 How to Start Investing Young and How to Catch Up Later in Life
00:47:26 How Inflation Affects Retirement Goals and The Benefits of Homeownership
6 Lessons From My 6-Week Mini-Retirement
The Best Strategies for Consistent Retirement Spending
7 Steps to Estimating Your In-Retirement Cash Flow Needs
If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com.
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If you want more Morningstar podcasts, check out The Morning Filter and Investing Insights.
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Amy Arnott: And I’m Amy Arnott, portfolio strategist with Morningstar.
Benz: Our guest on the podcast today is David Bach. David is the author of 12 national bestselling books, including The Latte Factor, Smart Women Finish Rich, Start Late Finish Rich, and The Automatic Millionaire. He just released the 20th anniversary edition of The Automatic Millionaire. David was a longtime contributor to NBC’s Today show and a featured guest on The Oprah Winfrey Show. He also produced and hosted two public television specials, Smart Women Finish Rich and The Automatic Millionaire. David started his career at Morgan Stanley, where he was a senior vice president and partner of The Bach Group.
David, thank you so much for being here on The Long View.
David Bach: Christine, it’s truly my pleasure. It’s great to be with you again.
Benz: Well, it’s great to have you. We have a ton of questions about work and your advice on personal finance. But before we get into that, we want to talk a little bit about your life because you made a decision in 2019 to move your family to Florence, Italy, that was pre-covid, pre-people doing dramatic things like that. So, maybe talk about that impetus to move overseas—and you’ve stayed much longer than you initially thought you might.
Bach: That’s all true. I’m laughing because we’ve been here now seven years. The impetus was interesting. I was a co-founder, I guess, technically, still am a co-founder. I’m a co-founder of a registered investment advisor called AE Wealth Management. And at the time, after we got this business really rocking and rolling all over the country, I was going around the country doing talks for my clients, for our clients and our clients’ clients. So I would do retirement talks across the country. And I would talk about the different stages of retirement. And this is, I know a lot of financial advisors are listening, so they’ll understand what I’m talking about. But I would talk about the three stages of retirement.
The first stage, which is often referred to as the go-go years. That’s your 60s when you retire, and you have a lot of energy and a lot of excitement, and your friends and your family are around. And it’s just a great decade. And then I would talk about the slower go decade in the 70s. And I’d talk about the won’t-go decade in the 80s and beyond. And I would call it won’t-go because often it’s the men who won’t go anywhere because they’re not in the health to go anywhere. Their wives are still healthy, and they want to go someplace, but the husbands don’t.
I would talk about the need to really—the whole point of financial planning is to get the most out of your life. And this idea that the reason all of our clients had hired their financial advisor is you’ve already done all the work. You did everything right. You saved and invested. And now this is your time to spend and enjoy. And I would say, you’ve hired an advisor, sit down with them and talk to them about what you’re not yet doing that you want to do. And start doing it now because some of you are waiting too long. And that really would resonate with my advisors’ clients.
And what happened after one event—I would always sign books for people and take pictures and do a meet and greet after the talk—is I had a couple wait for me very patiently for like 45 minutes because there was a big event. There were like 500 people at the event, 500 clients. And they waited for me, and they were in their 60s, and they were older, and they looked tired. And this woman put her hand on me, and she said, “David, can I ask you a question?” And I said, “Sure.” And she said, “How old are you?” And I said, well, at the time I was 52. And she said, “I would imagine that you could afford to retire now.” And I said, “Yeah, I can.” And she’s like, “If I could give you any advice, don’t wait until your 60s to enjoy your retirement. Move your retirement forward, and start enjoying your life sooner.” And she said, “Because right now I’m 62,″ and I think her husband was 65. She said, “We both have Stage 4 cancer. And he’s expected to pass away in the next six months. And I don’t know how much longer I’m going to live.” And she grabbed my arm, and she said, “So if I could give you a gift, because you’ve been such a gift to us today, just think about that.”
And it really, really hit me. And I came home, and I said to my wife, “You know what? I want to take our family to live abroad before the kids go to college because I don’t know when else we’re going to get to do that.” So my son was going to go be a sophomore in high school. And I said, “You know, let’s go when he’s a sophomore. That’s the easiest year to pull him out of high school. Let’s just go for nine months. So it’ll be like a mini-retirement. You know, we’ll move to Florence, we’ll move the family abroad. We’ll have a transformational experience. We can afford to do it now.” And she said, “Well, where do you want to go?”
And then that became the game of like, well, where do we want to go? And we thought about: We can go anywhere in the world. Where do we want to go? And we ended up coming to Florence, Italy. Ironically, I’m recording this in my son’s bedroom, my son who’s graduated, who’s almost graduated. He’s graduated high school. He now lives in Chicago, where you are, and he’s going to Northwestern. And he came to me in this bedroom. He called me into his bedroom after about 60 days of living here. It was October, and he said, “Dad, I love our life here. Is there any way you could run your business from here, and I could spend the next two years here and graduate from high school here and not have to go back to New York City?” And I was kind of shocked because we were really not even sure if he would like the whole experience of moving abroad. And I went back into my bedroom with my wife and said, “Jack wants to stay.” She looked at me and she’s like, “Well, I want to stay.” So then we sat down, and we sort of said, “Ok, well, we’ll stay.”
And then we have a younger son. He was not so happy. He was like 9 at the time. Actually, he was distraught. He started crying. “I want to go back to New York. I want to go back to New York.” And I said to him, “Well, what if I could talk your mom into giving you an iPhone before sixth grade?” And he said, “Seriously? OK, I can stay.” So we stayed. And really, all the things we hoped it would do over nine months ended up being bigger than just a transformational family experience. It really changed our whole lives. Moving abroad changed our life. I always say you don’t have to move abroad to change your life, but when you change your location, you really can change your life. And it turned out to be a beautiful thing for us.
Benz: I want to talk more about the retiring early or retiring more often piece, but sticking with your personal story: The trade-off of relocating, I would imagine, is that you did have to pull yourself out of the spotlight a little bit, that you couldn’t be on shows on a moment’s notice. You couldn’t be on the Today show all the time. So can you talk about that decision-making? Was that difficult? I would imagine it must have been to step back from some of the professional things that you were doing.
Bach: You know, Christine, nobody’s ever asked me this question before, so I love that you’re asking it. I moved from San Francisco to New York specifically so I could do media. I was at Morgan Stanley. I was a financial advisor. I had written Smart Women Finish Rich. I’d created a seminar program that was being used all over the country for a mutual fund company in Chicago, Van Kampen Investments, which is now Invesco. So I’d trained thousands of financial advisors to teach my seminars. I then created a program for couples and money. And I was flying back and forth from San Francisco to New York to do TV shows constantly. And the sixth time I was on The View, I was on with Barbara Walters back in the day, and the segment was going to be like three or four minutes, and she just kept going—it was her show—we were on show together for eight minutes. And at the end of the show, she took me up behind the stage. She’s like, “You’re really good at this. You should think about doing this, like really doing this, like living here and doing this.” And I mean, it was Barbara Walters, I felt like if only my grandmother could have seen that moment. But she did. She was watching me. My grandma passed away. She was. I knew she was watching that moment.
And I called my wife, and I told her what Barbara Walters said. And she’s like, “Well, maybe we should move to New York because this is what you want to do.” And so on a wing and a prayer, Christine, I left Morgan Stanley, and I moved in New York in 2001 with the dream of teaching people about money at a larger scale. And it’s actually, I hadn’t written the book, The Automatic Millionaire, which I mean, basically I’m on a media tour right now. I’ve got The Automatic Millionaire is out for its 20-year anniversary edition, but I moved to New York to do television and teach millions of people to be smarter with money. And living in New York was exactly what I needed to do. And it changed everything because once I lived in New York, the shows I couldn’t get on—the Today show and all the morning shows—once they book you once, if they like you, they have you back, especially if you’re local, because it’s easy for them to book you and also cancel you. And so I just, from then on, I spent 18 years in New York doing media nonstop. I think I did 3,000 media appearances over an 18-year career.
So when I decided to step back and move to Florence, I kind of thought to myself, “Well, I’m coming back in a year. I’ll still have all the relationships. I’ll be able to come back and do these things.” What I didn’t know is that the world would shut down, right? When covid happened, ironically, covid changed everything because all of a sudden, I was doing national television shows from my laptop. And then, I mean, that was amazing. And then Zoom came out, and I was doing keynotes from my laptop. And then I was like, “Well, this is a lot better than traveling, you know?” So in a way, covid made the ability to work from anywhere much easier. Now, as I say that to you, this Automatic Millionaire book came out in January, and I didn’t get any national media booked for the first week of January. And so I said to my publisher, “Well, look, I’m not just coming to New York to hang out, hoping I get shows. I’ll do podcasts. Podcasts are what most people are listening to now these days anyway. And I’ve done two podcasts that have come out in the last two weeks that have had, I think, 5 million views and downloads. What?! The Mel Robbins Podcast and The Diary of a CEO podcast, just those two podcasts, have had 3 million views so far on YouTube, and that doesn’t include downloads. I don’t know that you can do, you know, look—the Today show calls me and I’m in town, I’ll come on, but the reality is you go on the Today show for three minutes. That’s it, right? They don’t have a YouTube channel that’s getting 2 or 3 million views. And so, media’s changed. The media that you and I are doing right now is the media. Podcast is the media, and national television is a nice to do, but it’s not a have to do.
Benz: It sounds like there was a good element of luck in all of this in a lot of ways, right?
Bach: Well, I think luck is what you make it, too. What do they say? The harder you work, preparation meets opportunity, you get luckier. Everything’s like how many years you need to do something. My kids are like, “Dad, why are you even doing this now?” I’m like, “Well, I want to help one more generation one more time before I kind of put the mic down and wrap this baby up.” But I don’t know, there’s a lot to do with life. You don’t have to always work.
Benz: I want to ask about sabbaticals, which you’re a huge believer of. So even for people who aren’t close to retirement age, you think it is a good idea to try to put yourself in a situation where you can step away from your work for a period of time. Can you talk about why you’re such a believer in that? And then I want to delve into how to financially make that happen if that’s a goal.
Bach: I think sabbaticals are life-changing. And what is a sabbatical? Because a lot of people don’t know what they are. Another way to think about it is a mini-retirement. But a lot of corporations have sabbatical programs. Typically, if you’ve worked somewhere with a company that has a sabbatical program, often you need to work there seven years, maybe 10. And then there’s a six-week sabbatical where you get six weeks off, and you unplug from working, and you go do something else. And what happens in six weeks is that you can really recharge your batteries. And if you take a longer than six-week sabbatical, you can really replace your battery.
And I think a lot of people are way more burnt out than they realize. And what happens when you take a break is your energy can come back. So I took my first break at age 46. I took an intentional one-year break in the middle of doing everything in my career. People don’t even often know this, but I took a whole year off. Stopped doing Today show, didn’t put out a book, didn’t take keynotes, didn’t do anything. And that year off completely recharged me. It’s actually why I then became a vice chairman of one of the largest financial-service companies in America, which is now Edelman Financial Services. And then after that co-founded AE Wealth Management.
I was reenergized. It gave me a new look on life. And so I think it’s a mistake to work, I think, this idea that we should work our whole life and then finally retire in our 60s is outdated. I think people should really plan to take breaks every five to 10 years. And if more people did that, they’d have longer careers. In fact, it’s funny. Dr. Oz is on a campaign right now to get Americans to work one year longer because if Americans work one year longer is worth trillions of dollars to the economy. And I’m like, you know, if people took breaks, if more people took breaks, they’d work longer. The problem is people get burnt out. Now I live in Europe, and in Europe, they just call this “summer,” or “August,” actually. You know, like everyone takes August off. But in America, it’s just a joke. I mean, people don’t take a full two weeks of their vacation time off during the work year because they’re so worried about missing something. Americans live to work versus in a lot of European countries, they work to live, especially in Italy. In Italy, you really learn that people slow down the pace of life. And I just think that what most people need in their life is more life.
Arnott: Related to being able to take a break, I think can often enhance your mental health and your physical health, and you talk about the concept of health expectancy. What is that? And why is it so important to stay attuned to?
Bach: It’s fascinating because I don’t think most people know about health expectancy. So, the World Health Organization has done—whatever they do, their research and their study—is they know what age in every country someone, on average, gets sick and that illness, whatever happens to them, has a permanent effect on the rest of their life. So, in the United States, it’s age 63. Age 63. In Italy, it’s 67. So, in the United States, the average age that somebody will get some type of a physical ailment that will impact the rest of their life permanently is 63. Well, that’s really young. You know, the first book I wrote was Smart Women Finish Rich. The average age of widowhood is 59. I think that there’s just this enormous myth out there that we’re all going to live to be 100 now. And that’s just not, it’s just not really what happens. My dad passed away a little less than two years ago. My mom is now living in a senior living community. She’s 84, 85 now. When you go to the dining room of her senior living facility, and I would challenge anybody to go do this, go to any nice senior living facility anywhere around the country, what you will find is that 80% of the people in the community are women. And that’s especially so, guys, its mostly men, I think probably a lot of men listen to this podcast—guys do not stick around. And so, we overestimate how long our health is going to last. And, another thing I’d say, because we have a lot of financial advisors listening. The number-one thing I would do when I would meet with clients in their 50s is, aside from run the numbers, is I would look them in the face with their wife in the room, and I would say, “When’s the last time you had an annual physical?”
“What do you mean?”
That one’s not confusing, guys. When’s the last time you went and had an annual physical? Women go to the doctors all the time. Men do not go and have annual physicals on a regular basis. And the wife would be like, “I’ve been telling him to go have an annual physical.” And I’d look at him and go like, “Dude, this money is not going to help you if you’re not around to enjoy it.” I can’t tell you how many clients retire and then get sick and die right away. So your 50s is the time to be looking at your health. Your 60s is the time to be looking at your health. And I talked about this in the update of The Automatic Millionaire because I think that people are overestimating how long they’re going to be healthy, and they’re underindexing for using their life.
Christine, you just did this. I just saw it on Twitter. X. You just did this thing you called Team Good Enough. You did a great interview with Consuelo. You have to tell her I said, “Hello.” I didn’t even know she’s still doing her show. And Team Good Enough. And I think people try to get retirement perfect. They try to get the exact amount of money that they need—that they think they need—to retire. And they don’t spend enough time on making sure that their health is dialed in. And your health matters so much more than your money I can’t even tell you. You know, you show me somebody who’s healthy and they have a thousand wishes, and you show me somebody who’s not healthy and they have one.
I’m 59. I’ve now had three best friends under the age of 57 pass away. My best friend from college—freshman dorm roommate, David Kronick, passed away. He died of ALS. My two best friends from college, Tom Cooper and Steve Jones, passed away also—one of cancer and one of suicide. They didn’t make it to 59. I just went to my 40th-year reunion. There was an entire table of people who didn’t make it to the 40-year reunion because they’ve passed away.
So I think what happens when you’re super into money and investing, and anyone who’s listening is, that’s why they use Morningstar—I’ve used Morningstar since, I used Morningstar back in 1993 at Morgan Stanley, when I had to buy the book that got delivered to me, and it sat on my desk, and the office wouldn’t pay for it, and it wasn’t compliance-approved. That’s how long I’ve used Morningstar. I was one of the first users of Principia. I was one of the first users of the X-ray software—people who are into money often lose sight of what’s the point of money. And the point of money is to have your best life. I think my guess is a lot of people who are listening are in their 50s and 60s and then this is like your wake-up call: Make sure you’re using your money to live your best life. This whole idea that you should only spend 4%--such an outdated model for most people who are listening. Most people who are listening have plenty of money. It’s never the problem that they’re going to run out. If you’re a financial advisor, you know this. Clients don’t spend their money. That’s why they get so distraught about doing RMDs because they’re like, “Oh, I don’t need the money, and I don’t want to pay taxes.” Gosh, just take the money and go enjoy it and do something with it.
Benz: I want to ask about that, David. With retirement, there does seem to be this persistent issue when you talk to financial advisors where their clients are overly frugal. They can’t turn off that savings mechanism like the thing that helped them accumulate this wealth. It’s very difficult to turn off. Do you have any thoughts on that? Any tips for people who are in retirement, getting close to retirement, how they can give themselves comfort with spending what they’ve managed to save?
Bach: Absolutely. Well, first of all, the biggest thing that can give you comfort is a financial plan. If you’re working with a financial advisor, they have run a financial plan for you. Hopefully. I can’t imagine today anyone that you would be working with hasn’t run a financial plan. If you’re working with a registered investment advisor, which I would think anyone who’s listening probably is, they’ve run your financial plan, and it’s sitting on a dashboard. I can tell you that my financial advisor, what do we do? Every six months, we sit down, and we go back into the plan, and we look at it on the dashboard, and I know exactly what we spent, and I can see how much the account has grown, and I can see where the dividends have all gone, and I sit there, and I review it with my wife, and we do planning. That’s a simple thing that you can do.
A second simple thing you can do is make sure, if you’re worried about spending money, that you create yourself an income stream of money that’s guaranteed, whether that’s coming from bonds or CDs or annuities, but giving yourself a guaranteed income stream can be very helpful in retirement. I think what’s happened, and I say this now having been in financial-service industry for 33 years, I look at the fact that there’s $45 trillion in retirement accounts, and I ask myself, “You know, what’s happened here? There’s so much money in retirement accounts, and people aren’t using their retirement money. How did that happen?” Well, one thing that’s happened is we just spent 40 years, myself included, teaching people to save and invest for retirement. 90% of all efforts that have been done around financial education is about making sure you put aside enough money for retirement. It’s all been about accumulation. Save and invest, save and invest, save and invest, save and invest. Very little time has been spent on spend and enjoy.
And I think the financial-service industry now actually really needs to be looking at this, and you’d be looking at how do you start to—decumulate even a bad word, right? Nobody likes to decumulate, but if the financial-service industry started spending time on “how do you spend and enjoy your money because now’s the time to do it?” that would be really powerful. Now, the problem that you run into, I think, is there’s a conflict of interest in the financial-service industry. I’m saying this, having been in the industry. The financial-service industry gets paid based on assets under management. So they’re not always jumping up and down to get you to take more money. And that’s a problem, actually.
And then the other issue is that all financial planning, every single financial-planning software that exists today in America, defaults to take retirement dollars last. So if I open up my account with my advisor sitting on top of Orion and I look at my dashboard plan, my dashboard plan looks just like everybody else in America. And it shows me taking IRA money at the age of 75. That’s when I’m going to have an RMD. That’s my required minimum distribution. And so it shows how much I’m going to probably have to take at 75. Now, here’s the thing. I’m going to have an extremely large IRA account at 75. And if I only take RMDs, which is the minimum, because I don’t need the money, because I’m like a lot of people who saved and invested, I don’t need the retirement money, so I’m going to take the minimum, it’s going to continue to grow. That’s why so many people today have these multimillion-dollar IRA accounts. In some cases, they’re having eight-figure retirement accounts now. And so that’s a problem because we’re not encouraging people to take this money earlier. And so part of this is education.
And then part of this is you, as a client, you’ve got to start thinking through, like, are you sure you don’t want to use some of this money? Because I don’t know what you’re waiting for. I would sit here and do these events with my advisors, and I would look out in the room, and I would say to the clients, “Take some more money, and go enjoy it.” And often the wife would like sit there, and she’d kind of elbow the husband, like, “Did you hear what he had to say?” And people would come up to me, and go, “Thank you for telling me that.” I’m like, “Guys, stop traveling coach. OK? If you’ve already hired these advisors here, you have plenty of money. If you don’t want to travel coach anymore, don’t travel coach. Or if your car is broken down, get yourself a new car, whatever it is you want to go do …” Because everybody who’s listening who’s a financial advisor knows that if you’re a typical financial advisor, your clients have plenty of money, and the problem is they are not spending it.
I had a client that came into my office one day. I told the story in Smart Couples Finish Rich. She was so upset because her CDs were coming due, and she had like a 7—back in the day, she had like a 7% CD—and it was coming due, and the rates were like 4.5%, and she was distraught. And she sat down with me, and I opened up her file, and I said, “You know, we’ve been talking about you wanting to take your family on a cruise for the last three years. You haven’t done it yet. You don’t spend any of this money. All this interest just keeps piling up in the brokerage account, and then we just sweep it back into another CD. Why don’t you go downstairs, and talk to the travel agent, and go price the cruise you want to take, and let me worry about the CD, and come back upstairs in an hour, and tell me what the cruise cost?” So she did that. She comes back upstairs, and she says, she tells me the cruise cost, and I go, “Listen, Lynn, you can take this cruise three times this year.” She’s like, “Seriously?” I’m like, “Seriously.” And she’s like, “Well, if I only want to take the cruise once, could I get a bigger suite?” I’m like, “You can get a bigger suite.” And she took her family, she took her kids, she took her grandkids, and they did that trip. And about two years later, she was in her early 70s, and she passed away unexpectedly because she hadn’t been sick. And her kids would come in and show me pictures of that cruise, and they would say that was the greatest thing our family ever did.
And to me, that’s what financial planning is all about. That’s the purpose of financial planning. The purpose of financial planning is not just dying with the largest account. It’s using your money to live your best life. And those who are listening who have saved and invested over decades, you’ve earned the right to enjoy your life.
Arnott: You’ve also proposed a change in the tax code where there would be a flat 12% tax on retirement account withdrawals after age 60 for eight years from 2026 through 2033. Can you talk about some of the benefits of that and how it might make people feel more comfortable spending?
Bach: Yeah, absolutely. The idea is called an IRA flat tax. You can actually go to IRAflattax.com, and I’ve done a white paper, and I built a website that has all the analysis that we’ve done on this idea—because that’s what it is. It’s an idea that I’m trying to get in front of Trump and other politicians. I started having calls with senators on this. The idea is we’ve got $45 trillion in retirement accounts. Eight out of 10, specifically 83%, according to JPMorgan, 83% of retirees who have money in an IRA account will not take their money out until they’re forced to at the RMD age, the required minimum distribution age. So for all the reasons I just talked about, they’re not taking money out. They’re literally waiting until their RMD age. Why? The number-one reason is they don’t want to pay taxes. They don’t want to pay ordinary income on their deductible retirement accounts. So I asked a question, and I’ve been thinking about this for like five years: Well, what would happen if we incentivize that money to come out of these accounts sooner, if we made it easier? I think it would change everything.
My idea is that we, I ran the analysis, what happens if we had a flat tax of 10% on IRA distributions, or 12%, or 15%? And either one of these numbers would, for someone who’s got a lot of money in IRA account, they’d like either one of them. So we ran the analysis, and what we think would happen based on the analysis is that trillions of dollars would come out of these retirement accounts. It’s like doing a Roth IRA conversion only the money would come out, and retirees would use this money, and they’d either move it into a taxable account, and leave in the investments that they’re already in and pay the flat tax, or some of that money would get loosened up. They might go buy, they might pay their home mortgage off, they might help their kids buy their first house, it might go to help their kids pay off their student loans, it goes back into the local economy. It actually creates trillions of dollars worth of economic movement. And the analysis that we’ve done shows that GDP could actually go up by a 0.25% to 1% annually, and it pulls forward trillions of dollars in tax revenue.
And my idea is this is basically an eight-year tax window. It’s not a permanent thing because what you want to do is you want to incentivize baby boomers to start utilizing some of this retirement money. And people go, “Well, isn’t there a risk that people will take this money out and just go to Vegas and go crazy?” And the answer is, “I don’t think so.” I don’t think so because the people who are taking money out of their retirement accounts already—they’re taking money out of the retirement accounts because they need the money. A baby boomer who’s leaving money in their IRA account until the RMD age for the most part is simply waiting because they don’t want to pay taxes and they want the tax deferral. For somebody who’s in a low tax bracket, it wouldn’t affect them, because the way I recommended that government consider this idea, if you’re paying 0% tax on your IRA distributions because you’re in a low tax bracket, fine, great. It doesn’t affect you. But if you’re somebody who’s paying 37% taxes right now and you can take money out of your IRA account at, let’s say, 12%, you’ll take the money out. And you’ll still pay taxes, but you’ll pay less tax. I think a lot of people would take advantage of that. I also think what it would do is it would super-motivate people in their 50s to save more for retirement.
And the reason is we have catch-up provisions to save more in your 50s, and you can save more in your deductible retirement accounts knowing that as soon as you hit the magic age of 60, you can take some money out and pay a lower tax bracket. So that’s the idea in a nutshell. It’s going to take, if you ask me, how is this going to get done because I’m not a lobbyist, and I don’t have any skin in the game. I don’t economically benefit from this idea. It’s going to take this idea being put in front of Trump. And Trump’s come up with some pretty big ideas like no tax on TIPs, no tax on Social Security, tax deduction on car loans. If he came forward and said, “You know what, I think it’s time for baby boomers to enjoy their retirement. They’ve spent the last 40 years saving, investing for retirement, and I’d like to incentivize you to go and enjoy some of this money. You’re still going to pay taxes, but you pay a lower tax.” I think a lot of people would like that idea.
Benz: I wanted to ask, and I don’t want to get too in the weeds on this, but I did want to ask about kind of long-term tax receipts. As you mentioned, it would encourage this infusion of people to step up and pay the lower tax, but how about long-term implications for deficits and so forth? What do the numbers say on that front?
Bach: This is a very important question, and it’s hard for me to get the correct answer on this. We’ve run this through so many different language models, but the answer, the short-term answer is it depends on the rate. Like at 10%, you create a bigger deficit than you create at 15%, revenue neutral, 12% is in the middle is where it appears. But a lot of people will make the argument because the money is going to come to the government earlier and it’s going to actually increase GDP that it will actually be revenue neutral.
So here’s the interesting thing. The government actually has budgeted for when these RMDs, in theory, are taken. The government knows how much money is in retirement accounts, in theory, they know this, and they’ve actually budgeted for how much David Bach is going to have to take out at age 75. And so there’s a number out there for that, right? But here’s the thing about that. That budget is hypothetical because what happens in the real world is people die, and IRA accounts get inherited. So if I die before age 75, my IRA accounts are going to be inherited either from my wife and she’s younger, so it’ll go on, and there won’t be an RMD, or it’ll get inherited from my kids or a combination of the two, and then the kids won’t have to take money out but take it out over 10 years. So I think what would actually happen is—I don’t, this is me personally, look, the government’s got to run these numbers—I don’t think it would create a big deficit. I actually think it would create a surplus. And if ever there’s been a time that the government needs tax dollars, it’s now. We have got to start getting this deficit down now. So if all of a sudden you pull forward taxes and you create a trillion dollars in tax revenue, that’s a good thing.
And by the way, this is exactly why they did the Roth IRA. They did the Roth IRA because they got together as a bipartisan committee and realized, “All right, well, this is a gimmick, but let’s get people to pay taxes upfront and then tell them they’ll never pay taxes again.” I think the ultimate way to make this like superhuge is that actually you come up with the Trump IRA. So Trump comes out and, again, Trump wouldn’t create this because it’s got to be done by the Senate and Congress, but you have a Trump IRA account. Instead of doing a Roth conversion, you do a Trump conversion. You’d move money over an eight-year window into a Trump IRA for a period of 10 years, and then the money’s got to come out of the Trump IRA.
Because I think we’re making a mistake with these Roth IRAs from the government standpoint. They’re a great benefit to all of us as people, putting money away for tax-free forever, but you’ve got a huge problem now in this country because we’re running massive deficits, and you have $45 trillion of retirement accounts at this point that are going to grow to $100 trillion. And that’s money that’s just not circulating through our economy, and it’s not circulating to pay taxes.
I was on this call, Christine, with the senator. I won’t say who it is because I don’t want to put him on the spot yet, but I was on a call with the senator, and I said, “You know, if you take all the sovereign wealth funds in the Middle East, they’re the largest sovereign wealth funds in the world, you combine them all together. They have $7 trillion in assets. You take all the sovereign wealth funds with the Middle East and everyone else combined, and there’s about $13 trillion. It’s a lot of money. There’s more money in baby boomer IRA accounts than all the sovereign wealth funds in the world. That is a lot of economic power.”
Arnott: We also wanted to spend some time talking about the new 20th anniversary edition of The Automatic Millionaire that recently came out. What were some of the key things you wanted to update with the revised edition?
Bach: First off, this book sold 2 million copies, and I launched it on Oprah 20 years ago, and I wanted the book to be updated because I wanted a book to give to my kids, and I wanted a book to give my kids’ friends, and I wanted a book for the next generation to save and invest automatically. And so with The Automatic Millionaire update, it’s completely updated with all the new technology, all the new financial-service companies, all the new tax rules that make saving money automatically for your future easier than ever before. And a lot’s changed in 20 years. I mean, 20 years ago, it wasn’t that simple to save money automatically. When people would come into my office back in the day at Morgan Stanley and set up what we would call a systematic investment plan, the paperwork to do that was six pages long. It took us 45 minutes to have you fill it out. It took us three weeks to get your voided check, send it to the bank, and get money to move from your bank account to a mutual fund. And back in the day, also you had to find mutual funds that could take a small amount of money monthly.
Today, you can open up an app, and you can be saving money automatically. You can basically put The Automatic Millionaire program in place in less than 10 minutes. You can open up an app like Acorns or Schwab or Fidelity or Vanguard, and you can be—Robinhood, Coinbase, I list all of these in the book—you can be automating your financial life in less than 10 minutes. So it’s become completely democratized, the ability to save and invest. And you can invest your change today. So you don’t have to be rich to be an investor. It is not complicated. It’s never been easier.
And so I wanted to have a book that, all of us who are—probably most of your listeners here in their 50s and their 60s—you can give this book to the young people in your life that you love and care about. You can get them started sooner. I think the number-one thing I’ve always seen when I go around the country and do these lectures is I ask a room of people in their 60s, “How many of you wish you’d have started saving and investing when you were younger?” and every single hand goes up. And then I say, “So tell the people who are younger than you that you love to do this sooner.” Because the benefit of age is wisdom that comes with being older. You learn a lot, but it sure would be nice to have the wisdom when you’re younger.
And so I wanted to put The Automatic Millionaire book into people’s hands who are younger, so that we could get an entire generation to save and invest for the future, because things are more expensive than they’ve ever been, and you’re going to need more money than we did for retirement. The one thing that you can count on because we have such a large deficit is that all the social services that have been put in place to save people are slowly being eroded. And whether that, we can talk about Social Security and Medicare and Medicaid, there’s just not going to be enough money to support everybody in America who needs to be supported. You’re going to have to take care of yourself. And The Automatic Millionaire is about paying yourself first and putting yourself first. And when you do that, you won’t have to be dependent on the government. And I think that’s really important.
Benz: A major thesis of yours is that, obviously, automating contributions really works. And most people do that or many people do that through their company retirement plans. It seems like those payroll deductions that just happen without you lifting a finger are very, very powerful. Do you think more can be done on that front to help encourage savings? The Secure 2.0, for example, had a provision that allows employers to include an emergency fund kind of side by side with a 401(k). Do you think innovations like that are a step in the right direction?
Bach: Absolutely. I mean, what’s funny is I’ve been on a lot of these shows where people said, “David, you won. You know, the government now has a law in place that requires 401(k) plans to automatically enroll people to save and invest. You’ve won.” And I said, “Well, I’ve started the process. I don’t know if we’ve won yet.” Because what’s happened is—the Secure 2.0 Act, most employers are only opting in people at 3%. And in fact, in a way, it’s actually becoming a disaster because what’s happening is that people are being enrolled in their 401(k) plan at 3% automatically, and they think they’re done. And they’re not going in and increasing their 401(k) plans, or they are increasing their 401(k) plans, and then they’re changing jobs. Then they change jobs, and they’re automatically reenrolled at 3%. And so, there’s studies now, Vanguard did a study that said, that one single thing, let’s say you work at Morningstar, you’re maxing out your 401(k) plan, you leave Morningstar, you go work at, I don’t know, pick a number, Bloomberg. And you go to work at Bloomberg, and now you’re automatically enrolled at 3%. If you don’t change that, Vanguard says that that single mistake will cost you $300,000 in retirement.
What could be done? A lot of things could be done. First of all, you could actually make it so that 401(k) plans, everyone’s got to have a 401(k) plan in place. If you’re an employer with over 25 employees, you should have to have a 401(k) plan in place. And everyone’s got to be automatically enrolled at 10% at least, 10% minimum off the top. And then you as an employee have to actually opt out or opt down. But when you start people at a higher savings rate, that would change millions of people’s lives.
The second thing we could do, because there’s like 50 million people who don’t have 401(k) plans, the government, and this has been talked about, Christine, for years, and Amy, this is like an idea that’s been talked about for 30 years, the government has a retirement account. It’s called TSP. This retirement account that the government has for government employees is available to 7.2 million government employees. There’s 4.1 million using it. It’s basically the 401(k) plan for government employees. That plan, people have said, “Well, why don’t we open up that plan, and make it available to people who have jobs but don’t have 401(k) plans?” And they’ve never done it. That would be an amazing solution. And the pushback is like, well, people can go use IRA accounts. And they can. But the challenge is they don’t.
Not enough people go and—they may listen to a podcast, and they read The Automatic Millionaire, those people will go open an IRA account—but there’s just too many people who are not doing it. And what’s really happening in our country right now, and this is again why I do this one more time, is I am really worried about our country right now. I think we are in a place where two out of 10 Americans are getting really wealthy because they own stocks and they own real estate. And you got basically eight out of 10 Americans who are really, really now falling behind. The middle class in America is getting squeezed in a way that’s never been squeezed before. And if we don’t create an environment where everyone can be an investor, you’re just going to really have a problem. And you can see the problem in America right now. You can see all the anger and all the discourse. And it’s because so many people are living paycheck to paycheck.
Arnott: One of the big challenges a lot of young people face is where to start if they have competing priorities like building up an emergency fund, starting to contribute to a 401(k) or paying off their student loans. How should people think about prioritizing those different goals?
Bach: I would say first of all for anyone who’s young and listening, the moment you get a job, the most important decision you will make is to pay yourself first automatically one hour day of your income. So you should be signing up for your 401(k) plan. Don’t sign up at 3%, sign up at 12.5%. We actually know that the exact right number to save is 14%. Why 14%? Because if you save 14% of your gross income in your retirement account at work and your employer matches, which most employers match something, it’s going to get your savings rate in a 401(k) plan a little over 17%. And that for the average American creates millionaire status in about 27 years. If you go pull up all the Fidelity data on how many 401(k) millionaires there are on Fidelity right now, there’s like 650,000, and they’ve saved 14% of their gross income.
So I would tell you: Don’t wait. Your first job is your best job to start saving and investing because you don’t even have a lot of expenses yet. “Well, I’ve got student loans.” That’s fine. You still should be paying yourself first automatically one hour day of your income. And you should look at your student loans, but it’s so critical to put money aside for your future because you’re going to literally blink your eyes and snap your fingers and you’re going to turn around and be in your 50s and your 60s. And you want to meet yourself in your 50s and your 60s having taken care of your 60-year-old self.
I don’t know if you know Chuck Jaffe. I just did podcast with him right before this. And he said, “David, I started saving in my retirement account in my 20s because I didn’t want to let my 60-year-old self down.” And he’s 63. And he’s like, “I can give myself a high-five now. Like I was afraid to meet myself at 60 and be like, ‘Dude, what’d you do with all the money?’ ” And he’s like, “I did what I was supposed to do. I took care of us.” And I said, “You know, it’s interesting because a lot of young people can’t see that far into the future.” And it’s hard to imagine yourself in your 50s and your 60s when you’re in your 20s. But I promise you, God willing, you will get there sooner than you think.
Benz: Wanted to ask about people who are a bit later in life. You wrote a book about people who are kind of playing catch up with retirement who maybe are in their 50s and they feel like they did not empathize enough with their older selves when they were younger. What are the key pieces of advice you would give people at that life stage who do feel like they have some room to move in terms of making retirement work?
Bach: I wrote this book called Start Late, Finish Rich. It’s funny how that book came to be. I was doing a Barnes & Noble book signing for The Automatic Millionaire. And there’s, I tell the story in the book, there’s a woman in the book signing, and she says, “David, I bought Smart Women, Finish Rich. I bought Smart Couples, Finish Rich. I bought The Finish Rich Work Book. I’m going to buy The Automatic Millionaire. But you haven’t written the book that I need.” And I go, “Well, tell me what book you need. I get all my book tells from my readers.” And she says, I need Start Late, Finish Rich. And the room cracked up. And I said, “Well, so tell me more about that.” And she tells me she’s in her 50s, and she’s starting over, and she’s behind, and she feels like it’s impossible. And I said, “Well, let me ask you a question. Could you save $20 a day?” And she said, “Yeah, I could do that.” I’m like, “Are you married?” She said, “I’ve got a boyfriend, a partner.” “Can you get your partner to do that?” And she’s like, “Yeah, I can get him to do that.” OK, OK, so that’s $40 a day. It’s a lot of money. Like we’re talking over $1,000 a month. That’s over $10,000 a year. And then I ran the calculation for them. OK, so you’ll say you’re 50, you work 15 more years, here’s what it could be worth. And the answer is it could be worth somewhere between a quarter of a million dollars to a half a million dollars. And she’s like, “Is that enough for retirement? I’m like, “You know, I’m not sure. But I know this, it’s better than you getting there and having zero.” And she’s like, “You’re right, I can do that.” And so as I signed books that night, every single person’s like, “I need that book. too.”
And what I talked about in Start Late, Finish Rich—and don’t go buy this book, because this book is from 2005, it’s totally out of date, go buy The Automatic Millionaire update—but what I talked about in this book is it basically comes down to if you’re starting late, you need to, there’s a handful of things: Save more, which often means spend less, so you can save more; and the other is make more, right? Now, spending less is easier than often making more. You have to get really honest with yourself about your expenses if you have to catch up. I will tell you in your 50s is a great time to save and invest, even if you’re starting late, because, most cases, your expenses have gone down, your kids are out of the house, you’re not paying for college, if you have a home, chances are your mortgage, you paid your mortgage down, your cost of living has actually gone down. The only thing that’s gone up is healthcare costs. So it’s a great time to catch up. And let me tell you something, catching up in your 50s is much better than catching up in your 60s. And catching up in your 60s is better than catching up in your 70s. But wherever you are today, wherever your feet are planted at this moment, that’s where you should start. You should start today. Don’t wait for tomorrow, start today.
Arnott: What about the argument that, with inflation, $1 million doesn’t go as far as it used to—if you’re using the 4% rule, it would be a $40,000 starting safe withdrawal rate. Should people be shooting for more than $1 million? And if so, how much more?
Bach: It’s so interesting when you read comments on, let’s say, YouTube, because people will say exactly what you said. “Well, $1 million isn’t going to be worth anything in 30 years.” Actually, what people are saying now, because I’m talking about saving $27 a day and how that can add up to over $4.4 million in retirement, what people are now saying on YouTube on the comments, people were unhappy, is they’re saying “$4.4 million isn’t going to be worth anything in 40 years.” So the same people that said $1 million wouldn’t be worth anything 20 years ago are now saying $4.4 million won’t be worth anything in 40 years.
Here’s the answer. It’ll be worth a whole lot more than zero.
Right? If you’re not saving at least 10% of your income, you’re never going to get to the $1 million number. And if you want to have more than $1 million, then you need to save and invest more. I think when people talk about inflation, there’s no question, everything costs more. The first home I grew up in, my parents stretched to buy it in Oakland, California, and it cost $27,500. The house that I grew up in, first home. That home today would be worth $1.5 million. The second home I grew up in, my parents, they moved the suburbs, and it was $110,000. That home today is worth over $3 million. It’s the same house; it’s just 50 years older. So you need more money to buy the exact same stuff. So the answer is you will need more money. But if you tell someone you’re going to need $5 million to retire, they’re just going to go outside and throw themselves off a building. You have to meet people where they are. And $1 million is a great starting point for most people. It’s more than 98% of Americans have saved right now in an account.
Benz: For our last question, David, you just referenced homeownership, how it can be such a home run for people, especially if they’ve picked the right geography. But I wanted to discuss why you think homeownership is such a pillar for households, even though price appreciation of real estate has generally lagged the stock market by a pretty big margin. Can you talk about that?
Bach: Sure. Well, first of all, I don’t think that homeownership is a solution. The data says it’s a solution. When you look at it, I’ll go through all the statistics: Homeowners are worth 40 times more than renters. That’s a statistic that hasn’t changed in 20 years. Today, the average homeowner has a net worth of over $400,000, and the average renter is worth $10,000. The primary thing that creates generational wealth is home equity. If you don’t buy a home, there’s no equity that typically passes to the next generation. In fact, it’s the key indicator as to who buys a home, because most people, when they pass away with equity in their home, it goes to kids, and then the kids are able to go and buy a house. So most people today who are like, “I’m going to rent, it’s better to rent and put my money in the index fund because the S&P 500 has gone up over 10% annually and homeownership has only gone up 4%,” they’ve been led to believe that because there’s a lot of financial influencers giving, quite honestly, pretty bad advice. You can’t live inside a mutual fund. Let me just say it again. You can’t live inside the S&P 500 mutual fund. You can’t live inside a 5-star Morningstar fund. It’s not possible. Try it. I’ve tried. You can’t do it. So you have to live somewhere. So when you live somewhere, you’re either going to rent or you’re going to own. So the other question is, do we think rents will be higher in 10, 20, 30, and 40 years? So if you’re renting and your rent’s $4,000 a month, do you think it’ll be more in 10 years? Of course, it’s going to be more. Is it going to be more in 20 years? Yeah, rents have doubled. In many cases, they’ve tripled. The only thing that rents are going to do long-term is go higher. Why? Because of taxes, insurance, all the costs that the investor who owns your rental property has—they don’t eat those costs. They pass them on to you. And what happens is people go, “Oh, but the mortgage payments …” Someone’s like, “If I buy a $1 million home …” Actually, it’s funny—I just did this podcast, and I talked about a $200,000 home. And people are like, “Where can you get a $200,000 home anywhere? He’s out of his mind.” So I said, “You know what? If I had said a $435,000 home, which is the average price of a home in America, there would have been people saying, ‘I can’t afford a $435,000 home.’ OK, most people can’t afford a $435,000 home. They’re putting 10% or 20% down for a down payment, and then they’re borrowing the rest from the bank. So then the person’s like, ‘Yeah, but then I have to make all the interest payments.’ I know you do. And taxes and upkeep. Now you compare those costs to having rent.”
Here’s what you’ll have at the end of 15 years if you rent. Nothing. If you have a home with a 15-year mortgage, at the end of 15 years, you will have paid the home off. You’ll still have taxes. You’ll have insurance. You’ll have upkeep. But I promise you it will be significant less than renting. And so for most people who are listening today in their 50s and their 60s, and they’re Morningstar followers, they bought a home, they paid the home down. And when someone pays their home down and they pay it off, they’re able to retire an average of five to 10 years sooner.
And there comes a point in time where you don’t have to own. So a lot of retirees, because they’ve made so much money in their houses, they’re able to actually sell their house, move somewhere else, buy a home that’s less expensive, and then retire off the equity in their house. I come from the Bay Area. So much money got made in people’s homes in the Bay Area. People would sell their houses, and they’d moved to places less expensive. Where’d they go? They went to Arizona. Lots of people did that. You know what happened to those people? People would sell $2 million home in California, the Bay Area. They’d moved to Arizona, and they’d buy a $500,000 house. And then they’d take the $1.5 million, and they’d put that money into an investment account, and they’d live off that money. That $500,000 home today is worth $2 million. Because everybody else moved there. They also moved to Nashville, and they moved to Florida, and they moved to North Carolina. People go, “Well, you know, that doesn’t always work. You can’t always take the equity in your house and go and use it for retirement.”
Oh yeah, people do it all the time. People move abroad with the equity from their home. I live in Florence, Italy. It’s filled with expats that have retired here, sold their houses, took their million dollars of home equity, and between that and Social Security and a small retirement account, they’re living the dream in Florence, Italy, right now. So I don’t know. That’s what I think.
Benz: David, we have probably 100 more questions, and we could sit here for another couple hours. I wanted to thank you so much. This has been really a treat to have you here today. Thank you so much for being here.
Bach: Well, it has been my pleasure. You guys, thank you so much for having me, and continue all the great work that you do and Morningstar does. I’m a huge fan.
Arnott: Thanks, David.
Benz: Thanks so much, David. Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow me on social media at Christine Benz on LinkedIn or @christine_benz on X.
Arnott: And at Amy Arnott on LinkedIn.
Benz: George Castady is our engineer for the podcast and Jessica Bebel produces the show notes each week. And Jennifer Gierat copy edits our transcripts.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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