How Much Is Your Happiness Worth?

00:00:00.000 | [Beeping]

00:00:07.000 | [Music]

00:00:13.000 | Welcome back to Ask the Compound.

00:00:15.000 | This week I'm joined by Corporal, Lieutenant, what was your rank Bill?

00:00:18.000 | Captain.

00:00:19.000 | Captain.

00:00:20.000 | Yes sir.

00:00:21.000 | Filling in for Duncan who is driving a German sedan on the Autobahn right now I think.

00:00:26.000 | In honor of Duncan I was looking for my goofiest hat and I think this fits the bill.

00:00:31.000 | I like it.

00:00:32.000 | Thanks.

00:00:33.000 | Today's show is sponsored by Rocket Money.

00:00:35.000 | I was playing around with Rocket Money today.

00:00:37.000 | It's a pretty cool app.

00:00:38.000 | It's really easy to link up your bank accounts and your credit cards through Plaid.

00:00:43.000 | And then you go through and you see all of your different subscriptions.

00:00:45.000 | Lucky me, I did not find one subscription that I doubled up on so I'm doing okay there.

00:00:50.000 | But they also have this little tab that says, "Hey, let us negotiate a lower bill for you."

00:00:54.000 | Everyone here knows that I'm good at negotiating with my cable company every year.

00:00:57.000 | I'm undefeated.

00:00:59.000 | But they said, "Let us take a look at your cable bill or your phone bill with AT&T or your internet bill

00:01:05.000 | and we will try to lower the rate for you."

00:01:07.000 | And it says I have an 85% hit rate, which is pretty cool.

00:01:10.000 | But just seeing all of your different-- it shows you recurring.

00:01:13.000 | This is a monthly basis.

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00:01:15.000 | This is an annual.

00:01:16.000 | It's a really cool little budgeting tool just to help understand where your money is going.

00:01:19.000 | Because I think a lot of people frankly just don't know.

00:01:21.000 | Maybe they don't want to know, but I think it's very helpful.

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00:01:27.000 | So rocketmoney.com/atc to sign up.

00:01:31.000 | Again, that's rocketmoney.com/atc.

00:01:34.000 | It's really, really easy.

00:01:35.000 | It's a cool little tool you can use right on your phone.

00:01:38.000 | Big fan.

00:01:39.000 | Yeah.

00:01:40.000 | All right.

00:01:41.000 | Bill Sweet stepping in today.

00:01:42.000 | So we have a lot of text questions.

00:01:43.000 | We've got other stuff.

00:01:44.000 | We get 75 Roth questions a week.

00:01:47.000 | So people really like the Roth.

00:01:49.000 | Keep them coming.

00:01:50.000 | Floyd.

00:01:51.000 | I dig it.

00:01:52.000 | They let me out of my cage.

00:01:53.000 | Yeah, if we get 10.

00:01:54.000 | I want to say thanks to, as always, the people who are here on YouTube for the live show.

00:01:57.000 | Amen.

00:01:58.000 | It feels like we have the same people here every week.

00:02:00.000 | You can always count on them being there.

00:02:01.000 | And they were here before I even signed in.

00:02:03.000 | I know they're there.

00:02:04.000 | They're talking to each other.

00:02:05.000 | They're asking us questions.

00:02:06.000 | They're making us jokes.

00:02:07.000 | I want to say I appreciate all of you in the live chat as usual.

00:02:09.000 | John, let's do question number one.

00:02:11.000 | Let's do it.

00:02:12.000 | All right.

00:02:13.000 | Samuel.

00:02:14.000 | Oh, I'll take this one.

00:02:15.000 | OK.

00:02:16.000 | Samuel.

00:02:17.000 | Good name, right, Bill?

00:02:18.000 | It's perfect for a firstborn.

00:02:19.000 | Tweeting to me, "Any advice on how to find a good CPA, particularly for personal or small

00:02:24.000 | business taxes when hiring one versus doing it myself would be a good idea."

00:02:28.000 | We've talked about this one a little bit on the personal side of things.

00:02:31.000 | We've never done it from a small business angle.

00:02:34.000 | Before we get into the question, John, do a chart on for me.

00:02:37.000 | This is from Bloomberg.

00:02:38.000 | Monthly U.S. small business applications, or business applications, has just skyrocketed

00:02:42.000 | since the pandemic.

00:02:43.000 | And after falling, it continued to stay in a pretty good range, and it's way, way above

00:02:48.000 | the pre-pandemic trend.

00:02:49.000 | So I think this is one of my favorite unintended outcomes of the craziness of the pandemic

00:02:53.000 | is just an explosion in entrepreneurship.

00:02:55.000 | But if you do have your side hustle or side business or start going out on your own, there's

00:02:58.000 | a lot more to think about.

00:03:00.000 | So I guess technically, I have a small business between my blog and books and podcasts, that

00:03:04.000 | sort of stuff.

00:03:05.000 | It's true.

00:03:06.000 | So when my tax stuff started getting more complex, I came to you for help.

00:03:08.000 | So how much more complicated is a small business than personal when thinking through this tax

00:03:13.000 | stuff?

00:03:14.000 | How much more important is it to have a professional there to help you?

00:03:17.000 | Yeah, this is a great question, Ben, and a common one.

00:03:20.000 | And Ben, to me, it's very similar to a question we've got commonly on the advice side, which

00:03:24.000 | is, when should I hire an advisor versus run my own portfolio?

00:03:28.000 | What I would argue is, like financial advice, taxes is very niche.

00:03:31.000 | It ends up being a relationship business.

00:03:33.000 | And again, similar to financial advice, that the value comes in the advice about what you

00:03:38.000 | should do, how to plan.

00:03:40.000 | And that conversation, thinking intuitively and viscerally with a professional about how

00:03:44.000 | to plan for the future, the tax preparation is the commodity, just like for us, a portfolio

00:03:50.000 | is a commodity.

00:03:51.000 | So I would start with, take a look at TaxSlayer, Tax Act, IRS free file if your AGI is less

00:03:56.000 | than 70K.

00:03:57.000 | But the threshold for when you should start looking for a professional, in my opinion,

00:04:00.000 | Ben, is when you want advice.

00:04:02.000 | When it stops being a commodity, you just don't want to get the work done, but you want

00:04:05.000 | to talk through, should I do this, should I do that?

00:04:07.000 | That, to me, is where the bar is.

00:04:09.000 | And probably for taxes more than anything, we have a pretty educated audience here.

00:04:14.000 | But I think a lot of it in taxes is, there's stuff in the tax code that you don't even

00:04:18.000 | know exists.

00:04:19.000 | Like, you can get this break here, or you can actually write this off, or there's probably

00:04:22.000 | a lot of stuff out there that most people don't even realize exists because it is so

00:04:26.000 | complicated, our tax code.

00:04:27.000 | Yeah, and it gets more complicated every year, unfortunately.

00:04:30.000 | But yes, how you treat a home office deduction, a lot of those decisions on corporate structure

00:04:35.000 | going into a small business, that is the type of thing I would strongly recommend speaking

00:04:39.000 | to a CPA or experienced professional.

00:04:41.000 | So, the next question coming from Sam, Samuel, was how do I find one?

00:04:46.000 | So, John, can you pull up that chart that I put together?

00:04:48.000 | I would say three big buckets.

00:04:50.000 | The number one place, and it's the same thing with financial advice, how do you find a professional,

00:04:54.000 | a CPA?

00:04:55.000 | I would look for a referral.

00:04:56.000 | Talk to a friend.

00:04:57.000 | If you happen to be starting a small business, something that you have someone else who is

00:05:01.000 | a mentor, somebody that you look up to who runs a similar operation, I would talk to

00:05:06.000 | them.

00:05:07.000 | Hey, how did you get started?

00:05:08.000 | Who did you talk to?

00:05:09.000 | Who's your CPA?

00:05:10.000 | Those to me are totally legitimate questions, and it's a fantastic way to grow a business

00:05:13.000 | from my point of view, which is to get good referrals because you end up replicating your

00:05:17.000 | clients over time if you know how to ask that.

00:05:19.000 | So, I'd start with asking for a referral from somebody that you trust or look up to

00:05:23.000 | in the business.

00:05:24.000 | The second thing I would think about is specialties or niches.

00:05:27.000 | There are CPAs that focus on real estate partnerships.

00:05:30.000 | There are CPAs that focus on getting depreciation right.

00:05:33.000 | One of my favorite interactions I have each year, Ben, is with a client who happens to

00:05:37.000 | be a dentist, and he interacts with a CPA business that all they do is dentist.

00:05:41.000 | That's it.

00:05:42.000 | So, I really like that specifically for tax because I think, again, the advice is what

00:05:46.000 | you're going to be paying for, and you are going to pay more, by the way, versus tax

00:05:49.000 | later.

00:05:50.000 | So, depending on your business, yeah, CPA for dentist, CPA for lemonade stand, whatever

00:05:54.000 | it is, find your niche.

00:05:55.000 | I like that one.

00:05:56.000 | Yep, seek that.

00:05:57.000 | And then, finally, the third bullet point was just business organization.

00:06:00.000 | If you strike out on one or two, go to a local chamber of commerce, go to a local rotary,

00:06:04.000 | because I think that one-on-one, that face-to-face, you can get an idea of people's reputation.

00:06:08.000 | I think, unfortunately, tax is not something that's translated well online, outside of

00:06:12.000 | very niche stuff and tax Twitter.

00:06:14.000 | Mostly, you're going to want to find somebody local that you can sit down and talk to.

00:06:17.000 | Before I used you, I relied heavily on my father, who was a former CFO in the same vein

00:06:23.000 | as you, and his thing that keeps him busy during tax season in retirement is he goes

00:06:28.000 | and does people's taxes at goodwill.

00:06:30.000 | They actually do it for free.

00:06:31.000 | Yeah.

00:06:32.000 | Right?

00:06:33.000 | And I think they use the IRS free filing software.

00:06:34.000 | That's for people who have very little complexity, but there are services like that that you

00:06:38.000 | could look for as well.

00:06:39.000 | Yeah, and I give Ed Carlson a lot of props, because it's a great way for him to use his

00:06:44.000 | skills, right, and donate what he has most right now, which is time, right, to help people

00:06:47.000 | out.

00:06:48.000 | So, I give him a lot of credit.

00:06:49.000 | You raised an excellent son, Ed.

00:06:51.000 | Great work.

00:06:52.000 | He made me do my first tax return when I was like 15 years old with my first job.

00:06:55.000 | On the kitchen table with a pencil, did you have to erase when you made a mistake?

00:06:58.000 | I mean, I probably had three boxes I had to fill out, because I had a job, and that's

00:07:01.000 | it.

00:07:02.000 | I bet they don't do that.

00:07:03.000 | But when should I start that for my son?

00:07:04.000 | Do you think age seven, is that appropriate, the next couple of months?

00:07:07.000 | What do we think?

00:07:08.000 | Yeah, put him to work.

00:07:09.000 | I've got my first one, 1987, my very first tax return.

00:07:12.000 | Maybe I'll bring it to the next show.

00:07:13.000 | You still have it?

00:07:14.000 | Yeah, I do.

00:07:15.000 | I do.

00:07:16.000 | I worked really hard on that, Ben.

00:07:18.000 | All right.

00:07:19.000 | Let's do another one.

00:07:20.000 | Great.

00:07:21.000 | Question two.

00:07:22.000 | I work for a Magnificent Seven company.

00:07:24.000 | Ben, on titles, why are we Magnificent Seven?

00:07:27.000 | Where did this come from?

00:07:29.000 | We just keep moving the goalposts for the biggest companies.

00:07:31.000 | It's getting crazy.

00:07:32.000 | It's a new name every six months.

00:07:34.000 | But Robert says, I've accumulated RSUs quarterly for the past four years, and each of those

00:07:38.000 | carries its own cost basis.

00:07:40.000 | It's about 30% of Robert's investable assets, almost $300,000, which is not to brag.

00:07:45.000 | I'm in my mid-30s.

00:07:46.000 | I have a pretty high risk tolerance.

00:07:48.000 | But what is a good rule of thumb for single stock exposure?

00:07:51.000 | What's a tax-efficient way to rebalance into index funds?

00:07:54.000 | I am considering selling them as there's more to vest.

00:07:56.000 | There isn't much capital gain.

00:07:58.000 | But what do I do with my existing stocks?

00:08:00.000 | Should I sell my highest cost basis first?

00:08:02.000 | Do I care if it's mixed between short- and long-term gains?

00:08:05.000 | What are my options from Robert?

00:08:07.000 | And Robert's going to show up several times here on this show.

00:08:09.000 | That's right.

00:08:10.000 | Yeah, double question.

00:08:11.000 | Yeah, yeah, yeah.

00:08:12.000 | So it always kind of boggles my mind how many 20- and 30-somethings we have running into

00:08:17.000 | on this show who work for a tech company, who have very high salaries,

00:08:20.000 | and have some really good RSUs and are doing very well for themselves, obviously.

00:08:24.000 | Worked hard for it.

00:08:25.000 | Yeah, and probably have high-stress, high-work jobs, and probably are highly educated.

00:08:30.000 | So the first one is he obviously knows I have way too much single stock exposure.

00:08:35.000 | I need to get this down.

00:08:36.000 | So kudos to you for admitting that and understanding that.

00:08:38.000 | Some people don't ever get there.

00:08:40.000 | We have plenty of clients who come to us in similar situations.

00:08:42.000 | For a lot of them, it could be way more than 30%.

00:08:44.000 | We've had people with 90, 95% of their wealth in, like, one stock,

00:08:49.000 | and they know, like, "Listen, I made a lot of money on this.

00:08:51.000 | Now I need to diversify."

00:08:53.000 | Yeah, and one of my talking points for Robert here, it's not just the stock exposure,

00:08:56.000 | but not only is 30% of your net worth tied to the company that you work for, so is your income.

00:09:01.000 | So if something happens to that company, you're in pain in a lot of different kinds of pain.

00:09:06.000 | So how does this work between--because for some of these, you have to pay the taxes up front

00:09:10.000 | to vest the stocks, and then he has to pay after.

00:09:13.000 | How does this actually work?

00:09:15.000 | Yeah, so relative to other types of equity-based compensation, Ben,

00:09:18.000 | RSUs, Restricted Stock Units, are extremely simple.

00:09:22.000 | Ben, the concept is each year you get paid based on a vesting number of shares,

00:09:27.000 | but instead of getting paid in cash, you're getting paid in company stock.

00:09:30.000 | That's it.

00:09:31.000 | And what they do is they play a little bit of game and chip in that they say,

00:09:34.000 | "Look, we're going to declare that you have a $50,000 RSU grant,

00:09:38.000 | but those shares aren't going to vest for five years."

00:09:40.000 | And so you see the stock price, you do the math, this is how much it's worth.

00:09:44.000 | But in reality, you can't do anything with that stock until it vests,

00:09:48.000 | and that's the most important date when we talk about RSUs.

00:09:50.000 | Which has got to be such a psychological toll because, you know,

00:09:53.000 | like I'm worth this much based on the stock price, and then you see it fluctuating

00:09:58.000 | and it goes up and you feel better, and it goes down and you feel worse.

00:10:01.000 | Yeah.

00:10:02.000 | Right, that rollercoaster, living that with your income.

00:10:04.000 | I guess the concept is you want people pulling in the same direction, right?

00:10:07.000 | You want a profitable enterprise, and so if people are thinking as owners,

00:10:10.000 | that's the concept.

00:10:11.000 | But yeah, I would agree.

00:10:12.000 | It's a bit of a game because ultimately the minute that you get that stock,

00:10:16.000 | there's really no tax benefit at that moment.

00:10:18.000 | It's exactly as if they handed you exactly that same amount of net worth in cash,

00:10:23.000 | and it gets taxed that same way too.

00:10:25.000 | So step one for me, Robert, would be the minute that your next tranche vests,

00:10:29.000 | just sell it immediately.

00:10:30.000 | You already have 30% of your net worth in the stock in a company that you work for too.

00:10:34.000 | There's no reason to take on additional single stock exposure.

00:10:36.000 | And if there's no tax benefit like there is with ISOs, like there is with ENSOs,

00:10:41.000 | just liquidate the shares going forward.

00:10:43.000 | That's step one for me.

00:10:44.000 | So as they come in, it's like reverse dollar-cost averaging.

00:10:46.000 | You're slowly selling them off as they vest.

00:10:48.000 | That's great because your cost basis is equal to your market value on the date of vest.

00:10:51.000 | So that's step one.

00:10:52.000 | In terms of percentage spend, not sure how you feel about this,

00:10:55.000 | but yeah, I get really queasy when we get up to 50%,

00:10:58.000 | and Robert's more than halfway there of his total net worth.

00:11:00.000 | I prefer for my clients to keep the total single stock exposure to 10%.

00:11:05.000 | I get kind of uncomfortable when we get north of 20.

00:11:08.000 | So, Robert, you're in the danger zone in my opinion.

00:11:10.000 | And, Ben, you've written a lot about financial history.

00:11:12.000 | General Motors, Enron, SVB, Lehman, General Electric we were talking about with a client today.

00:11:18.000 | These are companies that were the largest, most stable,

00:11:20.000 | most growing companies that you could possibly imagine in their day,

00:11:24.000 | and they declined net worth, some of them to zero, right?

00:11:27.000 | And so many people in these individual positions that work at a company

00:11:30.000 | probably get a little overconfident, like, "Hey, I know this business.

00:11:33.000 | I understand it," and that is tough for people who are in the situation of--

00:11:37.000 | Precisely.

00:11:38.000 | --the business goes down, maybe your income falls, you lose your job,

00:11:40.000 | and your retirement is gone because the stock got wiped out.

00:11:43.000 | Yeah, you don't want to get into that situation.

00:11:44.000 | Amen.

00:11:45.000 | So our friend and colleague, Mr. Joel Fishman from Bend, Oregon,

00:11:48.000 | likes to use a regret minimization framework.

00:11:50.000 | I would sit down and do the exercise, Robert.

00:11:52.000 | What happens if that stock goes to zero?

00:11:54.000 | What moves looking backward would you wish you would have made, right?

00:11:57.000 | You want to be a company man.

00:11:59.000 | You want to help invest in your stock.

00:12:00.000 | You're going to continue to get RSUs.

00:12:02.000 | Do you need to have that much exposure?

00:12:04.000 | And I would just rip off the highest-cost basis,

00:12:06.000 | the lowest capital gains stock that's long-term,

00:12:10.000 | and do that more or less as soon as you can.

00:12:12.000 | In working for one of these magnificent seven companies,

00:12:14.000 | it's Google or Amazon or Microsoft or whoever,

00:12:16.000 | the stock price is probably up quite a bit.

00:12:18.000 | So you've probably already done pretty well in these,

00:12:21.000 | so the time to diversify after you've made some money,

00:12:23.000 | it's probably pretty decent timing.

00:12:25.000 | I'm not going to say these companies are going to fall off a cliff,

00:12:27.000 | but you've probably done okay in these.

00:12:28.000 | A millionaire in mid-30s, yeah.

00:12:30.000 | When you've won the game, it's time to stop playing.

00:12:32.000 | And again, you're going to continue to receive RSU grants,

00:12:35.000 | so there's no reason to hold that percentage.

00:12:37.000 | He sounds like he's thinking about this thing the right way,

00:12:39.000 | which is that's a good first step.

00:12:41.000 | Very good.

00:12:42.000 | All right, let's do a Roth one.

00:12:45.000 | Maxed out my contributions to my Roth 401(k) IRA every year

00:12:48.000 | for almost a decade,

00:12:49.000 | with my 401(k) match being the only traditional I have.

00:12:52.000 | Always weird to me that they have a Roth 401(k),

00:12:54.000 | but then the traditional has to be the match.

00:12:56.000 | You've explained it to me, I still don't get it.

00:12:57.000 | Bill Sweet recommends Roth until the 32% tax bracket.

00:12:59.000 | I do.

00:13:00.000 | This person has been paying attention.

00:13:02.000 | But how does your time horizon affect the decision?

00:13:04.000 | I'm in the mid-30s now, and 35% tax bracket.

00:13:06.000 | I don't plan on touching it until I run through my taxable account first,

00:13:09.000 | when I eventually retire.

00:13:11.000 | Does the 30-plus years of tax-free compounding growth

00:13:13.000 | trump the high tax rate, even if I am in a lower tax bracket later?

00:13:16.000 | Again, we've got someone in their 30s here who is thinking way ahead.

00:13:20.000 | They're already thinking about retirement withdrawal strategies.

00:13:22.000 | They're in the tax bracket thoughts.

00:13:24.000 | This is a good question.

00:13:25.000 | Does age or time horizon ever affect your rule of thumb on the tax rate?

00:13:30.000 | Yes, I think it does.

00:13:32.000 | And, Robert, good to be with you again.

00:13:34.000 | The answer, of course, is it depends.

00:13:36.000 | But for me, Ben, 35% is right around the place

00:13:39.000 | where I would favor a traditional contribution over a Roth

00:13:42.000 | as a general rule of thumb.

00:13:43.000 | We do happen to have a lot of details about Robert,

00:13:45.000 | but we're not in a place where we can give him specific financial advice.

00:13:49.000 | But in my opinion, Ben, most folks in our practice that I observe,

00:13:52.000 | they kind of slow down and they stop working, usually in their 60s.

00:13:55.000 | And usually when RMDs, when Social Security kicks in,

00:13:58.000 | let's say 70, 73, sometime in that time frame,

00:14:01.000 | most taxpayers settle in around the 22, maybe 24% tax brackets.

00:14:05.000 | And 35%, where Robert is now, relative to where he's probably going to be,

00:14:10.000 | that's a full 12% higher today than it is in the future, right?

00:14:14.000 | And so, Robert, if you plan to delay Social Security,

00:14:17.000 | you're going to have a few years at 0%, 10%, 12%

00:14:20.000 | to fill up those lower tax brackets.

00:14:22.000 | 22% bracket in today's dollars runs all the way up to $198,000

00:14:26.000 | for a married couple.

00:14:27.000 | P combined, the primary thing I think that a lot of taxpayers

00:14:31.000 | don't accumulate for or think about when they're considering this

00:14:34.000 | is that tax brackets are also adjusted for inflation, Ben.

00:14:37.000 | And that's a key point, that if I can do up to $200,000

00:14:41.000 | of Roth conversions today at 22%,

00:14:43.000 | if we have a 4% inflation rate over the next 30 years,

00:14:46.000 | that number is going to be up to 1.1 million, right?

00:14:49.000 | So yes, we need to account for compounding.

00:14:50.000 | I guess I didn't realize that.

00:14:51.000 | So does that mean they've been tracking the actual inflation rate,

00:14:54.000 | so they've been going up pretty high in the last couple of years?

00:14:56.000 | Yeah, so it's tied to CPI-U, just like a lot of other indices.

00:14:59.000 | There are some discussions to switch that to chain CPU,

00:15:02.000 | like Social Security did.

00:15:04.000 | But in my mind, right around 35%, that's when it stops making sense.

00:15:08.000 | And even a great study I'm going to reference later

00:15:11.000 | showed that even when you dial up the tax rates,

00:15:14.000 | like we think might happen in 2026,

00:15:16.000 | people are probably going to revert to pay about 3% more.

00:15:19.000 | That's not what moves the needle.

00:15:20.000 | What moves the needle is these big shifts from '35 to '22.

00:15:24.000 | I think '35 is too high to recommend a Roth,

00:15:26.000 | and so I'd stick to traditional as a general rule today.

00:15:29.000 | Okay, that makes sense.

00:15:31.000 | The last point for Robert, state taxes might move the needle,

00:15:34.000 | particularly if you're in a high-tax state now.

00:15:36.000 | Yeah, if he's a Magnificent Seven company, he might be in California.

00:15:38.000 | Yeah, or California, and you plan to move to Nevada, let's say.

00:15:41.000 | You plan to move to Washington state, no state income tax.

00:15:43.000 | Traditional makes all the more sense, right?

00:15:45.000 | Because you're not going to pay that state income tax

00:15:47.000 | in addition to higher federal tax.

00:15:48.000 | So get out of San Francisco and move to Seattle.

00:15:50.000 | Yeah, assuming that anything's left there

00:15:52.000 | that's not nailed down in San Francisco, I would agree.

00:15:54.000 | Okay, all right, let's do the next one.

00:15:57.000 | So I just turned 27,

00:15:59.000 | and I make $260,000 at a job that started less than a year ago.

00:16:03.000 | That's a lot of money, Ben, at 27.

00:16:05.000 | It is.

00:16:06.000 | It was a grind to get there, but the job itself is very stressful.

00:16:09.000 | I dread going to work in the morning,

00:16:10.000 | but I deal with it for the money, and I save an investment majority,

00:16:13.000 | so I don't have to do this forever.

00:16:15.000 | For context, I have about $400,000 in investments right now.

00:16:18.000 | Recently an opportunity came up that's much more interesting and pays well,

00:16:22.000 | but not as much as my current job.

00:16:24.000 | It's around $150,000.

00:16:26.000 | At this is the intersection of what I do for work and my actual interest,

00:16:29.000 | so it could be a tap dance to work situation,

00:16:31.000 | but can I stomach a $100,000 income drop

00:16:34.000 | in the vanishing years of compounding?

00:16:36.000 | Should I continue to grind it out and pack cash away

00:16:39.000 | or let myself go down the more interesting road?

00:16:41.000 | From Gavin.

00:16:42.000 | Ben, have you ever tap danced to work?

00:16:45.000 | Only Warren Buffett does that, I thought.

00:16:47.000 | I think so.

00:16:48.000 | Buffett and Munder.

00:16:49.000 | I have a lot of thoughts on this.

00:16:50.000 | You're going to have to let me cook here for a minute.

00:16:51.000 | Oh, let's do it.

00:16:52.000 | This is one of my favorite questions I've gotten

00:16:53.000 | because I think most career advice is useless

00:16:56.000 | because I think your career path and trajectory is governed so much by luck

00:16:59.000 | and timing and personality and politics and skills in your network

00:17:03.000 | that it's basically impossible to say, "My career went this way,

00:17:05.000 | so if you just follow my lead, you'll do the exact same thing,"

00:17:08.000 | because I look back at so many forks in the road for my career,

00:17:10.000 | if I would have done this, and how it changed,

00:17:13.000 | and the jobs that I did get and the jobs that I didn't get.

00:17:15.000 | But this question totally hits on a trade-off that you--

00:17:18.000 | do you want to earn a lot of money or do you want to work in the job that you love?

00:17:22.000 | That's a difficult decision.

00:17:24.000 | So the way I see it, especially in your 20s--

00:17:26.000 | and again, this person is very blessed to make that much money in their 20s--

00:17:29.000 | there's three types of jobs.

00:17:30.000 | So there's learning jobs.

00:17:32.000 | Some jobs are just more about learning than earning,

00:17:34.000 | like learning what industries or jobs you want to work in,

00:17:37.000 | the people you do or don't want to work with,

00:17:39.000 | the types of companies you want to work with,

00:17:41.000 | and some people just need experience and on-the-job training.

00:17:43.000 | Then I think there's earning jobs.

00:17:45.000 | A lot of my friends going out of college,

00:17:47.000 | the sole reason they picked a specific company was because of the salary.

00:17:51.000 | They took the best offer they could get, the best signing bonus, whatever.

00:17:55.000 | You might have to put in more hours and more stress,

00:17:57.000 | and a lot of these people did,

00:17:58.000 | but setting a baseline early in your career for future negotiations

00:18:02.000 | with different companies I think is something to think about.

00:18:04.000 | You earn a lot of money at first and you set that baseline high,

00:18:07.000 | but in the future when you're negotiating salary,

00:18:09.000 | you already have that high starting.

00:18:10.000 | Then I think the third one is the dream job,

00:18:12.000 | which is perfect industry, perfect company,

00:18:14.000 | people you want to work with.

00:18:15.000 | I think 99% of people in their 20s probably never get the dream job right away.

00:18:19.000 | If you do, you're lucky.

00:18:21.000 | Obviously, the ideal scenario is I want a job that I'm going to learn a lot,

00:18:25.000 | I'm going to earn a lot, and I'm going to be my dream job.

00:18:28.000 | My 20s were the learning route.

00:18:29.000 | I worked for a company that didn't pay much right out of school,

00:18:32.000 | mostly out of necessity because I had no idea what the hell I wanted to do,

00:18:34.000 | and that was part of it.

00:18:35.000 | I was learning on the job, but I think that job springboarded my career

00:18:39.000 | because I learned so much about the investment business from my boss

00:18:42.000 | that I still use today, stuff about investment policy and asset allocation

00:18:45.000 | and making good decisions.

00:18:47.000 | So I think it was totally worth it for me.

00:18:48.000 | I had a friend who went into investment banking who worked 80, 90 hours a week.

00:18:52.000 | His first year he had three days off all year, but he kind of loved it,

00:18:56.000 | and he used that to go into a different--

00:18:58.000 | So I mean a lot of that is about your personality.

00:19:01.000 | So I can totally sympathize with the reluctance to give up a big salary

00:19:05.000 | because you're always going to be anchoring to that level,

00:19:07.000 | and the psychological toll of losses sting twice as bad as gains feel good.

00:19:11.000 | If you get rid of that salary--

00:19:14.000 | I could say right now you could pay me five times as much,

00:19:18.000 | and I wouldn't leave because I love working with you

00:19:20.000 | and working with all the stuff I get to do at Ritholtz

00:19:23.000 | and the creative projects.

00:19:24.000 | The feeling is mutual then.

00:19:26.000 | Yeah.

00:19:27.000 | So I love that job, and you couldn't pay me enough to work somewhere else

00:19:30.000 | because you just wouldn't have the freedom and work with the same people,

00:19:33.000 | but I think it's easier for me to say I wouldn't take this mythical higher number

00:19:36.000 | versus saying I have a higher number, now I'm going to go lower to take that.

00:19:40.000 | So you've heard of this Harvard study before.

00:19:43.000 | I think it was performed in the '90s.

00:19:45.000 | They asked a bunch of students and faculty,

00:19:47.000 | "Would you rather have a yearly income of $50,000

00:19:49.000 | but everyone else makes $25,000 on average,

00:19:52.000 | or would you rather have $100,000

00:19:54.000 | and everyone else earns $200,000 on average,

00:19:56.000 | keeping prices and cost of living constant?"

00:19:59.000 | And it was interesting.

00:20:01.000 | The results were right down the middle.

00:20:03.000 | It was half people said, "I would rather make more relatively and less absolutely,"

00:20:08.000 | and half people said, "I would rather make more absolutely and less relatively."

00:20:11.000 | And it's totally a psychological how-you-think-about-things kind of--

00:20:16.000 | So I think life is full of tradeoffs.

00:20:18.000 | I'm a huge principles guy, personally.

00:20:20.000 | I would have a hard time working in a soul-sucking job that's high-stress.

00:20:23.000 | I just don't have that type-A personality of I'm going to do this job,

00:20:27.000 | it stinks, but I'm making a lot of money and I'm packing it away.

00:20:31.000 | So I think it's hard to put a dollar figure on the tap-dance-to-work situation.

00:20:35.000 | Here's the questions I would ask yourself.

00:20:37.000 | Because there really is-- There's no right answer here, right?

00:20:40.000 | I think you have to ask yourself--

00:20:42.000 | Like you said, half of that Harvard study would do this and the other half wouldn't.

00:20:45.000 | Yeah, so I think it's personality.

00:20:47.000 | Do you really think your long-term financial situation

00:20:49.000 | is going to be markedly worse by taking this job?

00:20:52.000 | We're dealing with a 27-year-old that saved $400,000.

00:20:55.000 | Yeah, they're already in a pretty darn good place.

00:20:57.000 | If you compound that over 30 years, you're already in a very good spot.

00:21:00.000 | How much do you really hate your current role?

00:21:03.000 | I think how much better would other areas of your life be

00:21:05.000 | if you didn't have this stress?

00:21:07.000 | And what other perks might you get from this job?

00:21:09.000 | Like remote work, ability to benefit,

00:21:11.000 | some of these other things you can't quantify in a salary number.

00:21:14.000 | And then I think you have to think through

00:21:16.000 | is this opportunity ever going to come knocking again?

00:21:19.000 | Could you put it off for two or three years

00:21:21.000 | and if you wanted to pack away 70% of your income for a couple years

00:21:23.000 | to really make yourself good?

00:21:24.000 | Or the inverse.

00:21:25.000 | Could you go back to this hellish investment job?

00:21:28.000 | If you had to, right.

00:21:30.000 | The question really boils down to how much is your happiness on the job worth?

00:21:34.000 | Which, again, you cannot answer, but I think this is--

00:21:36.000 | I would have a very difficult time answering this

00:21:39.000 | if I was put in this scenario.

00:21:41.000 | I'd like to say I'd go with my dream job, tap dance to work situation,

00:21:43.000 | but it would be hard to let go of that salary.

00:21:46.000 | A story that this makes me think of,

00:21:48.000 | my favorite author, Ben, is Kurt Vonnegut,

00:21:50.000 | and there's a great story with him and Joseph Heller,

00:21:52.000 | the author of Catch-22,

00:21:54.000 | and they're walking at a beach party in the Hamptons,

00:21:56.000 | and there's some hedge fund guy,

00:21:58.000 | and he's got all the cars on the beach,

00:22:00.000 | and he's got the models, and there's the shrimp and the cocktails,

00:22:02.000 | all this stuff in the '60s.

00:22:04.000 | And Heller looks at Vonnegut and says,

00:22:06.000 | "I've got one thing this guy doesn't have."

00:22:08.000 | And Vonnegut says, "What's that?"

00:22:09.000 | And Heller says, "Enough."

00:22:11.000 | Yeah, I love that.

00:22:13.000 | Big Slaughterhouse-Five guy here.

00:22:14.000 | Oh, great, great.

00:22:15.000 | Classic story.

00:22:16.000 | So, Gavin, I'd go.

00:22:17.000 | I'd go, man.

00:22:18.000 | That would be my answer.

00:22:19.000 | Here's one of the things.

00:22:21.000 | I talk to a lot of friends and family members

00:22:23.000 | who just hate their bosses

00:22:25.000 | or hate the people they work with or hate their job.

00:22:28.000 | With people outside of the industry,

00:22:29.000 | I rarely talk about my job because I actually enjoy it.

00:22:31.000 | I like what I do.

00:22:32.000 | I like the people I work with.

00:22:33.000 | We have fun together.

00:22:35.000 | My wife is always saying, like,

00:22:36.000 | "Stop talking about your job to other people

00:22:37.000 | and saying that you like it,"

00:22:38.000 | because they don't, obviously.

00:22:40.000 | So I don't know how you can put a price on

00:22:42.000 | having a job that you love going to

00:22:44.000 | just because of how much time you spend working in your life.

00:22:48.000 | True, true.

00:22:49.000 | And especially if you can find that dream job in your 20s,

00:22:51.000 | I do agree that I don't know how often that comes around

00:22:55.000 | where you have that opportunity.

00:22:57.000 | Yep.

00:22:58.000 | Gavin, money's not all that's in life.

00:23:00.000 | Trade some money for time.

00:23:01.000 | True.

00:23:02.000 | All right.

00:23:03.000 | Last question.

00:23:04.000 | All right.

00:23:05.000 | 65, recently retired.

00:23:06.000 | When my employer started offering a Roth 401(k),

00:23:08.000 | I switched my contributions to the Roth.

00:23:10.000 | See, everyone's listening to Bill.

00:23:11.000 | But most of my career retirement savings

00:23:13.000 | went into traditional 401(k) before.

00:23:14.000 | As I look at what I will be getting in retirement,

00:23:16.000 | I'm realizing that I'll be in the 24% bracket forever.

00:23:18.000 | That's pretty close to your estimate earlier.

00:23:20.000 | Delayed Social Security, RMDs from the TSP,

00:23:23.000 | and a nice federal pension.

00:23:24.000 | They all add up.

00:23:25.000 | I'm keeping Federal Employee Health Benefit

00:23:27.000 | instead of Medicare,

00:23:28.000 | so I don't need to worry about higher Medicare bills

00:23:30.000 | because of IRMAA.

00:23:31.000 | What's that?

00:23:32.000 | Yep, IRMA.

00:23:33.000 | IRMA.

00:23:34.000 | It's a Medicare adjustment for higher income folks.

00:23:36.000 | You pay more for Medicare in your 60s.

00:23:38.000 | Getting assets into the Roth will protect them

00:23:40.000 | from possible future tax increases.

00:23:42.000 | Some of my account will go to my heirs,

00:23:44.000 | so the Roth might be a better wrapper for that asset for them.

00:23:46.000 | Given all that, should I just move my money

00:23:48.000 | out of the traditional account into the Roth now?

00:23:50.000 | For example, do the minimum Roth conversion

00:23:52.000 | that keeps my income within the 24% bracket each year?

00:23:55.000 | My total is all in the Roth.

00:23:56.000 | What am I missing?

00:23:57.000 | So they're essentially wanting to transfer

00:24:00.000 | as many of those traditional assets to Roth now,

00:24:03.000 | so they'd be paying the taxes, obviously.

00:24:05.000 | Right.

00:24:06.000 | Is it still called the backdoor Roth

00:24:07.000 | if you do it this way?

00:24:08.000 | No, that's a conversion.

00:24:09.000 | Okay, just a Roth conversion.

00:24:10.000 | Yeah, that's a front door or ceiling or roof.

00:24:13.000 | So this is a little bit of the opposite

00:24:15.000 | of the other one about the time horizon.

00:24:17.000 | Well, I guess it is because they're looking for their heirs,

00:24:19.000 | but is this overkill?

00:24:21.000 | Is this too much, or do you think this makes sense?

00:24:23.000 | No, I think David's got all the checkboxes, right?

00:24:26.000 | So like he said, Ben, he mentioned an IRMA.

00:24:28.000 | He mentioned delaying Social Security.

00:24:30.000 | He's got a pension coming.

00:24:31.000 | He's got a TSP, a Thrift Savings Plan,

00:24:34.000 | which we've talked about on this show.

00:24:35.000 | It's a 401(k) for government workers.

00:24:38.000 | My man, David, did everything right,

00:24:40.000 | and now he's thinking,

00:24:41.000 | "Gee, I'm probably going to pass these assets on to my kids,

00:24:44.000 | to the next generation.

00:24:46.000 | What is the most efficient way to do it?"

00:24:48.000 | And I think it comes down to, Ben,

00:24:49.000 | do you want to maximize your net worth now,

00:24:51.000 | or do you want to maximize your after-tax spending

00:24:53.000 | or your kids' or grandchildren's after-tax spending?

00:24:56.000 | Ed McWorry, Ben, at Santa Clara University,

00:24:59.000 | wrote the best paper on this in 2021.

00:25:01.000 | It's called

00:25:02.000 | "When and For Whom Roth Conversions Are Most Beneficial,"

00:25:04.000 | and the quote that I want to share with the listeners,

00:25:06.000 | "A Roth conversion will always pay off

00:25:08.000 | if the time span is long enough."

00:25:10.000 | The problem is, on a long enough timeline,

00:25:13.000 | according to Tyler Durden, we're all dead, right?

00:25:15.000 | But David's thinking beyond his life,

00:25:16.000 | and I think that's really cool.

00:25:18.000 | The curveball, I think, that Congress threw us,

00:25:21.000 | the Value Secure Act in 2020,

00:25:22.000 | is now your time span for inherited IRAs, including Roths,

00:25:27.000 | is 10 years after your death.

00:25:28.000 | But to me, that's still long enough for somebody who's 65,

00:25:31.000 | probably has another 25, 30-year life expectancy,

00:25:34.000 | tack on another 10 years after that.

00:25:35.000 | We're talking about 40 years.

00:25:36.000 | John, can we pull up my final chart here of the day?

00:25:39.000 | This is from the Ed McCrory paper from Santa Clara.

00:25:42.000 | It just measures very quickly Roth conversion or surplus,

00:25:45.000 | and for folks listening to my podcast,

00:25:47.000 | I've adjusted the ages to 65.

00:25:49.000 | The break-even point for most taxpayers at a 22% bracket

00:25:53.000 | is somewhere between age 80 and 84,

00:25:55.000 | depending on the situation.

00:25:56.000 | Can we take the chart off for a sec, John?

00:25:58.000 | So you still have some time, then?

00:26:00.000 | I think we have some time.

00:26:01.000 | And keep in mind, again,

00:26:03.000 | that you've got 10 years after your mortality, right?

00:26:05.000 | So if we've got a life expectancy in late 80s,

00:26:07.000 | if David's already hit 65,

00:26:09.000 | his life expectancy is probably in the 90s.

00:26:11.000 | We're really looking at a 35-year horizon here.

00:26:14.000 | So how much will those heirs appreciate?

00:26:16.000 | So let's say he does it just--

00:26:17.000 | I'm going to do it just for the money I'm leaving to my heirs.

00:26:19.000 | If he just does those Roth conversions for them,

00:26:21.000 | how much will they appreciate getting a Roth

00:26:23.000 | as opposed to traditional money?

00:26:24.000 | I mean, it solves all the tax problems, right?

00:26:26.000 | Because if you end up getting a Roth on the back end,

00:26:28.000 | tax-free, you're not writing a check to the IRS.

00:26:31.000 | You're not doing any tax withholdings.

00:26:32.000 | You don't have to mess around with your own IRMA,

00:26:34.000 | assuming you're somebody 65.

00:26:35.000 | I think it's the thing to do

00:26:37.000 | if you're looking at a 35- or 40-year time horizon.

00:26:40.000 | David, I give you all the credit to doing it.

00:26:42.000 | The key point I wanted to emphasize, though, Ben,

00:26:44.000 | is I wouldn't go beyond--I said this before--

00:26:46.000 | I wouldn't go up to the 32% tax bracket.

00:26:48.000 | I would draw a line at 24,

00:26:50.000 | because after that, it stops making sense.

00:26:52.000 | I don't know what the dollar amount is we're looking at,

00:26:54.000 | but assuming that we have income from our TSP,

00:26:56.000 | from our Social Security, from our government pension,

00:26:58.000 | we just don't want to go too far, right?

00:27:00.000 | We don't want to be paying at 37%.

00:27:02.000 | So I think it's a multi-year process,

00:27:04.000 | but David's got the right idea,

00:27:05.000 | and I don't mind getting started here today.

00:27:08.000 | Kudos to the audience today.

00:27:09.000 | These are all great questions.

00:27:10.000 | I think this also--but I think this also proves--

00:27:13.000 | all these questions prove--

00:27:14.000 | you can study all this stuff you want and know everything,

00:27:17.000 | and it's still hard to make decisions at some point, right?

00:27:20.000 | Because I've done this right, I've done this right,

00:27:22.000 | I've done this right, I know this,

00:27:23.000 | I understand what this means,

00:27:24.000 | but still, now, what do I do?

00:27:26.000 | And I think that's always the challenge

00:27:28.000 | with financial decisions is,

00:27:30.000 | even if you do everything right,

00:27:31.000 | it's still difficult psychologically to realize, like,

00:27:34.000 | "What if I go left and what if I go right?"

00:27:36.000 | Because it's rarely black and white for these things.

00:27:40.000 | Yep, and it goes back to the first listener's question

00:27:42.000 | from Robert, which I believe--or Samuel,

00:27:44.000 | "When do I look for a CPA?"

00:27:45.000 | When you want to sit down and talk about advice.

00:27:47.000 | And I would not be afraid to ask a professional,

00:27:49.000 | "What should I do?"

00:27:50.000 | At the end of the conversation,

00:27:51.000 | going back to Joey Fishman, regret minimization,

00:27:54.000 | what am I going to regret more, looking back?

00:27:56.000 | Am I going to regret more not doing enough Roth

00:27:58.000 | or paying the tax?

00:27:59.000 | And that probably would give you the answer.

00:28:02.000 | Perfect.

00:28:03.000 | Okay.

00:28:04.000 | We only have a million more tax questions in the doc,

00:28:06.000 | so they'll be back again, of course.

00:28:08.000 | Keep them coming.

00:28:09.000 | Thank you for filling in for Duncan.

00:28:11.000 | I'm very excited for Duncan to come back.

00:28:13.000 | There's a part of my heart that's missing right now.

00:28:15.000 | Yes, we all miss him.

00:28:16.000 | Come back from Germany.

00:28:17.000 | Thank you to John for handling everything behind the scenes,

00:28:19.000 | as usual, all the charts.

00:28:20.000 | God bless you, John, Nicole, big shouts.

00:28:21.000 | Remember, our email here, askthecompoundshow@gmail.com.

00:28:24.000 | Leave us a comment.

00:28:25.000 | Thanks again to everyone in the live chat.

00:28:27.000 | Leave us a comment on YouTube.

00:28:29.000 | Always ask some questions there.

00:28:32.000 | What do you call it?

00:28:33.000 | Rate, review, subscribe, all that good stuff.

00:28:36.000 | See you next time.

00:28:38.000 | [Music]

How Much Is Your Happiness Worth?

Chapters