How Many Millionaires Are There?

00:00:00.000 | Welcome back to Ask the Compound, where today we're going to be talking about hyperinflation

00:00:14.580 | and the end of the U.S. dollar as you know it. Sorry, I'm still stuck in anti-Ben mode

00:00:19.700 | there. I just can't do it, Duncan. I'm a Glass-Cephal guy.

00:00:24.540 | Today's show is sponsored by our friends at YCharts. YCharts provides basically all of

00:00:29.380 | the charts we do for this show, for my blog, stuff I post on the internet, on Twitter,

00:00:35.860 | stuff we use on Animal Spirits, what are your thoughts, all that stuff. They just posted

00:00:39.680 | a timely new chart, the top 23 charts of 2023. Michael and I actually did a webinar with

00:00:47.140 | YCharts last week where we talked about some of these charts. Pretty fun. We'll have a

00:00:50.520 | link in the show notes. We'll have a link on YouTube. It's pretty good. And if you go

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00:01:10.140 | deflationary podcast. Not just disinflation, deflationary. It's true. Putting money back

00:01:15.780 | in your pockets. Thanks to YCharts. They're probably the longest running sponsor that

00:01:20.100 | the Compound has had, period. The very first sponsor we ever had on Animal Spirits. Yeah.

00:01:26.180 | That's true. Let's do a question. Good questions today. A wide range of topics. I think we're

00:01:32.780 | now past the point where we're just getting topics zoned in on one specific topic. They're

00:01:38.960 | all over the place now, which I think is good. Yeah. I mean, I'm seeing... I was looking through...

00:01:45.620 | We'll talk about it later, but yeah. I'm seeing a lot more crash calls in the last couple

00:01:50.180 | of days, which I guess that makes a little more sense. I guess you move your crash call

00:01:55.540 | up when the market starts soaring, right? Because then you can call even a 5% pullback

00:01:59.820 | a crash. But yeah. Interesting stuff happening. Thanks to everyone in live chat for mentioning

00:02:05.120 | my haircut. I get a haircut and I go home and no one even notices. So, at least the

00:02:08.980 | people on YouTube... We don't notice because it always looks good. Thank you. All right.

00:02:15.540 | But wait, before the end of the show, can we pull up the picture of you with the haircut

00:02:21.540 | from... What's the guy's name? The country singer. Nicole Kidman's husband. John's going

00:02:29.500 | to pull it up before the end of the show. I'm drawing a blank on this. Emo Duncan. Is

00:02:33.660 | it Keith Urban? Keith Urban. Yes. You have a Keith Urban haircut from when you were like

00:02:37.140 | a teenager. Oh, you're talking about when I was a freshman in college. Yeah, yeah. Okay.

00:02:40.700 | Yeah, yeah. Yes. By the end of the show, we got to find out. We'll see what John can do.

00:02:43.120 | Next question. Okay. Up first today, we have a question from Andrew. My father-in-law recently

00:02:47.620 | came into a decent size inheritance and is trying to decide what to do with it. He doesn't

00:02:51.660 | know a lot about finance and can be stubborn. So, giving him suggestions mostly falls on

00:02:55.620 | deaf ears. Recently, he told us that he found someone at a local financial firm who gave

00:03:00.540 | him an idea on what to do with the funds. I asked a few questions and he said the guy

00:03:05.260 | couldn't email the details. I told him I thought that sounded suspect. Now, he wants me to

00:03:09.820 | come along to this meeting with this person. I'm above average with personal finance, but

00:03:15.020 | I don't know how to really get a sense of whether this is a good idea or not. Can you

00:03:18.700 | share some questions you'd ask in this meeting? I'd like to help him avoid making a decision

00:03:22.900 | that he regrets down the road. This is a good question. I like this. Yeah, it is. I'm going

00:03:27.340 | to give the advisor the benefit of the doubt that hopefully the reason they can't share

00:03:29.980 | is for compliance reasons, but unfortunately, people who come into a decent size amount

00:03:34.360 | of money have a target on their back, and I'm sure that's probably what happened here.

00:03:39.460 | I think investment decisions with family are always tricky, especially when you're talking

00:03:42.900 | about the in-laws, but I think there are certainly questions you could ask this advisor about

00:03:46.940 | the specific investment, whatever it is, to do your due diligence process, but I think

00:03:51.260 | first, you should go into that meeting and think about questions the advisor is asking

00:03:55.660 | your father-in-law. The questions they should be asking him are what are your goals with

00:04:00.140 | this money? What is your appetite for risk? How much risk are you willing to take? How

00:04:04.140 | much risk do you need to take? What's your time horizon? What are your current financial

00:04:07.860 | circumstances? What does the rest of your portfolio look like? What's your experience

00:04:10.940 | like in the markets and investments? Have you ever done this stuff before? How have

00:04:15.500 | you reacted to losses and gains in the past? What are your expectations for returns on

00:04:19.980 | investments? Because there's a million different investments that could be good under the right

00:04:24.300 | circumstances for the right investor. That doesn't mean they're necessarily right for

00:04:27.300 | this person. You're not just going into investing thinking, "I'm going to earn 9.5%, and if

00:04:32.500 | I do that, I'm going to be happy." Real people aren't like hedge funds, right? So, it's impossible

00:04:36.740 | to make an investment recommendation to someone without understanding their goals and their

00:04:40.420 | circumstances and their emotional makeup. So, a doctor doesn't come into the office

00:04:45.300 | and say, "Here, here's your prescription. Go fill it. Now, let's check out and see what's

00:04:49.340 | wrong with you." That's how a lot of people who sell financial products work. So, you

00:04:53.300 | always have to diagnose before you prescribe. So, I would just go in there making sure that

00:04:57.860 | this person at this financial firm is asking the right questions of your father-in-law.

00:05:01.540 | If they're not asking those questions, that's when the red flags go up for me. So, I just

00:05:07.260 | think it's a good opportunity to understand that. That's when you say, "All right, hold

00:05:10.740 | on a second. You're trying to push this product on us without understanding where my father-in-law

00:05:14.780 | is coming from. What do you want us to do with the money in the first place?" Those

00:05:17.780 | are the red flags that would be to me. Is the first meeting too early to ask about

00:05:21.580 | how they get their alpha and how they outperform? Risk-adjusted returns typically don't come

00:05:26.980 | up in the first meeting. But that's the difference between someone who's trying to sell you a

00:05:30.860 | product and someone who's trying to offer you financial advice. Most financial advice

00:05:35.060 | back in the day, call it, I don't know, pre this century, it was people selling products.

00:05:41.220 | Stuff was made to be sold and people just kind of pitched stuff. It was a pitch, right?

00:05:47.340 | That's why a lot of financial advisors were called producers back in the day because they

00:05:50.580 | were producing commissions and making money. I don't know if this financial advisor is

00:05:56.040 | doing this, but that's kind of stuff I'd be looking out for. Do they have your father-in-law's

00:05:59.260 | best interests at heart, or are they just trying to push a product at them?

00:06:04.540 | This is the time that you would find out about fees and all that kind of stuff, right? That's

00:06:09.340 | all stuff that would be a first meeting. Yeah, but again, the first meeting is just

00:06:14.060 | the feeling out process. Is there a good fit here? And then we can talk about specifics

00:06:17.700 | and details. That's the thing, is you don't want to go in saying, "This thing is going

00:06:22.660 | to give you 7% and it's going to cost this much." That stuff is for down the line.

00:06:26.580 | Before you even ever get to the details, you want to make sure there's a good fit and this

00:06:29.380 | person is looking out for you in the first place. When they give you financial advice,

00:06:34.060 | they're thinking about your goals and needs as opposed to, "I'm going to sell someone

00:06:37.420 | this product." It seems like a dangerous recurring theme

00:06:40.180 | I've heard over the years, though, is people who are like, "Oh, but they're such a nice

00:06:43.780 | person," or, "I like them a lot." How do you try to block that out? Because it's in our

00:06:49.500 | nature to like people who are nice to us, right?

00:06:51.740 | This is something Josh always says. Whether this is right or wrong, people work with people

00:06:55.740 | that they genuinely like or respect, right? It's not always the smartest person. Sometimes

00:07:01.140 | it is, but most of the time it's someone that, yeah, is endearing to you or shows some empathy

00:07:06.760 | or whatever it is, and it's not always the person that's specifically right for you.

00:07:11.200 | People do have a hard time sometimes turning someone down and saying no. I think it's okay

00:07:16.500 | to take your time here and make your father-in-law realize that they don't have to rush into

00:07:20.780 | anything. There's no hurry with this stuff. Get it right the first time so you don't make

00:07:24.300 | a mistake.

00:07:25.780 | Yeah, it seems like kind of a potentially lose-lose situation for the son-in-law, right?

00:07:31.140 | Yeah, because if they talk him out of it, it is a good investment. It makes him money.

00:07:35.580 | Then you look like a jerk for talking him out of it. That's the kind of stuff I would

00:07:38.500 | tell your father-in-law to look for is, is this person actually offering advice or are

00:07:41.940 | they just trying to pitch you a product?

00:07:43.660 | Yeah.

00:07:44.660 | There's a big difference.

00:07:46.060 | Good advice.

00:07:49.220 | Next one.

00:07:50.220 | Up next, we have a question from Durga. "I know that owning a home is not for everyone.

00:07:57.480 | I particularly appreciate your point about maintenance and upkeep after visiting a fairly

00:08:01.700 | recently constructed home that within about 15 years needs a lot of repairs. If I've decided

00:08:07.160 | that I'm a renter forever, do I think about investing in REITs to get more exposure in

00:08:12.180 | real estate? If yes, what do you think would be the pros and cons, and what percentage

00:08:17.020 | should it be? I'm a target date fund investor in my retirement and brokerage accounts."

00:08:21.920 | And just for everyone, like all the young people that are new here, maybe just explain

00:08:25.120 | what a REIT is real quick too.

00:08:27.300 | Real Estate Investment Trust, and it's typically a fund that invests in commercial real estate.

00:08:32.740 | There could be a little bit of residential in there, but mostly it's commercial. And

00:08:36.140 | because of the way they're structured, 90% of the money has to be paid out. So it's a

00:08:40.020 | high income fund. So it better to be put into some sort of retirement strategy because it's

00:08:44.580 | going to be paying out a lot of income.

00:08:47.140 | If you own a target date fund, you probably already have some REITs in there. You're probably

00:08:50.700 | pretty well set. Even if you own a total stock market index fund like VTI, or a total world

00:08:54.900 | fund like VT, REITs make up 3% of the total. So you already have some exposure to REITs.

00:09:00.900 | So, John, show up the first chart here. But I don't necessarily think you need REITs to

00:09:07.140 | offset owning housing. So this is the Vanguard Real Estate ETF versus the total stock market

00:09:12.340 | index fund for the US. You can see the performance from, I don't know, the early to mid 2000s,

00:09:18.220 | when this fund first came out. Pretty much through COVID, we're pretty similar. The stock

00:09:22.420 | market has outperformed since then. John, show the next one. This is correlation. I'm

00:09:25.540 | doing some portfolio management stuff here. There is some diversification benefit here.

00:09:31.380 | But most of the time, these things are going up and down together. And it's 0.66, almost

00:09:35.940 | 0.7 correlation. That means there's a strong correlation. It's not like one to one. So

00:09:40.780 | there are some diversification benefits from year to year. You can do a chart off, John.

00:09:45.020 | So, in 2020, REITs were down 5% when the S&P was up almost 20%. The next year, REITs rallied

00:09:50.620 | more than 40% when the S&P was up 28%. 2014, REITs rose more than 30% while the S&P was

00:09:56.540 | up a little more than 13%. And in 2013, REITs were up just 2% when the S&P gained 32%. So,

00:10:02.340 | there are years where you could use REITs for rebalancing purposes. So, from a diversification

00:10:06.780 | portfolio management perspective, sure, I could see REITs adding some value. I wouldn't

00:10:10.740 | necessarily compare those benefits to owning a home, though. REITs are, again, mostly commercial

00:10:14.900 | real estate, not much residential. They're more diversified, so that's nice. And there's

00:10:18.900 | some leverage involved in these commercial real estate transactions, but not nearly as

00:10:22.100 | much as most homeowners take out when they take out a loan. And one of the biggest benefits

00:10:26.140 | of owning a home is that fixed rate mortgage. It's an inflation hedge, right? REITs are

00:10:30.260 | also more of a liquid market. So, there's pros and cons to that. The pros are, it allows

00:10:33.740 | you to rebalance and trade more often if you need to get the money in or money out. But,

00:10:36.940 | John, let's throw up the drought on chart. This is the drought on chart for the Vanguard

00:10:40.780 | REIT fund I was talking about. In the housing bust from 2006 to 2012, the U.S. housing market

00:10:46.860 | fell something like 26% or 27%. In 2008, REITs fell 73% at the bottom of the ... way worse

00:10:54.460 | than the stock market. During the COVID crash, REITs fell 30%. At their worst point last

00:11:00.500 | year, they were down 35%, I think, 30%. So, the housing market is not nearly as volatile

00:11:06.500 | as REITs. REITs act like the stock market in terms of risk. So, I like where this person's

00:11:12.000 | head is at. They're trying to think about diversification and all these things. But

00:11:16.140 | I think if you take the savings from renting and not having to do down payment and not

00:11:21.220 | having all the ancillary costs like property taxes and upkeep and maintenance and insurance

00:11:25.440 | and throw those into a more diversified portfolio, that makes sense. So, do you need REITs? I

00:11:29.780 | don't think so. If you have a target date fund, if you want to have REITs to be more

00:11:33.920 | diversified, sure. But I don't see REITs as a stand-in for owning a house. I think that's

00:11:38.300 | two completely different assets. Yeah, the thing that confused me when I first

00:11:41.580 | got into the market, I probably did what a lot of people do and I would just sort stocks

00:11:45.520 | by dividend and just started buying a bunch of those.

00:11:48.580 | You were dogs with the Dow guy. And they were like ... Well, these were mortgage real estate

00:11:54.340 | trusts or whatever. Oh, yeah. So, Annali, they have 15% dividends

00:12:00.440 | or something, right? Right. Yeah, yeah. That was one of the first

00:12:02.940 | ones I bought. So, they have to pay out the majority of their

00:12:05.200 | income in dividends. I actually wrote a chapter in my first book, Wealth of Common Sense,

00:12:09.420 | about this showing that these stocks had 15% dividends and people were just throwing ... Couldn't

00:12:15.480 | believe it because rates were at 0%. But on a total return basis, a lot of these stocks

00:12:19.500 | did absolutely nothing because the price went down. So, that's why the total return thing

00:12:23.260 | matters more than the income. But, yeah. I don't necessarily see REITs as a stand-in

00:12:27.500 | for the housing market. I think it's different assets. If you want them for diversification

00:12:31.580 | purposes and portfolio management, that's fine. I don't think they are a stand-in for

00:12:35.540 | housing. It seems like there's not a good one, really,

00:12:38.500 | because you've talked about how you bought Zillow and during a roaring housing market,

00:12:42.860 | it really hasn't outperformed it. Even the home builder stocks, you could think

00:12:46.660 | that those are a stand-in. They've been offsides from where the housing prices are. Housing

00:12:51.660 | is just a very unique financial asset, unlike anything else. I think as long as you're diversifying

00:12:57.380 | into a portfolio of financial assets, I think that's probably fine.

00:13:01.980 | All right. Next question. Another housing question next.

00:13:05.900 | Yep. Okay. Up next, we have a question from Octavia. Every personal finance blogger ...

00:13:12.580 | A lot of good names today. Yeah. I'm liking this. We've got some diversification

00:13:16.140 | of names. Every personal finance blogger says not to prepay a low-interest mortgage, but

00:13:20.940 | what if you're carrying PMI, which is mortgage insurance, right?

00:13:25.220 | Private mortgage insurance. Yep. I'll explain it.

00:13:26.940 | I have two of 30 years with a 2.6% mortgage with a low down payment in the home. Should

00:13:33.100 | I at least try to pay down enough extra principal to pay off the PMI and then resume the monthly

00:13:37.700 | payments? If not, what would your advice be? I think Octavia was saying they're two years

00:13:41.660 | into the loan of 30 years. Good question, and one that's likely relevant to a lot of

00:13:45.500 | home buyers right now, because I think a lot of people are putting down less than 20% because

00:13:49.300 | housing prices are so high and mortgage rates are so high, they want to save some of that

00:13:52.140 | savings. So PMI essentially protects the lenders from borrowers who are looking for a larger

00:13:57.820 | loan relative to equity. So if you put less than 20% down, you put 10% or 5% down, it's

00:14:02.820 | a little riskier because they're letting you borrow more money. It's typically a requirement

00:14:07.260 | for those loans that don't have the loan to value of 80%. So most lenders require you

00:14:12.180 | to pay PMI once a month, and it's an escrow account. And if you have PMI, usually they

00:14:17.780 | make you put your property taxes in there as well. So you're going to be paying per

00:14:20.700 | month your property taxes, your mortgage payment, and your PMI, sometimes your house insurance

00:14:25.740 | too. And the amount you pay is usually determined by the size of the loan or your credit score.

00:14:30.380 | It's a percentage of the loan, kind of depends, something like 1% around there. For most borrowers,

00:14:35.660 | we're probably talking 100, 150, 200 bucks a month for PMI. So it's not nothing. Compared

00:14:41.980 | to mortgage payments today, it's smaller, but it's not nothing. The good news is for

00:14:46.620 | home borrowers in the past few years, home appreciation could help. So let's say you

00:14:50.260 | bought a house for 400K with 10% down two years ago and took out a $360,000 loan, and

00:14:56.300 | the house is up 20% since then. Just on a price appreciation alone, the house is worth

00:15:01.980 | 480K. Even if we don't assume how much ever you paid down in principle over the last couple

00:15:07.060 | of years, you have 25% equity now that the house went up 20%. So you're pretty close

00:15:11.700 | to there. The problem is a lot of lenders have rules in place to how to get out of PMI,

00:15:15.900 | and they can be kind of stringent. I had one a few years ago where I'm pretty sure they

00:15:19.860 | low-balled the appraisal because they didn't want me to get PMI off. We ended up selling

00:15:23.660 | the house anyway, but I was pretty mad about it. That's a racket I can talk about for another

00:15:28.340 | time, the home appraisal industry. I feel like Zillow could do it way better than most

00:15:31.860 | home appraisers do, but I digress. So the first step would be talk to your lender and

00:15:36.740 | figure out ... A lot of them will have you have to have the loan for two years. That's

00:15:39.700 | typically a requirement before you can do it. So this person does, so I think they should

00:15:42.780 | be okay. Then you go to them, and they have to do some sort of appraisal to figure out

00:15:47.740 | if you have that 20% equity yet. If you don't, then they can let you know at least, "Here's

00:15:51.500 | how much you'd have to put down to get to that point." But I would talk to them before

00:15:55.140 | thinking about gathering the money and figuring out what the terms of it are. So go through

00:16:00.420 | that process first. If you're lucky, price appreciation for the past few years could

00:16:04.500 | save you a couple thousand bucks a year and not have any money out of your pocket. I would

00:16:08.660 | talk to your lender first before going through this, but it makes sense to me where then

00:16:12.540 | you can do the cost-benefit of, "Okay, I've got to put an extra $10,000 down to get this

00:16:16.340 | PMI off, but each year I'm going to save $2,500 or whatever, so the payback period is five

00:16:20.940 | years or four years or whatever."

00:16:23.020 | Can you make PMI make sense to me? It just seems like something that is just another

00:16:27.720 | barrier keeping younger people from being able to buy a house.

00:16:30.940 | It does sound like a little bit of a racket, but the idea is if you're not putting as much

00:16:34.980 | money down, if you're putting 5% down in your house versus 20, it doesn't take much for

00:16:38.940 | the house price to go down. If you're forced to sell for whatever reason, then your loan

00:16:44.740 | is underwater. I don't know when exactly PMI was instituted, but I'm sure it came into

00:16:49.500 | effect in 2008 on a lot of these houses that went underwater and short sales and that sort

00:16:53.860 | of thing.

00:16:54.860 | It does seem like a racket, and there are ways around it. My very first loan, I put

00:16:59.580 | 5% down on my first house, and they gave me essentially a home equity line of credit,

00:17:03.980 | so I didn't have to do the PMI. It was like, "We're going to give you 80% of the loan

00:17:08.460 | as a regular mortgage and 20% as a home equity line of credit." We did end up paying it

00:17:13.220 | down a little faster because the rate fluctuated a little more, but it does kind of seem like

00:17:17.860 | a racket, considering you have the house as collateral already, but that's the way it

00:17:23.700 | works.

00:17:24.700 | I'm just trying to make it seem less bad in my head. Maybe it protects taxpayers from

00:17:28.840 | having to bail out a private company that would end up in trouble because of defaulting?

00:17:33.060 | I don't know. It sounds like more of a racket from the banks than anything. I'm sure there's

00:17:37.260 | some regulations involved, but it does kind of sound like a racket. Again, they make it

00:17:40.980 | hard to get it off of there. It does seem like a banking thing, but yeah.

00:17:47.140 | I don't like it, but I'm a millennial. We'll never be able to buy a house anyway, so it's

00:17:50.820 | okay. I don't have to worry about these things.

00:17:52.700 | This is true. If I don't buy a house, I'm never paying PMI.

00:17:56.020 | Yeah, exactly.

00:17:57.020 | You can put that PMI money into REITs.

00:17:58.580 | It's my life hack. Duncan's best way to avoid PMI. Don't buy a house.

00:18:02.180 | Don't buy a house. All right. Next question.

00:18:04.140 | Up next, we have a question from Tom. I saw the Dave Ramsey video about 8% withdrawal

00:18:08.860 | rates and agree it's a bit far-fetched after reading Nick's piece on the actual numbers.

00:18:13.500 | That's Nick Majulie. I get the sequence of return stuff, but Nick and Dave are using

00:18:17.660 | 100% stock portfolios. I'm closer to 60/40. Do the numbers change at all if you use a

00:18:22.980 | more diversified portfolio? I was hoping for 5% or so when I retire in a few years.

00:18:28.900 | Good question. We actually get a lot of retirement withdrawal questions from people who are

00:18:33.460 | approaching retirement. Why don't we bring Nick in here?

00:18:36.500 | You mentioned Nick Majulie, and we can make him appear.

00:18:39.460 | Of dollars and data. So Dave Ramsey said, "I can earn 12% on my stock portfolio or something,

00:18:46.940 | 4% for inflation. I can take out 8%," which seemed high to pretty much everyone. You poked

00:18:54.260 | some holes into this, but this person's saying, "Okay, I kind of get that because the stock

00:18:58.100 | market, you don't want to be selling when the stock market is down because that can

00:19:00.860 | really hurt you, especially if you get a crash early on in your career. But what about a

00:19:04.820 | more diversified portfolio?" You actually wrote a blog post about this, so why don't

00:19:08.580 | you share some of your numbers? Yeah. Today, I actually released something

00:19:12.780 | in some of the charts I think that John will show will really illustrate this. But basically,

00:19:16.780 | if you're using a 60/40 portfolio, the probability if you can do it with a 5% withdrawal rate

00:19:21.980 | that you'll survive the 30 years is about 84%. So, it's not 100%. It's not safe withdrawal

00:19:27.580 | based on the safe withdrawal definition. And this is using every 30-year period going

00:19:31.700 | back to 1926, from 1926 to 2022, an annual rebalance on a 60/40. A 5% withdrawal rate

00:19:38.820 | is still a little risky. Obviously, 84% chance means you'll probably make it, but there's

00:19:42.980 | still a 16% chance that you'd run out a little bit sooner. So, keep that in mind.

00:19:48.380 | I think if one of the heat maps, I have a heat map here and it shows the withdrawal

00:19:53.580 | rate and the percentage of stocks in the stock bond portfolio, U.S. stock bond, and you can

00:19:57.540 | see that. Give us a chart on here, John.

00:20:01.020 | You can see that. So, this one's just showing that's just over 30-year periods. That just

00:20:04.580 | shows the withdrawal rate and then the survival percentage.

00:20:06.860 | I think it's important to tell people how the withdrawal stuff works, because it's not

00:20:10.220 | like you're just taking 5% of your portfolio every year. So, why don't you explain that?

00:20:15.580 | You said it at the beginning. How it's supposed to work is like, let's say you have a million

00:20:18.620 | dollar portfolio. If you're using a 4% withdrawal rate, or let's say 5%, you would take $50,000

00:20:25.340 | in your first year, and then every year you adjust that for inflation. So, if inflation

00:20:28.940 | was 10%, next year you would take 55,000, right? And then if the next year inflation

00:20:33.980 | was 10% again, then you would take, whatever, 55,000 plus 10 more percent on it.

00:20:38.460 | Because most people don't want to see their spending each year fluctuate with the markets.

00:20:43.140 | It's great when the market is up, like this year when the markets are up, 60/40 is up

00:20:47.340 | like 12% or something. That feels great, but last year when it was 60/40, it was down 15%

00:20:51.140 | or 16%. Most people don't want to cut back. So, they want it to be more regular and steady,

00:20:55.540 | like a paycheck.

00:20:56.540 | Yeah, exactly. So, I mean, the main thing, it's like, "Why can't I just take 4% a year?"

00:21:00.980 | Well, you could just look at your portfolio value and do 4% a year, but the problem is

00:21:03.940 | it's going to jump around depending on what's going on with your portfolio. If your portfolio

00:21:07.020 | drops by 50%.

00:21:08.020 | So, here in this chart, you look at different withdrawal rates at different levels of stocks.

00:21:11.940 | So, you did a 50/50, 60/40, 70/30, all the way up and did a heat map. So, what's the

00:21:18.460 | sweet spot here?

00:21:19.460 | Yeah. So, I mean, obviously 4% is the safe rate for across every portfolio, but you can

00:21:24.740 | see if you have a 60/40, you can go to 4.5%. There's still a pretty good chance, a 94%

00:21:30.620 | chance that you would make it through to the end. So, that's just the thing to keep in

00:21:33.960 | mind is your withdrawal rate, as you said at the beginning, in reality, people are going

00:21:39.260 | to do different things. You can be flexible. You can change it at some point. If the market

00:21:43.380 | comes down badly, you can move things around. In my blog posts, I talk about different strategies.

00:21:47.760 | You can use guardrails, flexible spending, etc. Or what most people do, if you actually

00:21:51.900 | look at the data, most people don't even use withdrawal rates at all. They just live off

00:21:55.780 | their interest, right? Whatever their investments earn them, they just live off that. They never

00:21:59.720 | touch the principal. That's actually how most retirees work.

00:22:03.100 | The withdrawal strategies are interesting for people like us in finance to debate, but

00:22:06.460 | most people don't actually use them. Their spending fluctuates. A lot of people, we'll

00:22:11.060 | talk about it in the next question, I got some data, their spending peaks in their 50s

00:22:14.780 | and it goes down from there for most people. So, it's not a steady state for most people.

00:22:19.140 | And you're right, you can be flexible. If there's a really bad year and you feel nervous,

00:22:23.180 | then you can always pull back your spending. And when it's a good year, you can spend more

00:22:26.640 | or you can bank some and save it. So, I also think that a 60/40 portfolio gives you some

00:22:31.180 | flexibility to, I'm going to rebalance intelligently and when the stock market is down, I'm taking

00:22:36.260 | from bonds. When the stock market is up, I'm taking from stocks. So, I think there's ways

00:22:40.280 | to think about it in a more flexible way that can actually make your money go a little further

00:22:45.140 | than it does just in a backtest like this. Yeah, I agree. And so, I think the backtests

00:22:49.460 | are very rigid, but hey, that's what the numbers say. So, I'm not saying 5% is impossible,

00:22:54.300 | but you may have to cut in some years to get to 5%. Just realize that.

00:22:57.180 | And the point of this too is that original 4% rule, I want to talk about it for the next

00:23:01.940 | question a little bit, because we've got another one like this, but that is your worst-case

00:23:06.140 | scenario. The biggest risk for a retiree is, "I don't want to run out of money." In a decent-case

00:23:13.260 | scenario or best-case scenario, you could end up with way more money. So, I have some

00:23:17.940 | stats in the next one. So, why don't we go to the next post, because this is, I think,

00:23:20.860 | kind of similar. Okay. Yeah, Viking River cruises are not cheap.

00:23:23.540 | Nice commercials though, right? Yeah, they do. I mean, yeah, they look awesome. Okay,

00:23:31.660 | last but not least, we have a question from Greg. "Ben, in your recent blog post, you

00:23:35.140 | said $1 million of investable wealth makes you rich. I would like to provide a counter-argument

00:23:39.700 | to that. When you retire, $1 million basically gives you $40,000 a year to live off of, assuming

00:23:44.300 | the 4% rule of thumb is a reasonable starting point to think about retirement income. So,

00:23:49.300 | is $40,000 a year really rich? I would argue that it's middle class at best, probably lower

00:23:53.620 | middle class. I would argue that if your wealth is buying you a retirement, then it takes

00:23:57.420 | at least $3 or $4 million to be rich or upper middle class. What are your thoughts?"

00:24:01.700 | So I wrote this blog post last week called $5 million is nothing, which was a play from

00:24:06.140 | Succession where cousin Greg said he's going to inherit $5 million and Connor said $5 million

00:24:11.420 | is nothing. It's like too much money to work, but it's not enough to be rich. And there's

00:24:16.340 | all these surveys that show that these millionaire people with millions of dollars or a million

00:24:20.040 | dollar investment portfolio don't feel rich and they think they're middle class or upper

00:24:22.780 | middle class. And in fact, I heard from half a dozen people who said, "Your post is describing

00:24:28.580 | me to a T. I have a million dollars or $3 to $4 million and I don't feel rich." So it

00:24:34.500 | was interesting. I wanted to run the numbers on this and Nick, I know you have too. Credit

00:24:38.180 | Suisse puts out this global wealth report every year and it shows how many people are

00:24:43.180 | millionaires around the globe. So John, throw this up. First of all, this is where the distribution

00:24:47.700 | of millionaires comes in. I think this might be why people in the U.S. think it's more

00:24:51.180 | common than it is. 40% of all millionaires, almost 39% reside in the U.S. There are more

00:24:57.060 | millionaires in the U.S. than there are in China, Japan, Great Britain, France, Germany,

00:25:01.380 | Canada, Australia, and Italy combined. So there's a lot more wealth concentrated here.

00:25:05.340 | Obviously, the bigger population than everyone but China there. But out of the 8.1 billion

00:25:10.260 | people in the world, I think Credit Suisse says there's 62 million millionaires. So it's

00:25:16.220 | like less than 1%. If you have more than $5 million, you're in the top 0.1% globally.

00:25:23.100 | I don't know how else to say you are very, very wealthy compared to the rest of the human

00:25:26.940 | beings alive. And Nick, I think you have some data on how this fits in the U.S. too. Where

00:25:33.180 | does being a millionaire put you in the U.S.? Yeah, so John, can you show the chart of the

00:25:38.180 | median net worth? I think this is just good. So this shows median net worth by age and

00:25:41.740 | so you can see like, you know, none of these people are necessarily millionaires. So that's

00:25:45.740 | like the middle of the pack. But a million dollars actually using this survey of consumer

00:25:50.100 | finances data from 2022 puts you in the top 20% on net worth basis. And just having a

00:25:56.540 | million dollars in financial assets would put you in the top 10%. Remember, net worth

00:26:00.820 | includes home equity and things which are not as liquid. But if we just said, okay,

00:26:04.140 | who has a million dollars in financial assets, like that puts you in the top 10% of Americans.

00:26:08.740 | So American households, right? So let's think about this. So just liquid portfolio of assets

00:26:13.900 | besides your house, a million bucks, there's top 10%. Yeah. And so maybe is the top 10%

00:26:18.860 | rich to you? I mean, and I also think like this question, like, oh, 40K a year, that's

00:26:22.220 | like a middle class income. Well, let's think about a couple other things. You're going

00:26:25.020 | to get social security most likely, right? This person probably works. That's what I

00:26:27.540 | was going to ask about. Let's add 20K to that. Now you're at 60K. A lot of these people with

00:26:31.580 | a million dollar portfolio, they've probably paid off their house. So they don't really

00:26:34.860 | have a payment outside of taxes. Right? So it's like they have 60K a year in just spending

00:26:39.340 | money. That's 5K a month. Right. And just spend like your credit card bill. Like that

00:26:43.980 | is not a quote, middle-class lifestyle. That's easily an upper middle class. I mean, depending

00:26:48.260 | on what you're doing, but yeah. And if you were, if you got your million dollars by saving,

00:26:52.100 | let's say you were one of these diligent savers, like a lot of the DIY people that listen to

00:26:55.020 | us, they might save 20 to 30% of their income. The rule of thumb is usually you'll have to

00:27:00.780 | recreate 70 to 80% of your income in retirement. If you save 20 to 30%, you're already there

00:27:04.780 | right? Then you take the mortgage out, social security. And I think what a lot of people

00:27:09.180 | forget it's hard for people to wrap their minds around this is in the past people's

00:27:13.460 | retirement plan was they literally died, right? If you have enough money, so you have control

00:27:17.700 | of your time and freedom and don't have to work, then I think you're wealthy, regardless

00:27:21.800 | of if that's a million dollars or a hundred thousand dollars, right? If you just have

00:27:24.580 | the ability to sustain your lifestyle. The other thing about this 4% rule that we talked

00:27:29.300 | about, you you've mentioned this before. And I think I looked at it, the Michael Kitsis

00:27:32.380 | strategy, he did this study on the 60/40 going back to 1870, I'm guessing he used the Shiller

00:27:36.180 | data. And he said that in two thirds of all scenarios for the 4% rule, again, the 4% rule

00:27:43.020 | is just kind of the baseline so you don't run out of money. In two thirds of the strategies,

00:27:48.260 | you're likely to end up with more money than you started with. And you're more likely to

00:27:52.620 | quintuple your starting wealth than you are to finish with less than your starting principal.

00:27:57.820 | So people think about the 4% rule as like, I don't know if I can sustain it. Most likely

00:28:02.260 | if you retire with a million dollars, you're going to have more money by the time you're

00:28:05.980 | dead because you're not in, that's the other thing. You don't spend a lot of it. So the

00:28:12.780 | problem is, if you have money and the facts do not ever trump your feelings. So if you

00:28:19.020 | don't feel wealthy, unfortunately, there's not a lot you can do. If you still worry about

00:28:22.460 | money, you're not really wealthy. But I think by any definition of the term, yes, you are

00:28:29.260 | wealthy by all sorts of comparisons.

00:28:32.260 | Location matters so much in this too, right? If you're paying $4,000 for a one-bedroom

00:28:37.460 | apartment in Brooklyn, then yeah, that probably doesn't sound like a ton of money. But if

00:28:42.140 | you live in the mountains of North Carolina, that's probably going to feel like a ton of

00:28:48.020 | money for you.

00:28:49.020 | But a lot of it, again, is lifestyle.

00:28:50.020 | Unless Asheville. Asheville's expensive.

00:28:52.020 | Good live music there, though, right?

00:28:54.620 | Right, yeah.

00:28:55.620 | I think, again, I don't think seeing these numbers is going to help make anyone feel

00:29:00.420 | any wealthier because I don't think facts really change people's feelings a lot. But

00:29:05.780 | I think a lot of it does come down to your lifestyle. There's people who don't have nearly

00:29:10.180 | as much money who have control over the people they see and the stuff that they do. So I

00:29:14.180 | think that's the biggest thing is what is your lifestyle? That's part of it.

00:29:20.780 | The millionaire stats from Credit Suisse really surprised me. It's a tiny, tiny, tiny drop

00:29:27.180 | in the bucket of people that have that much money.

00:29:29.420 | I mean, yeah, even looking at the U.S. stats, top 20%, top 10%, no matter how you cut it.

00:29:34.620 | You're definitely upper-middle class. I don't know, what do you define as rich? Is the top

00:29:37.860 | 10% rich? That's debatable. Obviously, globally, it's rich, but it may not be rich in the U.S.

00:29:42.540 | It's up to kind of how you define rich.

00:29:44.300 | And I did have one guy come to me and said, "You know what? I have a few million bucks,

00:29:49.180 | but what's rich to me is driving a Porsche, and I'm never gonna be able to drive a Porsche."

00:29:54.660 | And so we sent him, "What's the service, Duncan? We can rent a Tura or something?"

00:29:59.940 | Yeah, a Tura.

00:30:00.940 | I told him, "Rent a Porsche for a week and see if it makes you feel any better." And

00:30:06.020 | it probably won't, but I don't know. I think you do have to find little ways of making

00:30:11.740 | yourself feel wealthy, if that's the occasional first-class ticket on a plane or something.

00:30:16.820 | I think it's okay to treat yourself and give yourself places that are going to make you

00:30:21.660 | happier and make you feel like you're a little wealthy if you have that much money, 'cause

00:30:26.340 | it's a lot of money. It is.

00:30:27.980 | Yeah. I think a GT40 would make me feel pretty happy to be driving around.

00:30:32.380 | What's a GT40?

00:30:33.380 | It's a Ford GT40. You watch Ford versus Ferrari. It's the actual consumer production version

00:30:39.940 | of that.

00:30:40.940 | Okay. Good movie.

00:30:41.940 | Yeah.

00:30:42.940 | All right. Go check out Nick's blog of Dollars & Data. He has a great post today on the 60/40

00:30:49.020 | withdrawal strategies.

00:30:50.020 | Yep. It's out today. It just came out. I did it just for this episode.

00:30:54.220 | What do you got, Duncan?

00:30:56.660 | Before we get out of here, I wanted to tell people, the holidays are here and approaching.

00:31:03.060 | If you're looking for a good gift to get someone in your life who is starting out in investing

00:31:08.380 | or a kid that you want to learn about investing, I have the book for you. It's from our very

00:31:13.780 | own Ben Carlson. This is a great book. We've talked about it before, but those of you that

00:31:18.060 | are new here, this is a great book.

00:31:19.580 | Plugging, Duncan. Thanks for the plug, Duncan.

00:31:21.020 | Yeah. I was just thinking, a lot of people want to ... They get the Oculus or Meta glasses

00:31:26.180 | or whatever, and they're like, "I want to get something that's actually nutritious for

00:31:30.980 | my kids, too."

00:31:31.980 | Give Nick's book a plug, too. Just keep buying.

00:31:33.700 | Just keep buying, too. Sorry, I don't have that graphic ready.

00:31:35.380 | It worked again, Nick. Two years of a bear market and it worked again. We're back to

00:31:37.780 | all-time highs.

00:31:38.780 | It worked again. All the doubters, sorry. Sorry. I'll see you guys in the next drawdown.

00:31:45.220 | Thanks to everyone in the live chat, as always. Remember, askthecompoundshow@gmail.com. If

00:31:49.020 | you want to send us a question, send us a question. Oh, there's Keith Urban. See, someone

00:31:54.620 | sent me this picture, and I did not know it was Duncan. Wait, when is that? College?

00:32:01.420 | 2005. That's my freshman year of college, Myrtle Beach, outside of the House of Blues,

00:32:06.380 | about to go see String Cheese.

00:32:07.380 | See, you guys both have -- Nick has a long-haired picture, too, and he was like an AC/DC guy.

00:32:11.540 | Yeah, his is real.

00:32:12.540 | That will not be showed today, but maybe the next time I'm live.

00:32:15.780 | I'm the only one here without a long-haired picture. Thanks to everyone for watching,

00:32:19.340 | as always, and we'll see you next time.

00:32:20.340 | Thank you, guys.

00:32:21.340 | Thanks, everyone.

00:32:21.340 | [Music]

00:32:41.340 | [Music]

00:32:46.340 | [BLANK_AUDIO]

How Many Millionaires Are There?

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