What’s the Best Time to Buy Stocks?

00:00:00.000 | (beeping)

00:00:02.160 | - Welcome back to Ask the Compound,

00:00:14.440 | where we finally got some stock market questions this week.

00:00:16.660 | Remember, our email here is askthecompoundshow@gmail.com.

00:00:19.780 | Duncan, when I was growing up,

00:00:21.600 | you basically had two choices when it came to fashion.

00:00:23.640 | One, you could be comfortable and look like a slob,

00:00:26.640 | or two, you could look nice, but be totally uncomfortable.

00:00:30.500 | I feel like sometime in the last 10 to 15 years,

00:00:32.260 | that's changed.

00:00:33.540 | Today's show is sponsored by our friends at Bird Dogs.

00:00:36.180 | No one cared about making clothes

00:00:38.340 | that had both in the past, right?

00:00:39.620 | Stretchy, breathable materials that also look nice.

00:00:42.340 | I feel like it's a huge leap forward.

00:00:43.720 | Bird Dogs has these new polos.

00:00:45.260 | I got one on under here.

00:00:46.380 | See, look, Bird Dog.

00:00:47.620 | It's comfy. - Nice.

00:00:48.900 | - It's the stretch material, just like those shorts.

00:00:51.500 | It looks nice, but it's also very comfortable.

00:00:55.300 | I think it's one of the biggest innovations this century

00:00:57.540 | besides the skip intro button on streaming services.

00:01:01.020 | And it's the same thing across their polos,

00:01:03.940 | their shorts, their pants, joggers.

00:01:05.660 | I've been wearing the joggers a ton lately.

00:01:07.100 | Every weekend, I'm going to flag football games

00:01:09.060 | and soccer games, and I have to move around

00:01:12.220 | and stand around a lot, and I wanna be comfortable.

00:01:14.220 | I wanna look okay, though, so I wear my Bird Dog joggers.

00:01:16.700 | Remember, we still have the Tech Dad hat here.

00:01:19.400 | Sorry, Duncan, this is yours.

00:01:20.300 | I still owe it to you.

00:01:22.020 | - One day.

00:01:22.860 | - BirdDogs.com/ATC, or enter the promo code ATC,

00:01:27.340 | and you get this free hat.

00:01:28.900 | It's great.

00:01:29.720 | Stock up now.

00:01:30.560 | - Sounds like a good deal to me.

00:01:31.780 | - BirdDogs.com.

00:01:32.940 | All right, last week--

00:01:34.140 | - Wait, should we make sure we're alive?

00:01:35.580 | I'm just kidding.

00:01:36.400 | We're alive.

00:01:37.240 | - It's always hit or miss here.

00:01:39.820 | Last week, there was a lot of discussion

00:01:41.000 | on the person who wrote in and said,

00:01:42.260 | "Hey, I make 50K.

00:01:43.420 | "I live with my partner in California, in Los Angeles,

00:01:45.700 | "and I save $500 a month."

00:01:47.420 | And a ton of people responded.

00:01:48.700 | I put this out on Twitter.

00:01:49.540 | What do people think?

00:01:51.140 | And a lot of people said, "Hey, this is a great question."

00:01:53.820 | But there's also the usual contingent of,

00:01:56.300 | in this economy, what about inflation and government debt?

00:01:59.300 | And what's the point?

00:02:00.120 | You'll never save enough.

00:02:00.960 | - What if annual inflation's 11%?

00:02:03.100 | - Yeah, and all these things.

00:02:04.140 | And my whole point is that just,

00:02:06.720 | when thinking about your finances or your career

00:02:08.700 | or anything like this, any type of advice,

00:02:10.620 | just ignore the defeatist attitude people.

00:02:12.540 | I hate those people, right?

00:02:14.580 | Those people are never going to be helpful.

00:02:16.500 | They're not helpful.

00:02:17.700 | So, I mean, if they're right, what's the point anyway

00:02:21.020 | of planning, right?

00:02:21.840 | That's their whole idea.

00:02:22.680 | So, I don't know.

00:02:24.060 | I think you can safely ignore these people

00:02:25.420 | that have the defeatist attitude.

00:02:26.540 | Like, "Well, you're lucky to have a job.

00:02:28.380 | "You should, you know,

00:02:29.340 | "how can you do anything in this economy?

00:02:30.860 | "And what about this?

00:02:31.700 | "And what about that?"

00:02:32.520 | And people who are always looking

00:02:33.360 | for the cynical downside of things,

00:02:35.080 | those people are not helpful.

00:02:36.100 | I say safely ignore them.

00:02:37.460 | That's why you come to us.

00:02:40.300 | Glasses half full, optimistic.

00:02:42.920 | We're not here to be cynics.

00:02:44.180 | Let's go.

00:02:45.020 | First question.

00:02:46.020 | - Okay.

00:02:47.420 | Up first today, we have a tweet that came in.

00:02:50.700 | And so, you posted S&P 500 returns 2020 to 2021,

00:02:55.620 | up 52%, 2022 to now, down 7%.

00:03:00.620 | You don't get one without the other.

00:03:03.180 | And then Brent responds,

00:03:04.940 | "I began investing in S&P index fund in summer of '21.

00:03:09.380 | "Is that unfortunate, good, or bad timing?"

00:03:12.860 | - All right.

00:03:14.060 | Good question for a young person.

00:03:16.060 | I think intuitively you want to see,

00:03:18.700 | when you put money in, you want things to go up, right?

00:03:21.340 | You want to make money.

00:03:22.660 | It makes you feel good.

00:03:24.340 | If you're just starting out though,

00:03:25.540 | it should be the opposite.

00:03:26.900 | So from 1928 to 2022, S&P 500 achieved

00:03:31.020 | annual returns of 9.6%.

00:03:33.360 | We can round up to 10% if we want to be,

00:03:36.060 | you know, fudged a little bit.

00:03:37.920 | But we all know that the stock market

00:03:39.500 | does not simply offer nine to 10% annual returns

00:03:41.860 | year in and year out, right?

00:03:43.800 | Any given year in the stock market

00:03:45.420 | is anything but average.

00:03:46.980 | In fact, if we just look at what happens

00:03:48.820 | in an average up year and an average down year,

00:03:50.340 | we can kind of figure this out.

00:03:51.160 | So in an average up year, back to 1928,

00:03:54.060 | there's an average gain of about 21%.

00:03:56.460 | You with me, Duncan?

00:03:57.300 | So stocks go up, the average gain is like 21%.

00:03:59.860 | The time stocks goes down,

00:04:01.420 | the average return is like a loss of 14%.

00:04:03.960 | So the stock market is up roughly three out of every four

00:04:06.840 | years in that, right?

00:04:07.940 | You with me?

00:04:08.780 | 75% of the time it's up, and when it's up, it's up.

00:04:10.780 | Let's round it down to 20, right?

00:04:12.420 | And when it's down, it's down, we'll say 15.

00:04:14.260 | I like nice round numbers.

00:04:16.660 | So let's say if you're in an average world,

00:04:20.340 | which again, doesn't exist,

00:04:21.220 | but for the sake of this example, let's just go with it.

00:04:23.040 | So you'd have plus 20, plus 20, plus 20 down 15

00:04:26.820 | in some order, right?

00:04:27.780 | If things follow the average,

00:04:29.020 | and that would give you around 10% per year.

00:04:31.280 | I'm not saying that 10% is gonna stick with us going forward

00:04:34.100 | and I'm also not saying that you're gonna get a 20% up year

00:04:36.620 | every time it goes up and a 15% down year when it goes down.

00:04:39.540 | Sake of example, disclosures out of the way, right?

00:04:42.400 | But I think these numbers can be instructive

00:04:43.920 | when thinking about it through your life cycle investing,

00:04:46.420 | especially when you're young and just starting out.

00:04:47.780 | So let's say you're gonna save $1,000 a year

00:04:50.220 | for the next 40 years, right?

00:04:52.400 | And we'll use our same gain and loss numbers as before,

00:04:55.760 | right?

00:04:56.600 | When the market's up, it's up 20.

00:04:57.940 | When it's down, it's down 15, right?

00:05:00.460 | And three out of every four years, it's gonna be up 20.

00:05:02.600 | One out of every four years, it's gonna be down 15.

00:05:04.460 | Now let's look at two scenarios

00:05:05.520 | and think about which would be better.

00:05:07.260 | Your gains to be front loaded.

00:05:09.340 | So you have 30 years of gains over 40 years

00:05:11.700 | or your losses are front loaded.

00:05:13.100 | So you start with 10 years of down 15%, all right?

00:05:15.860 | So scenario A, John, throw it up here.

00:05:17.980 | So let's say you get 10 years of down 15% in a row

00:05:21.940 | and then you get 30 years of up 20% in a row.

00:05:24.780 | Your average return from this scenario is 10% per year,

00:05:27.980 | but I'm just moving things around, okay?

00:05:30.860 | All right, now let's look at scenario B, John.

00:05:32.820 | This is you get 30 years in a row of 20% returns.

00:05:36.180 | Again, you're putting in $1,000 a year for both scenarios.

00:05:38.300 | Then you have 10 years at the end

00:05:39.820 | where you're losing 15% a year.

00:05:41.100 | Again, 10% per year return.

00:05:43.940 | The market itself is up 10% per year in either scenario.

00:05:46.980 | I just shuffled around the order here, okay?

00:05:49.880 | So a person who's saving periodically,

00:05:51.300 | which one should you choose, Duncan?

00:05:53.020 | A or B?

00:05:54.520 | Would you rather have your losses up front

00:05:56.740 | or losses at the end and have a ton of gains up front?

00:05:59.200 | - I'm gonna be honest, I was just in the chat

00:06:01.380 | and so I missed the last part.

00:06:03.320 | - All right, I'm gonna tell you.

00:06:05.620 | So you want this, so in scenario A,

00:06:07.820 | your returns are dreadful for the first 10 years, right?

00:06:10.340 | And then the ensuing 30 years, you have gains every year.

00:06:13.900 | Saving $1,000 a year,

00:06:15.140 | your ending balance would be $2.5 million.

00:06:17.880 | Pretty good, right?

00:06:19.300 | Scenario B, your returns were wonderful

00:06:21.660 | for the first 30 years, but dreadful for the final 10.

00:06:25.020 | That $1,000 a year would be $200,000.

00:06:27.840 | So we talk about a $2.3 million difference.

00:06:30.940 | Again, the market has the same average return

00:06:34.420 | in each scenario.

00:06:35.860 | But in scenario A, you're saving and investing

00:06:39.460 | in the most important compounding years of your life

00:06:41.080 | during a nasty crash, right?

00:06:43.440 | And in scenario B, you're saving and investing

00:06:45.500 | in the most important years of your life

00:06:46.620 | during a rip-roaring bull market.

00:06:48.300 | Obviously, these examples are not realistic.

00:06:50.900 | If the stock market fell 15% per year for 10 years,

00:06:53.160 | we're talking like an 80% crash,

00:06:55.420 | and that's the Great Depression.

00:06:57.660 | If you gain 20% for 30 years in a row,

00:06:59.580 | we're talking about a gain of nearly 2,400%.

00:07:01.620 | So obviously, the stock market doesn't look like this.

00:07:03.220 | There's more give and take.

00:07:04.600 | But the idea here is that you should want

00:07:06.240 | those poor returns front-loaded.

00:07:08.740 | You want to be investing

00:07:10.460 | because you're going to be buying in at lower prices

00:07:13.160 | and buying more shares and at higher dividend yields

00:07:15.700 | and lower valuations and all these things when you're young.

00:07:18.320 | When you're young,

00:07:19.160 | you should not be wanting all-time highs.

00:07:20.820 | If you're periodically saving out of your paycheck

00:07:23.140 | or saving on a monthly basis,

00:07:24.580 | you should want the stock market to fall.

00:07:26.100 | You should get on your hands and knees

00:07:27.100 | and pray for bear markets and corrections and crashes.

00:07:29.940 | These are good things for young people.

00:07:31.300 | - That's what I've said before

00:07:32.140 | is I think too many people, including myself in the past,

00:07:34.540 | always thought about it from dollar terms.

00:07:36.620 | Here's how much money I have in my account

00:07:38.500 | instead of looking at shares.

00:07:40.540 | If you look at shares, then it feels a lot better, right?

00:07:42.960 | 'Cause you are constantly accumulating more and more shares

00:07:45.460 | early on. - And especially if you're

00:07:46.300 | going to be a net saver.

00:07:47.120 | - Yeah, yeah. - Right?

00:07:48.300 | Yes, exactly.

00:07:49.140 | So John, throw up the chart here.

00:07:50.620 | This is since August, 2021

00:07:51.980 | when this person started investing.

00:07:53.740 | The stock market has essentially gone nowhere.

00:07:55.340 | We're talking about it's down 2% or so in total.

00:07:58.980 | And it fell for a while, it was up for a while.

00:08:01.140 | If you've been diligently saving and investing

00:08:02.660 | in the stock market on a regular basis

00:08:04.080 | and index fund like this person has,

00:08:05.560 | you've had the ability to slowly build up a position.

00:08:08.380 | Right?

00:08:09.780 | Sometimes prices are higher, sometimes they're lower,

00:08:11.580 | but it's essentially gone nowhere,

00:08:12.700 | which is a good thing, right?

00:08:14.140 | So I think if you're just starting out,

00:08:16.800 | the best thing that could happen to you

00:08:18.140 | is a series of down markets or sideways markets, whatever.

00:08:21.940 | The thing is you can't promise

00:08:23.660 | which way the stock market's gonna go.

00:08:26.700 | Sometimes it's luck, sometimes it's timing.

00:08:29.160 | The stock market's not gonna do what you need it to do

00:08:30.920 | just because you want a certain outcome.

00:08:32.920 | But most people think about it the wrong way.

00:08:34.640 | They should be thinking that the stock market should be bad

00:08:37.300 | when I'm a saver.

00:08:38.140 | That's a good thing.

00:08:38.960 | And hopefully it's better later on.

00:08:40.100 | So bad returns are not always a bad thing

00:08:42.540 | as long as they lead to better returns down the road.

00:08:44.420 | That's the idea here.

00:08:45.660 | - Also, going to cash or bonds early on in that scenario

00:08:49.700 | would completely negate what we're talking about.

00:08:52.500 | So just--

00:08:53.340 | - Exactly, it's the market timing thing, right?

00:08:54.780 | And obviously, again, this is probably a different scenario

00:08:57.660 | for older investors who have the majority of their wealth

00:09:00.560 | already tied up into the stock market.

00:09:02.420 | That's a different scenario.

00:09:03.660 | But if you're someone who's young and periodically saving,

00:09:05.280 | you want the returns to be poor.

00:09:06.700 | You want bad outcomes now

00:09:09.860 | so they can be better in the future.

00:09:11.980 | - Yeah, makes sense.

00:09:13.020 | Buy it on sale. - All right, next question.

00:09:16.300 | - Just not individual stocks.

00:09:18.500 | - Well, yeah.

00:09:19.340 | - Yeah, okay.

00:09:21.340 | Up next.

00:09:22.180 | - I mean, oldie goes down 15% every year for 10 years,

00:09:24.160 | probably, right?

00:09:25.000 | Is that what we're planning on?

00:09:26.260 | - That, yeah, that stock is not looking too hot,

00:09:29.440 | but I still have some.

00:09:31.380 | Okay, up next, we have a question from Brian.

00:09:34.540 | I want you to assume you could decide on the annual return

00:09:37.220 | for the S&P 500 for the next 20 years,

00:09:39.740 | but you had to select the lowest return

00:09:41.500 | you would be content with.

00:09:42.980 | What return would you choose and how would you decide?

00:09:46.140 | - All right, very philosophical here from Brian.

00:09:47.820 | - I like this. - He may have had a gummy

00:09:48.900 | before asking this one, but I like it, right?

00:09:51.420 | Because I think philosophical questions like this,

00:09:53.220 | although totally unrealistic,

00:09:54.600 | just like my first example, it was unrealistic,

00:09:56.660 | but I think if it helps you get in the right frame of mind,

00:09:58.900 | it can still be useful.

00:10:00.320 | So especially thinking about things like risk and reward.

00:10:02.260 | So John, do a chart on first.

00:10:04.060 | Let's look at the historical track record

00:10:05.300 | of the US stock market over 20 year periods.

00:10:07.300 | This is going back to 1926.

00:10:08.740 | I did rolling monthly returns.

00:10:10.680 | These are annual averages.

00:10:12.240 | So the average is a little more than 10% per year

00:10:15.060 | for over 20 year periods, which makes sense.

00:10:17.060 | You can see that there's a wide range around the average.

00:10:19.260 | The worst 20 year return, I have a gain of 1.9% per year.

00:10:23.580 | And the highest one is 18.3% per year.

00:10:26.980 | Of course, there's no, as usual, no taxes or costs

00:10:29.860 | or that sort of stuff taken out of this,

00:10:32.060 | but this is just the market.

00:10:33.620 | So even over longer time periods,

00:10:35.740 | there are risks involved with stocks, right?

00:10:39.360 | Interesting enough though, 75% of the time,

00:10:42.240 | going back to 1926, rolling returns have been eight,

00:10:44.980 | over 20 year periods have been 8% or higher.

00:10:47.500 | So like our three out of every four years,

00:10:49.220 | the stock market is up.

00:10:50.660 | Three out of every four 20 year periods,

00:10:52.740 | the stock market is up 8% or more.

00:10:54.540 | Now, obviously there's a lot of those periods overlapping.

00:10:56.980 | There haven't been that many 20 year periods.

00:10:59.180 | If we broke them up, it might look a little different,

00:11:00.660 | but initially I'd probably fall right around that 8% number,

00:11:03.900 | but there are obviously other considerations here, right?

00:11:06.260 | You have to think about it on a relative basis.

00:11:08.460 | So the 20 year treasury right now yields 5.2%.

00:11:12.920 | I think it hit yesterday, maybe a little higher,

00:11:14.880 | maybe a little lower today.

00:11:16.160 | That's a pretty good lock-in for 20 years, not bad.

00:11:19.120 | 20 year tips are yielding 2.6% real,

00:11:21.920 | meaning you get 2.6% per yield

00:11:24.680 | on top of whatever inflation is over the next 20 years.

00:11:26.880 | So these are like your hurdle rates or your bogeys,

00:11:28.520 | I think, as far as if you want to think about them

00:11:30.680 | in risk-free terms.

00:11:32.400 | So that's a much higher hurdle rate

00:11:33.440 | than we've had over the past 20 years.

00:11:34.560 | It also depends on what stage in life you're in.

00:11:36.360 | Like I said, older people are different.

00:11:37.620 | Retirees would probably take some sort of guarantee

00:11:40.440 | in the 6% to 7% range, I would imagine.

00:11:42.400 | Like if I'm done saving and I'm investing in the portfolio

00:11:46.640 | as a thing that's driving most of my income

00:11:48.660 | besides Social Security or pension,

00:11:50.680 | I'm sure a lot of retirees would say,

00:11:52.320 | give me 6.5% or 7% all day long for the next 20 years.

00:11:55.640 | Count it, I don't want to think about it.

00:11:57.720 | Young people, you're probably better off

00:11:59.400 | rolling the dice and accepting volatility,

00:12:01.200 | 'cause again, like the first question,

00:12:03.160 | it gives you the opportunity to buy in at lower prices

00:12:04.960 | and rebalance on occasion.

00:12:06.920 | Duncan, you actually pulled our audience

00:12:08.260 | about this question yesterday.

00:12:09.460 | John, just throw up the results here.

00:12:10.620 | So what's the lowest--

00:12:11.460 | - Yeah, thanks to everyone who responds.

00:12:12.460 | We always get thousands of people responding to me.

00:12:14.660 | - Yeah, this is great.

00:12:15.500 | On YouTube, we got over 2,300 people voted.

00:12:18.260 | The lowest annual S&P 500 return

00:12:20.100 | you would be content with over the next 20 years.

00:12:22.140 | It was actually more spaced out than I thought it would be.

00:12:24.260 | About a quarter of people said 5% to 6%.

00:12:26.140 | Again, if we could look at it by age,

00:12:27.940 | I'm guessing that's older people,

00:12:29.300 | 'cause you can get 5% in a treasury right now for 20 years.

00:12:32.420 | 6% to 7% was around 1/5 of the people.

00:12:34.700 | 7% to 8% was a little more than a quarter.

00:12:37.280 | And then over 8%, I guess it was around 30%.

00:12:41.320 | So a pretty even distribution.

00:12:44.320 | And I don't know, it would be interesting

00:12:47.080 | to see these broken out by age, but--

00:12:49.600 | - I mean, you can get 4% or 5% in Beanie Babies, I think.

00:12:52.500 | - But again, the treasury is the big thing here.

00:12:56.080 | So yeah, I would have fallen in like the 7% to 8% range.

00:12:58.740 | But the other problem with this exercise is,

00:13:00.200 | the funny thing is, if you did offer

00:13:02.160 | some sort of guarantee in the stock market, right?

00:13:04.320 | Like you can get 8% per year in the stock market.

00:13:06.960 | Our human nature, we would bid up the,

00:13:09.600 | regardless, we would bid up the prices,

00:13:11.420 | so eventually prices got so high

00:13:12.780 | that returns in the future would be too low,

00:13:14.900 | which is kind of how the stock market works, right?

00:13:16.600 | If you look at the actual fundamentals,

00:13:18.240 | they don't move around nearly,

00:13:19.720 | like dividends and cash flows and earnings and revenue,

00:13:22.480 | they don't move around nearly as much

00:13:23.480 | as the stock market itself.

00:13:24.500 | So even if this did exist, we'd probably mess it up somehow.

00:13:29.080 | And obviously life would be much easier

00:13:30.440 | from a planning perspective if you could say,

00:13:32.080 | hey, I'm getting 8% per year, year in and year out,

00:13:35.320 | and I'm just gonna bank on it.

00:13:36.760 | It would be way easier to plan for retirement,

00:13:38.920 | plan for 529 plans, all this stuff.

00:13:40.840 | Alas, risk and reward are attached at the hip,

00:13:43.880 | always and forever in the stock market, unfortunately.

00:13:46.080 | So certainly a useful question in light of the move

00:13:49.200 | I think we've seen in long-term bonds recently,

00:13:51.400 | especially for retirees thinking about like,

00:13:53.080 | do I take the guaranteed 5% for seven years

00:13:56.620 | or 10 years or whatever,

00:13:58.520 | or do I go for the juggler in the stock market

00:14:02.280 | and hopefully it's better?

00:14:03.840 | - I haven't seen many questions about munis recently.

00:14:06.680 | Is there any reason people wouldn't be looking at munis?

00:14:09.440 | - Well, I think we've gotten questions

00:14:12.440 | across the spectrum of yield, I think.

00:14:15.160 | Munis and corporates and the high yield

00:14:17.880 | and all these things.

00:14:18.700 | I think people are starting to get interested

00:14:20.480 | in all of them.

00:14:21.860 | So we'll see, I bet we have a muni one or two

00:14:24.000 | we can look for.

00:14:25.060 | Anyway, let's do another one.

00:14:27.080 | - Okay, up next.

00:14:28.080 | - What was your answer?

00:14:29.120 | What would you pick?

00:14:30.760 | - I said 7%.

00:14:32.640 | - Seven, okay.

00:14:33.480 | - It's like what feels like I would want

00:14:35.640 | and need to be invested in the stock market.

00:14:38.520 | - Okay, that's fair.

00:14:39.720 | - I mean, I'd like, you know, 20, but.

00:14:42.000 | - Yes.

00:14:42.840 | - Okay, up next we have the following.

00:14:46.880 | Hey guys, long time listener, first time emailer.

00:14:49.460 | I'm in sales and landed two large accounts

00:14:51.480 | that will move me from 300,000 to over $450,000 a year.

00:14:56.200 | That bumps my tax rate from 24% to 32%

00:14:59.700 | for a good deal of income.

00:15:01.320 | Should I be optimizing for lowering my taxable income,

00:15:04.000 | prioritizing things like traditional 401k over Roth

00:15:07.160 | and maxing out my 529s?

00:15:09.280 | Are there programs similar to the calculators online

00:15:12.200 | that you can play out tax scenarios in the future?

00:15:16.320 | I think we're talking about like how you can look

00:15:18.080 | at your different portfolios,

00:15:19.440 | but they're talking about for taxes.

00:15:20.980 | I'd love to try and see the math of traditional

00:15:23.380 | versus Roth as your income and tax brackets change

00:15:25.840 | throughout your lifetime.

00:15:27.000 | That sounds kind of cool.

00:15:28.160 | - Yeah, we don't have a tax calculator here,

00:15:30.240 | but we do have Mr. Bill Sweet.

00:15:31.640 | That's close enough.

00:15:32.480 | - Basically a tax calculator.

00:15:33.360 | - He's a tax calculator, Bill.

00:15:35.320 | See, tax GPT.

00:15:36.800 | Bill, I told you before the show started,

00:15:38.980 | I'm impressed with how many people email us in

00:15:41.120 | and know their tax bracket,

00:15:42.360 | because I don't know how many people in America

00:15:45.080 | could actually tell us what their tax bracket is.

00:15:46.760 | Maybe 2%, and that might be too forgiving.

00:15:50.720 | I don't really know what mine is

00:15:52.360 | until you tell me every year.

00:15:54.760 | - Yeah, I'm the only one here in New York City

00:15:56.520 | for some reason today.

00:15:57.440 | I think I'm gonna go on Fifth Avenue

00:15:59.080 | and take an impromptu poll when this show closes.

00:16:01.520 | Do you wanna do it live?

00:16:02.680 | You guys wanna come with me?

00:16:04.200 | I'm not actually gonna do that.

00:16:05.320 | - Let's not do that.

00:16:06.140 | - I don't see like a Jimmy Fallon or Jimmy Kimmel show

00:16:08.840 | from that ever coming about,

00:16:11.080 | because I don't think people care about their tax rates.

00:16:11.920 | - Who's the dude that like runs up and like just like,

00:16:15.840 | what's that guy's name?

00:16:16.680 | - Oh, it's Billy on the Street.

00:16:17.520 | That could be you. - Billy on the Street.

00:16:18.360 | Yeah, we could do that. - That's you.

00:16:19.180 | - Bill on the Street, tax GPT on the street.

00:16:20.440 | Anyway, let's get to Brian's question.

00:16:22.280 | Also, this is a not to brag.

00:16:23.480 | Good for you, Brian.

00:16:24.320 | He made some sales, got a huge jump in income.

00:16:27.000 | - My guy's making a half million dollars a year.

00:16:28.600 | I mean, that's gonna solve a lot of problems.

00:16:31.280 | But I love the thinking, which is like,

00:16:32.840 | cool, I've got this big raise.

00:16:34.080 | What am I gonna do tax-wise?

00:16:36.000 | So let's go back to the start.

00:16:37.720 | As we've discussed many times in the show,

00:16:40.060 | in a 401(k) plan, you have a choice to make

00:16:41.920 | on your contributions.

00:16:42.840 | And this year you can fund up to 22,500 per year,

00:16:46.140 | which is a big number.

00:16:47.840 | And that can go either into a traditional bucket

00:16:50.680 | and you get a tax deduction upfront for that,

00:16:53.400 | but you'd have to pay the full tax later, or Roth.

00:16:56.320 | And if you go Roth, you're gonna pay the tax now,

00:16:58.600 | but you get tax-free distributions later.

00:17:01.360 | I think at a half million dollars, as Brian indicates,

00:17:03.800 | that jump from 24 to 32% is where I would shift from Roth

00:17:07.840 | and go traditional there.

00:17:08.840 | - That's kind of like your cutoff, right?

00:17:10.340 | - For me, that's it.

00:17:11.180 | And we've discussed this in the past,

00:17:13.000 | but there's really two reasons, Ben,

00:17:14.440 | why the cutoff is there.

00:17:15.880 | So reason number one is it's the second biggest jump

00:17:18.760 | in the U.S. tax code.

00:17:20.540 | You go from 10 to 12, not a big deal, right?

00:17:23.040 | Then you go from 12 to 22, that's a big one.

00:17:25.440 | That happens about $118,000 a year.

00:17:28.040 | The next biggest jump is 24 to 32,

00:17:30.120 | right where Brian's looking at.

00:17:31.400 | And that happens at about $390,000 a year.

00:17:34.800 | And so Brian's marginal tax rate at 450, 500K,

00:17:39.220 | every dollar he puts into traditional 401K

00:17:41.360 | is gonna reduce his taxable income

00:17:43.580 | at that 32% tax bracket.

00:17:45.560 | And that's why I think that that leap is relatively big.

00:17:48.760 | Brian's right there,

00:17:49.780 | and that's where I'd make that shift.

00:17:51.380 | Very, very important. - Yeah.

00:17:52.680 | That makes sense.

00:17:53.520 | Any other considerations in terms of trying to figure out

00:17:55.980 | a way to do a SEP or a solo 401K?

00:17:57.860 | - Yeah, so, well, let me skip forward to the other,

00:18:00.300 | or skip back a second, Ben.

00:18:01.540 | The other big consideration is in our work,

00:18:03.860 | and this is based on our clientele,

00:18:05.980 | which are relatively affluent, relatively wealthy

00:18:08.340 | in the scheme of humanity,

00:18:10.780 | most of them are distributing assets in retirement

00:18:12.780 | at the 20 to 4%, 22% tax bracket, right?

00:18:15.900 | And so back to our point, if Brian's at 32 now,

00:18:18.740 | and we think he's probably gonna be at 24

00:18:21.300 | when he gets to retirement,

00:18:22.540 | that arbitrage is right there looking at you in the face.

00:18:24.740 | And so that, to me, is the second reason.

00:18:26.780 | So your question was what?

00:18:27.940 | Are there opportunities for other--

00:18:29.740 | - Well, I just wanna make a point here that,

00:18:30.820 | see, to all the Roth haters out there,

00:18:33.260 | you don't always recommend a Roth, right?

00:18:34.780 | - I don't, I don't.

00:18:35.700 | And it's almost like that was cued up, right,

00:18:37.340 | to rescue me from my--

00:18:39.460 | - I'm just saying, is there anything else,

00:18:41.020 | because this is a such,

00:18:41.860 | I mean, we're talking like a 50% jump in income here.

00:18:44.780 | Obviously, there's gonna be more taxes paid,

00:18:46.140 | but are there any other,

00:18:47.780 | should we be looking at any other tax-deferred vehicles

00:18:50.340 | to set things aside to try to save some taxes?

00:18:52.860 | - Yeah, so I'm assuming that Brian's working for an employer

00:18:55.020 | and so 401(k) is off the table, right,

00:18:57.380 | because he can't direct his own SEP IRA too.

00:18:59.420 | It's not his own business that he's directing.

00:19:02.180 | 401(k) is the easiest opportunity.

00:19:03.680 | I think HSA is the other one, Ben, that commonly comes up.

00:19:06.400 | It's gonna come up here in question two.

00:19:08.460 | Those are the big ones.

00:19:09.300 | But no, I mean, unfortunately, you're really limited.

00:19:11.220 | I mean, you can look at charitable,

00:19:12.420 | but in order to deduct a charitable

00:19:14.420 | at a married filing tax, married filing joint,

00:19:17.020 | you have to give like 30 grand, right?

00:19:18.420 | So that's a wonderful thing to do.

00:19:19.660 | I'm not saying don't, but it's a big lift, right?

00:19:22.300 | - Like no one's gonna feel sorry

00:19:23.900 | for someone making a half a million dollars a year,

00:19:25.700 | but when you're making that much,

00:19:26.820 | the traditional $6,000 limit or whatever

00:19:30.020 | on a traditional IRA and trying to do a backdoor,

00:19:32.180 | it almost doesn't seem,

00:19:33.700 | it's such a drop in the bucket at that point.

00:19:35.180 | - It is, it is, but the way to win the tax game

00:19:38.340 | is improve at the margins.

00:19:39.460 | Like you're not gonna give a big swing.

00:19:41.580 | No, you're not gonna cut your taxable income in half.

00:19:44.180 | - Okay, I guess that's the point, right?

00:19:45.980 | You know, there's only so many levers you can pull.

00:19:47.540 | - It's really winning the game.

00:19:48.580 | And fortunately, if you're earning a half million dollars

00:19:51.100 | from your job, like, yeah, you're gonna pay a lot of tax.

00:19:53.060 | So ultimately the small things do add up, Ben.

00:19:56.620 | But the second half of Brian's question was,

00:19:58.500 | is there a tax planning software out there

00:20:00.540 | where I can look at this?

00:20:01.500 | And like we use, Ben, as you know, in our practice,

00:20:04.380 | we use a combination.

00:20:05.580 | We use Orion Planning, we use eMoney,

00:20:07.820 | and we have a relationship with MoneyGuide.

00:20:09.260 | And each of those software platforms

00:20:11.180 | have different pros and cons.

00:20:12.580 | And unfortunately, none of them

00:20:13.740 | are offered to the retail investor.

00:20:15.860 | There are a couple of options that are out there

00:20:17.540 | that you could go Google.

00:20:19.060 | But unfortunately, for me and Bill, Ben,

00:20:20.900 | this becomes such a complex topic.

00:20:24.100 | We have not found that there's any real reliable software

00:20:27.540 | that can accurately forecast somebody's tax rate over time.

00:20:30.780 | What me and Bill Archeronian, CPA,

00:20:33.540 | he's the CEO at Ardubam Tax.

00:20:35.540 | What we end up doing

00:20:36.380 | is exporting financial plan data in Excel,

00:20:38.300 | and we end up building tax projections

00:20:39.940 | customized for clients.

00:20:41.300 | So unfortunately, I think that's the work of the CPA,

00:20:43.940 | and that's why you would pay somebody

00:20:45.300 | to kind of help there.

00:20:46.380 | There's not a lot that I think Brian can do

00:20:48.220 | outside of 401ks and things like that.

00:20:50.820 | - Tax is not very scalable as a business.

00:20:52.900 | - And it's not very scalable.

00:20:54.100 | And so we just end up with these homemade, small batch,

00:20:57.340 | this artisan tax planning that we do for clients.

00:21:00.220 | And for us, it's a big part of our value add.

00:21:02.380 | It's why we think we can charge.

00:21:04.060 | - My only other advice here would be,

00:21:07.140 | I'm okay when you're making that much more money,

00:21:09.100 | I'm okay with some lifestyle creep

00:21:10.500 | as long as you have savings rate creep.

00:21:11.900 | So if you were saving 20% of your income at 300,

00:21:14.980 | save 20% at 500 too.

00:21:16.580 | So that way you are saving the same percentage of income,

00:21:20.060 | and you're also giving yourself a raise

00:21:21.300 | to spend a little more.

00:21:22.140 | I'm fine if you're gonna do one, do the other.

00:21:24.540 | - Yep, and there are limits to what you can contribute

00:21:26.700 | to IRAs, to 401ks, to tax qualified investment accounts.

00:21:29.860 | There's no limit to what you contribute

00:21:31.220 | to a non-qualified account.

00:21:33.380 | We have relationships with some really good firms

00:21:35.420 | that do tax loss harvesting,

00:21:37.140 | direct indexing through our Shaughnessy Canvas.

00:21:39.220 | There are ways to solve this problem

00:21:40.740 | that are not just retirement accounts,

00:21:42.340 | and I'd urge somebody making a half million dollars

00:21:44.060 | to you to consider that.

00:21:44.980 | - Yeah, you're gonna be saving more in a taxable account.

00:21:46.700 | - Amen.

00:21:47.540 | - And if you need any help with tax loss harvesting,

00:21:50.020 | I can always provide.

00:21:51.460 | - We've got the market, Duncan's got the market cornered.

00:21:53.260 | - Yeah, I know how to get you there.

00:21:56.460 | - A great, great way to save on taxes is to lose money.

00:21:58.900 | It's very easy.

00:22:00.060 | - Yeah. - All right.

00:22:00.900 | Someone says savings rate creep is a new compound shirt.

00:22:02.540 | I like it.

00:22:03.380 | - Yep, yep, do not recommend losing money in the market.

00:22:05.340 | - You just gotta be careful with that

00:22:06.580 | because it could be like on a savings rate and a creep.

00:22:08.900 | - Yeah. - You want both of those.

00:22:09.940 | - We could do like a Halloween themed one,

00:22:11.420 | like some creepy character or something.

00:22:13.420 | - Great radio hit song though, come on.

00:22:15.140 | - Also on the Always Sunny podcast,

00:22:16.620 | that's what they call viewers of the podcast.

00:22:18.900 | - Creeps. - Creeps?

00:22:20.020 | - Yeah. - Okay.

00:22:20.860 | - Didn't know that.

00:22:21.700 | - All right, next one.

00:22:23.380 | - Okay, up next we have,

00:22:25.500 | I'm 38 years old and a newish dentist.

00:22:28.380 | I make about $400,000 a year

00:22:30.020 | and recently started investing in stocks.

00:22:31.860 | Maxed out my 2022 and 2023 Backdoor Roth IRA

00:22:35.660 | as well as my HSA account.

00:22:37.660 | Since I'm already in a higher tax bracket,

00:22:39.460 | I've been thinking it would be better

00:22:41.380 | if I do a SEP IRA instead of Roth

00:22:43.900 | to save more on my reported income and taxes.

00:22:46.580 | Also thinking about starting my solo 401k.

00:22:50.160 | I know I'm older and kind of late to the investing game

00:22:52.500 | and that's why I'm trying to invest the most

00:22:54.620 | and save the most on taxes.

00:22:56.800 | I would really appreciate your professional opinion on this.

00:22:59.180 | - Okay, so this stuff with someone who becomes a dentist

00:23:02.020 | or a doctor is interesting

00:23:02.860 | because they spend so much time in school

00:23:05.620 | and then even when they start working,

00:23:06.620 | like a doctor would be like a residency,

00:23:08.420 | you don't get paid as much

00:23:09.300 | and then all of a sudden it kicks in

00:23:11.140 | and your higher salary kicks in

00:23:12.660 | but you feel like you're a little late in the game.

00:23:14.780 | This is also where probably lifestyle creep is.

00:23:16.220 | So this person is thinking about it the right way.

00:23:18.740 | They make a higher salary.

00:23:20.100 | They want to make up for some lost time.

00:23:21.340 | They probably have some student loans, I would guess.

00:23:24.180 | - Probably typically in the hundreds of thousands

00:23:27.780 | of student loan debt, right?

00:23:29.220 | - Yes, obviously a good investment though

00:23:31.980 | for the type of salary you're making

00:23:33.220 | but also they want to catch up.

00:23:35.020 | So I know a lot of dentists are business owners, right?

00:23:38.340 | So they probably have this,

00:23:39.820 | they can do the solo 401(k) thing.

00:23:41.660 | So that's probably a good place to start, right?

00:23:43.540 | If they want to have the tax deferred income.

00:23:45.660 | - Absolutely, so Pizad, congratulations.

00:23:47.860 | Thank you for getting work done

00:23:50.220 | out there in the mountains of America.

00:23:51.780 | But I guess Pizad says,

00:23:52.860 | "Hey, should I do a SEP IRA instead of a Roth IRA?"

00:23:56.980 | Great news, you can do both.

00:23:58.660 | - Both, right?

00:23:59.500 | - Yeah, the SEP IRA limits

00:24:00.580 | because they're tied to a retirement plan

00:24:02.340 | are totally different and separate

00:24:04.260 | from your Roth IRA traditional IRA limits.

00:24:06.820 | And not only that, but they're 10 times as large.

00:24:09.180 | Duncan, John, me, Nicole, Ben,

00:24:11.700 | we can each contribute $6,500

00:24:14.300 | to a traditional or Roth IRA.

00:24:15.940 | Pizad's doing the right thing, backdoor Roth.

00:24:17.580 | I would keep that up.

00:24:18.700 | A SEP IRA has a limit this year of $66,000, right?

00:24:23.260 | $66,000 or 20% of your income,

00:24:25.740 | whichever is lower. - Hey, these limits

00:24:27.060 | make no sense to me and they never have.

00:24:29.100 | Why is that so big and IRA is so small

00:24:31.900 | and then the 401(k) is, why?

00:24:34.560 | Why are they so different? - I do not know.

00:24:35.580 | I do not know, probably we'd have to go back

00:24:37.180 | to dig up the ghost of Ronald Reagan

00:24:39.180 | and find out what happened to the tax reform code in 1986.

00:24:41.720 | But no, I think it's just a case

00:24:43.260 | of been summer inflation adjusted

00:24:44.740 | and higher numbers and businesses

00:24:46.660 | tend to have higher limits, right?

00:24:48.340 | Because of a myriad of reasons.

00:24:50.220 | But Pizad also asks, "Hey, should I do a solo 401(k)?"

00:24:53.380 | For his amount of income,

00:24:54.860 | the contribution limits are gonna be the same,

00:24:56.820 | whether it's $66,000, it's gonna be the exact same

00:24:59.300 | SEP IRA versus 401(k).

00:25:01.180 | So I don't know that you get necessarily a benefit

00:25:03.420 | from a solo 401(k) at his amount of income

00:25:05.380 | 'cause it's gonna be limited

00:25:06.460 | to 20% of his income either way.

00:25:08.380 | So the only thing I caution him on

00:25:10.220 | is if you have a dental practice,

00:25:11.300 | I'm assuming you're not working totally by yourself.

00:25:13.700 | Typically there's dental assistants, there's staff,

00:25:15.820 | whatever you're doing

00:25:16.660 | for your own profit sharing contribution,

00:25:18.420 | you would have to do as well for your employees too.

00:25:20.460 | And so it's not just you, unless you're a consultant,

00:25:23.700 | you're working for a big,

00:25:24.540 | like if you actually are actually on your own.

00:25:26.700 | So I'd be careful there.

00:25:27.980 | But Ben, Pizad mentions he's 38, right?

00:25:30.300 | And he feels like he missed the boat.

00:25:31.420 | I take the opposite side of that.

00:25:33.100 | 38 to me feels like a young man in my mid 40s.

00:25:36.340 | And if you're 38, you still have 30 years of compounding

00:25:39.260 | before you hit 68, right?

00:25:40.660 | Where you probably are gonna retire.

00:25:42.540 | And $66,000 saved today,

00:25:44.580 | assuming you get a 7% compounded rate of return,

00:25:47.220 | is gonna turn to $132,000 in 10 years,

00:25:49.580 | $264,000 in 20 years, and $528,000 in 30 years.

00:25:54.340 | You are not too late, Pizad.

00:25:55.620 | - And he's making mid six figures already,

00:25:57.900 | probably gonna make more as his career goes on

00:25:59.940 | and more people's teeth get bad.

00:26:01.660 | - Our guy Brian, he's winning the game,

00:26:03.300 | making a half million dollars a year in this economy.

00:26:05.380 | - Yeah, at that age,

00:26:06.500 | you're definitely not too late to get started.

00:26:08.380 | - And the SEP component means

00:26:10.300 | they own their own business, correct?

00:26:12.180 | - Yeah, more than likely.

00:26:13.580 | So they're tying it to their practice.

00:26:15.260 | So yeah, I'm presuming he owns a dental practice.

00:26:17.780 | But again, Ben Duncan, as you know,

00:26:19.860 | we take care of our Ridholds Wealth employees.

00:26:21.620 | Your contribution rate is matched like anybody else.

00:26:24.180 | You gotta take care of your employees too.

00:26:25.420 | And that's not just like a suggestion,

00:26:27.060 | that's also actually the law.

00:26:28.380 | So whatever you're contributing for your business

00:26:30.620 | to yourself, you need to match your employees too.

00:26:34.540 | - Okay, and just to clarify,

00:26:36.740 | so there's three different kinds of IRAs,

00:26:39.220 | there's Roth, traditional, and a SEP?

00:26:41.100 | - Oh, we can throw out some simples.

00:26:43.100 | We can throw out rollovers, yeah.

00:26:44.900 | There's a suite of IRAs that we could talk about.

00:26:48.300 | - And we have the 401(k), traditional, Roth,

00:26:50.620 | and the SEP, the individual 401(k),

00:26:53.220 | yeah, there's tons of stuff.

00:26:54.260 | - And just to clarify for those that are new

00:26:55.780 | and young people that might not know this,

00:26:58.180 | for traditional and Roth, the cap is 6,500 combined.

00:27:01.660 | - Correct, yep, this year.

00:27:02.940 | This year, until our guy bazaar hits 50 and then it's 7,500.

00:27:06.500 | Very great thing to do.

00:27:07.500 | And again, good for you, congratulations.

00:27:11.220 | - All right, one more question.

00:27:12.900 | - All right, last but not least,

00:27:14.540 | we have a question from Mark.

00:27:16.380 | If one is lucky enough to retire

00:27:17.740 | with a decent size net worth,

00:27:19.300 | wouldn't it be more prudent to borrow against assets

00:27:21.780 | and pay interest versus taxes?

00:27:24.420 | - All right, so securities-based line of credit,

00:27:26.980 | I guess we're talking about here.

00:27:29.100 | I know this was huge when rates were really low.

00:27:32.020 | And I know some of our clients could borrow

00:27:34.900 | against their portfolio at 2% maybe,

00:27:37.540 | sometimes sub two, around 3% when rates were low.

00:27:40.860 | Didn't this make more sense when margin loans were 3%?

00:27:42.820 | Now you're probably paying seven to 9%

00:27:44.900 | depending on the financial institution

00:27:46.220 | or how much money you have.

00:27:47.580 | Like, how do you even think about calculating the break-even

00:27:49.940 | on that kind of hurdle rate?

00:27:51.700 | - Yeah, it's hard.

00:27:52.980 | Yeah, and Ben, you skipped to the chase, right?

00:27:54.700 | That was gonna be my take-home point, right?

00:27:56.580 | That we could end the conversation with.

00:27:57.980 | But as a concept, yeah.

00:28:00.100 | S block or borrowing against a portfolio, it's a tool.

00:28:02.340 | It's a tool that you could use.

00:28:03.740 | And so there are pros.

00:28:05.380 | Ben, let's list the pros.

00:28:06.420 | Like borrowing against your assets,

00:28:08.060 | that doesn't generate a taxable event, right?

00:28:10.140 | So if you have a large deferred gain on your Apple stock,

00:28:12.860 | if you have a property or your house or something else,

00:28:15.420 | yeah, tacking on an S block

00:28:16.940 | allows you to withdraw those funds

00:28:18.940 | and not realize to pay any taxes.

00:28:20.260 | - And you're letting the money continue to compound.

00:28:21.980 | - Correct.

00:28:22.820 | And so let's just say hypothetically,

00:28:24.340 | you get a half million dollar property.

00:28:25.700 | You have $100,000 basis.

00:28:27.020 | So you have a $400,000 capital gain.

00:28:29.100 | If you were to liquidate that property at 15%,

00:28:31.500 | let's say some state taxes too,

00:28:32.860 | you pay about 80 grand in income tax, right?

00:28:35.140 | So pulling out an S block allows you to pull out

00:28:37.500 | up to usually 80% of your loan to value.

00:28:39.780 | So $400,000 in your pocket tax-free.

00:28:42.860 | So those are the pros.

00:28:44.380 | However, the cons.

00:28:45.580 | Con number one is most people get to retirement

00:28:48.060 | and their goal is then not to add debt, right?

00:28:50.060 | So I do like the thinking, right?

00:28:51.980 | The invert, let's invert this thinking.

00:28:53.540 | Why not?

00:28:54.380 | But I guess the cons are that tax on gain can be deferred,

00:28:57.740 | but it really can't be avoided.

00:28:59.340 | On a long enough timeline, you can defer, defer, defer.

00:29:02.380 | On a long enough timeline, we're all dead, right?

00:29:04.260 | So it's not a terrible idea.

00:29:05.940 | But Ben, you're exactly right.

00:29:07.380 | If I'm borrowing at 8%, let's say,

00:29:10.140 | which is roughly the U.S. mortgage rate right now,

00:29:12.460 | $400,000 borrowing that amount of money

00:29:14.500 | is gonna cost you 30 grand a year.

00:29:16.260 | And so for what you're paying to borrow that money,

00:29:19.220 | you're probably paying a third of your tax bill each year.

00:29:22.460 | And this is the kicker, Ben.

00:29:23.860 | Again, you're just deferring the tax.

00:29:25.820 | So if and when you spend out your S block,

00:29:29.180 | if and when you go to sell that property,

00:29:31.060 | that 80 grand tax bill or more is still due,

00:29:34.180 | but now you've borrowed against your proceeds.

00:29:36.500 | And so you're not gonna have the net cashflow potentially

00:29:38.980 | to finance that tax.

00:29:40.860 | My take would be, look, if you made it that far,

00:29:43.900 | it's something to consider,

00:29:45.100 | talk it over with your financial planner,

00:29:46.540 | talk it over with your tax people,

00:29:48.020 | but reducing your net worth on day one,

00:29:50.620 | maybe not a great idea,

00:29:52.500 | but compared to your other options.

00:29:54.300 | Last quick point for me, Ben,

00:29:55.700 | you cannot borrow against your retirement assets.

00:29:58.340 | Thou shalt not take a loan against your IRA.

00:30:00.340 | It invalidates the entire IRA

00:30:01.980 | as if the entire IRA was distributed.

00:30:03.580 | - It's only taxable money.

00:30:04.540 | - So this is just taxable money.

00:30:05.940 | And back to our guy, Bazaad, and back to our guy, Brian,

00:30:08.340 | this might be a reason to build up

00:30:09.780 | your non-qualified balance.

00:30:11.260 | I like to think about hitting that first.

00:30:12.660 | - But trying to game the system here.

00:30:14.580 | So you're like putting off taxes forever.

00:30:16.900 | It's especially with rates being variable,

00:30:19.700 | it's probably not going to work out for you.

00:30:21.660 | And 'cause you'd have to pay the money back so quickly,

00:30:23.980 | you'd be pulling money out of the account

00:30:25.460 | to pay it back almost,

00:30:26.540 | unless you had some sort of other source of income.

00:30:28.820 | - Yeah, and it just depends.

00:30:29.660 | So like as a timing strategy, absolutely consider it,

00:30:32.660 | but as a tax avoidance strategy,

00:30:34.660 | it's not going to work

00:30:35.740 | unless you pass these assets onto your kids.

00:30:37.740 | - Again, when rates were lower,

00:30:38.780 | we had people borrowing against their portfolio

00:30:41.180 | to put like a down payment on a second home.

00:30:43.300 | And 'cause the rates were, and it made a lot of sense,

00:30:45.820 | but then now once rates get jacked back up,

00:30:48.180 | they're thinking, well,

00:30:49.020 | I need to pay this down immediately, right?

00:30:51.100 | - Anybody with a 5-1 arm is sweating bullets

00:30:54.100 | for the next two years.

00:30:54.980 | So we'll see.

00:30:56.420 | I mean, we'll see.

00:30:57.260 | But as a strategy, as a tool and toolkit,

00:30:59.100 | absolutely 100% mark.

00:31:00.780 | I would consider it,

00:31:01.620 | but definitely talk it over

00:31:02.700 | and think long-term with this stuff.

00:31:04.180 | - I mean, if we had a Michael J. Fox DeLorean

00:31:06.820 | in the driveway right now with Doc Brown

00:31:09.100 | saying get it up to 88,

00:31:10.380 | most of us would probably go back to like 2020, 2021

00:31:13.060 | and borrow as much money as we possibly could at 3%, right?

00:31:16.100 | - Yeah, buy a Tesla.

00:31:16.940 | - Well, it's so easy in hindsight, right, to know.

00:31:19.300 | That's an argument I've been making internally

00:31:20.620 | is everybody thinks interest rates are high.

00:31:22.380 | You're like, when are they gonna go down?

00:31:23.660 | What if interest rates go up?

00:31:24.940 | Like we don't actually know

00:31:26.260 | how the future is gonna play out.

00:31:27.740 | So 1.21 gigawatts, I'm with you.

00:31:30.420 | Let's go back.

00:31:31.300 | - I'll let you know when I buy a TLT

00:31:33.060 | and that's when rates will go up more.

00:31:35.500 | - All right, that's when we can, all right.

00:31:38.020 | - So can we just, before we leave,

00:31:39.500 | can we talk about how many collars

00:31:41.220 | a man can have on his shirt?

00:31:42.340 | I'm just, can we go into fashion corner?

00:31:44.380 | 'Cause that was my big question starting the show.

00:31:46.540 | A great, great, great, great clothing,

00:31:48.820 | great line, we're big fans.

00:31:50.460 | But what is the limit, is it three?

00:31:52.940 | - Listen, there's only two shirts on here, Bill.

00:31:54.940 | - Is there a limit, I'm not sure.

00:31:57.260 | Hey, I have a quick bonus question if you guys don't mind.

00:31:59.620 | - Yeah.

00:32:00.460 | - Everyone is talking about student loans lately

00:32:02.820 | and for some reason people are asking me questions

00:32:04.940 | about student loans because payments are showing back.

00:32:08.380 | Would you be okay with someone diverting some of their money

00:32:11.580 | that they would have been putting into retirement accounts

00:32:13.820 | to help pay down their student loans?

00:32:16.260 | Let's say, for instance, like my student loans

00:32:18.020 | are 7.5% interest rate, right?

00:32:19.780 | - Okay, I was gonna say it's rate dependent

00:32:21.420 | 'cause a lot of people were able to borrow

00:32:22.820 | at much lower rates.

00:32:24.420 | This is something I've been really against for years.

00:32:26.340 | I don't know why the government

00:32:27.380 | sets the rates so high on them.

00:32:28.580 | When I graduated, my rates were 2.5%

00:32:32.820 | and I think if I made a certain amount of payments

00:32:34.220 | over five years, it dropped down to like two.

00:32:36.260 | And interest rates were much higher back then.

00:32:38.060 | I don't know why the government,

00:32:39.300 | anyway, that's my soapbox rant here.

00:32:41.780 | But yes, if the rate is, I don't know,

00:32:44.180 | higher than 5% or so right now

00:32:46.540 | and you wanna divert some,

00:32:47.580 | I think I don't see a huge problem with that.

00:32:49.740 | No.

00:32:50.580 | - No, 100% Duncan.

00:32:51.500 | Yeah, and at 7%, again, it's negative compounding, right?

00:32:54.420 | So if it takes you 10 years to pay off that balance,

00:32:57.460 | I would.

00:32:58.500 | And frankly, the other point,

00:33:00.180 | and this is something that we talk a lot with our clients,

00:33:02.300 | that like nothing feels better in life,

00:33:04.260 | I think, than paying off debt.

00:33:05.620 | If you ask clients on a survey,

00:33:07.340 | what was the best financial decision you made?

00:33:10.100 | Paying off the house, paying off the loan,

00:33:11.900 | that's usually at the top of the list.

00:33:13.460 | So even if it's not the right mathematical answer,

00:33:15.900 | Duncan, not having to make that student loan payment

00:33:17.780 | in a couple of years, that feels better

00:33:20.420 | than any tax savings.

00:33:21.340 | - Which is funny coming from us, Bill,

00:33:22.500 | 'cause you and I are the ones who said,

00:33:24.220 | a few years ago, we're never paying our mortgages off.

00:33:27.300 | - That's mortgage.

00:33:28.140 | (laughing)

00:33:28.980 | - Does that mean we're not human?

00:33:30.420 | We don't have human emotions, I guess,

00:33:31.580 | is what you're trying to say.

00:33:32.420 | - Yeah, yeah, and it's one thing to live life

00:33:34.060 | on a spreadsheet.

00:33:34.900 | I think that can give you the answer.

00:33:35.780 | But again, it makes a lot of sense

00:33:37.660 | to right sides of your life for what you wanna achieve,

00:33:40.220 | right, and what you wanna do.

00:33:41.060 | So yeah, I would prioritize paying off debt at 7%.

00:33:44.180 | - Yeah, at that rate, I think so too.

00:33:45.980 | - Amen. - That's good advice.

00:33:47.380 | - Okay, good question.

00:33:48.580 | Thanks to Bill and Duncan, as always.

00:33:50.040 | - This is a fun one.

00:33:51.540 | - Thank you to John behind the scenes,

00:33:52.700 | and Nicole in the chat.

00:33:53.540 | Thanks, everyone, for logging on to the live chat.

00:33:55.940 | As always, we appreciate your comments.

00:33:57.300 | Leave us a comment on YouTube, send us a question,

00:33:59.820 | askthecompoundshow@gmail.com, and we'll see you next week.

00:34:03.500 | - See you, everyone.

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What’s the Best Time to Buy Stocks?

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