Am I Spending Too Much?

00:00:18.060 | This is Portfolio Rescue. Before we got on the air, Duncan and I were just talking about

00:00:22.140 | how impressed we are by the caliber of questions we're getting from people. People seem to

00:00:26.260 | have their finances in order. I'd like to think it's because they're following our advice,

00:00:29.820 | but I think actually they follow this stuff because they've already done pretty well for

00:00:33.440 | themselves. Remember, our email here is AskTheCompoundShow@gmail.com. Today's Portfolio Rescue is brought to you

00:00:39.280 | by Bird Dog. It's the most comfortable and stylish shorts and pants in my closet. Two

00:00:43.200 | weeks ago, Duncan, it's 80 degrees here in Michigan. So I have my shorts on, very comfortable.

00:00:48.400 | I got the liner. It's great. Can wear it with a nice button-down shirt or maybe just an

00:00:52.400 | athletic tee. I'm a new convert to the pants. Over the past year or so, my daughter had

00:00:56.540 | a soccer tournament this past weekend and we were dealing with wind and rain and hail,

00:01:00.600 | so I needed to be warm and comfortable. So I put on the Bird Dog sweatpants. All weekend,

00:01:04.780 | they were just delightful. All the other soccer dads were so jealous of me because I looked

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00:01:26.460 | I don't have anything as cool as that as looking good in front of other people, but the sweatpants

00:01:31.840 | are so comfy, I've actually been sleeping in them some. They're like comfy pajamas.

00:01:35.520 | They're great, aren't they? Yeah.

00:01:38.140 | I love it. Okay. So like I mentioned, we've been getting some great ... I mean, it's really

00:01:43.760 | cool how people are so open to sharing with us. People give us their salaries, their jobs,

00:01:49.080 | their retirement account balances, when they're going to retire, all this stuff. People share

00:01:52.340 | very personal information, so we don't take that for granted. We really appreciate it.

00:01:55.240 | So here is one right now and I think the first one up is our first not to brag of the week.

00:02:00.260 | Yeah. Yeah. Getting started strong. So first up we have, "I just read Nick's latest and

00:02:05.860 | I'm feeling a bit ashamed. Nick is awesome and just keep buying is my investment motto.

00:02:10.180 | I'm 34, my wife is 28 and not to brag, we make about $590,000 a year with a net worth

00:02:16.600 | of 1.2 million. We max out our 401ks and take the employer match, about $55,000 a year.

00:02:22.860 | We also save between $20,000 and $40,000 if not more. Our savings rate in my monthly budget

00:02:28.700 | is about 24%. I wonder if they use Excel like you. I also own one income producing rental

00:02:35.660 | in the Midwest. However, we live in Los Angeles and spend a lot. We take extravagant vacations.

00:02:42.380 | I drive a nice car. Wish you would have told us what kind, but that's okay. I like nice

00:02:46.580 | clothing, etc. After reading Nick's piece, I felt like I should be saving more even though

00:02:51.140 | I know we save adequately, if not more than most. Save me, Ben.

00:02:55.260 | Listen, you don't need me to save you financially. In your mid-30s, financially, you're doing

00:02:59.980 | amazing. You're at four, you have a seven-figure net worth, you make a mid-six-figure income,

00:03:04.620 | you have a rental property that's income producing, you have a 24% savings rate. You're in an

00:03:09.060 | amazing place financially. If you never saved another dime, you have $1.2 million net worth

00:03:13.980 | and it compounded at 5% per year over the next 30 years. By retirement age, you're looking

00:03:18.340 | at $5.2 million. You are fine. You're doing just fine. You need me to save you psychologically.

00:03:25.060 | This is obviously a good problem to have. This person is not alone. It can be a psychological

00:03:31.300 | hurdle for people to realize, "I've got my finances in order, but I'm following these

00:03:35.260 | personal finance experts and they make me feel bad about myself." I'm not saying that's

00:03:38.980 | his Nick. I think this is the part of Nick's post that

00:03:40.580 | has our guy Mark worried here. Nick Majulia of Dollars and Data wrote this Rich vs. Wealthy

00:03:46.340 | post. He says, "Mr. Rich," and he's trying to lay it out here, what's a good and bad

00:03:51.620 | behavior. He says, "Mr. Rich earns an impressive salary and loves to showcase his success with

00:03:55.580 | luxury cars, designer clothes, and extravagant vacations." It seems like this is written

00:03:59.060 | exactly for our person writing the question here. "He is the life of the party and appears

00:04:03.860 | to have it all. However, his high income is matched by his high spending habits, leaving

00:04:06.980 | him with little savings or investments. Should his income disappear, Mr. Rich's financial

00:04:10.820 | situation would quickly crumble, revealing the facade of his seemingly successful lifestyle."

00:04:14.540 | I can see why this kind of resonated, because it's exactly what he says. Luxury car, designer

00:04:20.100 | clothes, extravagant vacations. "Ms. Wealthy, on the other hand, earns a similar income

00:04:24.180 | to Mr. Rich, but chooses to live a more modest lifestyle. She invests a significant portion

00:04:27.940 | of her earnings into a diverse portfolio of income-producing assets that create passive

00:04:31.860 | income streams, such as rental properties and dividend stocks. She may not have the

00:04:35.060 | outward appearance of success, but she enjoys true financial freedom, knowing that her assets

00:04:38.260 | and income will continue to support her lifestyle, regardless of whether she works."

00:04:42.020 | Now, I'm not trying to put words in Nick's mouth here, but he is showing two extreme

00:04:46.740 | examples here. And the whole point of it is to show that it doesn't matter how much money

00:04:51.940 | you make, if you're not living below your means, you're not gonna get ahead and you're

00:04:55.500 | not wealthy, right? Having a large income is not the same as being wealthy. So allow

00:04:59.720 | me to offer a third option. This is the Ben Carlson middle ground, 'cause this is where

00:05:03.980 | I go. So Mr. and Mrs. Balance. Mr. and Mrs. Balance save 20 to 30% of their income and

00:05:09.320 | prioritize spending after that. They spend guilt-free on areas of their life that matter

00:05:12.660 | the most to them and cut back everywhere else. Maybe they drive a new automobile, but don't

00:05:16.180 | pay up for a luxury car. They enjoy spending money on experiences, but don't need to stay

00:05:19.740 | at five-star resorts. Maybe they live in a nice house, but spend roughly one third of

00:05:24.260 | their gross pay on housing-related expenses. They utilize debt where it makes sense, for

00:05:27.980 | things like mortgages, maybe a home equity line of credit to fix their house up, but

00:05:32.100 | they always pay off their credit card debt. Automate their savings and investing every

00:05:34.940 | month and max out their retirement accounts, but generally leave their portfolios alone.

00:05:38.840 | And Mr. and Mrs. Balance don't feel guilty about spending money on the stuff that matters

00:05:41.860 | to them, 'cause they know that they are saving and investing for the future. So they prefer

00:05:45.700 | to be selectively cheap as opposed to frugal at everything, right? How's that for some

00:05:49.540 | middle ground? That's what I'm looking for here. So the way that I think about it is

00:05:52.940 | there's no hard and fast rules for how much you should save or spend, but if you're saving

00:05:57.020 | 20 to 30% of your income and your income keeps growing or just stays the same, you're just

00:06:02.100 | fine. I think you just need to do a better job of figuring out how to spend guilt-free

00:06:05.500 | and the things that make you happy and defining those areas. So go on extravagant vacations

00:06:09.960 | if you want to, but maybe that means you're cutting back on eating at fine dining places,

00:06:13.700 | right? Drive a luxury automobile, but maybe that means you don't get to go to a bunch

00:06:17.320 | of concerts and shows all the time. Spend money on nice clothes, sure, but maybe that

00:06:21.740 | means you don't buy expensive furniture for your house. Whatever the trade-off is, you

00:06:25.060 | have to figure out those trade-offs. So Nick actually has another rule of thumb called

00:06:28.660 | the two times rule, where he says if you want to spend money on something really nice and

00:06:32.700 | extravagant, you have to save, too. So I think Nick's example was he buys a $250 pair of

00:06:37.820 | shoes, but when he does that, he needs $500, because he's going to save $250 as well. And

00:06:42.700 | it doesn't have to be something simple like that, but I try not to quantify these things

00:06:47.380 | as much as my finance brain likes to do that. You need to think about it more qualitatively.

00:06:51.860 | So I look at it as my savings rate should be high enough that it feels a little painful

00:06:55.940 | at times, where you look at it and go, "God, imagine the amount of stuff we could buy if

00:06:58.620 | we didn't save so much." On the other hand, I think I should be spending enough money

00:07:01.980 | where that also feels a little painful at times. Can you imagine how much that money

00:07:05.900 | would be worth in 20 to 30 years if we didn't spend it on this?

00:07:11.700 | I've mentioned before on the show that I was always a big saver. I was a pretty frugal

00:07:15.060 | person growing up. For me, the big way to get over this sort of cavern of being comfortable

00:07:22.020 | spending more money was treating my savings like a bill. So every month, I treat savings

00:07:27.420 | in my 401(k), in my IRA, in my brokerage account, in the kid's 529 plans, all that stuff, it's

00:07:32.180 | automated and I treat it like a bill. It's non-negotiable. So all those savings go into

00:07:36.260 | those accounts automatically and then we spend whatever's left over. So I do think it's something

00:07:43.220 | that can change over time for people, too. Having kids completely changed my worldview

00:07:47.820 | of this. We only have a finite amount of time before they become teenagers and never want

00:07:52.100 | to spend any time with us anymore. So my wife and I prioritize spending money on experiences

00:07:56.900 | now, as opposed to maybe having that money when we're 60 or 70 to do stuff. So I look

00:08:02.300 | at it as I'm selectively cheap in certain areas and selectively extravagant in other

00:08:06.580 | areas. I think that's the thing. I don't judge other people's spending habits as long as

00:08:12.100 | they're saving money. So this person is saving money. They have a double-digit savings rate.

00:08:17.660 | Spend the money on whatever makes you happy, then, and figure out ways to cut back elsewhere.

00:08:22.220 | That's the kind of thing. I think you just have to align any future lifestyle creep with

00:08:26.300 | future increases in savings. So I think the biggest problem for people making as much

00:08:29.120 | as you do and having a high net worth is trying to keep up with people who have even more

00:08:33.500 | money than you. That's where the problems come in. But otherwise, you're doing fine.

00:08:38.560 | If you're saving that much and you can still spend, you're in a good place.

00:08:42.460 | Yeah. There's always going to be someone, right? There's always going to be someone

00:08:45.340 | that's doing better, spending more, that kind of thing. So yeah, I feel like that's a dangerous

00:08:49.980 | game.

00:08:50.980 | I think that's the problem. Some people look at it as, "I need to keep up with this person

00:08:53.020 | because they spend so much and they have all these toys and they have a boat and they

00:08:55.260 | have a jet ski and they have all this stuff. I need to keep up with them so they spend

00:08:57.540 | too much." Other people go down the personal finance track of, "Well, geez, that fireperson

00:09:02.460 | is saving 70% of their income and they're eating grass in their backyard to save money

00:09:06.540 | by not going out to eat." Whatever it is, and I should be doing that too. Why am I not

00:09:10.140 | doing that? I prefer the middle ground of, "Listen, I've heard enough stories of people

00:09:14.660 | who save their entire life and then they get to retirement age and something health-wise

00:09:20.380 | breaks in and they all of a sudden die or someone gets dementia or Alzheimer's or Parkinson's

00:09:24.420 | or whatever, and it totally derails their plans."

00:09:27.460 | And so I'm a huge proponent of enjoying yourself now as long as you have a decent savings rate

00:09:33.140 | that you can delay some gratification for the future. I think a balanced approach makes

00:09:36.460 | a lot more sense and that makes it so you don't have to feel so guilty about spending

00:09:40.380 | money when you have the savings taken care of and it's already done.

00:09:43.620 | So what you're saying is YOLO.

00:09:44.940 | Yeah.

00:09:45.940 | You only live once.

00:09:47.420 | Yeah.

00:09:48.420 | I mean, yeah, YOLO white. We're like YOLO white.

00:09:51.620 | Yeah, diet YOLO. How's that?

00:09:53.500 | Yeah.

00:09:54.500 | Yeah, there you go.

00:09:55.500 | But yeah, this person is doing so well for themselves and if they keep a 20-some percent

00:09:59.620 | savings rate at that, I guess the big problem would be if their income doesn't stay forever.

00:10:05.000 | We talked before we got on about who are these young people making this much money? And it's

00:10:09.860 | tech people and private equity people from our experience. And so those industries can

00:10:14.700 | be fairly fickle. So if that income all of a sudden goes away, then you have to make

00:10:18.620 | some hard choices. Right now, the fact that you're saving so much money, you're saving

00:10:21.500 | a quarter of your income, you're fine.

00:10:24.100 | Yeah, not bad. Okay. And you know how I look nice and wear nice clothes without breaking

00:10:31.100 | the bank? Bird dogs.

00:10:32.540 | There you go.

00:10:34.580 | Yeah.

00:10:35.580 | Smooth.

00:10:36.580 | Okay. So up next, we have a question from V. I think is how you say it. I was hoping

00:10:43.660 | you could explain the relationship between the 10-year treasury yield and the P/E ratio

00:10:47.500 | on equities. Does a 4% yield on the 10-year indicate a 25 P/E on risk-free assets? So

00:10:53.940 | if the 10-year is at 4%, do we just add the equity risk premium to that to get the expected

00:10:59.220 | return? You can tell by the way I'm reading that, I have no idea what I'm reading there.

00:11:02.820 | All right. Equity risk premium. It's kind of an academic term. It's basically just any

00:11:07.300 | excess return you get in stocks over some sort of risk-free rate. So since 1928, the

00:11:13.220 | stock market in the U.S. is up like 9.6% per year. Bonds, in using the 10-year treasury

00:11:18.340 | as a risk-free rate, stand in here, are up 4.6%. So we're talking about a 5% equity risk

00:11:23.700 | premium, right? Over and above some sort of benchmark. You could use cash, too. Cash is

00:11:27.380 | up like 3-something percent over that. So it would be even higher if you used cash.

00:11:31.540 | So the idea here would be, can we just take the bond yield and slap on this historical

00:11:35.940 | premium and get expected returns? I wish it was that easy. John, do a chart on for us.

00:11:41.900 | This is the returns by decade for stocks, bonds, and cash since the 1930s. Stocks is

00:11:47.980 | the S&P 500. Bonds is the 10-year treasury. Cash is three-month T-bills. And I also put

00:11:52.100 | another category in here, starting rates. And that's the starting 10-year treasury.

00:11:56.220 | And sometimes high starting yields led to above-average returns. Sometimes they didn't.

00:12:00.580 | Sometimes -- same thing as low starting yields. Sometimes it led to good returns. Sometimes

00:12:04.300 | it led to bad returns. Unfortunately, there's not much rhyme or reason here when it comes

00:12:08.820 | to rates. And that's because that relationship with stocks and bonds is not quite that simple.

00:12:15.220 | Athalas Damodaran from NYU, a recent guest on Masters in Business with Barry. Highly

00:12:19.820 | recommend if you want to listen to that.

00:12:21.860 | He's awesome.

00:12:22.860 | Yeah, he's great. Updates the equity risk premium on a monthly basis on his blog. So

00:12:26.780 | I get a ton of free long-term data from his blog, actually. John, do a chart on here.

00:12:31.920 | This is Damodaran's equity risk premium versus bond yields going back to 1960. The blue line

00:12:38.100 | there is bond yields. Orange is the equity risk premium. You can see, there's a little

00:12:42.580 | uptick in the equity risk premium when bonds were rising in the '60s and '70s, but it certainly

00:12:47.220 | didn't keep up. And then, it's kind of interesting that as the bond yields have fallen this century,

00:12:53.420 | the equity risk premium has actually risen. So, it's not like a one-to-one relationship.

00:12:57.380 | The variables are kind of all over the place. And it certainly doesn't always keep pace.

00:13:02.220 | It would be nice if it did, but at a certain point, if bond yields were high enough, they

00:13:06.500 | become competition for stocks, and you're not going to get as much of a premium there.

00:13:10.060 | So, it's more one of these things that works out of a long-term average. It's not like

00:13:13.220 | it's going to follow on a year-to-year basis or anything. So, I'm not sure there's much

00:13:16.940 | useful information in this kind of valuation measure beyond the fact that the equity risk

00:13:20.740 | premium will likely go up when stocks are going down, and down when stocks are going

00:13:24.460 | up. That's kind of the only ... I actually like John Bogle's expected returns formula

00:13:28.660 | better. He outlines this in one of his books. I think it was "Don't Count On It," which

00:13:31.820 | is excellent. Very underrated author, actually, for all the great things he did. He breaks

00:13:36.040 | down returns into three components. John, do another chart on here. Bogle looks at this

00:13:39.860 | in terms of dividends, earnings growth, and then changes in valuations. And that gives

00:13:43.740 | you your returns. This is another one by decades, going back to the 1900s. Bogle started this,

00:13:48.060 | and I kind of filled it in the last couple decades. And the easy part is the fundamentals.

00:13:55.140 | Earnings are all over the place by decade, but they're not a huge wide range. Dividends,

00:14:00.140 | that's a pretty easy one. The starting yield, you can calculate that pretty easily. So,

00:14:04.980 | you could back up the envelope a pretty good ... Dividends are 1.5%. Earnings growth, I

00:14:09.160 | think, is going to be 6. Stock market is going to give you 7.5%. But that change in valuations

00:14:14.920 | is the big part of it, and that's kind of a filler. It's kind of how people feel about

00:14:19.220 | the stock market, and how they feel about where they allocate their assets. And that's

00:14:22.900 | the kind of thing that's impossible to predict. So, the furthest I'm willing to go out on

00:14:25.740 | a limb here is that stocks will outperform bonds over the very long term. But over the

00:14:29.680 | short term, there's going to be times when bonds and cash outperform, which is not super

00:14:33.900 | helpful. But that's the problem with these things. It's not very easy to come up with,

00:14:38.460 | especially in the stock market. The bond market's easy. If you take the starting yield, and

00:14:42.780 | if you go anywhere out beyond government bonds, take away any sort of default or credit risk,

00:14:47.620 | take that out of the equation, you get a pretty good starting point from the starting yield.

00:14:51.660 | The stock market is much harder to figure out. Sometimes even valuations don't help

00:14:55.460 | you much over 5, 10, even 15 years. So, I think the relationship between equity risk

00:15:01.420 | premiums and interest rates is probably a lot more noise and signal embedded in it.

00:15:05.360 | But, fair question.

00:15:06.700 | Look at that 1.2% dividend in the 2000s. That really stands out there.

00:15:12.100 | Yes. I mean, the 1999-2000 is probably the worst entry point in the history of the U.S.

00:15:18.900 | stock market. That's a pretty good one. Valuations were so skewed to the upside that, yeah, it

00:15:26.100 | had to be pretty -- the first decade of that century was awful.

00:15:29.520 | All right. Let's do another one. Do you know what the equity risk premium is now? You got

00:15:34.100 | it?

00:15:35.100 | Yeah. Sure. I think so.

00:15:38.460 | Close enough.

00:15:39.460 | I've read Ben Graham. Yeah. I think I got it.

00:15:43.740 | All right. Up next, we have a question from James. Let's see. If one is able to, is there

00:15:51.140 | any reason not to just lump some $30,000 to $50,000 into a 529 and call it a day? What's

00:15:56.980 | a reasonable target for the future value of a 529? Seems like colleges can demand whatever

00:16:01.340 | price they want, which makes it impossible to predict. I have some thoughts on this one,

00:16:05.680 | having been involved in academia in the past.

00:16:08.260 | All right. Let's look at the Consumer Price Index for college tuition and fees, set against

00:16:12.140 | the regular old CPI, John. On an annualized basis since the late 1970s, the annual inflation

00:16:19.980 | for college is like 6.3%, 3.5% or so for the regular CPI. Almost double over a very long

00:16:26.420 | time period. You can see, in this century, it's even risen more.

00:16:29.980 | To be fair, things have leveled out a little bit. Let's do the next one, John. This is

00:16:33.300 | over the last 10 years. The CPI is actually above college, and that's more that inflation

00:16:42.140 | is playing catch-up, not necessarily that college tuition is slowing. It's still increased

00:16:47.060 | at a pretty good rate. So this is the kind of financial planning question that, unfortunately,

00:16:51.260 | doesn't have a great answer. So why don't we bring a financial advisor in to help with

00:16:53.900 | this one, since this is another one that's hard to quantify, exactly.

00:16:58.220 | Hey, Kevin.

00:16:59.220 | Kevin Young, back to the show. Hey, Kevin.

00:17:01.260 | Gentlemen, nice to be here. Thanks for giving me the hardballs here.

00:17:05.140 | Well, I think this is kind of like planning for a moving target. And I've heard this from

00:17:09.340 | people before, like, listen, I have no idea how much college is going to be, you know,

00:17:12.700 | if my kid's going to be in college in 15 years or whatever, how in the world am I supposed

00:17:17.700 | to plan for this when college inflation is running at 6% per year? Is it going to be,

00:17:21.860 | you know, $100,000 a semester or whatever it is? How do you even begin to plan for something

00:17:26.460 | like that, that is a target that you can't, it's not like you can lock it in right now.

00:17:30.180 | So how do you think about this?

00:17:31.780 | Yeah, so it is a very, very common question that financial advisors get, is how much is

00:17:38.180 | the right amount to save? And the honest answer is, I don't know. No one really does because,

00:17:44.260 | you know, you've got a three-month-old baby at home, understanding what they're going

00:17:50.980 | to be interested, where they're going to want to go to school, if they're going to want

00:17:53.420 | to go to school, what college looks like in, you know, 17 and a half years from that moment

00:17:58.140 | is impossible to predict.

00:18:00.940 | That being said, I think starting out early with a lump sum is a great idea if you can

00:18:07.420 | do it. Let the compounding work for you, right? Nick Majulia, our colleague who you mentioned

00:18:13.940 | previously, has written a lot about lump sum versus dollar cost averaging. And with a long

00:18:20.060 | enough time horizon, lump sum statistically works out far more frequently than dollar

00:18:25.100 | cost averaging. The other thing to consider here, though, would be depending on what state

00:18:30.940 | you're in is going to have a big impact on the tax deductibility of this kind of contribution.

00:18:36.780 | You might have to spread it out if you want the tax deductibility, right?

00:18:40.440 | Yeah, exactly. And so the example here, $50,000. I live in the state of Connecticut. In Connecticut,

00:18:48.580 | I can make a $50,000 contribution to one of my kids' 529s, and I could deduct $10,000

00:18:54.700 | per year over five years. Easy, great, awesome, everybody wins. There are other states that

00:19:01.880 | have that same $10,000 deduction per year, but they will not let you carry forward the

00:19:07.020 | deduction. So in order to really capture it, you'd have to do 10, 10, 10, 10, 10. So now

00:19:15.140 | with that out there, the other thing to consider is, OK, well, even if I'm in the highest tax

00:19:20.480 | bracket in my state, $10,000 off my state income, is it really going to move the needle?

00:19:27.260 | My argument would be probably having the dollars compounding for that much longer probably

00:19:32.080 | outweighs it.

00:19:33.080 | Yeah, you're comparing it to investments at that point, right?

00:19:35.540 | Exactly, exactly. And so just thinking about, OK, well, what if I put in $50,000? And let's

00:19:41.860 | say you return, I think I ran it at 6%. Obviously, early on, we're going to be pretty aggressive.

00:19:49.060 | As we get closer to school, we're going to dial down the risk. You're probably looking

00:19:53.780 | over 17-ish years, you're looking somewhere around $130,000 of future value. Right now,

00:20:00.820 | that would be enough to pay for a good, large in-state public institution. It's going to

00:20:06.380 | buy you a year and a half at some of the more expensive private schools, your Harvard's,

00:20:13.740 | your Duke's, your Lehigh's, et cetera.

00:20:17.020 | So those things are unanswerable at this point. It's not a bad idea to start saving early

00:20:21.540 | with a lump sum. And the thing that makes me even a little bit more bullish on this

00:20:25.260 | idea now than I was even a couple months ago is the new legislation that will allow people

00:20:29.660 | to convert unused $529 into a Roth IRA.

00:20:34.260 | So we've got a lot of questions for Bill Sweet about that one. People love that option.

00:20:38.080 | Yeah, yeah. So for my daughter, Emma, who's she'll be five in a month or two, if she goes

00:20:45.460 | to school and there's $10,000 left over in her 529 at the end of the time, she can convert

00:20:52.020 | that at whatever the contribution limit is that year. As long as it's been in for 15

00:20:56.940 | years and hasn't been added two and five, there's some nuance there. She can convert

00:21:02.900 | whatever the contribution limit that is for that year, convert it to a Roth in her name,

00:21:08.300 | and 30 years later, she's going to be pretty happy that she did that.

00:21:11.300 | So I think that takes a little bit of the edge off of the idea of, "I don't want to

00:21:14.820 | over-save." Because at the end of the day, you're just putting money aside for your kids.

00:21:18.920 | And now you've got the extra flexibility of, if we don't use it all, they're already on

00:21:22.940 | a great path for retirement.

00:21:24.460 | Right. And the thing about now, it's a moving goalpost kind of thing. But I think that as

00:21:30.660 | you get closer to the date, then you can kind of figure out what the actual costs are and

00:21:33.780 | where you stand. And maybe that's a time to actually have a good financial conversation

00:21:36.760 | with your 18-year-old child about finances and understanding, "Listen, set some boundaries.

00:21:42.580 | We'll pay for your whole state school. But if you go to a private school, we're only

00:21:45.620 | going to pay for 30% of it and you have to take the rest." Whatever it is, I think that's

00:21:48.860 | a good way to open up to thinking through the various options, depending on how much

00:21:52.300 | you have at that time.

00:21:53.300 | Yeah. And I think there's some kind of stigma around parents just being proud. And if their

00:22:00.940 | parents were able to pay for college, or they maybe weren't able to pay for college, it's

00:22:05.660 | almost like a thing where people feel like they have to pay for whatever school their

00:22:09.460 | kid wants to go to or whatever they get into. But to your point, I think it's a great thing

00:22:14.180 | to have that conversation with your child.

00:22:16.780 | Alternatively, I have a friend who has five kids, which is pretty rare these days. And

00:22:21.500 | he said from the start, "I'm not saving for any of my kids. They're on their own."

00:22:27.020 | Yeah.

00:22:28.020 | I guess if that's the decision you want to make, but you're right. But I think a lot

00:22:29.620 | of parents do. I understand how a lot of parents out there don't have a ton of savings because

00:22:34.140 | they put their child first. That makes a lot of sense to me.

00:22:36.660 | Yeah. And you want to ... Our colleague, Tony Isola, does this for our clients a lot, right?

00:22:41.500 | He'll run comparisons of, "Okay, your kid got into this place at $75,000 a year and

00:22:47.460 | the state school at $25,000 a year, and they absolutely love history and they're going

00:22:51.660 | to be a history major." And he can show you the data that says, "Here's what a graduate

00:22:57.780 | of their history program makes two years out of school from each place." Most of these

00:23:02.460 | things are not that wide of a spread. So just having that conversation with the student

00:23:07.500 | and saying, "This is the difference. You're not going to make much more by spending $50,000

00:23:11.980 | more a year for four years." It's worth having the conversation.

00:23:17.140 | Right.

00:23:18.140 | And I'm not picking on history majors because I am one and I love history, so.

00:23:23.740 | Yeah. I was just going to throw into this conversation. I did a poll on the chat whether

00:23:29.380 | or not college tuition should be capped or regulated. And the vast majority of people,

00:23:33.900 | for what it's worth, we have 130 some people watching right now. But the vast majority

00:23:37.820 | of people are saying yes. So I feel like something might happen down the road. Too many people

00:23:42.820 | are getting really upset about this.

00:23:44.660 | I would say that that 6%, there's no way that can continue forever. Because at a certain

00:23:49.060 | point, the growth in that is just so high, it becomes impossible for people to go and

00:23:53.700 | more people are going to college. So you'd think at a certain point, technology would

00:23:57.420 | step in and make things a little easier that would level off.

00:23:59.780 | And it's not helping the learning. It's not helping the education, right? I dropped a

00:24:02.940 | stat in here that Stanford now has almost 16,000 administrators and they have just under

00:24:07.500 | 17,000 students. That's not professors, administrators. So that probably sounds like a problem. And

00:24:14.660 | in my experience, I thought that there was definitely an administrator bloat at the schools

00:24:19.140 | I taught at.

00:24:20.140 | All right. Let's do another one.

00:24:22.820 | Okay. Up next we have a life insurance question. If I died tomorrow, what would be a reasonable

00:24:30.140 | amount of money to leave to my child in the form of life insurance? I would imagine enough

00:24:34.020 | to pay off our mortgage and cover expenses until the child can finish college. I've read

00:24:38.300 | that the average amount it takes to raise a child to 18 is $300,000. Is $300,000 plus

00:24:43.900 | remainder of the mortgage balance a reasonable life insurance target? Some have suggested

00:24:48.580 | more to continue funding current lifestyle, my income of $450,000. However, my wife is

00:24:54.740 | also a high earner, so I'm not concerned about reproducing my earnings.

00:24:57.820 | >> Okay. This is actually the question from the same guy, James here. He asked both these

00:25:01.660 | questions. I like him so much. I got life insurance following the birth of my first

00:25:05.700 | child. Honestly, I decided the amount based on a number that sounded good at the time.

00:25:09.460 | I did not crunch any numbers. It's just kind of -- they were kind of like, "Do you want

00:25:13.020 | a half a million dollars or a million?" And it was like, I don't know, $10 a month more.

00:25:17.180 | I'm like, "Let's do a million." So again, this is kind of another one that you don't

00:25:22.140 | really know because -- and it's kind of morbid to think about this stuff, but obviously,

00:25:25.220 | again, with a family, this is the kind of thing that you have to have. It's kind of

00:25:27.780 | a difficult decision. So how do you -- when you're working with clients to ensure any

00:25:31.740 | kind of risk like this, where do you begin?

00:25:34.460 | >> So I think he -- James mentioned the word reasonable. And I think reasonable is one

00:25:40.460 | way to approach this. Yes, having enough money to cover the cost of raising a child and your

00:25:46.780 | mortgage is a very reasonable approach to life insurance. Does that mean it's the answer?

00:25:52.900 | No, it doesn't. Because there are -- there are other aspects to consider. You know, one

00:25:59.900 | thing is you mentioned, you know, your high salary. Okay, if that goes away, but your

00:26:04.820 | wife is still a high earner, would your wife want to work if you hadn't woken up this morning,

00:26:10.780 | whether that be for three months, six months, forever? I think there's -- one is I'd have

00:26:17.340 | that conversation and be real clear on what that means. And by the way, that's a two-way

00:26:23.420 | conversation. Just because you make more as a spouse does not mean that you shouldn't

00:26:29.180 | have insurance on a nonworking spouse or a spouse that makes less than you. My wife works

00:26:34.900 | part-time, but a big part of her job is helping to raise our children. If God forbid she wasn't

00:26:40.940 | here anymore, I would need help, a lot of it. And so that's something to consider as

00:26:45.740 | well. But so I also just think about sort of the outside of the spreadsheet ramifications,

00:26:52.900 | right? What's the emotional toll on something like that happening? And I think that's what

00:26:57.300 | leads back to, yeah, the math makes sense, but in your kind of stomach and heart, does

00:27:03.340 | it really make sense? For an extra half a million dollars, if you just had a child,

00:27:09.100 | you're thinking about 529s and life insurance, I'm assuming you're maybe in your 30s, like

00:27:16.420 | you said, Ben, an extra half a million dollars of term life insurance at 15 or 20 bucks a

00:27:21.700 | month for somebody making 450, I think that's an appropriate --

00:27:26.100 | If you're in good health and you're relatively young, you are in the stage of having kids,

00:27:31.900 | it's not that expensive. That's the thing. Yeah. And so, you know, to hedge that with

00:27:39.620 | a tiny fraction of your income, I think is worth it. Look, the likelihood is that it's

00:27:46.300 | not going to pay out. That's why term insurance works. Most of it will never, ever be paid

00:27:50.820 | out. But you don't want to be, you know, you don't want to put your family in a situation

00:27:56.600 | where they're thinking, wait, if he had, I thought he had this much and he only has this

00:28:00.860 | much and you're telling me if he had paid 20 more dollars a month, then I wouldn't have

00:28:05.860 | to go back to work and I could be with my family full time or I can do X, Y, and Z.

00:28:10.100 | I just think it's a good idea just to up it. And, you know, you can always reduce it later

00:28:15.260 | on. You can always change things. So but it's never a bad idea to lock it in when it's cheap

00:28:19.380 | and you're young.

00:28:20.380 | Duncan, you can probably get a smaller amount. Your wife can just sell your hat collection.

00:28:23.340 | Yeah, that's, I mean, that's kind of the plan. Beanie babies and hats.

00:28:27.060 | All right. We got one more question.

00:28:30.060 | OK, up next, we have. My wife and I are retiring next year at 57 with four million dollars

00:28:36.900 | in a 55-45 portfolio, a one point three million dollar house and zero debt. Not to brag. We

00:28:43.180 | know we're blessed. If we'll get forty two hundred dollars a month at sixty two and seventy

00:28:47.660 | three hundred dollars a month at seventy and a half in Social Security and only need a

00:28:52.020 | three percent withdrawal at retirement because we're not spenders. Doesn't it make more sense

00:28:56.060 | to take Social Security at sixty two and use our cash bucket and then an IRA at fifty nine

00:29:01.160 | and a half for the remaining amount by taking Social Security early? That forty two hundred

00:29:05.620 | dollars a month would stay invested and we'd be doing Roth conversions for years. I know

00:29:09.540 | we'd break even at some point in our 80s or 90s, depending on the market. But by that

00:29:13.260 | time, we're spending a lot less, even if Rick Edelman is right and we live to one hundred

00:29:17.020 | and ten. Just trying to apply some math and common sense before we have to make some decisions.

00:29:22.500 | Good TCAF. Yeah. Thanks for watching. Watching everything. So I think the return you get

00:29:27.460 | by waiting from sixty two to seventy is like been calculated like seven or eight percent

00:29:32.100 | per year. Right. That sounds about right to you. That's like the bump you get. And that

00:29:37.020 | makes sense based on these numbers that are given here. So they're saying if we just waited

00:29:41.460 | or if we took it early, we wouldn't have to pull that forty two hundred from our portfolio.

00:29:46.100 | And then, you know, they've kind of it sounds like they've done the break evens here. But

00:29:49.380 | in my thinking, isn't this just a wash? And then there's other ancillary things you have

00:29:54.180 | to think about, like the portfolio withdrawals or minimum distributions or taxes, all that

00:29:59.180 | other stuff. Isn't that kind of what you're getting down to? You're whittling things down

00:30:02.180 | here. Yeah. Yeah, exactly. And, you know, what I would think about here is, you know,

00:30:11.060 | I ran some just some basic some basic numbers here. And I think if you and I'm sure this

00:30:15.900 | isn't the case, but if the Social Security payments were exactly equal for for each spouse

00:30:20.780 | here, the break even on this, if you delay, i.e. what what amount of money at what age

00:30:28.820 | would the delaying the payout make sense as far as you've now collected the same amount

00:30:32.700 | of dollars? It's it's just to age 80. So from 70 to 80, you know, you're you're you're catching

00:30:39.400 | up and you're catching up quickly on those previous eight years. And if you live to 90,

00:30:45.120 | the number ends up being something in the neighborhood of an extra six hundred thousand

00:30:48.000 | dollars in benefits. So obviously, the longer you live, the better that trade is. That's

00:30:54.960 | a variable we obviously can't control. Rick Edelman last week, as you mentioned, I was

00:30:59.620 | pretty shook after that episode for a lot of reasons. But I think if if you're if you've

00:31:05.420 | got, you know, a decent idea that you're probably going to live into the 90s, then I think delaying

00:31:12.320 | probably does make sense on paper. The other thing that, you know, we obviously can't really

00:31:16.620 | opine on because we don't know the makeup of the investment accounts here. But if you're

00:31:21.060 | talking about RMDs and doing Roth conversions, those kinds of things are going to drag your

00:31:26.940 | income forward, your ordinary taxable income forward. So if you are doing if you're getting

00:31:31.820 | your Social Security at 62, you're doing Roth conversions at 62 through 70. If you're taking

00:31:38.100 | one hundred and twenty thousand dollars a year in whether it be long term cap gains

00:31:42.580 | or money from your money from your IRAs, all of a sudden your taxable income is going to

00:31:48.380 | be relatively high. And the higher your regular income is, the more taxed you get on Social

00:31:54.300 | Security. So, you know, there's this is one of those things where, like we tell people

00:32:01.080 | all the time, you can't Google expertise. We we you guys know, we talk to a lot of people

00:32:06.860 | that have successfully done this themselves for twenty five, thirty years and they get

00:32:12.220 | to this point and all of a sudden there's a lot of questions that you can't quite answer

00:32:16.900 | just by plugging in some numbers on an Excel sheet. Right. And then one question leads

00:32:20.500 | to another question and another one. Yeah, exactly. So, you know, you know, I'm not sitting

00:32:25.820 | here as a as a shill saying, give us a call. We'll help you out and we'd love to work with

00:32:29.700 | you. But at the end of the day, like it might be worth just seeing having somebody run through

00:32:34.240 | these scenarios with you, because I think the great thing for this couple is I think

00:32:39.380 | at the end of the day, it's not really going to matter yet on the on the spreadsheet. It'll

00:32:44.500 | matter. But are they going to run out of money if they take Social Security early at these

00:32:47.760 | spending rates? No, they're not. So it's really a question of what are you trying to really

00:32:52.000 | accomplish with the money? Why are you doing Roth conversions? Are you trying to leave

00:32:54.860 | a legacy for kids and grandkids? Are you just trying to, you know, enjoy it while you're

00:32:59.780 | here and die with zero? Right. So there's a lot of different variables here. But I think

00:33:06.300 | I think delaying it could be helpful because you just know that on the back end, you're

00:33:10.820 | going to have a guaranteed income. That's also shows what a great deal Social Security

00:33:15.860 | is for some people. Seventy three hundred dollars a month is I mean, we're talking close

00:33:19.060 | to ninety thousand dollars a year in income. Mm hmm. I mean, it's just an amazing program.

00:33:23.980 | And it sounds like these people have things all set anyway and don't really don't really

00:33:28.440 | need it. Yep. Yep. And that's the ability. And again, like just going back to the tax

00:33:33.380 | piece of it, like that is the devil's in the details with this stuff. And if you're not

00:33:38.860 | really thinking about taxes, you're not thinking about, oh, well, if I do these Roth conversions

00:33:45.180 | and my ordinary income rate gets bumped up and now I'm paying a higher Medicare subsidy.

00:33:49.820 | Oh, I hadn't thought about that. Right. So there's there's so many moving parts to this.

00:33:54.780 | A lot of decision trees. Again, like these people are in great shape. So that's a good

00:33:59.780 | thing. But, you know, it might be it might be worth talking to an advisor and a tax and

00:34:06.280 | a tax pro as well, just to get a good sense of things. All right. Duncan's request for

00:34:10.020 | next week is question two for some regular Joe's without. I mean, I was just saying to

00:34:16.220 | Cliff in the chat, you know, these are these are questions we get, you know, so it's somewhat

00:34:20.060 | it's self-selecting. It's true. The people. Yeah, it is self-selecting. Next week, unless

00:34:24.700 | something goes wrong, we'll be back here with a rebrand of the show. Right. Duncan, putting

00:34:29.820 | me on the spot. Yeah, I put you on the spot. If I put it out some more work to do. Am I

00:34:33.780 | the last guest of Portfolio Rescue? It's possible. Wow. It's got to come through for us over

00:34:39.340 | email. Ask the compound show at Gmail dot com. Leave us a question or comment on YouTube.

00:34:43.880 | Thanks for everyone for joining in live. We always appreciate that. Thanks for coming

00:34:46.500 | in, for coming back on again. And we'll see you next week with maybe a new logo and a

00:34:50.180 | new name. Exciting. Thanks, guys. See you, everyone.

00:34:53.500 | [Music]

00:35:17.500 | you

Am I Spending Too Much?

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