Could Crypto Kill the Stock Market?

00:00:00.000 | - Welcome to Portfolio Rescue. I am joined today, as always, by Duncan Hill. Duncan,

00:00:22.700 | you look like you're using a switchboard at Santa's secret workshop.

00:00:26.120 | - Yeah.

00:00:27.120 | - Looking good.

00:00:28.120 | - Basically what I'm doing.

00:00:29.120 | - We have a show every week where we answer questions from you, the viewer. If you have

00:00:31.380 | a question, remember, askthecompoundshow@gmail.com. Duncan, let's do it.

00:00:38.360 | - Okay. So, first up today, we have a question regarding our recent Tom Lee video. So, for

00:00:45.920 | The Compound and Friends. So, if you haven't seen that yet, go and watch it after this,

00:00:50.920 | obviously. But, so, this question is, "I watched The Compound and Friends where Tom Lee discussed

00:00:55.520 | his prediction about demographic effects on the S&P 500's performance. As a Gen X-er who

00:01:01.040 | got burned in the GFC, I'm happy to ride the wave with millennials, even if S&P 19,000

00:01:08.740 | for 2029 seems ambitious. I also heard on CNBC that millennial millionaires hold 25%

00:01:13.680 | of their wealth in crypto. My question is whether the potentially limitless supply of

00:01:17.560 | cryptocurrencies might divert millennial investments away from the S&P and impact performance.

00:01:22.920 | While there have always been alternatives to the stock market, they existed in more

00:01:25.920 | finite supplies, like real estate, art, gold. Could the supply of cryptocurrency and millennial

00:01:31.000 | adoption derail the S&P market wave?"

00:01:33.320 | - A lot going on here. I like this one. If I was on a podcast, I would say there's a

00:01:37.320 | lot to unpack here. But I'm not, so I'm not gonna say that. All right. I did a little

00:01:41.200 | research here. Total financial assets held by individuals, this is excluding real estate,

00:01:45.840 | excluding liabilities, at the end of 2020 was around $250 trillion. So, crypto right

00:01:50.320 | now makes up around $2.2 trillion in market cap. That's all of crypto. So, that's like

00:01:55.560 | 0.5% of global financial assets. On the one hand, very, very small in the grand scheme

00:02:00.960 | of things. On the other hand, it's really only been a financial asset for, I don't know,

00:02:04.680 | five years, legitimately. And all the money from actual wealth managers is only now coming

00:02:10.320 | in. So, obviously, you could make the case that's going to grow in the years ahead.

00:02:15.360 | Here's the way I'm thinking about this, as a way to be a stopper for the stock market.

00:02:20.720 | Millennials really won't have much of an impact for a while, for the simple reason that they

00:02:23.460 | don't have a ton of assets right now. So, John, let's do a chart on here of wealth by

00:02:27.560 | generation. So, this shows baby boomers hold 53% of financial assets right now. This is

00:02:33.520 | in the U.S. Gen X holds 26%. Millennials have less than 5% of financial assets. Obviously,

00:02:39.960 | eventually, a lot of that money from the boomers, if they don't spend it all and go to Vegas

00:02:43.680 | and blow everything before their kids get it, a lot of that money will be passed on

00:02:47.320 | to the next generation. But it's going to happen at a glacial pace. It's going to take

00:02:50.760 | a while. And obviously, you have the fact that millennials are coming up, and they're

00:02:54.640 | going to be in their peak earnings years, and they're going to be saving more. So, they

00:02:57.440 | could divert some more money to crypto. But it's going to be a while. I would actually

00:03:01.720 | be far more worried about other asset classes before I got to worry about the stock market.

00:03:06.780 | Gold is the easiest one, right? I actually think millennial/Gen Z digital gold is probably

00:03:12.600 | the most compelling investment thesis for Bitcoin at the moment. So, gold is $9-10 trillion,

00:03:19.280 | depending on how you count it. Is it possible that Bitcoin and all crypto could get there?

00:03:24.400 | I think that's, especially for Bitcoin, as the digital gold, I think that makes sense.

00:03:29.160 | Next we have money markets or savings accounts. How many young people these days love having

00:03:34.240 | their money in a bank savings account that earns 10 basis points? Or a money market account

00:03:39.120 | at a brick-and-mortar bank? Even if you go to an online bank account, you're talking

00:03:43.160 | 50 basis points. Let's say interest rates remain low. That's a possibility they could

00:03:48.480 | remain low for a long time. If they're not going to rise now, when economic growth is

00:03:52.120 | going crazy and inflation is going crazy, I really don't know when they're going to

00:03:55.640 | rise. So, could you see things like stablecoins take the place of money markets, or at least

00:04:01.160 | for young people? Or savings accounts? Now, obviously, stablecoins will probably need

00:04:05.600 | some sort of regulation first. They don't have the FDIC insurance on them. They're paying

00:04:09.360 | much higher yields than anywhere else. You can get 8-10% in a stablecoin right now. Obviously,

00:04:14.500 | if there is some regulation and more people pile in, those rates' yields have to come down.

00:04:18.900 | But let's say in the future you could get 4-5% in a stablecoin as a savings account

00:04:24.200 | vehicle, versus less than 1%, less than 50 basis points in a savings account with a bank.

00:04:29.320 | I think that's way more compelling to me. How about this? A status symbol for a lot

00:04:34.460 | of boomers starting in the '90s, really ramping up in the 2000s, and then the 2010s for sure

00:04:38.760 | after the global financial crisis was hedge funds. If you count the number of Wendy's

00:04:43.440 | and Chipotle's in the United States right now, there are more hedge funds than those

00:04:46.840 | two combined. There's 10,000 hedge funds in the world right now. Will millennials really

00:04:52.800 | want to put their money there when they can have maybe something more exciting in crypto,

00:04:56.040 | especially with the abysmal returns we've seen in hedge funds, especially with the fees

00:04:59.920 | they charge? I still think that all those other avenues would probably be disrupted

00:05:05.780 | much faster than the stock market assets. And if you look at crypto, it's still five

00:05:09.860 | to six times more volatile than stocks. You still can't put crypto in a 401(k). Maybe

00:05:14.540 | that's coming eventually. You can't do it now. I suppose you could make the argument,

00:05:18.180 | "Well, listen, young people have grown up with crypto. They don't care that it's five

00:05:21.420 | to six times more volatile. They're used to the 24/7 markets. What's the Bain quote, Duncan?

00:05:27.320 | You think darkness is your ally. You merely adopted it. I was born into it. Molded by

00:05:31.160 | it. Is that right?" Something like that. So, you could make that case. But I still think

00:05:36.140 | that all these other things, crypto has a much better chance of disrupting them than

00:05:40.700 | the stock market. And I think crypto and stocks could actually go hand-in-hand in a portfolio.

00:05:45.260 | That makes more sense to me. Getting back to the unlimited nature of crypto, it is kind

00:05:47.900 | of funny that there's this abundance of scarcity. The initial draw to Bitcoin, especially, was

00:05:53.220 | scarcity. And now we have a million different coins. And this person is right. You can keep

00:05:57.020 | creating coin after coin after coin. But I think, eventually, that's all going to go

00:06:01.900 | away. So, the analogy I want to make here is the automobile. The first car manufacturing

00:06:06.820 | company I think came out in 1895. Cars really ramped up. By the 1900s, from 1900 to 1910,

00:06:14.020 | you had 250 new automakers came on board as new companies. From 1910 to 1920, you had

00:06:20.580 | another 150, 160. Apparently, this is Wikipedia, so take it for what it's worth, but there's

00:06:26.360 | been 3,000 car companies founded in the United States since then. 3,000. By 1950, there were

00:06:31.820 | three of them, basically. Ford, Chrysler, and General Motors. You had the big three.

00:06:35.700 | Now, maybe -- and they had that for, I don't know, 10, 20, 30 years by the time Honda and

00:06:40.220 | Toyota started really making some headway in the 1970s, 1980s. Now, maybe you have eight

00:06:44.180 | to 10 car manufacturers that control the entire market share. I think you're going to see

00:06:48.820 | that same dynamic play out in crypto, where, eventually, a lot of these ones that just,

00:06:54.180 | for a while, you realize there's no use case for them. There's something better that comes

00:06:56.740 | along. A lot of the smaller ones just drop off or go nowhere. I think you're going to

00:07:00.940 | have a few use cases where you have these certain protocols that are actually useful

00:07:05.880 | when these use cases come about. You'll have a handful of crypto projects that dwarf the

00:07:10.920 | other ones by far. Those ones take this unlimited nature of it, and they make it so, why do

00:07:16.500 | you need to have so many of them? They can just dwarf them and get rid of them. That's

00:07:20.360 | kind of where I come on. I'm not worried about crypto taking headway from the stocks. I think

00:07:25.240 | that transformation could take a long, long time, even if millennials start doing it.

00:07:29.520 | You start at, I don't know, a 5% to 10% allocation for most people that aren't totally crypto

00:07:35.200 | evangelists. That's kind of the way I'm looking at it.

00:07:38.040 | It's kind of funny that you have this divergence of people who are going into stable coins

00:07:43.640 | for the yield, but then, traditionally, people have been in crypto to try to get 1,000 X

00:07:48.320 | or something. It's kind of interesting to see that playing out.

00:07:51.480 | Right. It's funny because money markets actually helped bring about Vanguard back in the day.

00:07:55.720 | That was their big asset. I actually think for adoption, for getting people who aren't

00:07:59.680 | in crypto right now, I think that's actually a pretty good use case as stable coins are

00:08:04.000 | the money market of crypto. I think that's a good way to get people in.

00:08:06.920 | Alright, let's do the next one. This is one of our favorite questions we've got in a while.

00:08:11.560 | This is a fun one. I like this one a lot. This question is from Chris. "Let us know

00:08:17.920 | in the chat if you're a Magic the Gathering fan." Chris writes, "I have a massive Magic

00:08:23.200 | the Gathering collection and I'm looking to move it into something more liquid. My collection

00:08:27.080 | was worth about $600,000, but I sold 170K worth of cards in 2021. I spent a large chunk

00:08:33.900 | of that on enjoying life and put the rest into savings and a munibond fund. I'm considering

00:08:38.680 | selling another large chunk of my collection in 2022. If I sell, what's the best way for

00:08:43.000 | me to put that cash to work?" Then the second part of that is, "Or do you think they should

00:08:46.900 | even sell given how the collectibles market is looking right now?"

00:08:50.640 | $600,000 worth of Magic the Gathering. Wow. Duncan, what is your experience with Magic

00:08:59.880 | the Gathering? Dungeons and Dragons, basically?

00:09:03.280 | There's definitely a lot of overlap there. I'm not an expert in Magic by any means. I

00:09:08.880 | was more of a Pokemon person. I do have a starter set. I have a starter pack of Magic

00:09:15.240 | from when I was in high school that I still have somewhere, so I should probably pull

00:09:18.300 | that out. Chris also shared this site that allows you to get real-time pricing on Magic

00:09:25.060 | cards. There's this entire site dedicated to that. They have a ticker showing prices.

00:09:30.900 | There's a few things happening in the collectibles market. One was, the pandemic happened and

00:09:34.140 | people got bored. The other thing was, though, that the internet has really just made a market

00:09:38.940 | for this stuff that didn't exist in the past. You can go look on eBay. You can go look on

00:09:41.660 | this site that you found and see what the prices are in real-time, which is kind of

00:09:44.700 | cool. I guess the one thing you have to be careful

00:09:48.100 | of here is the endowment effect, where you feel like things that you own are worth more

00:09:52.320 | simply because you own them, and you want to hold on forever. I think, especially with

00:09:56.420 | something tangible like this, it's probably more of an emotional investment than anything,

00:10:00.080 | because you can see it and feel it. You're probably not picking it up too often, because

00:10:03.820 | you don't want to mess it up. It's probably in the packaging still, if it's worth that

00:10:06.100 | much. But I think this huge collectibles boom in the market that we've seen since the pandemic,

00:10:11.500 | some people say, "Well, this is Beanie Babies, and look what happened then. It crested and

00:10:14.940 | it broke." And other people say, "No, we're actually making a market for these things.

00:10:19.580 | We can fractionalize them and sell shares in them." I don't know. This is kind of like

00:10:23.900 | crypto, where there's so much stuff now, and it really depends on who's in the market for

00:10:27.580 | this and how much money they want to spend. I guess the bull case here is that there's

00:10:30.900 | so much money sloshing around, it doesn't matter. I think if you have a chance to cash

00:10:36.280 | out at a much, much higher price on this, and that's going to diversify you more. For

00:10:41.540 | this person's portfolio, I think he said he has $1M in retirement accounts and $600K in

00:10:45.140 | Magic the Gathering cards. So, you have a huge, huge concentrated position in this one

00:10:50.180 | collectible that has some liquidity, but it's not as liquid as a financial asset. So, I

00:10:53.980 | think if you can diversify, that's just me. Boring old me would rather diversify. And

00:11:00.300 | if there's a specific piece that you want to hang on to, that you think, "I think this

00:11:03.580 | is going to be worth so much more," or, "It just has special meaning to me," you can hang

00:11:06.820 | on to it. As far as what you want to put your money towards, this is why you have a preset

00:11:11.980 | asset allocation depending on your time horizon. Then you don't really have to think about

00:11:16.660 | this question. If this is money that you know is going to be invested for a certain amount

00:11:20.500 | of time, then you have an asset allocation where you say, "My mix between stocks, bonds,

00:11:24.340 | cash, whatever, real estate, other investments, is going to be like this." And then you invest

00:11:27.800 | based on your asset allocation. You don't try to overthink it and think, "Well, should

00:11:30.760 | I try to off that, or should I put this in some sort of fund?" Look at your asset allocation

00:11:34.380 | and what you have now, and then use that as your guidepost for this.

00:11:37.820 | I did get one other thing on this. I actually asked a regular on the show, Bill Sweet, who's

00:11:42.820 | our tax expert, "How do taxes work on something like this?" Because taxes on collectibles

00:11:46.260 | are different. He said that there's actually a maximum rate. It doesn't work like just

00:11:49.620 | selling capital gains on a stock. There's a maximum rate of 28% on these, depending

00:11:54.460 | on your income level. So, think through the tax implications of selling this as well,

00:12:00.540 | which is kind of crazy. It has its own little market, but that's the way things work. Kudos

00:12:05.980 | to you for holding this whole time. I'm sure he's seen a massive increase in this, and

00:12:09.620 | held it for a long time.

00:12:10.380 | Wathen: We should also add that Chris mentions that they still play, still love Magic. They

00:12:16.300 | still have a collection of cards that they're keeping. These are other cards that they're

00:12:21.140 | getting rid of. So, yeah, pretty cool. That's something that you enjoy over the years. I'm

00:12:25.780 | guessing probably for a very long time, could actually end up paying off in that regard.

00:12:29.420 | Lewis: If you do sell, let us know what you get for this stuff. Please don't come back

00:12:34.660 | and blame me if it's worth way more than 20 years. But, that's my thought on it. Alright,

00:12:39.060 | let's do the next one.

00:12:41.820 | Wathen: Up next, we have a question from a young financial advisor. "I'm a new financial

00:12:49.160 | advisor at 25 years old, and I'm at an independent financial planning firm in California. I'm

00:12:54.700 | on a contract where I have to produce X amount of insurance in three years. I'm finding it

00:12:59.140 | difficult to build a client base and get assets under management early on. I've built great

00:13:04.020 | relationships with centers of influence and receive referrals somewhat consistently. However,

00:13:08.940 | the lack of pay from insurance and the non-existent AUM is making me second guess where I am career-wise

00:13:14.020 | and financially. Is it worth going to a discount brokerage and getting a salary and incentives,

00:13:19.100 | or should I look into buying another book of business, or should I just stick it out

00:13:23.060 | for a few more years?"

00:13:24.060 | I should also mention, we covered this question on another show a couple months back, but

00:13:29.700 | we wanted to dive a little deeper into this one.

00:13:31.900 | Lewis: Yeah, I want to go a little deeper, because I've never done the eat what you kill

00:13:35.300 | kind of thing, but we have some people in our firm. Jonathan Novy, who's our resident

00:13:39.460 | insurance expert, grew up in the insurance industry, and I'm sure you know a lot about

00:13:44.140 | this. I've had friends who've had these jobs, especially right out of school, like this

00:13:47.740 | young person, where it's basically like, go through your list of contacts, find your friends

00:13:52.180 | and family, sell them insurance. I think my brother-in-law, as a single guy in his 30s,

00:13:57.540 | was pitched from a friend for life insurance. But I guess that's how it works, and if you

00:14:03.140 | don't know how this works, why don't you explain from your perspective how this stuff works

00:14:06.420 | in the insurance industry and why this could be potentially difficult for this young financial

00:14:10.100 | advisor?

00:14:11.100 | Steele: Sure. First, I want to say to him, you're not alone. I mean, hell, Josh wrote

00:14:16.420 | a book about the incentives, or how incentives in this business are not necessarily aligned

00:14:21.420 | for the end user. But first thing to consider with this is, I know it's hard to realize

00:14:27.060 | this, but you're not at an independent financial planning firm. You're at a place that requires

00:14:30.980 | you to sell insurance. I'm not saying it's bad. I'm saying just understand what it is

00:14:34.940 | that you're doing. And I was at a place like that. I started at an insurance company, broker/dealer,

00:14:39.580 | back in 2007 when I got in this business, as my colleague Brian Rosen, who's with us

00:14:43.460 | now.

00:14:44.460 | Maxfield And I assume they gave you quotas, probably?

00:14:45.460 | Steele So your benefits and your payouts were based

00:14:50.140 | on how much of the proprietary crap that you sold, whether it's insurance products or annuity

00:14:55.980 | products or whatever. So it didn't take us long to realize then that we were at a place

00:15:02.180 | where the incentives weren't aligned for the end user. And that's the story of learning

00:15:06.500 | how to be in this business for a very, very long time. You're not alone who sent this

00:15:10.620 | question in. It used to be a long time ago that if you wanted to get into what was then

00:15:16.380 | the brokerage business, you went to some wire house and you got hired because your family

00:15:21.580 | had connections and they figured you could sell your dad's friends some stuff. And if

00:15:26.300 | you stuck around long enough, then you either stayed or you were gone and the "senior advisor"

00:15:33.700 | you work with kept the business.

00:15:34.940 | Maxfield So I guess you have to figure out whether

00:15:37.380 | you're going to be in sales or an advisor. But the thing to remember is that everyone

00:15:40.660 | is in sales in some aspect.

00:15:42.020 | Steele Right, right. So it could be that the place

00:15:44.500 | is a decent place to learn. And he mentions discount brokerages in here. By discount brokerage,

00:15:50.620 | I'm assuming you mean things like Fidelity or Vanguard, which have actually not bad planning

00:15:54.380 | programs. And we have a colleague who was at Vanguard for a while, and he learned how

00:15:59.020 | to become a financial planner. He got his CFP and now he works at RWM and talks to clients.

00:16:04.500 | So there's definitely a learning curve in this business. It could be that the place

00:16:08.980 | where you are isn't the worst place. And everything's a trade-off. And if you're at the point where

00:16:15.180 | you feel really awful about having to talk to every single person you talk to about buying

00:16:19.300 | an insurance product, then you shouldn't be there.

00:16:21.700 | Maxfield Jonathan, you have my favorite definition

00:16:24.300 | of this. So tell me, tell the people again, what is your definition of insurance and kind

00:16:27.720 | of thinking through that way too?

00:16:28.980 | Steele Got it. So when it comes to insurance, this

00:16:31.780 | is the thing you have to realize. People buy insurance because there will be a financial

00:16:36.340 | impact on their family, were they to die or be disabled or need long-term care or something

00:16:40.560 | like that. Our job as advisors is to figure out what that financial impact is. End of

00:16:46.740 | story. Measure that impact in dollars. And then if it is the kind of low probability

00:16:51.460 | high impact event that is a triggering event, then someone's going to insure that for you.

00:16:56.500 | But there is no like people don't need insurance. People have risks that they're trying to manage.

00:17:04.100 | Insurance is just a tool that we use to help manage that.

00:17:07.020 | Maxfield I think a pretty good way of looking at this

00:17:08.860 | from the young person's perspective is does your insurance company expect you to sell

00:17:13.660 | only insurance to everyone for every single problem they have? If that's the case, then

00:17:18.540 | that's probably not the kind of place you want to stick around at because insurance

00:17:21.220 | is not always the answer. It can be an answer for certain things, but it's not an answer

00:17:24.940 | for every financial problem someone has.

00:17:26.900 | Stewart Right. Right. And you end up at the kind of

00:17:28.820 | places and like the worst culprits, the places that are the guiltiest of having the really,

00:17:36.100 | really bad incentive structures are typically the captive insurance places where they try

00:17:42.500 | to convince you that you have some sort of moral obligation to sell insurance to people

00:17:47.180 | and that you're always doing something that's in their best interest by selling them an

00:17:50.140 | insurance product. It's flat out not true.

00:17:52.220 | Maxfield Right.

00:17:53.220 | Stewart And like I said, I started at an insurance

00:17:55.740 | company broker-dealer back in the day, and it took us a short amount of time to realize,

00:18:00.820 | "Well, it's not perfect if you want to be a fiduciary."

00:18:03.940 | Maxfield Yeah. I think the biggest thing is this person's

00:18:06.380 | got to realize, "Do you want to be a salesperson that sort of eats what you kill or do you

00:18:10.180 | want to actually be a financial advisor?" There's nothing wrong with that. There's

00:18:13.540 | great people who sell and do fine for themselves. It's just kind of getting your head around

00:18:17.340 | that.

00:18:18.340 | All right, let's do the next one. We had another insurance one for Jonathan.

00:18:21.660 | Okay. Up next, we have a question from Steve. "I'm 67 years old and about to retire.

00:18:32.060 | I live in the Midwest, have no mortgage, and have a relatively low cost of living. I have

00:18:36.340 | enough savings to wait until age 70 to take Social Security so I can get the max. I own

00:18:40.940 | a Fidelity deferred annuity. My father forced me to invest in this account years ago when

00:18:45.780 | he realized I was going to be a ne'er-do-well adventurer," which sounds interesting. "The

00:18:50.740 | amount dropped to $299,000 in April 2020 but now stands at $461,000. When I convert it,

00:18:57.540 | this annuity will provide the bulk of my retirement income so I live and die on how my money is

00:19:02.700 | invested at the time of conversion. I'm tempted to leave the allocation as is, 33% to 36%

00:19:08.380 | in bonds, 11% in international stocks, and the rest in U.S. stocks. Is there any reason

00:19:13.060 | not to annuitize the account as it stands now? Am I missing something?"

00:19:16.460 | All right.

00:19:17.460 | Also, there's some stuff in here for the new boys watching. I feel like you should probably

00:19:20.620 | write down what kind of account he's even talking about there.

00:19:23.700 | Yeah, for sure. And also, right away, Steve didn't have to tell us his age because he

00:19:27.500 | said "ne'er-do-well." How do you say it?

00:19:30.460 | Ne'er-do-well.

00:19:31.460 | That's definitely a boomer phrase, sorry, Steve.

00:19:35.460 | So the idea here, Jonathan, because an annuity is an insurance product, technically, explain

00:19:41.460 | to us what this is about the conversion factor. Because even I'm a little shaky on this stuff.

00:19:46.580 | So how does this work? Is it in a certain account that changes over time and then you

00:19:50.020 | have to lock in a certain allocation and that's it for the rest of your time?

00:19:52.700 | Right. So it's not locking in a certain allocation. What he means is, and let's look at annuities

00:19:56.780 | in general first, the specific thing that this guy's talking about. When he talks about

00:20:02.340 | like activating or annuitizing the contract, the cash value itself goes away for his use.

00:20:09.260 | So annuities, like everything else, are just a product and they allow you to engage in

00:20:12.620 | a series of trade-offs. In annuitizing or activating the account, what he would get

00:20:18.000 | is the insurance company would pay him out a stream of payments or income every month

00:20:24.220 | for the rest of his life, no matter what.

00:20:26.300 | All right. So that lump sum is now effectively gone and it's being replaced by regular income.

00:20:31.700 | Exactly. So it's akin to having a pension from years ago. I mean, I know not that many

00:20:35.980 | people have those anymore. The trade-off you engage in when you annuitize this kind of

00:20:41.680 | contract or buy something like a SPIA, a single premium median annuity, or a deferred income

00:20:47.180 | annuity, there's lots of this stuff swimming around in the world. The trade-off you engage

00:20:51.540 | in is you give up liquidity to make sure that you don't run out of money. This is flat-out

00:20:58.500 | longevity insurance and you're making a trade. Were he to annuitize that contract and live

00:21:04.680 | to be 106, he is the winner by far.

00:21:09.700 | But what people don't quite understand is they'll say things like, "And if he's 67 and

00:21:13.860 | he annuitizes that now, maybe they're going to pay him 6.5% or something of his account

00:21:18.620 | balance every year." You're not earning 6.5% on your money. The first many, many years

00:21:26.100 | of payments, the insurance company is returning your own money to you.

00:21:29.260 | Right. Yeah. If he hands over 300K or whatever it is, or 500K, whatever it is, at the beginning,

00:21:34.820 | that's that money coming back to him because it's the money he already gave them.

00:21:37.900 | Right. And it's the tax treatment of payments on annuities like this is generally pretty

00:21:42.520 | good because you're only taxed on what's known as exclusion ratio because basically it's

00:21:46.060 | a return of your own money for a lot of it.

00:21:48.860 | Right.

00:21:49.860 | But it is a trade-off. Now, the interesting part of this question to me is it allows us

00:21:56.380 | to kind of figure out the planning challenge of the difference between being rational and

00:22:02.300 | reasonable or the difference between optimizing for math and optimizing for people. It's not

00:22:07.660 | just the math. The math might say to you, if you invest that money, you could earn more

00:22:12.940 | over time and end up with more money at the end of your life. It may say that. But if

00:22:18.880 | it's true, and the assumption I'm making in here is that he has extra liquidity beyond

00:22:23.480 | what's in the annuity.

00:22:24.480 | Right. If he has a big purchase come up, he might be out of luck.

00:22:27.200 | Right.

00:22:28.200 | But yeah, you're right. The psychological component is he gets this money and it's coming

00:22:31.880 | to him every month and he doesn't have to have any sort of other planning. He doesn't

00:22:34.420 | have to figure out asset allocation, any of this stuff. It's taken care of him. And that

00:22:38.640 | seems appealing to me, especially for someone who may not have a huge retirement balance

00:22:42.320 | and have millions of dollars to pull from. It makes a lot of sense to me.

00:22:46.040 | Absolutely. If this is the kind of thing that allows him to do things like invest the balance

00:22:50.680 | he has, because effectively what you're doing when you're locking in the stream of income,

00:22:54.960 | that's the equivalent of a bond portfolio. It's not liquid, but that's the equivalent.

00:22:59.480 | So it changes if you're trying to think of an overall household asset allocation. This

00:23:04.420 | makes your asset allocation more conservative with the fixed part of what you have. So it

00:23:09.500 | allows you to, if you want, invest the liquidity you have.

00:23:14.180 | And it's also important to remember that he said he's going to wait to take Social Security.

00:23:17.480 | That's basically an annuity as well. So yeah, your point is do you wait? Do you do it now?

00:23:24.180 | It depends how quickly you want to lock in whatever your rate is going to be, basically.

00:23:29.800 | And if he's able to basically accommodate all of his lifestyle expenses with the annuity,

00:23:35.880 | and then the assumption you make is, based on what he wrote, that when he reaches age

00:23:39.980 | 70, he'll have more than enough to pay his bills with Social Security and with his annuity.

00:23:45.720 | That means the liquidity he has is extra. It's bonus money.

00:23:49.080 | So this is a personal finance question, but yeah, that makes sense to me.

00:23:53.560 | It's interesting. One more thing to note about annuities. They get a really bad rap in the

00:23:58.080 | media, and they deserve that. It's not because the products themselves are bad. It goes to

00:24:03.840 | the thing we were talking about in the earlier question. It's all about the incentives that

00:24:07.560 | go with selling them. This annuity looks like it's pretty good. It probably doesn't come

00:24:12.900 | with a massive sales charge or commission to the person who sold it to him originally.

00:24:17.300 | Annuities themselves are great. It's the incentive structures that are built into the sale of

00:24:20.560 | annuities, which give them a really, really bad rap, which they deserve, for sure.

00:24:24.440 | Hard to know what you're getting into. I've got one more question for Jonathan before

00:24:30.040 | we go. Jonathan, what is the name of the steakhouse in Chicago that you took me to that you go

00:24:33.600 | every year for Christmas Eve for your birthday?

00:24:35.080 | Oh, we go to Joe's. Joe's Steak and Seafood.

00:24:37.440 | Because that's your birthday, right?

00:24:38.640 | It is my birthday in two days. So, I will be going back there. It's a good one. I'm

00:24:43.480 | turning 50 in two days, so I intend to eat and drink for my country.

00:24:46.560 | Oh, nice. That's a great place. What is it like? It's like they make the most money of

00:24:51.300 | any restaurant per square foot of any in the country or something, right?

00:24:54.800 | Right. So, prior to COVID, they were allegedly the most profitable per square foot restaurant

00:25:00.240 | in the country. I don't know what it's like now. I intend to contribute to that on Friday.

00:25:05.960 | By the way, I'm looking at the comments here. I saw someone call me Ben J. Powell for my

00:25:09.640 | love of the Fed. Pretty good burn. Not bad. Remember, if you have a question for us, ask

00:25:16.540 | thecompoundshow@gmail.com. Leave us some thoughts in the comments below. I'd love to hear people's

00:25:23.000 | thoughts on their collectibles. I saw a bunch of people talking about stamps, any other

00:25:26.000 | magic, the gathering, Dungeons and Dragons. I have some 90s sports cards that are all

00:25:29.640 | probably worthless because there was no scarcity back then. Thanks to Duncan for being nice

00:25:33.700 | and festive today. Thanks for Jonathan for his insurance know-how. Remember, idontshop.com

00:25:38.280 | for all your needs. We're going to come back in the new year, right, Duncan? 2022, taking

00:25:42.760 | next week off. Happy holidays. Merry Christmas, everyone. Thanks for coming along. Thanks,

00:25:47.920 | everyone. Cheers, guys. See you in 2022.

00:25:49.440 | [music]

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