When Should You Rent Instead of Buy?

00:00:00.000 | shorts I was wearing them all last week at future proof but we've got an extended summer

00:00:05.220 | here so I'm still getting some shorts as but we're inching closer to jogger season and

00:00:10.960 | after jogger season in the fall then we inched even closer to sweatpants season and the great

00:00:15.640 | thing about these is that they also have the built-in liner just like the shorts and the

00:00:19.640 | side pocket so it feels like you're wearing the bird dog shorts even though they're joggers

00:00:22.440 | or pants plus they have the the stretch khakis as well which easily one of the harder words

00:00:28.960 | in the English language to spell is the stretch khakis but they're great because they have

00:00:32.920 | the same material as the shorts they're very comfortable and kind of stretch and move and

00:00:37.960 | remember if you go to birddogs.com/ATC you get one of these white stretch tech hats which

00:00:44.240 | are very cool I still owe you one Duncan I keep saying that but I still have it ATC is

00:00:48.440 | the is the code when you check out also just FYI I think I think StreamYard might have

00:00:54.080 | been delayed taking us live there so I think people might have missed some of the beginning

00:00:58.440 | part so just the TL;DR is I'm coming coming in live from Frankfurt Germany and Ben made

00:01:06.160 | a joke about me wearing wederhosen so yeah in case you missed that all right I had to

00:01:10.360 | look it up to remember what that was called I was gonna I had a very fun day at the Hofbrauhaus

00:01:15.960 | when I was in college before which is all I need to say but I know you're gonna be there

00:01:19.000 | for Oktoberfest you're going you're kind of traveling all over Germany right yeah yeah

00:01:23.600 | Berlin down to Munich yeah everything okay here's I have one question for you finance

00:01:28.200 | wise did you check that your credit card allows free foreign transactions before you left

00:01:32.520 | I did yeah yeah I'm using the Sapphire Reserve for pretty much everything here so just making

00:01:38.200 | sure it's kind of nice you don't have to I remember when I went there in college I had

00:01:40.400 | to like exchange money all the time and you'd get just screwed on the the transaction fees

00:01:45.540 | and the whatever the currency exchange rate was they'd always you know I feel like they

00:01:49.360 | took two or three percent off every time so yeah a lot more places now are accepting

00:01:52.700 | cards too when I came here years ago it was more you know cash only kind of stuff but

00:01:57.680 | now I'm seeing a lot more credit so we're catching up they're going there in the future

00:02:02.640 | dogecoin that sort of thing right all right let's do a question okay up first today we

00:02:07.440 | have I'm 39 with no kids or dependents I'm a registered nurse with an annual income close

00:02:13.160 | to $110,000 I have $370,000 in my 401k $190,000 in an IRA and $220,000 in my brokerage account

00:02:22.680 | not to brag that's me not them I currently reside in a duplex where I rent out both my

00:02:28.660 | basement and second floor my outstanding mortgage balance is $190,000 at a fixed rate of 2.8%

00:02:35.300 | for 30 years additionally I have an investment property which is paid in full per Zillow

00:02:40.740 | the estimated value of my primary residence stands at $400,000 while my investment property

00:02:45.620 | is valued at $650,000 I'm contemplating using the equity I've built up to further my real

00:02:51.260 | estate portfolio or explore alternative investment avenues I'm faced with the decision of whether

00:02:57.260 | to leverage a home equity loan even with high interest rates or wait for a potential rate

00:03:02.100 | change also is it wise to use my equity to buy more stocks I think it's a pretty impressive

00:03:08.460 | question coming from a 39 year old yeah he's in a pretty good position having one house

00:03:12.660 | paid off and a 2.8% mortgage on another one puts Joel here in a pretty good position but

00:03:17.540 | he's he's come to the he's realizing the problem though he's house rich right and the thing

00:03:22.060 | you realize once you have a house paid off you have a lot of it paid off you have equity

00:03:24.860 | is great he no longer has the payments on the one house and the payments are obviously

00:03:28.820 | probably low on the other one but that all that equity sitting there it's you once you

00:03:33.380 | have it you start thinking well what good is it doing I can't spend my house I can't

00:03:37.500 | sell shares of my house like I could with a stock if it's appreciated in value and use

00:03:42.180 | it for something else the liquidity is the problem so there are some options here but

00:03:47.300 | I think none of them are really a slam dunk so you could open up a home equity line of

00:03:50.380 | credit or do a cash out refinance but then we're talking borrowing it at ridiculous rates

00:03:54.860 | so seven and change probably if you did a cash out refi right now and eight to nine

00:03:59.580 | percent for a home equity line of credit which does not sound great so if you're planning

00:04:02.940 | on taking that money out and looking at other investment opportunities that's a really high

00:04:06.540 | hurdle rate I would prefer the HELOC at this moment than a cash out refi because those

00:04:11.180 | rates could fall when when other rates fall it'll fall faster you don't have to refi and

00:04:14.820 | you don't have to spend that you don't have to start making their debt repayments right

00:04:17.940 | away we've talked about the HELOC before you could use that equity in your home and just

00:04:22.660 | sell it and use it for a down payment on new house but then again you have the higher mortgage

00:04:26.340 | rates the reverse mortgage is something we've talked about in the past but he's 39 years

00:04:31.860 | old so you have to be older to do that so again having home equity is a wonderful thing

00:04:35.380 | but what are you supposed to do with it there he does have a very concentrated position

00:04:40.540 | in real estate with owning two houses even though one of them paid off the great thing

00:04:43.460 | is you don't have those down payment or those monthly payments anymore so you could take

00:04:47.660 | that money that you would have been paying for monthly payments and diversify that way

00:04:51.420 | but I think something that a lot of people who own rental properties probably don't think

00:04:55.380 | about is why don't you just sell it right it's kind of like retirees with their principal

00:05:00.420 | they say like I'm never touching my principal I'm only living on the income it's a psychological

00:05:04.060 | thing where people I think people once they get rental properties even if they'd appreciate

00:05:07.260 | in value they go no I'm getting this rental income it's doing great for me and the way

00:05:10.900 | that real estate investors look at this is through a cap rate so let's say you have the

00:05:14.380 | house valued at $600,000 or whatever let's say you're netting $2,500 a month so you're

00:05:19.700 | not making payments anymore so after taxes and stuff and maintenance let's say you're

00:05:22.780 | netting 2,500 bucks a month on that that's a $30,000 a year that's a 5% cap rate call

00:05:28.260 | it on a $600,000 house so could that money be put to work and obviously you can play

00:05:33.020 | with the numbers and figure out how much you're actually bringing in to figure out what that

00:05:35.140 | cap rate is so could that money be put to work elsewhere with better returns possibly

00:05:40.540 | I don't know maybe some people just like being landlords you can increase the rent each year

00:05:45.340 | to account for inflation Duncan you're a renter you know how this works I actually re-upped

00:05:49.860 | my office lease this week and Bill Sweet was looking through the contract with me I've

00:05:53.180 | been in the same office since 2015 it's still barely standing even though it's even though

00:05:56.940 | there's been a few floods and a few problems my office is okay I still like it it's close

00:06:01.420 | to my house and so I re-upped again and Bill and I actually calculated what's the inflation

00:06:05.260 | rate been since 2015 when I first moved in and surprisingly it it almost identically

00:06:12.260 | matches the rate of inflation so it's 3.4% per year my rent has gone up and CPI in that

00:06:17.980 | time has gone up 3.3% per year not bad so it's yeah not too bad so I just I think right

00:06:25.100 | now is not the environment to be a borrower so he asked about could I just wait until

00:06:29.460 | the rates situation is better and yeah I don't know how long that will be but I wouldn't

00:06:33.060 | feel great about borrowing at 7 to 9% right now that's a pretty high hurdle rate I think

00:06:37.340 | a lot of it depends on how much you care about owning real estate because again I you could

00:06:40.900 | just sell the house you don't you don't have to it does sound pretty cool though to be

00:06:43.860 | 39 and be able to like refer to your real estate portfolio right but I think I think

00:06:48.500 | the reason he's having this this internal tug-of-war is he realizes like I have all

00:06:53.540 | this equity sitting there and I can't do anything with it yes the home equity line of credit

00:06:57.420 | sounds good but that that works better typically if you borrow to do a you know fix the house

00:07:01.700 | up or something so maybe you could you could fix your house up or you could I don't know

00:07:05.580 | kick your your renters out of your duplex and and live like a king I don't know I think

00:07:11.660 | but I think it's okay to think about selling it especially in an environment where there's

00:07:14.900 | not much supply and and the house is probably appreciated in price a lot and then you then

00:07:19.340 | you you have that liquidity event and then now what are you gonna do you have a ton of

00:07:22.460 | money to put the work somewhere else I think it's I would at least consider that as opposed

00:07:28.020 | to holding the real estate and I think probably what he's thinking about is yeah I'll take

00:07:31.500 | some out I'll use it as a down payment for a new place and put some leverage on it then

00:07:35.020 | I don't care as much about the borrowing and I guess that makes sense too but I just be

00:07:37.720 | worried about the the rates being so high right now yeah John Carlo in the chat asks

00:07:43.780 | are there arm adjustable rate he locks well he locks are technically adjustable rate as

00:07:49.860 | it is like the rate fluctuates it's like a live or plus something or whatever whatever

00:07:54.140 | prime rate plus something so it'll fluctuate but it with rates this high it's it's going

00:07:58.980 | in the wrong direction and they who knows they could go higher gotcha that's a but yeah

00:08:03.340 | the hope would be that you could I don't know pay it off with the income and if if you're

00:08:07.420 | borrowing at seven or eight percent and it's only for a couple years and you pay off it's

00:08:11.820 | for down payment and maybe it's not so bad because that the longer term is what hurts

00:08:16.060 | you there but yeah good for you good finance position obviously yeah yeah a few not the

00:08:21.380 | brags all right let's do another one another another housing when we've gotten a lot of

00:08:24.140 | housing ones here all right up next we have a question from max I'm 30 and recently divorced

00:08:29.660 | I received a hundred and thirty thousand dollars settlement for a house we purchased in 2021

00:08:35.260 | she stayed in the house total liquid assets are two hundred and sixty five thousand dollars

00:08:39.580 | plus fifty thousand dollars in my 401k I live in the San Francisco Bay Area and make a hundred

00:08:44.580 | and twenty five thousand dollars base with sixty thousand dollars variable salary and

00:08:49.060 | my rent is twenty six hundred dollars a month having lost a five hundred thousand dollar

00:08:53.140 | mortgage at three percent I feel I'm stuck without a home in the current market friends

00:08:57.420 | are taking out seven thousand dollar monthly mortgages when comparable rents are four to

00:09:02.180 | five thousand dollars how is that sustainable how am I supposed to purchase something at

00:09:06.700 | six to seven percent on a single income I've explored land purchases to create Airbnbs

00:09:11.420 | or purchasing a rental property but barring costs and high prices make this feel impossible

00:09:17.140 | I feel like I'm not getting the full value of my two hundred and sixty five thousand

00:09:20.460 | dollars and I'm unsure of how to allocate it for my financial future aside from getting

00:09:24.420 | another wife to pay half the bills what should I do okay I understand the consternation here

00:09:30.820 | this is a tough break obviously divorces sorry to hear it yeah sorry to hear I mean that's

00:09:34.060 | always difficult from an emotional perspective but there are financial considerations as

00:09:37.300 | well I also wonder number in wedding crashers Vince Vaughn and Owen Wilson's characters

00:09:41.540 | are like divorce settlement attorneys and they help the negotiation I would love to

00:09:45.580 | know how those negotiations went for a three percent mortgage because how much is that

00:09:49.060 | worth in a seven percent environment like do you think that this guy kind of got screwed

00:09:53.240 | a little bit for his paint payout yeah I would have I would have done some discounted cash

00:09:57.840 | flow analysis something I'm not I'm not trying to say you got screwed but I think you might

00:10:01.420 | have got screwed because yeah that's all I was thinking that sounded a little low given

00:10:07.060 | what he's talking about yeah and I I've made this joke before but I've heard of stay together

00:10:10.580 | for the kids I wonder how many people are staying together for the three percent mortgage

00:10:13.220 | these days right stay together for the mortgage all right so Max here is in a tough spot the

00:10:20.720 | housing market is broken in many ways affordability about as bad as it's been we've talked about

00:10:24.340 | this before plus he lives in the Bay Area where house prices were unaffordable before

00:10:28.840 | we got to seven seven and a half percent or it was great yeah but I think there's a lot

00:10:32.340 | of peer pressure in these especially since he's 30 when it comes to the housing market

00:10:35.220 | and it's like you have to buy a house why are you paying someone else's rent you have

00:10:39.140 | to build equity I'm sure people have heard these ones before or he's thinking it himself

00:10:43.380 | here's the secret especially if you live in a high-cost moving area buying a house is

00:10:47.100 | not for everyone I know it seems like it has to be but owning a home is not for everyone

00:10:51.260 | yes it's a wonderful hedge against inflation it's a for savings vehicle it offers this

00:10:55.820 | wonderful form of psychic income that's really hard to match but that doesn't mean everyone

00:10:59.280 | has to buy a house here's the here's the list of people who shouldn't buy a home number

00:11:03.180 | one you want to retain some level of flexibility in your personal life or your career because

00:11:06.820 | you move around or whatever you don't want to put pay all the ancillary costs that come

00:11:10.820 | with a home ownership I've heard the line before that when you pay your rent your your

00:11:14.700 | housing costs are done right but when you pay your mortgage that's just the start of

00:11:18.780 | your housing costs mortgage plus all these things yeah another one is you just don't

00:11:23.100 | want all the responsibilities of owning a home it's the landscaping the upkeep it can

00:11:27.180 | be a lot for some people I think if you don't live in the house long enough to cover the

00:11:30.940 | swishing costs from buying selling moving closing costs all these things other people

00:11:35.900 | I think if you run the numbers and realize renting makes more sense for your financial

00:11:39.160 | situation and I think the last one is if you live in a high cost of living area I think

00:11:42.860 | the first one about retaining flexibility makes sense here because this guy just got

00:11:47.740 | a divorce his life is probably in a state of upheaval I don't know if he wants to think

00:11:52.320 | about moving somewhere else or if he has the potential for a job maybe he just loves living

00:11:57.140 | in the Bay Area because of friends or family or he just he just really likes it but I think

00:12:00.220 | the last two make the most sense you run the numbers and realize renting is better for

00:12:03.180 | you or you live in a high cost of living area right I think you know as he pointed out in

00:12:08.900 | his question buying is just more expensive than renting he's paying $2,600 a month in

00:12:12.820 | rent and $7,000 for mortgage or whatever Redfin actually did this analysis and they looked

00:12:18.060 | at the largest premiums in terms of renting versus buying and John throw up my chart here

00:12:23.660 | this is from Redfin and it looks at home ownership premiums so in San Jose is the worst one it's

00:12:29.180 | 165% more expensive to buy than to rent San Francisco it's almost 140% you can see the

00:12:35.540 | top ones here are almost all California right and this analysis was done on mortgage rates

00:12:40.620 | for 6.5% because they did this a few months ago now it's like 7.3% at the latest I think

00:12:45.180 | so John do the next one which is the most populous cities this is like the most populous

00:12:49.860 | cities with the biggest premium you can see a lot of them are in the Bay Area San Francisco

00:12:54.300 | Oakland Anaheim it's a lot of West Coast places a lot of California and it's just so I looked

00:13:00.380 | at the the median home price in San Francisco is like 1.4 million dollars kind of sounds

00:13:05.500 | like a lot so if you wanted to buy and you put 20% down that's 280 grand and you said

00:13:10.700 | your liquid net worth is 265 so it's your whole liquid net worth plus 15 extra thousand

00:13:15.340 | dollars plus closing costs and all that stuff with a 7.3% fixed rate mortgage over 30 years

00:13:20.980 | we're talking $7,700 and that's before property taxes insurance HOA maintenance is it really

00:13:27.260 | worth it to use all of your liquid financial assets and spend $5,000 more a month or more

00:13:35.020 | for your monthly payment just so you can own instead of rent for I mean for some people

00:13:38.500 | the numbers might not matter they simply want to buy a house no matter what ensure you have

00:13:42.180 | the ability to refinance even if you refinance that mortgage if rates went down to 5% you're

00:13:46.740 | back you're at $6,000 a month so my point is you don't have to buy a home just because

00:13:51.140 | society says you do especially in a situation like today you have to run the numbers you

00:13:56.180 | have to understand your circumstances and I don't think you need to be in a rush especially

00:13:59.780 | if your life has come up under like some big upheaval right so buying a house can be a

00:14:06.460 | wise financial decision for some people it doesn't have to be for everyone I say don't

00:14:10.220 | be in a hurry and and wait just because someone says you're paying someone else's mortgage

00:14:14.660 | because if you can take those savings figure out what you'd be paying in a mortgage and

00:14:18.660 | save the difference you're gonna be you're gonna be a pretty good place financially maybe

00:14:22.240 | in a few years you do feel like okay I've saved enough now I want to go ahead and buy

00:14:27.860 | then imagine how expensive California would be if they didn't have earthquakes that's

00:14:34.060 | the trade-off the earthquakes and wildfires kind of balance it out but it's still ridiculously

00:14:40.020 | expensive to live there obviously yeah but yeah I if you're in a high cost of living

00:14:44.380 | area like that and rent is that much cheaper don't be in a hurry to buy just because you

00:14:48.980 | think you have to owning a home is not for everyone good advice says the homeowner right

00:14:55.180 | fair stay away from my house let's see I'm in my early 20s with a stable job should I

00:15:07.380 | sell down assets in my Roth to pay off credit card debt okay you got a nice and succinct

00:15:11.980 | this question is you what did you say does to ask how do you I can't even say the name

00:15:16.140 | about how yeah we do get a lot of information from our from a lot of very long questions

00:15:22.860 | yeah what you see on the show is actually the abbreviated version usually yeah people

00:15:26.620 | want to make sure that we got all the bases covered okay Duncan what's Ben's number one

00:15:29.380 | rule of personal finance pay off debt pay off your credit card debt right not paying

00:15:34.500 | off your credit card debt each month is a personal finance killer it's like Jim Simons

00:15:38.820 | level of compounding but against you right it's like in the opposite direction so I don't

00:15:43.260 | think you necessarily have to pay off like liquidate your Roth to pay off your credit

00:15:46.860 | card you it is an option but you I would just recommend that you'd use the contributions

00:15:51.500 | from your Roth and not take out any gains that you might have because then you have

00:15:54.340 | to pay an early withdrawal penalty but you that's one of the benefits of a Roth is that

00:15:57.940 | you can take out the contributions tax and penalty free so I think this decision probably

00:16:02.500 | comes down to loss aversion versus debt aversion loss aversion I've been trying to teach my

00:16:06.420 | daughter this lately that losses sting twice as bad as gains make you feel good like when

00:16:10.760 | her favorite team loses it makes her feel worse than the winds feel good so I think

00:16:16.060 | if seeing a chunk of your Roth assets just that evaporate even if it makes your debt

00:16:19.780 | go away if you can't handle that I think that's one way to think about a debt aversion I think

00:16:23.420 | if it just causes you pain all the time to be in this debt and you feel like it's just

00:16:27.260 | a burden and a weight on you then maybe taking out some of those Roth conversions make sense

00:16:31.900 | I think you could start the initial first step would be just stop making any further

00:16:36.620 | Ross contributions and use whatever contributions you're making to pay off your credit card

00:16:40.620 | debt I think that's a good first step you could also look into a zero percent credit

00:16:44.500 | card and do a balance transfer Duncan we've been talking about this lately a lot of these

00:16:49.620 | places will allow you to open up a zero percent credit card for 15 18 21 months and then you

00:16:54.740 | pay 3% for a balance transfer now that sounds like a lot until you realize that you're paying

00:16:58.460 | a 27% or something on a credit card interest so I think that's a pretty good first step

00:17:02.660 | and that'll give you some breathing room to pay it off slowly instead of trying to pay

00:17:05.660 | it off all at once and again I think you can then take your Roth contributions use those

00:17:10.460 | to pay credit card debt once the credit card debt is paid off then roll those payments

00:17:15.320 | right into your Roth again so you can kind of play catch up and then you're you're in

00:17:19.260 | business that's the route that I recently to so yeah it's I mean 3% with my track record

00:17:26.680 | that's not that high of a hurdle rate in the market you know right yeah compared to Oatly

00:17:32.020 | options it's pretty good yeah so and the other thing is I would for all your credit cards

00:17:38.740 | going forward like paying it off would be nice but it makes no difference if you're

00:17:42.260 | just gonna rack up more credit card debt in the future click that autopay button to pay

00:17:45.420 | the entire balance each month and hold yourself accountable to pay it off and don't let it

00:17:49.220 | roll over each month yeah I mean this math is much clearer if you are paying 24 27% interest

00:17:55.500 | on a balance on a credit card like you got to get rid of that right I mean that's that's

00:17:59.180 | brutal yes that that's ridiculous so it figure out a way to do that all right cool let's

00:18:04.340 | do another long one up next yeah up next we have a question from Jeff I'm retiring in

00:18:08.780 | a month at 56 with a four million dollar portfolio no debt a three hundred thousand dollar severance

00:18:15.080 | package and a 5.2 million dollar net worth Jeff's pretty set in my opinion but non-professional

00:18:22.060 | opinion I'm married with two daughters college paid for I know it seems dumb but I'm trying

00:18:27.420 | to decide on a 50/50 simple for fund ETF portfolio versus my 55/45 simple for fund portfolio

00:18:34.740 | in perpetuity that's a hard word it's the difference of a hundred and fifty thousand

00:18:39.380 | dollars which is probably relatively small compared to the entire portfolio but I keep

00:18:44.060 | reading about how going to a 50/50 at the start of retirement is important to avoid

00:18:48.780 | sequence of returns risk I've put three years of cash away in a 5% t-bill ETF and we'd be

00:18:55.340 | very comfortable living off a 3% withdrawal rate I've always followed a monthly DCA plan

00:19:00.900 | and rebalance yearly and it's served us well it's weird but I'm stressing over this but

00:19:05.340 | I would like to only retire once a simple go for it will suffice and I'll do the 55/45

00:19:11.980 | I don't want to be greedy and have too many equities and don't want to be stupid by being

00:19:16.340 | overly conservative I'm going to need you to break this one down all right Dave in the

00:19:20.540 | chat says he wants Jeff to just simply adopt him because he's got somebody not to brag

00:19:24.740 | here this sounds like an asset allocation question because it's like should I be 50/50

00:19:28.740 | or 55/45 but it's really a financial planning and even more behavioral finance question

00:19:33.580 | so let's bring a financial advisor in here to help us out with this one Nick Sapienza

00:19:36.980 | hey guys Nick I think I think Jeff here has been reading Michael Kitsis who have some

00:19:43.060 | research on this that says early in retirement sequence of return risk can kill you because

00:19:47.380 | if you start out with a bear market and you sell your stocks you're gonna put yourself

00:19:50.500 | into a hole so I think that's what Jeff is worried about here should I get more conservative

00:19:55.380 | but obviously the the difference I think between 55/45 and 50/50 is kind of splitting hairs

00:20:01.420 | here yeah exactly I just want to call out a few things from the question right 56 married

00:20:06.380 | two daughters college paid for four million dollars investable no debt $300,000 severance

00:20:11.180 | package 5.2 million dollar net worth and the question is 50/50 versus 55/45 it's a difference

00:20:18.100 | of 5% or $150,000 right these are minimal differences when in the grand scheme of things

00:20:25.340 | and he mentioned reducing sequence of returns with so just to back into that we talked about

00:20:29.660 | this the first time I was on a few months ago it's the order in which you get a bear

00:20:34.420 | market so like to Jeff's fear is what if I'm retiring and this is the top of the market

00:20:39.780 | like it was in 2000 or 2008 what happens to my portfolio but he's already mitigated probably

00:20:46.620 | 95% of those risks right he's the biggest risk for sequence of returns is you're forced

00:20:51.740 | to sell your stocks when they're in a bear market right so that's that's that's the hardest

00:20:55.700 | part is you don't have to sell when they're down because if you're the timing every withdrawals

00:20:59.780 | works out bad where you're down 40% and you're selling your stocks then you're you're setting

00:21:03.940 | yourself up for potentially failure in retirement yeah exactly you can't make it to the other

00:21:07.900 | side of the bear market or secular bear market where you run into the bull market and that

00:21:12.660 | usually would offset that right you have to worry about running out of money but in his

00:21:15.740 | case low withdrawal rate a three-year cash buffer I mean usually it's like one or two

00:21:19.940 | years so he's gotten more on that side and then assuming he's got in that for ETF portfolio

00:21:26.540 | it's globally diversified it's not just entirely in like one specific country or sector or

00:21:31.660 | anything like that lastly it's the behavior piece that mitigates that sequence of returns

00:21:36.220 | risk is behavior and impulse control so whether or not he can stick with it we've got a few

00:21:40.860 | charts here just to you know go down the rabbit hole for fun and explore this a little bit

00:21:45.540 | the first one is just comparing the differences in the 50/50 versus the 55/45 the difference

00:21:50.540 | is half percent per year which is meaningful especially over a 40 year time horizon which

00:21:54.980 | is what Jeff potentially faces right and so it's again it's really look at that chart

00:22:01.460 | it's it's it's I mean you're hugging the line there either either one you're you're you're

00:22:05.900 | pretty much going to be in the same spot exactly and these are kind of like cherry-picked dates

00:22:08.940 | right well I mean at least we've got you know a full market cycle and and a few bear markets

00:22:13.700 | embedded in this but it's neck and neck there's like no difference whatsoever the next chart

00:22:18.580 | is okay well what if Jeff's thinking in terms of you know he's backtesting his portfolio

00:22:22.740 | and he's thinking in terms of maximum drawdown and he says and the way that he's gotten to

00:22:26.060 | 50/50 or 55/45 is not just so much by sequence of returns risk but his max pain threshold

00:22:31.140 | he said this is the most pain that I can tolerate and in you know it's at 31 I mean you're looking

00:22:36.500 | at 31% in 2008 for a 50/50 portfolio and then on the next chart you'll see the 55/45 breakdown

00:22:44.860 | now this is the act we enact so this is a globally diversified portfolio the 55/45 you're

00:22:49.300 | looking at a negative 34% drawdown in 2008 so again not really a huge difference if you

00:22:56.220 | look at the long-term average 4.78 versus 4.36 on the average drawdown this is pennies

00:23:02.580 | and so really what this comes down to is that the best plan is the one that you can stick

00:23:06.940 | with my thoughts on this whole topic or that you know Jeff is splitting hairs and typically

00:23:11.700 | when we split hairs it's usually about something else so the thing is not the thing this isn't

00:23:16.020 | really a stock or bond question this is am I going to be okay okay question Jeff needs

00:23:20.220 | the validation that he's making the right decision so that he can have conviction in

00:23:23.220 | his own plan and he could move forward with that and stop second-guessing it right it

00:23:27.460 | sounds to me like Jeff might need to talk to a professional just to be like tell me

00:23:31.300 | I'm gonna be okay because we could put all take all these inputs and put them into a

00:23:34.820 | financial planning software and run to Monte Carlo simulations and I'm guessing either

00:23:38.740 | one of these would show you know you have a very high probability of succeeding in your

00:23:43.260 | financial plan right regardless of the allocation so it's just you know this is perfect being

00:23:49.060 | the enemy of good here and in just being like I need someone to help me make this decision

00:23:53.940 | just point direction he's got everything else right but he's I think he's missing the psychological

00:23:58.820 | aspect of this is that decumulation is a difference is a different mindset than accumulation right

00:24:04.140 | he's always stuck to and been very disciplined in a DCA plan but now he's taking assets out

00:24:09.460 | and even if we know the math and he's probably he's probably looked at money Carlo calculations

00:24:14.180 | but even if we know the math it's really hard for us to reconcile the fact that we can take

00:24:18.180 | a hundred and twenty thousand or you know three percent out of a portfolio every year

00:24:22.540 | maybe increase that by inflation and yet if he's read kids this if he's read the sequence

00:24:26.780 | of returns papers he could on average according to the data end up with maybe six times more

00:24:32.380 | than the amount that he started with despite the bear markets corrections you know dips

00:24:36.420 | and everything else that accompanies right he's obviously conservative enough by holding

00:24:40.380 | three years in cash so that that piece to me that that's like how do you fight sequence

00:24:45.540 | of return this Duncan you said it's yeah you have a cash buffer it's a cash buffer in diversification

00:24:49.500 | that that's it so he's got that he's got to figure out so that being conservative he's

00:24:52.500 | got that that totally like tied up in a neat bow seems fine yeah I just kind of need someone

00:24:57.620 | to help him decide he wants them to say yes you can you're gonna be okay and we don't

00:25:01.580 | know exactly how the future is gonna play out but I think based on the circumstances

00:25:04.420 | you're doing pretty good it always helps to have that third party that's unemotional and

00:25:08.140 | that can pick apart your you know sort of it's you know I don't want to say distorted

00:25:12.100 | thoughts but just slightly disrupted thinking about his portfolio and really focusing on

00:25:16.980 | one thing stressing over too much and I think one more point like one thing that he's maybe

00:25:21.300 | not focusing on and and Jeff don't mean to throw a wrench into this you can you've got

00:25:26.540 | plenty of time you can kick this can down the road but is longevity risk he's 56 he

00:25:31.260 | might need his plan to last for 40 years so he is focusing a lot on minimizing downside

00:25:35.980 | making the right decisions but at the same point you can't constrain upside Nick you

00:25:40.180 | just caused Jeff to go into like an eight-year cash but I did I shouldn't have said it take

00:25:44.180 | it back delete this I take it back well I'm guessing to I mean revisit this in five years

00:25:48.620 | Jeff but just get the 5545 gone having this level of wealth I'm guessing Jeff is really

00:25:55.060 | into doing this on his own right I'm like managing that could be that could be feeling

00:25:59.060 | those people would be like you know what he's obviously done yeah he said his research and

00:26:03.340 | maybe doesn't want to take his hands off the steering wheel but I think you can at least

00:26:05.660 | talk to someone it doesn't have to be a relationship that you're in forever it could be a one-time

00:26:09.980 | hourly kind of meeting if you yeah you can talk to planners on an hourly basis that won't

00:26:14.060 | take that won't take over the investment management piece that that is available that is an option

00:26:17.820 | and I think that's definitely a good idea for him to get that affirmation but all right

00:26:22.460 | so my my my my takeaway is is go forward but also you know leaves room for flexibility

00:26:27.420 | sorry yep you got to be flexible all right next question Duncan hey up next we have a

00:26:32.580 | question from Lars my small business employer uses a simple IRA it caps out at fifteen thousand

00:26:39.380 | five hundred dollars this year so I effectively lose out on thousands of dollars of potential

00:26:43.540 | investing each year compared to my previous and previous large employer that I had a 401k

00:26:49.580 | with what is the purpose of this difference why does it feel like I'm being penalized

00:26:53.500 | for working for a small business I'll be muted you're muted in oh sorry I don't know why

00:27:03.100 | there's not just one big bucket for everything right retirement HSAs 529s just give everyone

00:27:09.140 | a big it should be like a speed limit everyone follows the same limit I don't know why that

00:27:13.140 | for some whatever reason someone's working on that someone's working on that a portable

00:27:17.320 | retirement plan that attaches I think to you like your social security number but so what

00:27:20.980 | what what other options do we have here because he's he's saying listen it's fifteen five

00:27:24.500 | hundred I think the 401k is twenty two five now is that about right for yeah yeah so the

00:27:31.980 | max the max in the simple is fifteen five you get a three percent employer match plus

00:27:35.540 | a catch-up contribution of thirty five hundred bucks if he's over 50 I'm assuming he's he's

00:27:39.660 | not because of the limit what's the simple part why is it called simple it's an acronym

00:27:46.980 | and and and really it kind of ties into the name it's supposed to be simple and easy to

00:27:50.660 | set up which is why they were at one point popular but basically so so look I mean he

00:27:55.620 | could his alternatives are that I mean a small company there's pros and cons to being at

00:27:59.100 | a small company pros and cons of being at a large corporation that would offer a 401k

00:28:03.260 | but maybe he can be vocal about it in in bring up you know hey should we review this should

00:28:07.980 | we look at other options you know should we look at 401ks but he can also save into an

00:28:11.740 | IRA at the same time he may not be aware of that he can max out a traditional or Roth

00:28:17.340 | IRA to sixty five hundred to seventy five hundred so it still doesn't really you know

00:28:22.020 | shake a stick at a 401k and the benefits of having those those three buckets usually of

00:28:26.580 | a pre-tax Roth and after-tax account but to answer his question you know why do they why

00:28:33.180 | do small businesses have them is because they're small and they might be you know cash constrained

00:28:37.380 | time constrained they might have you know ten or twenty employees and so they don't

00:28:41.820 | want to go with a full-blown 401k plan cost-effective maybe yeah but the thinking is about is a

00:28:46.020 | bit outdated look simple IRAs did you kind of they suck to be honest 401ks are superior

00:28:52.420 | in every way and now they've caught up to where the costs are it's more affordable and

00:28:58.020 | you can work with someone to take care of all the paperwork and you can have a TPA involved

00:29:02.860 | and there's more flexibility around them and whatnot but it's a lot easier to with a company

00:29:07.340 | like Betterment or something for a small business that you could do it now it would be a lot

00:29:10.940 | easier the other thing is if he has any other form of income outside of his employer he

00:29:16.420 | could do a SEP IRA right if he has some other income the other thing so Nick my Julie member

00:29:20.540 | Duncan on this show said why you shouldn't max out your 401k and he said if you put your

00:29:24.440 | money into index funds and buy and hold and don't make a lot of moves that are gonna cause

00:29:29.500 | taxes that you can end up pretty close to the same place so I guess a brokerage account

00:29:33.340 | is probably an option here too as long as he's not trading his face off right exactly

00:29:38.540 | yeah he could throw it in some ETFs and it you know it's not as tax advantage of course

00:29:42.600 | but it's it's better than nothing yeah simple simple IRAs are kind of like DVD players no

00:29:48.340 | one really has much use for them unless you're Michael Batnick I guess but they're a bit

00:29:53.500 | outdated 401ks are much easier to set up easier to get going and the problem is a lot of these

00:29:59.300 | I'm sure a lot of this stuff was was set up like with good intentions at the time and

00:30:03.780 | now that it's just we have all these different programs and plans and it would be nice we

00:30:07.260 | could simplify it but the unfortunately the tax code and the government doesn't really

00:30:11.260 | work like that so there is another one case are just too too complex and expensive for

00:30:16.120 | small employers basically is that what it comes down to they were there really not anymore

00:30:20.060 | it's just kind of an outdated it's an outdated piece maybe they initially sought out a 401k

00:30:24.300 | and they were advised to use a simple IRA but things have changed but there is a change

00:30:28.020 | talk to the HR people about this for sure yeah I would bring it up I think it's worthwhile

00:30:31.860 | and I don't think he's really overstepping just to ask a question you know just to look

00:30:35.020 | at other options but the there is a new update thanks to Daniel Rosa he runs all of our corporate

00:30:39.460 | retirement plans so we do small business 401ks and such here the secure act 2.0 now allows

00:30:46.500 | for a Roth option within his simple IRA plan so I can't fix the contribution limit but

00:30:51.220 | at least you know now you're aware of those other two options of the Roth and the additional

00:30:55.700 | Roth IRA contribution that you can make so Dave in the chat says simple stands for savings

00:31:00.460 | incentive matching plan for employees all right I feel like that's kind of a stretch

00:31:05.060 | they just wanted it to be simple and they just came up with words that match but nothing

00:31:08.820 | like using simple as an acronym for something that doesn't sound simple yes all right next

00:31:14.860 | week Duncan is off he will be traveling throughout Germany drinking liter beers and eating wiener

00:31:20.860 | schnitzel you know hopefully in a meter hosen but yeah okay that's just true I got sick

00:31:26.420 | on it when I was there actually it didn't didn't didn't sit right with me yeah you won't

00:31:30.340 | be eating you'll be eating a lot of pretzels I love I love a good pretzel okay thank you

00:31:35.740 | to Nick for joining us and helping out with some financial advice questions bill sweet

00:31:39.700 | next week we'll be filling in for Duncan as my co-host remember email us ask the compound

00:31:43.900 | show at gmail.com we always appreciate everyone in the live chat leave us a comment or a question

00:31:48.100 | on YouTube and we will see you next time see you everyone see ya thanks guys.

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When Should You Rent Instead of Buy?

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