Is It Crazy to Be 100% in Stocks?

00:00:00.000 | - Welcome back to Portfolio Rescue. We get tons of questions every week on Twitter, email,

00:00:21.040 | YouTube. People stop dunking on the street sometimes. And we like to try to answer them

00:00:26.760 | so askthecompoundshow@gmail.com is our email. Sponsor for today's show is Future Proof Festival

00:00:33.240 | 2023. This was the Future Proof Festival this past year in 2022 is easily one of the most

00:00:42.040 | fun things I've ever done career-wise in finance. It's on the beach. We're gonna be doing live

00:00:47.900 | podcasts there. Duncan and I are gonna do a live Portfolio Rescue there. It was helpful

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00:01:04.080 | for more. Duncan, one of my favorite things about the one last year, the food, was food

00:01:08.920 | trucks. And you could just go eat it whenever you wanted. You didn't have to wait in like

00:01:11.940 | a buffet line or someone to bring you food at like most conferences.

00:01:15.760 | - Right. And it was all-inclusive. You didn't have to have like tickets or, you know, pay

00:01:21.600 | separately, that kind of thing. That was nice. I like that.

00:01:23.800 | - It's fun. We had a ton of people who aren't even in the finance world come last year who

00:01:28.040 | were just kind of part of our audience and fans of the shows.

00:01:30.960 | - Right. We met up with some of the Animal Spirits Discord people. Well, maybe we can

00:01:34.240 | do that again. That was fun. John and I went and met them. That was fun.

00:01:37.400 | - That's right. Yeah. So anyway, check it out, Future Proof. I think if you go early,

00:01:42.480 | you can get a little bit of a discount. Let's get rid of the questions.

00:01:46.760 | - Up first today, we have a nice short one. Easy read from Edward. Is it crazy to be 100%

00:01:53.120 | in stocks from age 32 to sometime in my 50s for my retirement accounts?

00:01:58.480 | - I don't think it's crazy at all. But the thing is, there's no hard and fast rules for

00:02:03.560 | this that work for every person in every situation. But it certainly makes sense for younger investors

00:02:08.960 | to have more risk in their retirement accounts than older investors. My favorite finance

00:02:12.120 | writer of all time, William Bernstein. The guy's smart. He can communicate really good

00:02:16.480 | stuff. So he has a book called Deep Risk that goes over the concept of risk when it comes

00:02:20.400 | to investing better than any explanation I've ever read. Quick summary. He says risk comes

00:02:25.160 | in two flavors. Shallow risk, which is a loss of real capital, but it's recovered in a relatively

00:02:29.000 | short period of time, say within a few years. Deep risk is a permanent loss of capital.

00:02:32.960 | That could be through something like inflation. That could be selling out at the wrong point.

00:02:36.280 | That could be government confiscation, some of these things. And his whole thing is, stocks

00:02:40.880 | against deep risk, like a real loss of capital, but exacerbate shallow risk, which means you're

00:02:45.960 | gonna have a lot of volatility. So Bernstein's whole point is that if you're managing for

00:02:50.440 | short-term spending needs, you have to follow shallow risk, while long-term spending needs,

00:02:55.400 | you have to be guided by deep risk. So the moral of the story is, if you're a young saver,

00:03:00.160 | your biggest asset is human capital, right? It's your future earnings power and your savings.

00:03:04.280 | You want to have lower prices. So the biggest risk of the stock market is prices go down,

00:03:09.160 | right? As a young investor, you should be getting on your hands and knees and praying

00:03:11.800 | for lower prices, so you can put that savings to work at higher dividend yields and lower

00:03:15.720 | valuations and all that stuff. If you're an older investor, you still want to have a little

00:03:19.700 | bit of money in stocks, as we talked about before, but you have short-term spending needs,

00:03:23.120 | and you might not be able to wait out a bear market as long. So I totally agree with this

00:03:26.880 | rule of thumb, but let's throw up the second question, because it's kind of a similar one,

00:03:31.560 | and then before I get in, we can answer these both at the same time. So do another one.

00:03:35.680 | Okay, up next, we have the following. "I don't get why people work a 30-plus year career

00:03:40.640 | while investing in stocks, only to glide path into a heavier bond allocation around retirement.

00:03:45.280 | Why not just stay 100% in stocks and benefit from price appreciation and dividends for

00:03:49.200 | life?"

00:03:50.200 | So I got both of these questions from the same blog post. So John, do a chart on here.

00:03:53.840 | This is, I did a little thing of the calendar year returns from 1928 to 1922 for the S&P

00:04:00.040 | 500, broken out by different return. So you can see, 0 to 10%, 10 to 20. This is 95 years

00:04:05.880 | of historical data. One of the craziest things about the performance of the U.S. stock market

00:04:08.840 | historically is that you've been more likely to have a return in a given year of 20% or

00:04:13.800 | more than a loss in your given year. Let me repeat that. Over the last 95 years, you've

00:04:18.800 | been more likely to have a gain of 20% or more than a loss, which is pretty crazy. So

00:04:23.320 | there have been 34 years with gains in excess of 20% over the last 95 years. That's more

00:04:28.960 | than a third of the time. 26 down years in that time, which is around 25% of the time.

00:04:32.960 | So not too bad. Now, people look at this stat, and I think that's why we got the questions

00:04:36.640 | and say, "Why would I not just have all of my money in stocks then?" Stocks are your

00:04:40.840 | best bet at earning a return over the rate of inflation. If you just wait for the long

00:04:44.920 | term, the dividends grow, all these things. I think the optimal portfolio for anyone with

00:04:50.240 | a time horizon that's multiple decades should be mostly equities, but sometimes your emotions

00:04:54.440 | hijack you and don't allow you to get to those long-term decade periods. So, John, do a chart

00:04:59.000 | onto the next one. That's just the drawdown. Even when we have gains, we've shown this

00:05:02.560 | before, the blue lines are the gains, the red dots are the entry-year peak-to-drop losses.

00:05:07.520 | Since 1928, the average loss is like 16% a year, a little more than 16% a year. Since

00:05:12.600 | 1950, it's a little more than 14% per year. So even with long-term returns that are great,

00:05:18.640 | it can still be a volatile time in the short term, right? So I think some investors still

00:05:22.700 | need that emotional hedge, even when you're younger. I think that's kind of knowing yourself

00:05:25.840 | personally. I'm 41. For me personally, retirement accounts are all 100% stocks or equity-like

00:05:31.080 | investments. I have a time horizon that's measured in decades as opposed to years or

00:05:35.240 | months, so I'm fine taking that. But I still have liquid cash reserves or short-term bonds

00:05:40.960 | to see me through shorter-term goals and emergencies, and I imagine as I get closer to retirement

00:05:46.160 | that that would need to be picked up so that there'll be a higher balance in those liquid

00:05:50.760 | savings. So the thing is, you don't want to have to sell out of your stocks while they're

00:05:54.820 | down. So John, do the next one. This is S&P 500 bear markets since World War II, and I

00:05:58.760 | did peak-to-trough, means the top of the market when it peaks all the way to the bottom of

00:06:03.360 | the bear market, and how many months? That's an average of roughly 12 months, right? So

00:06:07.840 | call it a year on average, historically, for the last few bear markets. Then I did a break-even

00:06:12.960 | column showing, okay, how long did it take you to go from peak-to-trough back to break-even

00:06:18.240 | at all-time highs again? So that's, on average, 21 months, taking from the bottom. Add those

00:06:23.680 | up and you go peak-to-peak, and we're talking 33 months, so it's almost three years on average

00:06:28.520 | in the bear markets in modern history, where you go peak-to-trough back to peak. Shortest

00:06:32.880 | one was COVID crash at seven months. Longest one was the 1973-74 bear market, which took

00:06:38.000 | almost six years. So my whole point is, you can have these bear markets that last a long

00:06:42.760 | time. The 2000-2002 bear market was also pretty long. You know, you don't want to be selling

00:06:47.760 | off your stocks when they're down for that long. Now, maybe you say, well, my portfolio's

00:06:50.680 | big enough, I can live off the dividends. That's fine. Dividends aren't written in stone

00:06:55.520 | either. In 2008 crisis, the dividends on the S&P 500 fell more than 31%. So they didn't

00:07:00.200 | fall nearly as much as prices, which were 56%, but they did fall. So it's true that

00:07:05.080 | most of your compounding gains come later in life, when you have a big portfolio. I

00:07:09.840 | think that's, if you did this straight-line spreadsheet and say, I'm gonna earn 7% per

00:07:13.760 | year every year, or 8%, whatever it is, the majority of the gains come when you have more

00:07:17.720 | money. Which, compounding, that makes sense, right? An 8% gain on a million dollars is

00:07:22.500 | way bigger than an 8% gain on $100,000. But I think you have to kind of balance out your

00:07:28.520 | ability to sit through a bear market and maybe have bad timing, versus, I still want to grow

00:07:33.800 | my wealth. So I do think it's important to still grow your wealth when you're retired,

00:07:37.800 | but I think you have to have some balance in there of having some short-term liquidity.

00:07:40.640 | And the other thing is, I think people probably mentally bucket out different things where

00:07:46.480 | they're looking at short-term cash, or their real estate holdings, or their portfolio.

00:07:50.240 | And so, most people don't have all of their net worth 100% invested in stocks anyway.

00:07:55.720 | But I think if you're looking at a retirement portfolio, yeah, for young people, 100% is

00:07:59.000 | not crazy at all. When you get to retirement, I'm sure some people probably have the ability

00:08:03.240 | and intestinal fortitude to do that, but you're just setting yourself up for the potential

00:08:06.860 | for a really bad outcome if you're unlucky.

00:08:10.480 | I have a question. Is there a term in the markets for the opposite of alpha? Because

00:08:14.440 | looking at those benchmarks in history, it's pretty amazing, looking at my trading account

00:08:18.520 | over the last year or so. What do you call that, when it's the opposite of outperformance?

00:08:25.280 | That's called reality, I think. The market is really hard to beat, unfortunately. And

00:08:31.640 | even the people who do this for a living, they do this all the time. They have the computers

00:08:35.800 | and they have the quants, and they hire these people from MIT to be rocket scientists who

00:08:39.240 | are going to figure out how to beat the market. Beating the market is hard.

00:08:43.160 | Yeah, we can't all be Jim Simons, right?

00:08:45.920 | Yes.

00:08:46.920 | Also, on the dividend thing, am I crazy or did Disney used to have a dividend? I saw

00:08:50.480 | recently in my account that there's no dividend there. I just hadn't paid attention in a long

00:08:54.640 | time.

00:08:55.640 | I do believe that Disney canceled their dividend during COVID to kind of make up for the lost

00:09:00.600 | park revenues. And you get your Star Wars shows now because Disney canceled the dividend.

00:09:06.780 | That lack of dividend, that's how they funded.

00:09:08.520 | Maybe Bob Iger coming back will put that in there.

00:09:10.660 | Okay.

00:09:11.660 | Again, if you're somebody in their 30s and you can handle stocks moving around all the

00:09:17.000 | time and not touch it and not mess with it, then being 100% in stocks is certainly fine.

00:09:23.040 | I think there probably are retirees who can handle that kind of portfolio, but I would

00:09:27.280 | think that the number of them who can handle the emotional volatility from it is very small.

00:09:32.160 | And according to our poll in the chat right now, 72% of the chat say that they're nearly

00:09:37.140 | 100% in equities in their portfolios.

00:09:40.480 | That makes sense. We've got some long-term investors here. Good for them. All right,

00:09:44.820 | let's do another one.

00:09:45.820 | All right. Up next, we have a question from Zach, and this is a nice not to brag. I kind

00:09:50.940 | of like this one. Zach writes, "I'm a 38-year-old in California with $1.3 million in a 60/40

00:09:58.220 | portfolio with a 4% withdrawal from an inheritance, $250,000 personal portfolio of stocks, $150,000

00:10:05.560 | cash and some other small investments, and a paid-off house valued at $500,000. I have

00:10:10.820 | about 50% savings rate between my 4% withdrawal and income. I'm frugal, but here's the kicker.

00:10:16.620 | I've been working low-paying jobs my whole life while in this position. I make about

00:10:20.740 | $20 an hour with no college degree. Sometimes I feel like I should just quit my job because

00:10:24.780 | this income isn't doing much in the grand scheme of things. I'm just saving money to

00:10:28.180 | save more money and not leveling up. How should I structure my portfolio in this situation?

00:10:33.880 | Should I quit my job and enjoy an average life with the assets I have?"

00:10:38.020 | I really like this question. This is why there are no hard and fast rules, because in the

00:10:41.460 | last question, I said most young people, human capital is their biggest asset, and for old

00:10:45.460 | people, it's financial assets. Zach is a relatively young person who has a ton of financial assets,

00:10:51.780 | and they dwarf his human capital. This is why there are exceptions to the rule. This

00:10:58.660 | is interesting. I want to run some quick numbers here. Zach said he's taking 4% on his $1.3

00:11:04.140 | million inheritance. That's around $52,000 a year. I don't know why the 4% from that

00:11:10.100 | portfolio. Maybe it's some sort of trust thing where he has to take that money, and that's

00:11:12.980 | how it's squashed out. That's why I was going to ask if that was a required thing. I'm guessing

00:11:15.940 | that that would make sense. Otherwise, if he's saving 50% of it, what's the point of

00:11:19.280 | taking it out in the first place? He's saving a lot of it. Let's just assume your spending

00:11:24.800 | needs grows by the Fed's 2% inflation rate from that $52K, and I'm going to do a 4% rule

00:11:29.620 | every year. Your portfolio does 6% a year, because it's diversified. In 20 years, you'd

00:11:33.720 | still have roughly $1.8 million. He's doing pretty good. Don't take this to the bank,

00:11:39.080 | because we haven't factored in taxes and a sequence of return risks. This is just a quick

00:11:42.140 | one. Yeah, especially if he's saving 50%, he's probably really only spending a 2% rule.

00:11:49.360 | Zach is in a pretty good position. I don't know what happened to put him into this position,

00:11:54.480 | but houses paid off, no mortgage. He did say inheritance. Yeah. It could have been something

00:12:00.060 | with the parents, which is not a great situation. Six figures in liquid savings, seven-figure

00:12:04.360 | portfolio. Financially, as a 38-year-old, you already kind of won the game. The question

00:12:09.780 | is, now what? First of all, enjoy yourself a little bit, maybe. You've won the game.

00:12:18.260 | Some people would say stop playing, but you still have a potentially long time horizon.

00:12:21.840 | You could have 50, 60 years to save and compound this money. What do you do? Go back to school,

00:12:26.440 | start a business, take a risk, try a new job, travel for a few months, volunteer, maybe

00:12:30.280 | give some money to charity. The point is, do some stuff that makes you happy. You have

00:12:33.680 | plenty of capital and flexibility, but I think the first thing you need to do is you need

00:12:37.520 | a financial plan. You probably need to talk to a financial advisor to help you through

00:12:40.800 | this, because one of the things that a financial advisor can do is help you to define your

00:12:45.120 | goals. I think Zach is in a great position financially, but probably hasn't gone through

00:12:51.180 | and figured out, what do I actually want to do with this money? It seems like he doesn't

00:12:56.840 | know. You need someone to help you define what those goals are, put it down on paper,

00:13:01.780 | create a financial plan, and figure out what exactly you want to do. That will allow you

00:13:05.280 | to spend the money wisely, enjoy yourself, and also keep up your standard of living along

00:13:11.080 | the way. That's the goal, tooting your own horn here as a wealth manager, but I think

00:13:15.960 | Zach needs some sort of financial plan. That's the thing. You can't figure out what you're

00:13:21.080 | going to do with that money or your goals if you don't have something that you're shooting

00:13:23.560 | for.

00:13:24.560 | He could also start a FIRE podcast, talking about early retirement and stuff.

00:13:30.680 | Well, the Internet comes after people who go FIRE because of an inheritance, though.

00:13:34.680 | Yeah, no, I'm kidding. He'd have to leave that part out.

00:13:38.400 | But again, great financial position. I don't know how that happened, but now you have to

00:13:44.460 | figure out, what am I going to do with this great position that I'm in? This is the hand

00:13:48.520 | that I've been dealt. Let's do some good here.

00:13:50.720 | Yeah, I feel like I would maybe buy a business, a local business or something, a restaurant

00:13:56.640 | or something that I enjoyed. Because some people in the chat are talking about that.

00:14:00.240 | At that young of an age, if you just quit working, unless you have a bunch of hobbies

00:14:04.480 | that keep you busy, you might end up actually worse off and not happy if you just don't

00:14:09.400 | really feel like you have anything to keep you on track.

00:14:12.040 | Alternatively, if you don't have that type of personality, then like I said, maybe volunteer

00:14:17.960 | and do some charity work or something that can allow you to give back or keep you busy.

00:14:22.880 | If you wanted to buy a business, maybe a banana stand. Are you an Impressive Development fan,

00:14:25.760 | Duncan?

00:14:26.760 | I am. There's always money in the banana stand.

00:14:28.840 | All right. Let's do another one.

00:14:32.080 | Zach, give us a call if you want to talk to someone. I'm not tooting my own horn here,

00:14:37.240 | but maybe it'd be helpful to walk through some of the financial plan. I think that'd

00:14:41.080 | be helpful.

00:14:42.080 | Right. Yeah. It sounds like he can only benefit from that.

00:14:46.320 | Okay. Up next, we have a question from Lee. "If I plan to retire early in my mid-40s,

00:14:53.880 | should I stay with a traditional 401(k) and do a Roth conversion after I retire at a lower

00:14:58.160 | bracket or change to Roth and get the Roth matching? I'm in the 22% tax bracket." I don't

00:15:03.800 | understand this question.

00:15:05.000 | Lots of early retirement talk. Let's bring in the tax man himself, Bill Sweet.

00:15:08.000 | Hey, Bill. Oh, you're muted.

00:15:11.200 | Yeah, John. Gentlemen, it's good to be back to you in the new year. I was beginning to

00:15:17.040 | think you forgot about me, put me in a box. Good to be back. Let's do this.

00:15:21.920 | All right. Early retirement. This is another, sounds like we do have a fire advocate here.

00:15:26.280 | Early 40s, that's pretty young. Good for them for saving enough or having a lifestyle that-

00:15:30.640 | I'm in my early 40s. Should I retire?

00:15:33.320 | Me too. Personally, I could never do it, but I respect the move. Good for them for getting

00:15:38.080 | to that point. I could never do it. What are the tax implications? Because if you're retiring

00:15:42.040 | that early, the tax deferral stuff, the tax deferred retirement accounts kind of take

00:15:46.560 | on a different role here because you're not going to be able to utilize them as much as

00:15:50.440 | you would if you kept working. So what's the plan here?

00:15:53.160 | That's so interesting because I dialed right into the last part of that question, which

00:15:56.400 | was, should I switch to Roth to get the Roth matching? And I think what you gentlemen are

00:16:01.360 | not aware of, maybe because you skipped out on tax time with Bill and Bill at 1130 AM

00:16:04.920 | this morning, was the Secure Act 2.0, which Sleepy Joe signed into law for us on December

00:16:10.360 | 30th, includes now the ability for your employer to match Roth contributions with matching

00:16:16.120 | Roth retirement funds. And that's very cool. That's new. And you guys know what's on the

00:16:20.680 | back tattoo. Very first show, the back tattoo came out. Go back to Portfolio Rescue 1 if

00:16:25.560 | you want to take a look. But Roth IRA conversion is what the back tattoo on my back says.

00:16:30.280 | You know, Bill told us this last week. I didn't know that was a thing. So I've been in a Roth

00:16:34.960 | 401(k) for the last couple of years. I did not realize that my contribution from Rich

00:16:38.720 | Holds Wealth Management was going into a traditional 401(k).

00:16:40.800 | That is correct. We've been screwing you over unintentionally all this time. But to be fair,

00:16:45.040 | we were following the law. The law changed, right? But the only thing better than the

00:16:48.440 | Roth IRA conversion, guys, is matching Roth contributions, right? If I can get my employer

00:16:53.560 | match, my 4%, 6% safe harbor, whatever it is, if I can get that in a Roth account, not

00:16:58.400 | only is that free money, it's tax-free free money, right? It's double free. So that's

00:17:02.560 | what we need. And that's what I dialed in on.

00:17:04.720 | I like double free.

00:17:05.720 | Yeah. So, but Ben, you sort of dialed in on, right, that I'm going to retire in my 40s.

00:17:10.600 | And so what type of account, what kind of assets do I want to have if I'm taking distribution

00:17:14.400 | to my 40s?

00:17:15.400 | Well, we don't know how old this person is. They didn't tell us, but let's say they're

00:17:19.240 | in their 20s, and they say, "I'm going to retire when I'm 40." And maybe your plans

00:17:22.160 | change at that point. But at that point, you probably have to have a lot more taxable dollars

00:17:26.920 | rather than, right, to get you through that until you've touched the Roth burden.

00:17:30.560 | Yeah, yeah. Big ups, big ups. And I would definitely discuss that with a certified financial

00:17:34.480 | planner, Rich Holds Wealth Management or elsewhere. But conceptually and very broadly, I think

00:17:39.400 | if the question is, do I do traditional versus Roth? 100% the answer is Roth. And the reason

00:17:44.360 | is because of favorable distribution rules that occur for Roth assets vice traditional.

00:17:50.200 | For a traditional IRA, if you take a distribution prior to 59.5, which is the year where your

00:17:54.360 | distribution should come qualified, you need to eat a 10% penalty plus the income tax,

00:17:59.360 | right? And so if you're in a 22% tax bracket, you're paying five to state, all of a sudden

00:18:03.280 | your effective tax rate is like 40%, right, because you're paying that extra 10% early

00:18:07.800 | distribution penalties. Roth IRAs, there is a penalty for early distributions, but it

00:18:12.040 | only applies to the earnings portion. And assuming that on retirement, you take your

00:18:16.280 | Roth 401(k) rolled into the IRA, which is probably a good move, you get these favorable

00:18:21.760 | distribution rules allow you to access your basis first. So for somebody retiring in their

00:18:26.200 | 40s, yeah, I think a Roth is grade number one. Might even be favorable, Ben, over a

00:18:31.240 | taxable brokerage account, although tax diversification is a great principle.

00:18:34.840 | Right. So yeah, so you're saying if you roll over the IRA, you can still take out those

00:18:38.040 | contributions tax-free, penalty-free, and that's kind of what you can live on until

00:18:41.200 | you can get those other ones later on in your life.

00:18:42.560 | Yes, your contributions. And just point of emphasis, only from an IRA. So you actually

00:18:46.320 | have to roll the money over to an IRA to take advantage of those rules. Roth 401(k) distributions

00:18:51.540 | are always pro rata. So you have to be careful with the implications.

00:18:54.920 | And my other big advice here would be, beyond finances, have a plan for what you're going

00:19:00.040 | to do with your life. Because I think you could get bored real quick in your 40s if

00:19:04.240 | you don't have something that's going to keep you going. You can only go on so many trips

00:19:07.680 | and sit on the beach for so long before you get a little bored, I think. I know it sounds

00:19:11.960 | great in theory, but if you haven't thought through like, "What am I going to actually

00:19:14.960 | do with my life?" You see a lot of these fire message boards things where they show people

00:19:19.800 | who say, "I planned for 15 years. I saved 7% of my income, and I realized I didn't live

00:19:25.880 | my life. I didn't have any hobbies. I didn't have many friends." So I think that is probably

00:19:29.480 | a bigger part of the situation than the finances of it.

00:19:31.640 | I would agree 100%, Ben.

00:19:33.120 | Right. All right, let's do another one.

00:19:36.760 | Okay, up next we have a question from Eric. Also, Bill, I should make you put money in

00:19:41.520 | the swear jar for saying "Sleepy Joe." You're going to get so many hate political comments

00:19:45.360 | now in the YouTube comments.

00:19:47.200 | It's a great nickname. Come on.

00:19:49.280 | Okay. He should embrace it.

00:19:50.760 | Yeah, I agree.

00:19:52.320 | Up next we have, "We're 34 and 33 with two children, four and two, and expecting twins

00:19:57.680 | this summer. Both of us have Workplace 403B plans, Roth IRAs, and rollover IRAs from previous

00:20:03.560 | jobs. Taxable income in the 22% bracket. We currently have child credits of $6,000 a year,

00:20:10.280 | which will potentially jump to $12,000 a year in 2023. All else kept equal, our effective

00:20:15.080 | rate in 2022 of 13% would drop to about 6.5% in 2023 with the additional tax credit. I

00:20:22.720 | only hear of arguments for Roth early in career due to income level, but also think young

00:20:28.040 | families have a unique window to contribute and convert to Roth at a very appealing, effective

00:20:32.480 | rate up through their 30s and 40s. Does it make more sense, especially for young families,

00:20:37.480 | to use effective tax rate as the deciding factor?"

00:20:39.960 | All right, before we get into the Roth stuff here, I want to talk a little bit about having

00:20:44.960 | twins to a family. First of all, four, two, and twins, Godspeed to you.

00:20:50.520 | That's a lot.

00:20:51.520 | We have twins, George and Kate, are now five, going on six. We actually looked through some

00:20:54.440 | old photos, found this one recently. This one always makes me happy on the old... I'm

00:20:59.440 | so glad we got...

00:21:00.440 | Chunky monkeys, look at them.

00:21:02.840 | Yes. We actually have a handful of friends and family members who have twins. So it's

00:21:06.520 | kind of like you're joining this club or fraternity. A few thoughts on having twins, because it

00:21:10.840 | is a totally different experience. The first three to four months basically was a blur,

00:21:15.080 | complete blur. Life is very chaotic, but I think in the best way possible. It's really

00:21:20.000 | crazy to see the bond that twins have with one another. My twins have this unspoken language

00:21:25.560 | that they have that only the two of them understand. It's like they're on the same wavelength.

00:21:28.960 | It's very bizarre.

00:21:30.440 | Be prepared for this one on a regular basis, especially with car seats. I'd be carrying

00:21:34.440 | both car seats. You know, you get the biceps from carrying babies. I probably heard this

00:21:38.960 | on a weekly basis. "Got your hands full there, huh? Huh?"

00:21:41.840 | Yeah. Always hilarious. How about them apples?

00:21:44.840 | If I felt like pulling it up, I'd say, "Literally, my hands are full." So I think you also have

00:21:49.960 | to put on a brave face, because all the other parents out there are going to be expecting

00:21:52.840 | you to be double tired and double miserable in those early months when you're not sleeping.

00:21:57.280 | I think you have to pretend like you're not, right? Now, I was never miserable, but I was

00:22:00.520 | definitely tired. It actually didn't really happen for us that much. Things were pretty

00:22:03.960 | hectic, but my wife spent the first three months saying, "We've got to get these sleep

00:22:06.720 | trained," and we did.

00:22:09.000 | High-quality laundry machine and dryer are key. With four kids, you're going to be doing

00:22:12.760 | lots of loads. You don't want to double up on the laundry machine even. So anyway, that's

00:22:18.200 | my thoughts on twins.

00:22:19.200 | You're a guy, right?

00:22:20.200 | Yeah. Don't even think about the fact that you're going to have three, maybe four children

00:22:23.480 | in college at the same time. Just push that off. That's a future use problem. Don't even

00:22:27.240 | think about that now. The more practical stuff, how does the child tax credit stuff work here

00:22:31.760 | with four children? That's potentially a good thing for them, right? This could be a good

00:22:35.900 | deal?

00:22:36.900 | Yeah. My guy's math, I think, is a little bit off. He's using the prior child tax credit.

00:22:41.360 | It's $2,000 a year here in 2023, which is no small shakes. But what the listener is

00:22:46.760 | getting at is-

00:22:47.760 | Oh, and they thought it was $6,000.

00:22:48.760 | Yeah. So bad news right off the bat, but it's going to be okay. You're going to be so busy

00:22:52.960 | and sleep deprived you won't notice. But what they're getting at is these tax credits, they

00:22:57.120 | effectively wipe out your income tax. A tax credit, dollar for dollars, is more powerful

00:23:02.280 | than a deduction because instead of reducing your taxable income like a tax deduction does,

00:23:07.040 | a mortgage tax deduction, what you're getting is these credits that offset your income tax,

00:23:11.960 | which is awesome. And you get to take $2,000 a year as the current law all the way up through

00:23:15.940 | age 15, when the child turns 16. So it's a pretty long-

00:23:19.040 | So they're getting eight grand a year with four kids.

00:23:21.080 | Basically, yeah, to offset their taxes. And only part of that is refundable. And I think

00:23:25.600 | the listener's question is, "Hey, how do I use this? If this is going to offset a major

00:23:30.400 | tax, I'm going to be so sleep deprived I'm not going to notice. But should I flip the

00:23:33.840 | switch in the 22% bracket? Should I take some more income to use up this tax credit?" I

00:23:39.480 | think the answer is yes, but I would be careful because the last part of the question is really

00:23:43.160 | important on whether you use marginal versus effective tax rates. So to solve for this,

00:23:48.120 | because I didn't have a lot of time to prepare, I made a famous chart, and I want to walk

00:23:51.080 | through it briefly. I know, Duncan's going to throw me out. So just to illustrate what's

00:23:55.840 | going on here for podcast listeners, you get $100,000 of income, calculate the tax at $13,000,

00:24:00.840 | you could offset that by credits, let's say $6,000, you're left with $6,500 of tax. His

00:24:05.320 | question is, "Okay, cool, that means my effective tax rate is 6.5%, right?" $6,500 divided by

00:24:10.880 | $100,000 of income, that's where that comes from. So let's say that you add in a Roth

00:24:15.040 | versus a traditional, you were deducting, now you've got more income because you elected

00:24:18.600 | Roth, now what happens? You've got more income, you've got more tax, let's say that you still

00:24:23.000 | have the equivalent amount of child tax credit, but now your tax is $7,000 because you're

00:24:27.820 | at the 22% rate. And so his question is, "Cool, now my effective tax rate is 9.6, less 6.5%,

00:24:34.800 | that's only 3% more, right? Should I use that?" I think the answer is no, because the marginal

00:24:39.760 | tax rate, the extra dollar that comes in on top of everything else is the relevant number.

00:24:44.640 | That is going to be 22%, so ultimately you're going to be paying 22% on your taxes, not

00:24:49.640 | 3%, even if your effective tax rate is different. And the reason I think that's important to

00:24:54.080 | outline is that the child tax credit is partially refundable, you can get that back on a refund.

00:24:59.880 | So I think the math is a little more complicated depending on how much the listeners actually

00:25:04.200 | earn, but I think the bottom line answer to your question, use your marginal tax rate

00:25:08.120 | when you're making these decisions, not your effective.

00:25:10.400 | - Okay, I gotcha. Yeah, I see what you did there. That makes sense.

00:25:13.040 | - Yeah, yeah, yeah. Some jujitsu. And guys, I got, you just got to visualize this. You

00:25:16.800 | got to come live in my brain, come Inception style into here. You got to see it to believe

00:25:21.680 | it.

00:25:22.680 | - Yeah, yeah, 100%. I definitely get that.

00:25:24.320 | - Yeah.

00:25:25.320 | - I understand everything there.

00:25:26.320 | - Duncan, when was the last time somebody asked you a tax question on the street from

00:25:28.280 | Portfolio Rescue? I couldn't stop thinking about that backstage.

00:25:31.200 | - All the time. All the time.

00:25:32.480 | - I mean, I did it last week. Pop quiz! You know, I came out from... And you got it right,

00:25:37.520 | to your credit. So good for you. Good on you.

00:25:39.440 | - All right, we got one more here.

00:25:41.040 | - Okay, yeah. Last but not least, we have a question from Andrew. Is it possible to

00:25:45.160 | do a Roth 401k, traditional 401k, and backdoor Roth?

00:25:49.600 | - Okay, this person. Bill, you've been beating Roths over that. I mean, honestly, 90% of

00:25:53.720 | the questions this week had to do with Roth IRAs that came into my inbox. So people are

00:25:57.960 | trying to figure out like, okay, I want to max out as many tax for strategies as possible.

00:26:00.920 | What are the combos here? And what are some of the knockout factors that would deter you

00:26:04.520 | from using any one of these?

00:26:06.120 | - Yeah, 100% you can. I would advise it. I think it's great fun. It's a great thing

00:26:11.560 | to do on a Friday night with a glass of Chardonnay. But what I would throw at a listener is to

00:26:17.280 | pay attention to the limits. The limits are very important. So for 401ks, the aggregate

00:26:22.000 | amount that goes salary contribution, salary deferral, is $22,500 per person per year if

00:26:27.840 | you're under the age of 50. That amount is split between traditional versus Roth IRAs,

00:26:32.080 | meaning that you cannot duplicate that amount. So if you do 22,500 in one, you can't do it

00:26:36.920 | in the other. You can do 11,250 in both. Some mix, but ultimately those are aggregated.

00:26:41.680 | IRAs are not subject to the 401k limits. And so yes, you can do a traditional IRA contribution,

00:26:48.320 | backdoor convert it if you're over the income limit. And you can do that in addition to

00:26:51.320 | the 401k, but the aggregate limit applies to the 401k. So that's the important distinction.

00:26:56.000 | - So if I get another job that's remotely, and I'm doing another remote job on the side,

00:27:00.200 | I can't open a new 401k and get that limit from there?

00:27:02.200 | - Ah, great question, Ben. So you brought in a second job. No, so this is interesting.

00:27:06.600 | The salary deferral limit, which is what I talked about a second ago, that is limited.

00:27:09.560 | You cannot replicate that at different jobs. However, you can in different jobs do a profit

00:27:14.920 | sharing contribution. So someone who might have a SEP IRA is considered a profit sharing

00:27:19.240 | plan. Those are not subject to either the IRA limits or the retirement penalty limits.

00:27:24.040 | Again, distinct to the profit sharing element. So if you work multiple jobs, more than likely,

00:27:28.960 | you're not going to give you a lot of matching contributions. But if you happen to get a

00:27:32.320 | 4% match, yes, you can duplicate that in multiple places.

00:27:34.920 | - If someone made me the tax retirement czar of this country, I would just give everyone

00:27:39.800 | the same limit no matter what. Everyone gets $100,000 of tax deferral, whether it's an

00:27:44.800 | IRA, a SEP IRA, a 401k, a 403, whatever it is. I don't know why we have to have these

00:27:50.200 | different limits.

00:27:51.200 | - I'll go even further, Ben. When you and I retire in our mid-40s, I guess we missed

00:27:53.720 | the boat on that. But when we retire in our mid-50s, we are going to go lobby Congress

00:27:57.160 | in Washington and get this away from the employer. That'd be my thing. There is a retirement

00:28:00.680 | plan for federal employees called the TSP, the Thrift Savings Plan, one of the lowest

00:28:03.960 | cost plans in the country.

00:28:04.960 | - You're preaching to the choir here. My brother is part of it and I'm jealous of it all the

00:28:07.800 | time.

00:28:08.800 | - And it's open to federal employees. Why do we do this? Through employers, because it

00:28:12.000 | requires the employer. Me, as Red Hull Wealth Management, the plan sponsor, I have to set

00:28:15.840 | this up every year for the benefit of you guys, right? And our guy, John, I have to

00:28:19.280 | do this every year and certify stuff and pay bills and blah, blah, blah. Why don't we just

00:28:22.200 | do this through the federal government, encourage people to save? Like, screw the match. Maybe

00:28:26.080 | the company puts in the match, I don't know. But this should be open as a retirement program

00:28:29.600 | for the people.

00:28:30.600 | - You must be a reader of Wealth of Common Sense. It was one of my early blog posts.

00:28:34.640 | And it's also one of the cheapest retirement plans. I think each fund is like two or three

00:28:38.260 | basis points of investment expenses. BlackRock runs it for them. It's an amazing program.

00:28:43.640 | You get like five index fund choices. Yes, it should be open to all Americans.

00:28:47.880 | - Government employees, sponsors, yeah, the whole thing. So I'm with it. And so we are

00:28:50.400 | going to go to Washington.

00:28:51.400 | - How would companies use their retirement plans to try to lure talent?

00:28:54.640 | - Yep, yep. And for the inauguration day in 2036, meet me there on the steps of the White

00:28:59.640 | House. We're going to go meet Chuck Schumer, Kristen Gillibrand. We're going to go right

00:29:03.280 | up to Sleepy Joe, still be president and get this thing signed into law. Let's do it. Who's

00:29:07.680 | with me?

00:29:08.680 | - Okay, another dollar in the square yard.

00:29:12.440 | - You can Zoom me into that one. I'll watch from Zoom.

00:29:14.800 | - I think he's going to be like in his hundreds.

00:29:16.960 | - We'll do it live. We'll do a live show from DC.

00:29:20.440 | - Let's do it.

00:29:21.440 | - All right. If you have any tax questions for Bill, any of us, Duncan, keep them coming.

00:29:25.920 | - They take me out of my box when we get more than 10 a week, so.

00:29:29.040 | - Askthecompoundshow@gmail.com. Remember new compounded friends tomorrow. If you have something

00:29:33.280 | in podcast form, leave us a review, leave us a comment below. I respond to all of them

00:29:38.000 | unless they're mean, then I don't.

00:29:41.760 | - Yeah.

00:29:42.760 | - Compoundmerch is idontshop.com. Remember, keep those questions coming.

00:29:44.400 | - We've got some new stuff coming. We've got some new stuff coming in the shop. Keep your

00:29:47.720 | eyes peeled.

00:29:48.720 | - All right.

00:29:49.720 | - Yeah.

00:29:50.720 | - Are you still hiring? Are you still hiring a tax person?

00:29:52.840 | - Yeah. We're looking. We're looking. It's a hard time to hire somebody in tax, but yeah,

00:29:56.320 | if you've got skills, get on our radar.

00:29:58.840 | - Let us know. Thanks everyone who showed up to the live chat as always, and we will

00:30:01.920 | see you next time.

00:30:02.920 | - See you, everyone.

00:30:03.920 | - Yep. Big shouts to Eric. Congrats on the babies.

00:30:05.760 | - Yeah. Congrats.

00:30:06.560 | - Yeah. Thanks.

00:30:07.560 | - Thanks.

00:30:08.560 | - Thanks.

00:30:09.560 | - Thanks.

00:30:10.560 | - Thanks.

00:30:15.560 | - Thanks.

00:30:20.560 | - Thanks.

00:30:26.560 | - Thanks.

00:30:31.560 | you

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