How Do You Know if Your Financial Plan Is Working?

00:00:00.000 | (beeping)

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

00:00:13.080 | where each week our inbox fills up

00:00:14.480 | with more and more questions

00:00:16.120 | from our extremely intelligent audience.

00:00:17.840 | Duncan, I'm always pleasantly surprised

00:00:19.200 | with the breadth and depth of the questions we receive.

00:00:21.200 | Remember our email here, askthecompoundshow@gmail.com.

00:00:25.880 | Today's show presented by Tropical Bros.

00:00:28.300 | I love Tropical Bros.

00:00:29.400 | Been wearing the shirts for years.

00:00:30.760 | I always get a comment from someone when I'm wearing it.

00:00:32.980 | People love these shirts.

00:00:33.840 | It's the designs, the material, the look, the comfort.

00:00:36.720 | If you're coming to Future Proof,

00:00:37.800 | you have to get one of these.

00:00:38.680 | It's the shirt everyone will be wearing, including me,

00:00:40.960 | because we'll be on the beach, it'll be hot.

00:00:42.960 | Duncan will have one, John will have one, Michael will have one.

00:00:45.460 | If you're not coming to Future Proof,

00:00:46.560 | pick one up in time for Labor Day.

00:00:47.960 | And we still have, what, three sizes for Animal Spirits,

00:00:52.200 | Tropical Bros. collab?

00:00:53.360 | - I believe that's right.

00:00:54.200 | - I think we have XL, XX, and XXX, right?

00:00:56.680 | No more larges for Michael.

00:00:58.880 | We'll link to that one in the show notes.

00:01:00.480 | The other thing is, they don't just have Hawaiian shirts.

00:01:02.080 | These quarter zips are amazing when it gets cold.

00:01:04.040 | It's 60 degrees here in Michigan today.

00:01:05.360 | And also the polo shirts.

00:01:06.560 | I love the polos.

00:01:07.540 | - Wow, look at you, doubled up with the Tropical Bros?

00:01:09.800 | - Yeah, it goes well.

00:01:11.200 | This is like, I don't want, I'm wearing long sleeves,

00:01:13.140 | but it's still a summer shirt,

00:01:14.080 | 'cause it's got the pineapples on it.

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00:01:16.880 | I'm gonna have to pick up another one of those.

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00:01:20.240 | All right. - Do it.

00:01:22.600 | - Let's do a question.

00:01:23.480 | - Okay, so before we get started,

00:01:25.680 | I actually, I wanted to take a moment

00:01:27.840 | for a little happy birthday.

00:01:29.440 | It's Ben's birthday, everyone.

00:01:31.520 | - Thank you.

00:01:32.440 | - So let's switch this way out.

00:01:35.560 | So yeah, everyone's here to say happy birthday.

00:01:37.480 | (cheering)

00:01:38.620 | - Hey, thanks, guys.

00:01:39.880 | (cheering)

00:01:42.120 | - Happy birthday. - Much appreciated.

00:01:44.440 | All right.

00:01:45.280 | - All right, get out of here.

00:01:47.040 | Be quiet.

00:01:47.880 | Cool, but yeah, for real, happy birthday.

00:01:52.740 | - Yeah, thank you.

00:01:53.580 | They, I was just having a conversation with someone.

00:01:55.960 | At a certain point, they lose their luster a little bit.

00:01:57.800 | I used to be a big birthday guy,

00:01:59.400 | but you know, this is being a human being, I guess.

00:02:02.240 | - Just another day now, right?

00:02:03.720 | - Let's do it, yep, hi.

00:02:05.880 | - All right, up first.

00:02:07.640 | - I do wanna say,

00:02:08.480 | I always talk about how I never get carded at the store,

00:02:11.300 | because I have three, but I have, you know,

00:02:13.520 | or I used to get carded all the time,

00:02:14.960 | and now I have three kids, I still get carded.

00:02:16.680 | And I bought some booze last weekend,

00:02:19.440 | some beer, Coronalite something,

00:02:21.440 | and the lady looks at my ID and she goes,

00:02:23.600 | "You're probably, what, 20 years from being 21?"

00:02:26.080 | And I'm like, "Yes, I am.

00:02:28.000 | "You didn't need to say it like that.

00:02:29.800 | "She nailed it."

00:02:30.680 | All right.

00:02:31.640 | - That's rough.

00:02:33.240 | - I must be looking old, all right.

00:02:35.480 | - Up first, we have a question from Xerxes, Xerxes?

00:02:40.340 | - Xerxes.

00:02:41.180 | - Oh, Xerxes, okay, there we go.

00:02:43.680 | This is a difficult question to ask.

00:02:45.480 | My wife and I make about $220,000 combined

00:02:48.320 | and max out our 401(k) and 457(b),

00:02:51.680 | and she'll get a pension if she stays

00:02:53.320 | in the job for eight years.

00:02:55.160 | We're both 40 and have a three-year-old daughter.

00:02:57.800 | Expensive, he has in parentheses.

00:03:00.160 | My parents are 72 and 70 and have a net worth

00:03:02.760 | of over $4 million.

00:03:04.400 | They're both fit, and of course,

00:03:05.720 | I want them to live a long, healthy life,

00:03:08.600 | and we have a wonderful relationship.

00:03:11.000 | But purely mathematically speaking,

00:03:13.080 | how much can I expect to inherit?

00:03:15.520 | They are retired but relatively frugal,

00:03:17.480 | and I'm an only child.

00:03:19.220 | - I think Xerxes was like some Persian ruler

00:03:21.160 | back in the day, do you remember that from history?

00:03:22.280 | - I remember a South Park or something, I think.

00:03:24.360 | Loaded question here, but I like it.

00:03:26.200 | I heard a quote somewhere that said like,

00:03:28.720 | you know you're winning in life

00:03:30.080 | if you're asking uncomfortable questions from time to time.

00:03:32.160 | So this is definitely an uncomfortable question,

00:03:33.920 | but death and taxes, right?

00:03:35.240 | We can't outrun it.

00:03:37.480 | So it feels weird to even ask it.

00:03:38.680 | Fortune had this article a couple weeks ago

00:03:41.040 | that pegged the wealth transfer from boomers

00:03:43.280 | to millennials at $73 trillion until 2045.

00:03:47.240 | An additional 12 trillion will go to charity, they said.

00:03:49.620 | So how much can people plan to get?

00:03:51.200 | I found some research from University of Pennsylvania,

00:03:53.960 | researchers, they looked at inheritance

00:03:55.180 | by age and income groups.

00:03:56.100 | John, let's do a chart on for the first one.

00:03:58.120 | This is average inheritance received by age

00:04:02.760 | and then income group, and it breaks it down by,

00:04:05.780 | you can see here, the average is pretty tiny.

00:04:08.120 | It's probably in the five to $10,000 range

00:04:10.480 | for everyone who's below the 5%.

00:04:12.600 | If you're in the top 5%, by wealth, it's more,

00:04:15.660 | it's a little higher, closer to $50,000,

00:04:17.700 | but it's probably lower than most people would think.

00:04:20.080 | And interestingly enough, based on the research,

00:04:22.360 | it's only something like one of the 10 people

00:04:23.880 | actually receiving inheritance.

00:04:25.200 | Most people, I guess, spend it down or don't save enough.

00:04:27.720 | So unfortunately, this is a situation

00:04:30.600 | where the rich stay rich by just passing along their money.

00:04:33.080 | So one of my least favorite stock market inequality stats

00:04:36.240 | is that the top 10% owns like 90% of the stock market.

00:04:39.000 | The inheritance picture looks the same.

00:04:40.400 | So households in the top 5% of the income distribution

00:04:44.000 | receive inheritances that are like four to 12 times larger

00:04:46.980 | than households in the bottom 80%.

00:04:50.240 | So basically this high net worth

00:04:52.440 | and high alternate net worth.

00:04:53.400 | I think people with $5 million and up

00:04:56.280 | make up like 1.5% of all households,

00:04:59.540 | but they constitute 42% of the volume of money

00:05:02.040 | that's gonna be passed down.

00:05:03.580 | So John, do the next chart on here.

00:05:05.480 | This next graphic shows the people

00:05:07.600 | who actually get an inheritance, what is their average?

00:05:09.800 | So taking out all those people who don't get one.

00:05:12.120 | And now we see the bottom 90% get something

00:05:15.360 | between 90 and 100 to 60,000.

00:05:17.680 | The top 5%, it's more like $425,000.

00:05:21.440 | But look at where most of the money

00:05:22.680 | gets handed down, Duncan.

00:05:24.000 | They break the age group here.

00:05:25.520 | You're 66 to 75 years old.

00:05:27.480 | That's when you get it

00:05:28.300 | because people are living longer, right?

00:05:30.440 | So I think the stat is that a couple today

00:05:33.080 | that retires today faces a 50% chance

00:05:36.060 | of at least one of the people living to their mid 90s.

00:05:38.400 | So people living longer,

00:05:39.480 | that means that inheritance when you get it,

00:05:41.280 | it's not gonna come that soon.

00:05:43.640 | So I think, when do you need money,

00:05:47.020 | especially this person asking,

00:05:48.560 | right now they have a young child.

00:05:50.560 | They probably have a mortgage, saving for retirement,

00:05:52.320 | saving for college, emergencies, daycare, all that stuff.

00:05:54.600 | It's a lot.

00:05:55.440 | So I think obviously the amount you're gonna receive

00:05:58.520 | depends on how long your parents live

00:06:00.060 | and what financial market returns are gonna be,

00:06:01.400 | how much they spend, all this stuff.

00:06:02.580 | And you just don't know how, all this stuff.

00:06:04.760 | But with $4 million in the early 70s,

00:06:07.160 | I'm guessing you're gonna receive a pretty healthy chunk,

00:06:09.480 | especially since you're an only child.

00:06:11.600 | I do think if there were multiple siblings here,

00:06:13.080 | it'd be a little trickier.

00:06:14.480 | But since you are an only child,

00:06:16.760 | and obviously you know how much your parents are worth,

00:06:18.320 | unless you're just checking statements

00:06:20.100 | when they're not looking,

00:06:21.440 | you guys have talked finances, which is a good thing.

00:06:23.380 | So I would ask them about this,

00:06:25.400 | ask about their retirement plans,

00:06:26.560 | talk to them about the finances and let them know,

00:06:29.360 | it can be expensive to raise a family

00:06:32.360 | and talk about maybe having some of that inheritance come

00:06:34.720 | while they're still alive so they can watch you enjoy it

00:06:36.520 | and watch their grandchild enjoy it.

00:06:38.920 | And so I think it's at least worth asking what the plan is.

00:06:41.880 | So you kind of, I guess one of the questions here would be,

00:06:45.200 | if I'm gonna receive a big chunk at some point in my life,

00:06:47.200 | do I need to save less for retirement

00:06:48.600 | and these sorts of things so I can spend more now?

00:06:51.160 | So I don't think you make it all about you.

00:06:52.760 | I think you wanna tell them you want to enjoy it with them,

00:06:54.680 | maybe take some trips,

00:06:55.880 | help save for 529 for the grandkid, whatever it is.

00:07:00.580 | That way you don't have to wait for it

00:07:02.000 | until you're 60s or 70s or whatever.

00:07:03.620 | It's certainly a morbid conversation to have,

00:07:05.560 | but I think it's worthwhile to get a sense of their plans

00:07:08.120 | and see what, it'll help you plan better as well.

00:07:11.200 | - Yeah, and just don't piss them off.

00:07:13.920 | You don't want them going and weaving it to the cat

00:07:16.480 | or something like that.

00:07:17.560 | - Yes, the human fund, yeah.

00:07:18.920 | No, in my family, we're worried that my dad

00:07:20.680 | is gonna leave it all in the name of his dog

00:07:21.920 | because we're pretty sure he loves her more than us,

00:07:24.720 | but him more than us, but yes.

00:07:28.000 | - I mean, dogs are my favorite people.

00:07:30.960 | - That's true.

00:07:31.800 | So yeah, a weird, I love how they preface this

00:07:34.200 | with like it's a hard thing to have,

00:07:35.520 | but like, yeah, I mean, if you wanna just get it out

00:07:38.040 | in the open, it could be bizarre or awkward,

00:07:40.200 | but I think you just do it.

00:07:42.120 | Rip the van down.

00:07:43.280 | - What do you think though about this

00:07:44.760 | versus the like surprise scenario?

00:07:47.840 | Because the surprise is like, you're sad about the deaths,

00:07:50.440 | but then that's like some consolation.

00:07:52.040 | Like, oh wow, look, there's a surprise windfall

00:07:54.880 | of a bunch of money.

00:07:55.720 | You know what I mean?

00:07:56.560 | - Okay, yeah, again, another morbid kind of thought,

00:07:59.680 | but sure, this is what happens.

00:08:01.800 | We cannot run it, right?

00:08:02.920 | - You're hedging, you know, emotional hedging.

00:08:05.920 | - Just be happy that your parents

00:08:07.120 | aren't the Brian Johnson guy who's trying to live to 150.

00:08:10.620 | Right?

00:08:11.460 | - Sure, sure.

00:08:12.300 | - Got that going for you.

00:08:13.460 | All right, next question.

00:08:14.620 | - Okay, up next we have a question from Scott.

00:08:17.700 | You've discussed Canadians that are looking down a barrel

00:08:20.300 | to a much higher interest rate

00:08:21.700 | once their mortgage comes up.

00:08:23.300 | Unfortunately, I'm one of them.

00:08:25.140 | I'm currently locked into a 1.6% rate

00:08:27.740 | for another three and a half years.

00:08:29.460 | My concern is that when we renew,

00:08:31.260 | our rate will be much higher.

00:08:32.860 | My wife and I have been debating the merits

00:08:34.900 | of using this time to aggressively pay down the mortgage

00:08:37.220 | so we have a smaller mortgage to renew

00:08:39.460 | or saving the difference to give ourselves a cushion

00:08:42.180 | once that time comes.

00:08:43.740 | We're in a fortunate situation

00:08:45.660 | and we'll be all right either way,

00:08:47.340 | but just trying to see how we can put ourselves

00:08:50.060 | in the best position.

00:08:51.300 | Any thoughts or insights would be greatly appreciated.

00:08:54.260 | - We have a geographical diverse audience here

00:08:56.720 | at the compound, right?

00:08:57.660 | We receive questions all the time from people who say,

00:09:00.540 | geez, the mortgage market you're describing

00:09:02.580 | in the United States is nothing like we have here.

00:09:04.700 | And so people are always either confused

00:09:06.540 | or maybe a little jealous because the fact

00:09:09.060 | that we have 15 and 30 year fixed rate mortgages here

00:09:11.660 | is pretty rare.

00:09:12.500 | So John, do a chart on here.

00:09:14.020 | This just shows the number of mortgages

00:09:17.020 | by variable and fixed rates.

00:09:18.380 | You can see countries like Norway and Australia

00:09:20.420 | and Canada and Sweden and Finland

00:09:22.300 | are way more vulnerable to changes in rates

00:09:24.540 | because they have variable rates.

00:09:26.580 | And this was a great thing for the past,

00:09:28.940 | I don't know, 20 or 30 years

00:09:30.180 | because you would lock something in.

00:09:32.140 | These variable rate mortgages had five-year terms

00:09:35.180 | and then your rate would go down

00:09:36.380 | and then it'd go down again the next term.

00:09:37.580 | So it was a great thing until now

00:09:39.260 | that people are looking, again, looking down the barrel,

00:09:41.540 | as they said.

00:09:42.540 | So I think a lot of these European, Canadian,

00:09:44.860 | Australian listeners are like, what am I gonna do?

00:09:47.140 | They see this train coming, right?

00:09:48.780 | They know their rate is gonna reset.

00:09:50.860 | I never really knew how this all worked

00:09:52.420 | until a Canadian listener sent me an article

00:09:54.380 | that explains how the resets work.

00:09:55.540 | So they basically have two types of variable mortgages.

00:09:58.580 | One of them is like you would think

00:09:59.700 | it's an adjustable rate mortgage.

00:10:00.700 | It changes, your payment goes up.

00:10:02.140 | But another one is called

00:10:03.620 | in a variable fixed amount mortgage

00:10:06.460 | where your payment stays the same

00:10:08.060 | but the amortization period gets longer.

00:10:10.180 | So essentially you're paying a more towards interest

00:10:14.540 | when your rate goes up and less towards principal,

00:10:17.300 | like essentially extending the loan.

00:10:19.700 | So it would go from like a 30-year loan

00:10:21.260 | to like a 45-year loan or something

00:10:23.020 | because you're paying back lower principal amounts.

00:10:25.820 | I don't know how many people actually have these,

00:10:27.180 | but learning, reading about this kind of blew my mind.

00:10:29.460 | It's that the payment doesn't change,

00:10:31.500 | but you'd be paying it off.

00:10:32.680 | So obviously, you have five years.

00:10:37.680 | And so you know if you got one of these teaser rates

00:10:40.740 | that was effectively low,

00:10:41.940 | and I guess it's not a teaser rate,

00:10:42.780 | it's just what the market rates are.

00:10:45.300 | I did a quick Google search

00:10:46.860 | and Canadian mortgage rates now around 7%,

00:10:48.820 | which is pretty similar to United States.

00:10:50.500 | So for years I've been telling people

00:10:52.700 | to avoid paying off that 3% mortgages.

00:10:54.860 | Well, this is a whole totally different ballgame, right?

00:10:58.180 | So Scott has a much higher hurdle right now

00:11:00.780 | with his Canadian mortgage.

00:11:01.880 | He's seeing it coming down.

00:11:03.380 | I guess the only question I have

00:11:04.500 | is can you do a big principal pay down at renewal?

00:11:07.040 | So when this renewal happens in a year or two,

00:11:09.140 | can you just do it all at once?

00:11:10.140 | So you can save now and earn some interest at least

00:11:12.820 | on those higher short-term savings rates.

00:11:15.380 | So you're not paying it down sequentially.

00:11:18.540 | I think you can pay it off all in one big fell swoop,

00:11:21.660 | I think.

00:11:23.180 | So the math should be pretty easy to figure out

00:11:24.740 | in terms of like how much you pay down

00:11:25.980 | and how that impact your payment

00:11:27.100 | and any amortization and interest.

00:11:29.480 | I have no problem making this priority.

00:11:31.100 | 7% rates, I think that's a good idea

00:11:33.100 | at the time of renewal to pay it down a little bit

00:11:35.100 | and try to keep your payoff steady or your payment steady.

00:11:39.380 | I would love to hear how many people

00:11:40.660 | actually have these variable amount mortgages,

00:11:42.540 | but yeah, I do consider us lucky to have 30-year fixed rates

00:11:46.280 | because it's not like that in every country.

00:11:48.700 | - Do you think that at some point,

00:11:50.860 | you guys have talked about this before,

00:11:52.140 | but do you think at some point

00:11:53.100 | we'll have traveling mortgages?

00:11:55.100 | Or I don't know the way to state it,

00:11:57.260 | but where it stays with the house

00:11:58.760 | so like you can move into the previous owner's mortgage?

00:12:02.940 | - The longer rates stay higher,

00:12:04.420 | the higher the likelihood of that happening.

00:12:06.180 | I think some bank trying it, right?

00:12:07.740 | I don't know how they would do it

00:12:08.580 | if you pay some sort of upfront fee,

00:12:10.220 | but it would make sense to just sort of loosen up things up

00:12:13.260 | and add more supply to the market

00:12:15.140 | because yeah, those loan departments there,

00:12:18.680 | it's gotta be tumbleweeds for them right now

00:12:20.420 | because there's such a low supply of houses being sold

00:12:22.820 | and there's no refinancing going on.

00:12:24.500 | They need something to grease the wheels a little bit,

00:12:26.500 | but I like the idea.

00:12:29.200 | - Okay, oh, before we move on to the next one, actually,

00:12:32.360 | you mentioned our geographic area of viewership.

00:12:36.120 | Look at what Dave sent today,

00:12:39.760 | a new brew called Compound Interest.

00:12:42.320 | It's not exposing for some reason,

00:12:44.480 | but yeah, it's called Compound Interest.

00:12:46.200 | - I like it, 424, right?

00:12:48.800 | Nice.

00:12:49.640 | - Also some cool little bottle opener, coasters.

00:12:53.200 | I don't know, I thought that was cool.

00:12:54.320 | Thanks, Dave. - I like it.

00:12:55.800 | - Okay, up next, we have a question.

00:12:58.080 | - Holland, Michigan, not to be confused

00:12:59.200 | with Holland in the Netherlands.

00:13:01.480 | - Right, people get that confused all the time, right?

00:13:03.680 | - It's true.

00:13:04.760 | - Okay, up next, we have a question from Brennan.

00:13:08.200 | I'm a recent university graduate

00:13:09.720 | looking to break into the finance world.

00:13:11.800 | I'm starting to realize how many of the sought after jobs

00:13:14.000 | like research and investment analysts

00:13:16.520 | are few and far between.

00:13:18.380 | I'm trying to build skills and knowledge

00:13:20.040 | that are reflective of the real world

00:13:21.480 | and looking for suggestions on how to go about this.

00:13:24.040 | I also want Ben's opinion on CFA versus CFP

00:13:27.360 | and how someone might choose which path suits them best.

00:13:30.420 | Now, this is very much out of my ballpark.

00:13:34.480 | I don't know that much about this,

00:13:35.400 | but those are very different designations, right?

00:13:37.960 | They're not even kind of similar, right?

00:13:40.440 | - Right, CFA is more for investment analysis

00:13:43.280 | and portfolio management,

00:13:44.320 | and CFP is more for financial advice and financial planning.

00:13:47.760 | So let's bring in someone who actually has both of these.

00:13:49.960 | I've got the CFA, not to brag, Blair Duquene.

00:13:53.440 | She went through both.

00:13:54.680 | Blair, which one did you do first, CFA or CFP?

00:13:57.040 | - CFA, actually, yeah.

00:13:58.540 | - Okay, I did the CFA.

00:14:00.280 | The level two was the hardest one for me.

00:14:02.740 | I'm guessing they're both similar in terms of

00:14:04.840 | it's a self-study program, you pay some money,

00:14:06.940 | but it's not nearly as much as like a master's degree.

00:14:09.880 | And then you have to take some tests,

00:14:11.000 | and if you pass the test and sign off on some ethical stuff

00:14:14.160 | and have enough hours worked or whatever in a certain job,

00:14:17.200 | you get each of them, right?

00:14:19.120 | That's how it worked for you?

00:14:20.680 | - That is how it worked.

00:14:21.560 | It's still the same formula.

00:14:23.680 | And I'm so glad you guys asked me this question.

00:14:25.840 | Happy birthday, by the way.

00:14:27.480 | Thanks for having me on your birthday.

00:14:29.260 | I am sponsored by Christian Dior,

00:14:31.600 | if anybody's interested in that,

00:14:34.480 | in a different kind of apparel.

00:14:36.560 | But anyway, I digress.

00:14:38.360 | I'm so glad somebody has finally asked me this question

00:14:40.840 | because this has been debated online

00:14:42.600 | and on Reddit threads for years and years and years.

00:14:45.720 | And so I'm here to tell you, officially,

00:14:48.600 | that the CFA is better than the CFP.

00:14:51.160 | - Really? - Sorry.

00:14:52.000 | Please don't take away my CFP.

00:14:54.620 | However- - I was gonna recommend

00:14:55.560 | the other way.

00:14:56.400 | So why do you, I'm curious why you say that.

00:14:58.200 | - No, that's different than what I recommend, right?

00:15:00.820 | So which one is better?

00:15:02.000 | Obviously the CFA.

00:15:02.980 | It's the hardest test that there is.

00:15:04.680 | It's the gold standard.

00:15:05.640 | If you wanna prove that you belong in this club

00:15:08.780 | and are willing to go through the grueling tests,

00:15:11.680 | CFA all the way.

00:15:13.560 | However- - The pass rate goes down

00:15:14.800 | every year, it seems like.

00:15:15.840 | And the tests are hard.

00:15:16.960 | I mean, it's not necessarily the depth of the information,

00:15:20.260 | is what I remember, it's the breadth of it, right?

00:15:22.760 | It's not, what do they say, a mile wide

00:15:25.800 | and an inch deep or whatever.

00:15:26.680 | It's so much information.

00:15:28.040 | And the way that they write those tests,

00:15:30.040 | especially the second one, I think,

00:15:32.480 | the multiple choice questions,

00:15:33.640 | it makes you think three out of the five answers

00:15:35.840 | could be correct.

00:15:36.660 | So it's not like you have to be the smartest person

00:15:38.280 | in the world, you just have to study a ton.

00:15:40.340 | I think they say for each test,

00:15:41.960 | the average person studies 300 hours or something, right?

00:15:44.360 | - Do they make you open up your books

00:15:45.680 | and show your portfolio history?

00:15:48.520 | Anything like that? - Yeah, I wish.

00:15:49.360 | - Show you how your performance has been?

00:15:51.240 | - No, they're grueling tests though.

00:15:53.000 | And I would say it's deep and wide, Ben.

00:15:55.560 | So it's broad, there's all these topics

00:15:57.920 | that you have to learn from financial statement analysis

00:16:00.960 | to foreign currency translation,

00:16:03.240 | to wealth management- - Remembering all the ratios

00:16:04.720 | and stuff, right? - Yeah.

00:16:05.560 | - So you think the CFA is way harder than the CFP

00:16:07.920 | in terms of the test?

00:16:08.880 | - 100%.

00:16:09.720 | And not only that, when you are in your CFA charter,

00:16:13.000 | you're joining a global organization of professionals

00:16:16.280 | committed to raising the standards in the industry

00:16:19.000 | for the betterment of society.

00:16:20.120 | So it is absolutely worth the effort,

00:16:23.540 | but it's not for everybody because,

00:16:25.480 | especially somebody who specifically wants

00:16:27.460 | to be a financial advisor,

00:16:29.360 | not every financial advisor needs their CFA charter.

00:16:32.560 | CFP is the gold standard for financial planning.

00:16:35.680 | So if you wanna be a financial planner,

00:16:37.640 | 100%, the CFP is the way to go.

00:16:40.000 | You're gonna study all of the topics

00:16:41.600 | that you need to study to have the skills

00:16:43.680 | to become a financial planner.

00:16:45.320 | It is also broad.

00:16:46.640 | It's not as deep or as grueling,

00:16:48.360 | but I'm not here to tell you

00:16:49.640 | that those tests are easy either.

00:16:51.420 | But getting back to the original crux of this question is,

00:16:55.840 | it is hard to break into the financial industry.

00:16:58.000 | And it's one of the things that's been irking me

00:17:00.480 | for a long, long time.

00:17:01.420 | There's no clear path to a profession.

00:17:03.780 | You kind of have to scrap your way into it.

00:17:05.880 | And so some other suggestions I would have

00:17:08.000 | is figure out what area of finance you wanna be in, right?

00:17:11.120 | Do you wanna be a financial advisor?

00:17:12.580 | Do you wanna be a research analyst?

00:17:14.040 | The buy side, the sell side,

00:17:15.360 | investment banking, insurance.

00:17:17.080 | There are a lot of different subsets of that.

00:17:19.160 | And if you're not sure, there's nothing wrong

00:17:21.080 | with going and working in a big firm

00:17:23.080 | to get some experience under your belt.

00:17:24.700 | - Yeah, that's true.

00:17:25.540 | There's so many different routes you can go.

00:17:26.360 | And a lot of people will dunk on the CFA saying,

00:17:29.600 | well, Warren Buffett doesn't have a CFA,

00:17:31.520 | and neither does Howard Marks

00:17:32.360 | and all these legendary investors.

00:17:33.840 | And so what makes you so great to be a CFA?

00:17:35.840 | For me, it was I needed the education,

00:17:38.060 | and I also needed it as a foot in the door.

00:17:39.680 | I didn't have a great resume coming out of college.

00:17:41.640 | And I actually got an interview

00:17:43.400 | at my second job that I worked at

00:17:44.960 | because I was just studying for the first level.

00:17:47.200 | 'Cause they saw it as, oh, he's putting in the work here.

00:17:50.160 | He cares about the profession.

00:17:51.300 | He's doing it.

00:17:52.140 | So I think that's part of it, too,

00:17:52.960 | is some places will, if you wanna be

00:17:55.320 | in portfolio management or an analyst or whatever,

00:17:57.480 | they will make you go through the,

00:17:58.880 | or just the only interview people who have it.

00:18:01.600 | And so I think that's part of it, too,

00:18:02.760 | is you're showing that you have dedication to the craft,

00:18:05.480 | even if it's not gonna make you

00:18:06.440 | the world's greatest investor.

00:18:07.800 | So for me, it was helpful in actually landing a job,

00:18:11.320 | I think.

00:18:12.320 | - Now, do you have to have a college degree

00:18:16.200 | in something business or finance related,

00:18:18.640 | or can anyone that trains up and studies

00:18:22.220 | take these designation tests?

00:18:23.600 | - It doesn't have to be related to finance,

00:18:26.900 | but you do have to have an undergraduate degree

00:18:28.800 | in something.

00:18:29.800 | That's one of the basics of the requirements,

00:18:33.360 | but a lot of kids are now starting

00:18:34.900 | in their undergrad classes taking these tests.

00:18:37.560 | - Yeah, that's new.

00:18:38.400 | That didn't exist when I was around.

00:18:39.400 | But you do have to have a certain amount,

00:18:40.720 | you did when I, a certain amount of hours

00:18:43.040 | before you can get the designation.

00:18:43.880 | - In the profession, yeah.

00:18:45.200 | So you can pass all three tests,

00:18:46.520 | but then you have the hours worked in the industry

00:18:49.840 | to use the letters and to be a charter holder.

00:18:52.480 | - I still have nightmares about taking those tests.

00:18:55.160 | I will say, if I was coming out now

00:18:58.000 | and looking for opportunities,

00:18:59.200 | you mentioned, do you know which path you wanna go?

00:19:02.060 | I would think the CFP would be a better route

00:19:04.320 | for having employment because I just think

00:19:07.480 | there's gonna be so many opportunities

00:19:09.040 | with all the boomers retiring in the coming decade.

00:19:11.960 | The need for financial advice

00:19:13.480 | and the millennials getting that wealth transfer eventually,

00:19:16.000 | the need for financial advice

00:19:17.200 | is gonna grow and grow and grow.

00:19:19.000 | I don't think it's going away.

00:19:19.960 | I think the introduction of ETFs and index funds

00:19:23.240 | makes it a lot harder for a portfolio manager or analyst to,

00:19:27.480 | I don't think there's gonna be the need as much

00:19:29.200 | for those positions.

00:19:30.660 | If that's what you really wanna do

00:19:31.500 | and you wanna be a stock picker or a portfolio manager,

00:19:34.160 | the CFA makes more sense.

00:19:35.280 | But I think if you're unsure about what to do,

00:19:37.120 | I think the CFP is probably more helpful these days

00:19:40.000 | for a young person trying to break into finance.

00:19:42.280 | - And I think it all depends on what you really wanna do,

00:19:44.460 | but you're absolutely right.

00:19:45.800 | Portfolio manager, buy side, research analyst,

00:19:48.400 | those are the jobs that are going away

00:19:49.920 | as technology makes us more efficient,

00:19:52.040 | but there's a real need for financial advisors

00:19:54.620 | on the other side.

00:19:55.460 | So there's definitely more opportunity

00:19:57.520 | to make a career as a financial advisor.

00:19:59.960 | - I still remember, I finished the third CFA test

00:20:02.740 | and I felt like I passed it.

00:20:05.080 | And my wife and I went to Chili's

00:20:06.720 | and I had a whole bucket of beer

00:20:08.200 | because I'd been studying for six months straight.

00:20:10.760 | So I had like a bacon cheeseburger and a bucket of Coronas.

00:20:13.960 | And that's how I celebrated being done with the CFA.

00:20:16.520 | - Well, when I walked out of the Javits Center in New York

00:20:20.120 | after level one, somebody, I think it was the local society

00:20:23.240 | was handing out t-shirts.

00:20:25.000 | I passed or I survived level one of the CFA

00:20:27.520 | and I definitely did not feel like I had passed it

00:20:30.080 | that time 'cause I almost ran out of time.

00:20:31.800 | So it is really, really tough and grueling.

00:20:33.960 | They did move it to the computer

00:20:35.240 | so it's a little less of an experience now,

00:20:37.320 | but just as hard of a test.

00:20:38.960 | The pass rates remain just as low.

00:20:40.860 | - Yeah, not great.

00:20:42.400 | All right, Duncan, next one.

00:20:44.040 | - Okay, up next we have, we start off with a quote

00:20:46.960 | from A Great Mind to Finance.

00:20:48.880 | "The only thing that matters is you come up with a plan

00:20:51.960 | "ahead of time and stick to it."

00:20:53.400 | Do you know who said that?

00:20:55.440 | - Sounds familiar.

00:20:56.280 | That was one of my blog posts, I believe.

00:20:57.960 | - Yeah, it's Ben Carlson.

00:20:59.440 | Ben Carlson's who said that.

00:21:01.200 | "How do you know if your financial plan is working

00:21:03.440 | "or if you need to pivot?"

00:21:04.920 | That's the question.

00:21:06.120 | - Great question because it is difficult.

00:21:09.340 | There's not much black or white.

00:21:11.280 | You don't know what the financial market returns

00:21:13.520 | are gonna be, you don't know what your circumstances

00:21:14.800 | are gonna be or how your mind is gonna change

00:21:17.760 | about things like spending and savings.

00:21:19.280 | So Blair, when you work with clients,

00:21:21.480 | how do you assess their financial plans along the way?

00:21:23.840 | 'Cause it is more of a process than an event.

00:21:25.600 | It's not like it's here's your financial plan,

00:21:27.480 | we're gonna follow it exactly like this

00:21:29.640 | and life is gonna work out great just how we plan it here.

00:21:32.160 | So how do you assess whether someone is on the way

00:21:34.740 | to achieving their goals?

00:21:35.660 | 'Cause it is kind of hard for people to understand that

00:21:38.680 | and figure out wait, am I actually doing this right?

00:21:41.520 | Am I on the right path?

00:21:42.360 | 'Cause a lot of people just don't know.

00:21:43.880 | - Yeah, and for people with black and white brains,

00:21:46.480 | you know, engineers, accountants,

00:21:48.000 | people who think in certainties,

00:21:49.960 | it can be a really nebulous process, right?

00:21:51.960 | Because what we're taking is a lot of unknowns.

00:21:54.040 | We don't know how long you're gonna live.

00:21:55.280 | We don't know what your health will be.

00:21:56.760 | You may not even know what your financial goals are.

00:21:58.640 | The ones you have today may change in 10 years.

00:22:01.080 | And we certainly don't know the order of the years

00:22:04.120 | of what the stock market returns are gonna be

00:22:05.860 | or what inflation.

00:22:06.780 | So there we go.

00:22:08.500 | Everything is unknown.

00:22:09.540 | We're trying to make a best guess

00:22:11.020 | about whether we're on track.

00:22:13.140 | But the things you can focus on

00:22:14.620 | are making sure you understand what your goals are

00:22:17.260 | and that they're clear and objective.

00:22:19.020 | And it's okay to change your mind,

00:22:20.180 | but you've gotta have a goal first

00:22:21.500 | before you can try to make progress towards it.

00:22:23.980 | The second is you have to have reasonable assumptions,

00:22:26.260 | right?

00:22:27.100 | I'm sorry, Dave Ramsey,

00:22:27.980 | but you're not gonna get 12% average annual returns

00:22:31.340 | in your portfolio.

00:22:32.180 | You have to have reasonable assumptions

00:22:33.700 | for average annual returns and for inflation.

00:22:37.220 | So those are the two kickers.

00:22:38.780 | And it's really figuring out

00:22:40.980 | what do we think returns are gonna average

00:22:42.820 | over the next 10, 20, 30 years?

00:22:45.420 | What are our expenses gonna be?

00:22:47.220 | You really need four things

00:22:48.240 | to put together a financial plan.

00:22:49.980 | Your assets, your liabilities,

00:22:51.460 | your income, and your expenses,

00:22:52.980 | both now and in the future.

00:22:54.640 | And then if you're sticking to the plan,

00:22:57.460 | it's not about your recent investment performance.

00:23:00.060 | That is not going to be the gauge

00:23:02.260 | as to whether your plan is working or not,

00:23:03.900 | because we know there's going to be downturns in the market.

00:23:07.160 | So your financial plan success

00:23:11.220 | is not your recent investment performance success.

00:23:14.460 | Those two things are not the same,

00:23:16.380 | but it takes a leap of faith.

00:23:17.700 | It takes believing, okay,

00:23:18.980 | returns are going to average out

00:23:20.860 | to something around what my expectation is gonna be.

00:23:23.820 | But the questioner may be mixing up

00:23:26.020 | investment philosophy and performance

00:23:28.380 | versus financial plan performance,

00:23:30.060 | 'cause those are two very different things.

00:23:32.340 | - Yeah, the point of setting expectations

00:23:34.180 | is you want to build into the fact

00:23:36.700 | that there's going to be bear markets,

00:23:37.940 | there's going to be higher rates and lower rates

00:23:40.140 | and higher inflation and lower inflation, all these things.

00:23:41.900 | You want to make your plan durable enough

00:23:43.700 | to survive all those things.

00:23:45.460 | To your point about changing goals,

00:23:46.580 | we had a conversation with a client this week

00:23:48.700 | who wanted to make a huge purchase

00:23:50.180 | that was gonna totally change their financial plan.

00:23:52.660 | And it changed their goals because of it.

00:23:55.140 | So I'm gonna buy this huge thing,

00:23:57.100 | and now it's going to mean I'm not gonna retire

00:23:58.780 | for five to seven more years.

00:24:00.540 | And they were happy making that trade off,

00:24:02.180 | but they would have never known that

00:24:03.540 | when they created their financial plan

00:24:04.740 | 10 years ago or whatever, right?

00:24:06.180 | So I think part of it is making those course corrections.

00:24:08.700 | And to your point in the expectations,

00:24:10.340 | then when reality comes along

00:24:12.260 | and five or 10 years down the line,

00:24:14.020 | you kind of can gauge how close were we

00:24:16.860 | to those expectations,

00:24:17.940 | and do we need to make an adjustment up or down

00:24:20.020 | or based on where we're sitting now?

00:24:22.740 | - Exactly, I mean, it's just the future is unknown.

00:24:26.740 | And so the most important thing is knowing your goals.

00:24:28.620 | But my favorite call to get is plans have changed.

00:24:31.860 | Can we rework the plan with a new goal in mind?

00:24:33.980 | I love doing that.

00:24:34.900 | And I also say a financial plan is not something

00:24:37.540 | that we do once and print out a 100-page report

00:24:39.700 | and put it in a desk and let it collect dust.

00:24:42.780 | It's a garden.

00:24:43.860 | We have to continually tend and weed that garden

00:24:46.620 | and update it.

00:24:47.540 | So you're right.

00:24:48.380 | What you said in the very beginning is it's a process,

00:24:50.580 | and it's just making reasonable guesses

00:24:53.100 | about an unknown future.

00:24:54.420 | - Right, okay, one more question, Duncan.

00:24:57.940 | - I'd be checking that balance daily.

00:24:59.820 | You know, I'm just kidding.

00:25:01.260 | - It's not good for your financial health.

00:25:02.860 | - Okay, last but not least, we have a question from Igor.

00:25:06.380 | We have no children and no need to leave anything behind.

00:25:09.220 | Our current financial forecast shows that we're on track

00:25:11.540 | to retire 10 years from now when I'm 60.

00:25:14.420 | We have 20 years of mortgage left at 3.25% interest.

00:25:18.060 | In 10 years, we will have,

00:25:19.700 | assuming property value is the same as now,

00:25:21.820 | about $350,000 in equity,

00:25:24.100 | with $60,000 left to pay on mortgage.

00:25:27.020 | If in 10 years we have enough in savings to retire,

00:25:29.660 | mostly 401(k),

00:25:31.260 | does it make sense to think about a reverse mortgage

00:25:34.140 | since we have no heirs to think about?

00:25:36.180 | This is one I'm interested to hear you guys discuss

00:25:38.540 | because I've heard of these before,

00:25:40.260 | but I've never actually really understood what they are.

00:25:43.140 | - Yes, the funny thing about this question is,

00:25:45.380 | before we get into reverse mortgages,

00:25:46.660 | I think it used to be the rule of thumb was

00:25:48.940 | you want your mortgage paid off before you retire.

00:25:50.980 | Now I think with 3% mortgages,

00:25:52.580 | people are starting to change that tune and rethinking it,

00:25:55.500 | but it does make sense.

00:25:58.580 | Why not bleed that home equity dry

00:26:00.260 | if there's no one to leave the house to

00:26:01.660 | and you're not gonna sell and downsize

00:26:03.340 | or move to Florida or whatever?

00:26:05.540 | Wade Fowler has a book on these things that I've read

00:26:07.640 | and it's more complicated than you think.

00:26:09.540 | So Blair, thoughts on reverse mortgages

00:26:11.820 | and to Igor's point, why leave the equity there

00:26:15.220 | when they wanna stay in the house?

00:26:16.660 | Why not do something with it?

00:26:17.740 | What are your thoughts here?

00:26:18.940 | - Yeah, and you actually hit on one of the stats

00:26:21.560 | in the first chart, if you wanna throw that up, John,

00:26:24.380 | earlier in the show, which is that

00:26:26.660 | you were talking about the number of Americans

00:26:28.900 | owning stocks, right?

00:26:29.980 | And it's very concentrated in the higher incomes

00:26:32.580 | and that's what you're seeing at the top of this chart.

00:26:34.340 | But on the flip side, for the majority of Americans,

00:26:37.400 | their home equity is their biggest asset, right?

00:26:40.100 | So, you know, those in the bottom 50%,

00:26:44.740 | you know, 13%, you know, is in their home equity.

00:26:48.340 | They're gonna need it,

00:26:49.180 | but most people are kind of in the middle there, right?

00:26:51.100 | It's, they have a lot of home equity

00:26:53.220 | and very few people are using it, heirs or not, right?

00:26:56.100 | This is a big lever that people can pull.

00:26:58.420 | So just to get to some of the specifics,

00:27:00.700 | you don't have to pay off your mortgage

00:27:03.540 | to apply for a reverse mortgage.

00:27:05.140 | Most people don't know that.

00:27:07.060 | You have to have a certain amount of equity in the home,

00:27:09.760 | but a reverse mortgage can be put on

00:27:11.280 | even though you haven't paid off that 3% mortgage.

00:27:13.700 | - I guess I never thought about that.

00:27:14.540 | That makes sense.

00:27:15.360 | You just have to have a certain loan to value to do it, right?

00:27:17.300 | - To have equity, yeah.

00:27:18.260 | And I think the minimum is something like 15%,

00:27:20.500 | so they're gonna be well within the range

00:27:22.120 | of being able to put on a reverse mortgage.

00:27:23.540 | The other thing is, you don't have to take money out.

00:27:25.560 | You can open it like a credit line.

00:27:27.260 | And John, if you wanna throw up the second chart,

00:27:29.660 | our colleague Tony Isola had these two charts

00:27:31.680 | in a recent blog post that maybe we can reference.

00:27:34.180 | You apply, you can't apply 'til you're 62.

00:27:37.840 | So there was the mention of age 60 retirement.

00:27:39.840 | You gotta wait 'til you're 62,

00:27:41.320 | but you can apply for a reverse mortgage line of credit

00:27:45.380 | and not even pull on it.

00:27:46.800 | And that line of credit is gonna grow

00:27:49.060 | with the assumed growth in the value of your house.

00:27:51.800 | So your line of credit that you could tap into at any time

00:27:55.700 | is gonna grow as you age.

00:27:57.580 | And you can use the reverse mortgage basically as needed.

00:28:02.580 | If it's a year where the stock market is down

00:28:05.460 | and you don't wanna pull out of your investment returns,

00:28:08.040 | use the reverse mortgage.

00:28:10.060 | You'll never have foreclosure of the house.

00:28:12.820 | You can actually,

00:28:13.660 | because there's a federal insurance program,

00:28:16.300 | end up taking out more on the reverse mortgage

00:28:19.740 | than your home is actually worth, and that's fine.

00:28:21.520 | That's covered by insurance.

00:28:22.580 | They're never gonna throw you out of your house.

00:28:24.120 | I think it's a huge asset that gets a bad rap

00:28:26.280 | because the original home reverse mortgages were frauds.

00:28:30.240 | They were expensive.

00:28:31.480 | Before the government stepped in

00:28:32.600 | and started regulating these,

00:28:34.080 | it wasn't a great thing to use.

00:28:35.480 | But I think whether you have people

00:28:36.800 | to leave the asset to or not,

00:28:38.440 | it's a benefit that most people should be looking into.

00:28:40.600 | - And to your point, with the middle class,

00:28:42.120 | that being by far their biggest financial asset,

00:28:44.040 | people are gonna have to tap that equity somehow,

00:28:45.940 | whether it's selling a house.

00:28:47.000 | And a lot of people, frankly,

00:28:48.460 | probably aren't gonna wanna sell their house, right?

00:28:50.040 | I'm sure there's some people who will wanna downsize

00:28:51.840 | or move to be closer to the kids and the grandkids,

00:28:54.000 | but some people just wanna stay in their house

00:28:55.520 | or will want to, and I agree.

00:28:57.440 | There's gonna have to be simpler ways of tapping that.

00:29:00.180 | And this, to me, at that stage in life,

00:29:02.420 | probably makes more sense than a home equity line of credit

00:29:04.840 | where the rate can fluctuate and move up and down

00:29:07.340 | and change, and now those are very high.

00:29:10.340 | So I think it makes a lot of sense.

00:29:13.000 | - I do too, and unlike a home equity line of credit,

00:29:15.600 | which when credit gets tight, like in 2008, 2009,

00:29:18.620 | a lot of those were pulled away.

00:29:20.240 | A reverse mortgage isn't gonna be pulled away,

00:29:22.520 | and you can't be foreclosed on as you would

00:29:24.760 | with a second lien on your house with a home equity line.

00:29:26.800 | So it is an asset, it's an underutilized asset

00:29:30.180 | that I think a lot more people should be looking at.

00:29:33.380 | - Yeah, that makes sense.

00:29:34.880 | And this is one of the questions too,

00:29:36.280 | where it's a different thing where the first question

00:29:38.800 | was about leaving an inheritance.

00:29:40.720 | This person and his wife know

00:29:41.960 | they don't have to leave an inheritance,

00:29:43.800 | so they're in a totally different ballgame too.

00:29:46.060 | And yeah, I would ring out all that home equity I could.

00:29:49.200 | - Absolutely, it's certainly worth looking at.

00:29:52.080 | And now to even apply for a reverse mortgage,

00:29:55.120 | you have to talk to a third party counselor

00:29:57.820 | to make sure that you are a good candidate.

00:30:00.680 | And it sounds like based on the basic information

00:30:02.800 | that Igor provided that they will be,

00:30:05.120 | but it's nice to know that there's a third party involved

00:30:07.360 | even before you go to apply for the reverse mortgage.

00:30:09.400 | - See, there should be a third party involved

00:30:10.860 | before Duncan can buy futures on Oatly stock, right?

00:30:14.680 | - Indeed, an arbiter.

00:30:15.520 | - I would much rather have a money therapist

00:30:18.360 | for that kind of decision than a reverse mortgage.

00:30:21.000 | Sorry, Duncan.

00:30:21.840 | - Hey, keep your hands off my portfolio.

00:30:23.840 | (laughing)

00:30:26.680 | - All right, we want to thank Blair

00:30:28.480 | for coming on today and helping out.

00:30:30.200 | - Thanks for having me.

00:30:31.320 | - Email us, askthecompoundshow@gmail.com.

00:30:34.580 | Leave a comment for us on YouTube, on Twitter,

00:30:38.080 | anywhere you're watching or listening to this.

00:30:40.080 | We appreciate it.

00:30:40.920 | Subscribe to The Compound and we will see you next time.

00:30:43.480 | - See you, everyone.

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