How Much Money Do You Need to Save?

00:00:00.000 | (beeping)

00:00:02.180 | - Welcome back to Ask the Compound.

00:00:14.720 | Our email here is askthecompoundshow@gmail.com.

00:00:17.880 | Today's show is sponsored by Bird Dogs, yet again.

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00:00:43.920 | These things are the most comfortable shorts in the summer.

00:00:46.080 | All right, the last few weeks,

00:00:48.220 | we've gotten a ton of questions from people

00:00:49.800 | about the debt ceiling debate,

00:00:51.520 | and should I sell, and should I worry about the volatility?

00:00:53.920 | And obviously that stuff has taken care of itself,

00:00:56.400 | and it's fine now.

00:00:57.760 | Kind of like I said it would, but let's say I was wrong,

00:00:59.960 | right, would you still be right for panicking

00:01:02.240 | if I was wrong and they didn't come to a deal,

00:01:04.040 | and there was volatility?

00:01:04.880 | Probably not, that's my whole point here,

00:01:07.240 | is that taking these macro news headline events

00:01:11.280 | and trying to trade them, or time them,

00:01:13.120 | or get in front of them is basically never a good idea.

00:01:16.160 | You should make financial moves in your portfolio

00:01:19.200 | because of fundamentals,

00:01:20.680 | or your circumstances are changing,

00:01:22.120 | or you need to spend, or a good reason,

00:01:24.440 | a legitimate reason, not because you're trying to guess

00:01:26.680 | which way things are gonna go based on the headline.

00:01:28.720 | And that's the whole thing,

00:01:29.560 | it's like the process over outcomes,

00:01:31.440 | and not freaking out and panicking

00:01:33.040 | just because you're trying to just get ahead of things.

00:01:36.220 | Hopefully you didn't panic and sell your triple-levered,

00:01:40.800 | whatever. - No, no, no.

00:01:41.640 | I didn't sell.

00:01:42.920 | Yeah, I'll write something down 80%, you know what I mean.

00:01:46.000 | - (laughs) There you go.

00:01:48.340 | Panic later.

00:01:49.180 | All right, let's get into a question.

00:01:50.680 | - Okay, up first today, we have a question from Webb.

00:01:54.600 | When we read articles about how much you should have saved

00:01:56.960 | by age X, should it not be how much income

00:01:59.560 | you'll be earning with savings Y?

00:02:01.400 | Here's my scenario.

00:02:02.520 | Mid-30s, worked at a public university for 11 years,

00:02:05.640 | and left to take a job in the private sector.

00:02:07.820 | I have a pension at the university

00:02:09.200 | with a guaranteed fixed income,

00:02:10.720 | and just started a new 401(k).

00:02:12.880 | Total retirement savings doesn't help me know

00:02:14.860 | if I'm on pace.

00:02:16.120 | Assuming a presumed 5% withdrawal rate

00:02:18.360 | and 8% 401(k) growth rate,

00:02:20.720 | wouldn't a calculated retirement payout

00:02:22.520 | that can include things like pensions and social security

00:02:25.080 | be better than make sure you have $1 million

00:02:27.380 | by age 50, et cetera?

00:02:29.240 | - See, look at how intelligent our audience is.

00:02:30.760 | This is a great question.

00:02:31.840 | I like where your head's at.

00:02:33.000 | It makes a lot of sense.

00:02:33.840 | Remember those ING commercials five or six years ago,

00:02:37.360 | and people would be carrying around their number

00:02:38.800 | with them on the street?

00:02:39.880 | And like, I need to get this number.

00:02:41.480 | I need 500,000, I need a million, I need five million,

00:02:43.740 | whatever it is.

00:02:44.580 | I think the number itself is meaningless

00:02:46.740 | without some context.

00:02:47.580 | So Kahneman said in one of his books,

00:02:49.920 | might've been the Michael Lewis book

00:02:50.920 | that he wrote about Kahneman and Tversky,

00:02:52.480 | he said like, how do you understand memory?

00:02:53.800 | You don't study memory, you study forgetting, right?

00:02:56.480 | It's like the Charlie Munker, invert, always invert thing.

00:02:58.920 | I like the idea of backing into how much you need to save

00:03:00.880 | based on how much you spend

00:03:02.560 | and what your other income sources are.

00:03:04.900 | Because like, there are so many different questions

00:03:07.100 | that you have to go through to think in terms of like,

00:03:09.400 | what am I gonna spend on healthcare?

00:03:10.560 | And what are the market returns going to be when I retire?

00:03:13.000 | And what if there's a bear market when I retire?

00:03:15.360 | And what if my spending changes?

00:03:16.780 | And all these other things.

00:03:18.040 | So let's get in.

00:03:19.160 | I think the spending thing is a good one

00:03:21.100 | because the retirement calculators think about life

00:03:24.360 | in a linear fashion, right?

00:03:25.460 | You're gonna spend this much every year at this percentage,

00:03:27.880 | but people don't live in a straight line.

00:03:30.160 | People's lives change.

00:03:31.480 | So John, put this chart on for me.

00:03:33.220 | This is from the BLS.

00:03:34.240 | They break out all sorts of data

00:03:36.000 | on income and spending levels by age.

00:03:37.880 | And they look at this average expenditures per year.

00:03:40.440 | These are annual expenditures.

00:03:42.040 | And you can see the way the chart goes

00:03:43.460 | in your 20s and 30s, you sort of ramp up

00:03:45.160 | because obviously you don't make a lot of money.

00:03:47.160 | And then in your 50s, 40s and 50s, you're spending peaks.

00:03:50.600 | And these are average numbers.

00:03:51.840 | And then as you age, 50s, 60s, 70s, 80s,

00:03:54.680 | the numbers actually go down again,

00:03:55.960 | which this actually makes a lot of sense to me, right?

00:03:59.520 | And I think a lot of people don't think about this,

00:04:01.600 | but is it much easier to travel the world

00:04:04.100 | or go on a cruise or something when you're 65

00:04:05.900 | than when you're 85, right?

00:04:06.940 | So that's why you don't spend as much.

00:04:08.140 | So the way that you think about spending goes down.

00:04:11.080 | That Die With Zero guy, Bill Perkins,

00:04:12.800 | did you read that one yet, Duncan?

00:04:14.240 | - I haven't, that's on my list,

00:04:15.440 | but yeah, I got a lot on my list first.

00:04:17.200 | - He actually says like your net worth

00:04:18.720 | should also peak in your 50s.

00:04:19.560 | I think he says like 50 or 55

00:04:21.280 | is when your net worth should be peaking.

00:04:22.440 | You should be spending it down faster

00:04:24.040 | because you want to do it when you're physically

00:04:25.840 | and mentally able to do it, right?

00:04:28.160 | So I do agree with this idea

00:04:29.440 | that coming up with a number is the wrong way

00:04:31.400 | to go through it, especially for someone-

00:04:32.600 | - It's kind of like responsible YOLOing.

00:04:34.580 | - Yeah, yeah, exactly, yeah.

00:04:35.800 | And it's about smoothing things out

00:04:38.600 | and using it when you have it.

00:04:41.240 | I think this is especially true

00:04:42.200 | for someone in their 20s, 30s or 40s.

00:04:43.680 | Like trying to go through the retirement planning process

00:04:46.120 | is very difficult.

00:04:47.320 | Like, I don't know what tax rates are gonna be.

00:04:48.880 | I don't know what market returns are going to be.

00:04:50.600 | I don't know what interest rates are gonna be.

00:04:51.680 | Inflation, you don't know where you're gonna live,

00:04:53.520 | what your cost of living is gonna be.

00:04:54.760 | All these things, there's so many different variables

00:04:57.120 | that can get in the way.

00:04:57.960 | And that's why I think that financial planning

00:04:59.440 | is a process and not an event.

00:05:00.760 | Usually moving the goalposts is a derogatory phrase.

00:05:04.120 | Like it's a bad thing you're moving the goalposts.

00:05:05.880 | But I think in this instance,

00:05:07.240 | moving the goalposts is actually good

00:05:08.640 | because it should be kind of a moving average

00:05:12.240 | and a moving range of results

00:05:14.000 | that you're kind of looking for

00:05:15.040 | as opposed to I'm gonna hit this exact number.

00:05:16.960 | And I think, yeah, you want to back into it.

00:05:18.280 | And as you get closer and those expectations become reality,

00:05:21.520 | then you can make course corrections along the way

00:05:23.560 | in terms of your saving, your spending,

00:05:25.000 | or market expectations and all these things.

00:05:27.280 | I think that's the idea.

00:05:28.120 | That's why it is a very hard process to go through

00:05:31.280 | 'cause no one knows what their life is gonna look like

00:05:33.640 | in two years, let alone 20 years.

00:05:35.880 | - Yeah, it's true.

00:05:39.560 | - I like the way he's thinking about it here.

00:05:42.000 | - With the goalposts thing, just a quick aside,

00:05:43.760 | what kind of goalposts are we talking about?

00:05:45.600 | You know, are we talking about a basketball goal

00:05:47.240 | or are we talking about like soccer goal?

00:05:50.000 | I guess any could work.

00:05:51.120 | - That's true.

00:05:51.960 | You can't really move goalposts.

00:05:53.160 | I guess football is in my thinking, but-

00:05:56.240 | - Yeah, maybe that's it.

00:05:57.360 | Maybe that's it.

00:05:58.400 | - All right, let's do another one.

00:06:00.120 | - Okay, up next, we have a question from Love to Audit.

00:06:03.800 | I'm guessing this one came from social media.

00:06:06.140 | I'm 35 and trying to get some direction on lifestyle.

00:06:10.440 | - Maybe his dad was just a tax consultant.

00:06:13.040 | - Yeah, maybe.

00:06:15.280 | I'm 35 and trying to get some direction

00:06:16.960 | on lifestyle versus aggressive saving.

00:06:19.720 | This is a common theme we're seeing these days,

00:06:21.280 | so good people are thinking about this.

00:06:23.640 | The money I have saved doesn't feel tangible

00:06:25.280 | in terms of lifestyle.

00:06:26.540 | I make $120,000 to $150,000 a year,

00:06:29.200 | rent and have a roommate, drive a '90s car,

00:06:32.280 | cook my own food, and live in a very high cost

00:06:34.960 | of living coastal city.

00:06:36.480 | Obligatory not to brag, I have $3,000 in my HSA,

00:06:39.860 | $8,000 cash, $16,000 in company RSUs,

00:06:44.360 | $52,000 in a Roth IRA, $169,000 in my Roth 401(k),

00:06:49.360 | and $265,000 in a traditional 401(k),

00:06:52.840 | and $615,000 in a brokerage account.

00:06:55.480 | They started off, you see they worked their way up there,

00:06:58.320 | you know, smaller, smaller figures working out.

00:07:00.480 | - Yeah, pyramid here.

00:07:01.800 | - Yeah, a down payment on a home here

00:07:03.840 | is in the $100,000 to $250,000 range,

00:07:06.240 | depending on location/commute,

00:07:08.380 | but buying here would eviscerate my monthly savings rate.

00:07:11.720 | I'm considering a move to a cheaper state

00:07:13.360 | despite my family being here.

00:07:15.220 | All of my friends are settling down,

00:07:16.680 | starting families, having kids,

00:07:18.280 | and here I am with roommates.

00:07:19.720 | Admittedly, money seems to be getting

00:07:21.240 | in the way of my goals.

00:07:22.560 | Do I really need to choose between these extremes,

00:07:24.800 | saving versus comfortable lifestyle?

00:07:27.200 | - All right, this is a very existential question.

00:07:29.040 | This is like a not to brag,

00:07:30.480 | but also I'm kind of stuck here, right?

00:07:32.880 | This person seems to be living like

00:07:34.400 | probably the fire lifestyle,

00:07:35.600 | so I just, back of the envelope this,

00:07:37.640 | by my calculation, this person at 35 is a millionaire.

00:07:40.680 | They have like a $1.1 million,

00:07:43.040 | and the crazy thing is,

00:07:44.680 | this person is literally a finance compounding example.

00:07:48.920 | So I use this in one of my books.

00:07:50.200 | So, John, throw up my little table here.

00:07:53.040 | My sister's name is Sarah, my brother's name is John,

00:07:54.800 | so I helped them out here and I used them.

00:07:56.200 | So Sarah starts saving at age 25.

00:07:58.000 | She stops at 35.

00:07:59.080 | She saves $500 a month.

00:08:01.480 | Total saved is $66,000.

00:08:04.640 | If she earns 7% a year at 65,

00:08:07.280 | she's gonna have $720,000.

00:08:08.680 | John doesn't start at saving until he's 40.

00:08:10.920 | By age 60, and he saves the whole time until he's 65.

00:08:13.880 | He saved for 25 years, Sarah saved for 10.

00:08:16.360 | John saved almost three times as much money,

00:08:18.240 | but ends up with $412,000, right?

00:08:20.560 | Assuming those same,

00:08:21.480 | and the reason here is 'cause Sarah

00:08:23.280 | did the compounding thing.

00:08:24.680 | This love to audit person is this example.

00:08:27.520 | They saved so much by age 35,

00:08:29.480 | they could just let it go and they'd be fine.

00:08:31.520 | So if you, I looked at it.

00:08:34.080 | If you, if we look at their $1 million, right?

00:08:36.920 | Let's say, let's assume they take 100 grand out

00:08:38.960 | for their down payment for their house

00:08:39.800 | and they have a million dollars left over.

00:08:41.720 | They don't contribute another dime

00:08:43.720 | the rest of their life, right?

00:08:45.320 | If their investments grow at 6% per year

00:08:47.120 | for the next 30 years,

00:08:48.320 | they'll have something like $5.7 million

00:08:50.360 | at retirement at 65, right?

00:08:52.600 | Or let's say they just,

00:08:53.760 | all they do is max out their 401k, it's 20 grand a year.

00:08:57.120 | They'd have like seven and a half million dollars

00:08:58.800 | in 30 years.

00:08:59.640 | So you're already so far ahead of the game

00:09:01.880 | because you saved and scrimmed early,

00:09:03.760 | but now you're having this existential crisis of,

00:09:06.920 | oh geez, I'm in my 30s.

00:09:08.800 | I live with a roommate.

00:09:09.760 | I drive a 1990s car.

00:09:11.200 | If I had to guess, this person drives in a Accord.

00:09:13.920 | Has to be.

00:09:14.760 | - Okay, I'm so glad you mentioned it.

00:09:15.600 | I was gonna guess a Volvo station wagon.

00:09:17.920 | - Okay, that sounds, those are both fire-ish cars, but.

00:09:21.060 | So this person obviously has a wonderful savings.

00:09:24.880 | They've already done the hard part.

00:09:26.080 | They saved a boatload of money in their 30s.

00:09:28.160 | So they have the delayed gratification part down,

00:09:31.120 | living with a roommate, driving an old car, all this stuff.

00:09:34.040 | It's time to enjoy yourself a little bit, you know?

00:09:35.800 | Go live on your own.

00:09:36.800 | Buy that house in the city

00:09:37.720 | or move somewhere else and buy there.

00:09:38.760 | But I think you're doing just fine.

00:09:40.880 | At your income and savings level,

00:09:42.040 | you don't need to choose between the two.

00:09:43.160 | You already have a seven-figure net worth.

00:09:45.320 | So you don't have to buy a home if you don't want to,

00:09:47.160 | but you certainly are in a good position to.

00:09:48.720 | And here's the thing.

00:09:49.600 | I'm giving you permission to lower your savings rate

00:09:51.520 | because that's the great thing

00:09:53.000 | about having such a high savings rate.

00:09:54.320 | And I don't know what it is,

00:09:55.160 | but this person obviously probably,

00:09:56.280 | we're probably in the 50 to 60% range, I'm guessing,

00:09:58.880 | based on how much money they have saved.

00:10:01.200 | That's the great thing about having a high savings rate

00:10:03.240 | is it's a margin of safety to pull the lever

00:10:05.160 | when you need to spend a little more.

00:10:06.480 | So if, yeah, you're gonna take 150,000 out

00:10:09.720 | for a down payment and the mortgage is gonna be way more

00:10:12.200 | 'cause you're not sharing with a roommate anymore.

00:10:14.980 | But that's why you have a high savings rate to begin with,

00:10:17.400 | because it allows you to pull that one down.

00:10:19.400 | And the other thing is,

00:10:20.760 | you can grow into that mortgage over time, right?

00:10:22.720 | This person is obviously a financially successful person.

00:10:24.840 | I'm guessing their income

00:10:25.800 | is gonna continue to grow over time, right?

00:10:28.040 | So maybe for a few years,

00:10:29.680 | it's gonna be painful and your savings rate's gonna go

00:10:31.440 | from 50 to 25 or 20 or maybe 10 or 15.

00:10:35.000 | But so what?

00:10:35.840 | You can grow into it and as your income increases,

00:10:37.800 | then you can start saving more piece by piece.

00:10:40.160 | So I think this person

00:10:42.420 | is in a wonderful position financially.

00:10:44.040 | They need to worry more about their life, frankly, I think,

00:10:47.240 | and figure out how to have a little more fun

00:10:48.840 | and stop having their savings rate dictate their entire life

00:10:52.180 | because, as they said, at a certain point,

00:10:56.020 | those benchmarks and goalposts along the way that,

00:10:58.760 | oh, I see this money in my account or my brokerage account,

00:11:01.240 | it doesn't really do anything for you.

00:11:02.840 | At a certain point, it loses its luster.

00:11:04.400 | It doesn't make you happy.

00:11:05.440 | The whole point of saving in the first place

00:11:07.480 | is you're gonna spend it someday.

00:11:08.960 | So now is the time to spend it

00:11:10.220 | and make yourself a little happier.

00:11:11.920 | - Right.

00:11:13.680 | Also, I just had an idea.

00:11:14.500 | We should start having you write permission slips.

00:11:16.840 | You know, like you used to get in school

00:11:18.120 | for different things.

00:11:19.080 | You could write permission slips

00:11:20.400 | for people to adjust their savings rate.

00:11:22.440 | - Yes.

00:11:23.280 | Again, some people are gonna hear this and go,

00:11:25.560 | geez, I'm gonna play the world's smallest violin

00:11:28.120 | for this person.

00:11:29.000 | They save too much money and they can't enjoy themselves.

00:11:31.000 | But it is a real problem for some people.

00:11:33.200 | And I think you get into that mindset

00:11:35.820 | of saving, saving, saving,

00:11:37.580 | and you have your head down and you look up and you go,

00:11:39.160 | wait, what did I miss out on?

00:11:40.720 | And I think in your mid-30s, you still have plenty of time.

00:11:43.480 | - Yeah.

00:11:44.320 | Life's what happens while you're busy making other plans.

00:11:46.520 | - What is the Andy Dufresne?

00:11:47.600 | Get busy living or get busy dying?

00:11:49.260 | - Yeah, that's a good one too.

00:11:51.560 | - All right, next question.

00:11:52.960 | - Okay, up next, we have a question from Scott.

00:11:57.120 | I just listened to last week's show and heard Benny Markets.

00:11:59.520 | Benny Markets is a favorite, people love him.

00:12:01.200 | - Fan favorite for sure.

00:12:02.040 | Everyone likes his enthusiasm.

00:12:03.240 | - Also, I told him, I thought that was an all-time phrase,

00:12:05.920 | calling you smarter, Ben.

00:12:07.240 | That really cracked me up.

00:12:08.600 | - I've heard that before.

00:12:10.000 | - Anyway, I just listened to last week's show

00:12:12.560 | and heard Benny Markets say he keeps his short-term cash

00:12:15.160 | in bill, which is an ETF,

00:12:17.600 | which looks like it pays 4.55% right now.

00:12:20.800 | I realize it's small potatoes

00:12:22.260 | and maybe that answers the question,

00:12:24.040 | but is there any reason to choose that

00:12:25.560 | over a money market fund like SWVXX

00:12:28.780 | that pays 4.9% at present?

00:12:31.500 | Neither have locked in rates,

00:12:32.760 | though maybe bill is slower to move downward.

00:12:34.920 | Love the show.

00:12:35.760 | Wish I had something to not brag about.

00:12:37.560 | - This one's from Scott.

00:12:39.400 | Hey, Scott, do not sell yourself short.

00:12:40.640 | You have cash available to invest in T-bills

00:12:42.720 | and a money market fund.

00:12:43.560 | That is something to brag about.

00:12:44.860 | You can brag about that.

00:12:46.040 | I'll give it to you.

00:12:46.880 | That's my permission to slip to Scott.

00:12:49.260 | So here's the thing.

00:12:50.100 | Before we get into the comparison here,

00:12:52.020 | I wanna just give a little bit of a tutorial

00:12:54.040 | on the yields on some of these funds.

00:12:55.560 | So BIL is simply a T-bill ETF, right?

00:12:59.280 | And so, John, throw up the yield here.

00:13:00.760 | So I think what this person is looking at

00:13:02.000 | is the wrong yield.

00:13:02.840 | So if you go to the fund for this 30-day SEC yield,

00:13:06.000 | and I think this might be a little old from the emailer.

00:13:08.800 | So they said 4.55.

00:13:09.880 | It's now 4.67.

00:13:11.320 | The 30-day SEC yield is just the income

00:13:13.640 | over the past 30 days paid out.

00:13:15.500 | So it cares more about these actual,

00:13:17.240 | and it annualizes it,

00:13:18.200 | the actual cash flows and the go-forward yield.

00:13:20.380 | It's backward looking.

00:13:21.700 | And I prefer to look at the average yield of maturity.

00:13:24.220 | So John put up the next one.

00:13:25.800 | This is the average yield of maturity.

00:13:26.960 | You can see it's 5.2%, almost.

00:13:29.480 | So why is the difference?

00:13:30.520 | Because the yield of maturity

00:13:31.480 | is simply the market-weighted average

00:13:34.040 | of the holdings in the current portfolio

00:13:35.380 | if they were held to maturity.

00:13:36.800 | And I think this,

00:13:37.640 | so this takes into account current yields

00:13:39.040 | and what they would look like going forward.

00:13:40.800 | So I think this is especially important

00:13:42.360 | when yields are changing a lot,

00:13:43.500 | as they have the past few years,

00:13:44.460 | especially for short-term stuff like this.

00:13:46.400 | So the yield to maturity is way more important

00:13:49.360 | than the SEC yield, which kind of shows what happened.

00:13:52.100 | The yield to maturity is sort of what's going to happen.

00:13:53.880 | And obviously, the rates can change,

00:13:55.320 | and that yield to maturity can change

00:13:56.800 | if rates rise or fall.

00:13:57.840 | But that's just so you know.

00:13:59.640 | So the yield on this T-bill ETF

00:14:01.920 | is actually better than you think.

00:14:03.540 | But let's say those yields are right,

00:14:08.120 | and you're looking for an extra 45 or 50 basis points.

00:14:10.920 | If I'm still getting permission here,

00:14:14.000 | I'm giving you permission to do that one time, maybe.

00:14:16.000 | Like one time, okay, you're doing a bump in yield.

00:14:18.260 | But if you're gonna do that all the time,

00:14:19.640 | it seems like kind of a waste of time to me

00:14:21.360 | to constantly be chasing the best yield,

00:14:23.240 | how much bang for your buck

00:14:24.240 | you're really gonna get in that kind of move.

00:14:26.720 | In terms of the timing of the rates,

00:14:28.080 | that's a good question.

00:14:28.920 | Will money market rates fall quicker,

00:14:31.360 | or will T-bill yields fall quicker?

00:14:32.640 | We don't know for sure,

00:14:33.480 | but here's my general rule of thumbs when it comes to banks.

00:14:35.760 | Not all banks, but most banks.

00:14:37.440 | Banks are slower to raise yields and quicker to cut them,

00:14:40.840 | just like they're quicker to raise borrowing rates

00:14:42.920 | and slower to cut them.

00:14:44.560 | Right, does that make sense?

00:14:46.460 | Took a long time, so John, throw a chart on

00:14:48.600 | of money market rates versus T-bill yields

00:14:50.360 | over the last two years or so.

00:14:51.980 | So T-bills are in orange here.

00:14:53.440 | You can see they started moving up in January.

00:14:55.680 | It took money markets until May to start moving up.

00:14:58.240 | And so basically, T-bill yields

00:15:00.080 | are leading money market yields here.

00:15:02.640 | And this is, the average money market yield

00:15:04.320 | is lower right now than T-bill yields.

00:15:05.760 | Average T-bill yields are closing in on 5.5%,

00:15:09.260 | and average money market yields are like 4.8.

00:15:11.200 | Obviously, that depends on your institution

00:15:13.560 | and where you're looking, and that can be different.

00:15:15.200 | So treasuries go out first, and money markets follow on a lag.

00:15:19.000 | I think going down, we could actually see the opposite.

00:15:21.440 | I think money market yields will probably fall faster

00:15:23.680 | because the banks aren't gonna keep paying you more

00:15:26.960 | for the yield, so they'll either fall in concert

00:15:29.120 | or a little bit faster.

00:15:30.480 | So there you go.

00:15:32.800 | T-bill yields are probably better than you think

00:15:34.400 | in terms of these ETFs.

00:15:36.920 | I wouldn't be constantly chasing yield here.

00:15:38.760 | If you've done it once or twice, that's fine.

00:15:40.760 | I wouldn't be doing it all the time

00:15:42.380 | because it's probably not worth the hassle.

00:15:44.320 | And especially if you're jumping in and out of an ETF,

00:15:46.260 | you're paying taxes and it's just not worth your time.

00:15:49.420 | But the most important thing is going from,

00:15:51.080 | like we talked about last week,

00:15:51.960 | 10 basis points or whatever to four or five.

00:15:54.480 | Once you get to four or five, just stick with what you got.

00:15:57.880 | - Do you want to put it on the record here?

00:16:00.040 | Do you want to call when they're gonna cut?

00:16:02.080 | Is that in mind or anything?

00:16:04.400 | - Geez.

00:16:05.240 | - Just kidding.

00:16:06.960 | - I'd have to know when the recession's gonna start

00:16:09.660 | because if the Fed creates a recession,

00:16:11.740 | then they're gonna cut pretty quick.

00:16:12.960 | That's the thing.

00:16:15.040 | - I thought the recession started last year.

00:16:17.000 | - Well, let's see.

00:16:18.480 | It's always three months from now.

00:16:21.680 | All right, another question.

00:16:22.960 | - Okay, up next we have a question from Brandon.

00:16:26.440 | My wife and I just had our first child six months ago.

00:16:28.840 | Congrats.

00:16:29.680 | - Yeah, congrats on the addition.

00:16:31.240 | - Wondering what investment vehicle or options

00:16:33.360 | you recommend beyond a 529

00:16:35.160 | that we could use to save for our child's future.

00:16:37.480 | A wedding, house, et cetera.

00:16:40.080 | UGMA, Roth, IRA, traditional investment account.

00:16:43.980 | Those are their questions.

00:16:45.380 | - All right, we get a ton of questions.

00:16:46.960 | This is another pat on the back to our audience

00:16:49.000 | who is obviously thinking ahead.

00:16:50.480 | I like the idea 'cause you're not only thinking

00:16:51.960 | in terms of compound interest

00:16:53.200 | and planning ahead for your child's future,

00:16:54.740 | but it's your own future too, right?

00:16:55.860 | Because you want to get them off your payroll some day.

00:16:58.740 | Starting to save for them now is probably a good thing,

00:17:01.040 | especially for weddings and that sort of thing.

00:17:02.520 | So I like the idea here.

00:17:04.300 | This is definitely more of a financial planning question

00:17:06.280 | than an investment question, I think.

00:17:07.360 | So let's bring a financial planner in here

00:17:08.720 | to help out with this one.

00:17:09.980 | - Hey, Ross. - Ross Cohen.

00:17:12.720 | Ross is an advisor with us at Ritholtz Wealth.

00:17:15.200 | He is in our Chicago office,

00:17:16.560 | which is easily one of the best cities

00:17:19.600 | in the country in the summer.

00:17:20.600 | Correct, Ross?

00:17:21.440 | - It has to be.

00:17:22.260 | - Of course, nothing better than Chicago in the summer.

00:17:24.920 | - All right, so young people, young person here,

00:17:27.600 | you work with a handful of younger clients

00:17:29.660 | and want to know how to plan for the child's future.

00:17:31.840 | I like, again, I like where their head's at here,

00:17:33.820 | but what do you think are some of the considerations

00:17:35.800 | in terms of the kind of accounts we're looking at here?

00:17:38.020 | - Yeah, as you guys mentioned,

00:17:39.280 | congrats to Brandon on the newborn.

00:17:41.840 | I'd love to see a timestamp on this question

00:17:44.440 | when it came in.

00:17:46.000 | Ben, it feels to me like this was something

00:17:48.460 | that was like late at night

00:17:49.640 | while he's probably not sleeping much

00:17:52.360 | and thinking about his kid's future

00:17:53.880 | and potential wedding and first home purchase.

00:17:56.960 | So I'd love to see a timestamp on it.

00:17:58.880 | - Probably not in the first three months

00:18:00.160 | because that's kind of a blur when that happens.

00:18:02.540 | But yeah, good on him for thinking ahead here.

00:18:05.220 | - Yeah, and as you mentioned before,

00:18:06.640 | our listeners are in the 99th percentile

00:18:09.400 | thinking about this type of thing.

00:18:11.080 | They've gone above and beyond.

00:18:12.160 | They're already doing the 529 plan

00:18:14.320 | and they're thinking, okay, what's next?

00:18:16.000 | Beyond college, what's the next step?

00:18:18.160 | What's the next best place that I should be saving?

00:18:21.240 | And I created a chart for this.

00:18:24.440 | I've always wanted to say this, so chart on.

00:18:25.840 | Oh, you beat me to it, Duncan.

00:18:27.360 | - That's John, that's John.

00:18:30.600 | - Oh, sorry about that, John.

00:18:32.900 | So there's a couple of different vehicles.

00:18:34.440 | As Brandon's already doing, he's got the 529 covered.

00:18:38.360 | He's already contributing to the 529.

00:18:40.180 | I'm gonna skip over the Coverdell.

00:18:41.520 | It's an older type of investment vehicle

00:18:44.440 | meant for private education.

00:18:46.840 | So the two other areas are the UTMA/UGMA

00:18:50.360 | and just a general brokerage account.

00:18:52.580 | The reason why I love 529 plans so much

00:18:55.800 | is that there's amazing benefits to saving into a 529.

00:18:59.860 | For most states, you actually get a state tax deduction

00:19:03.360 | when you contribute to a 529 plan.

00:19:06.000 | Going down the line, there's no income limits

00:19:09.080 | and you have lifetime control over the assets,

00:19:12.120 | meaning that when the kid turns 18 or 21,

00:19:15.900 | they don't get this chunk of change

00:19:17.480 | where they can then go buy a convertible

00:19:19.600 | or some whatever they want, right?

00:19:22.480 | The 529 plan, as the parent,

00:19:24.580 | you maintain ownership over the assets.

00:19:26.480 | - I never thought about that.

00:19:27.360 | That makes sense.

00:19:28.180 | I've never heard it mentioned that way.

00:19:29.520 | That makes a lot of sense, actually.

00:19:31.520 | - Yeah, the last area that it's really important to

00:19:34.840 | is financial aid.

00:19:35.720 | So if there is a potential to receive financial aid,

00:19:38.680 | UTMA and UGMA accounts are deducted at a higher rate

00:19:43.920 | than 529 plans and parents' assets.

00:19:47.480 | So the low-hanging fruit, as you're already doing,

00:19:49.340 | is 529 plan.

00:19:50.700 | Saving early and often in the 529 plan

00:19:52.920 | is gonna be your best bet.

00:19:54.420 | If you are looking to earmark money

00:19:56.300 | for a future down payment for your kid

00:19:59.380 | 25, 30 years down the road or another purchase,

00:20:04.380 | that's where I would suggest

00:20:07.220 | going with just a brokerage account in your name

00:20:09.620 | or a joint account with you and your spouse

00:20:13.020 | and having it earmarked for that purpose.

00:20:15.240 | That way, when it comes up,

00:20:16.460 | whether it's a wedding or a purchase,

00:20:19.440 | you can then gift them the money

00:20:20.680 | and you have a little bit more control over the asset.

00:20:23.880 | - The other downside to UTMA or UGMA

00:20:26.000 | is it's just the worst sounding acronym in finance.

00:20:28.940 | Like, they just don't sound appealing, right?

00:20:31.920 | Ugh, right?

00:20:32.960 | - I'm not a big fan of UTMAs,

00:20:36.560 | just 'cause once they turn 18 or 21, that money is theirs.

00:20:40.100 | That is out of your control.

00:20:41.600 | Even if you want it earmarked for a down payment,

00:20:45.580 | it's out of your hands.

00:20:47.620 | - Here's my other consideration for Brandon here.

00:20:50.900 | You need a DeLorean that can go 88

00:20:52.660 | and go back in time to when you're like 17

00:20:55.580 | and start saving for daycare,

00:20:57.020 | because no one tells you

00:20:58.340 | that putting your kids through daycare

00:20:59.700 | is basically like putting them through college,

00:21:00.960 | but you don't get 18 years to save.

00:21:02.700 | I'm still a little bitter about the daycare costs.

00:21:05.660 | - What if you space your children

00:21:07.300 | so that the oldest one is old enough

00:21:09.300 | to take care of your second, you know?

00:21:12.120 | That seems like alpha.

00:21:13.680 | - There you go.

00:21:14.600 | - That's some intense family planning there.

00:21:16.840 | - All right.

00:21:17.660 | Ross, I like the visuals.

00:21:18.500 | All right, let's do another one.

00:21:20.080 | - Okay, up next we have a question from Brett.

00:21:24.860 | I'm a single 33-year-old freelancer

00:21:28.280 | living in Charlotte, North Carolina.

00:21:29.640 | Shout out, North Carolina.

00:21:31.440 | Being self-employed, I don't have access

00:21:33.240 | to a traditional 401(k) plan.

00:21:35.000 | Also, not to brag, but my income level

00:21:37.360 | has disqualified me from Roth IRA contributions.

00:21:40.660 | I'm an aggressive saver/investor,

00:21:42.860 | but the only accounts available to me

00:21:44.220 | are an IRA with a $6,500 annual limit

00:21:48.080 | and a taxable brokerage account.

00:21:49.900 | This has resulted in an ever-increasing imbalance

00:21:52.140 | of the three-bucket strategy,

00:21:53.700 | 200K brokerage, 50K IRA, 50K Roth IRA.

00:21:57.820 | Am I setting myself up for trouble down the road?

00:22:00.380 | Would a solo 401(k) or SEP 401(k) be a better option?

00:22:04.740 | - Okay, this is a question

00:22:06.740 | that's becoming more and more relevant to a lot of people.

00:22:08.200 | John, throw up the chart on here of business applications.

00:22:10.400 | So this is business applications since the pandemic.

00:22:13.800 | You can see the huge spike.

00:22:14.880 | I think it was like 5 million or something

00:22:17.720 | new business applications since the start of the pandemic.

00:22:20.120 | So if you have a side hustle,

00:22:23.200 | you're starting your own business,

00:22:25.000 | I think it makes a lot of sense to think through this

00:22:26.960 | because there is no universal 401(k) plan.

00:22:29.160 | I wish there was, like the thrift savings plan, the TSP.

00:22:32.080 | Duncan, nice shirt.

00:22:33.640 | I like it, you got it, huh?

00:22:35.620 | - Yeah, yeah.

00:22:36.560 | - Duncan's sporting the new Tropical Brothers shirt.

00:22:38.540 | All right, it looks good.

00:22:39.800 | Someone must have just reminded you.

00:22:40.880 | So short of having a universal retirement account,

00:22:45.880 | because a lot of people just simply don't have access

00:22:48.440 | to a 401(k), what are the options here, Ross?

00:22:52.400 | - Yeah, I love the question.

00:22:53.840 | And they're thinking about diversification in two sense,

00:22:56.680 | right, there's the asset diversification,

00:22:59.080 | meaning investing not just in the S&P 500 globally,

00:23:02.260 | diversified portfolios.

00:23:03.920 | Talk about that all the time.

00:23:05.200 | But then there's tax diversification, right,

00:23:07.080 | where you don't want all of your money,

00:23:09.280 | whether it's in a brokerage account or an IRA or a Roth IRA.

00:23:12.640 | That way down the road, you have different levers

00:23:15.480 | that you can pull, whether it's in five years, 10 years,

00:23:18.760 | or 20 or 30 years in retirement.

00:23:21.220 | So there's a few different options.

00:23:22.800 | And to answer his question too,

00:23:24.360 | he's not setting himself up to failure

00:23:26.520 | just by investing in a brokerage account.

00:23:28.400 | But if you do wanna invest in a tax advantaged vehicle,

00:23:31.360 | solo 401(k) and a SEP IRA are both terrific options

00:23:35.080 | for someone in his situation that's a entrepreneur.

00:23:38.320 | Depending on his situation,

00:23:40.760 | there's a couple of different pros and cons.

00:23:43.000 | - Just so we know, I'll do a visual here, John.

00:23:48.080 | I have a, I actually have a SEP IRA.

00:23:51.040 | This is the one that I use because I have money

00:23:52.960 | that is on the side outside of my employer income.

00:23:56.940 | And some people say that I'm an idiot,

00:23:58.080 | I should have a solo 401(k).

00:23:59.200 | So Ross, what do we got here for the differences?

00:24:02.080 | - Yeah, the main difference is the flexibility

00:24:04.960 | within the two.

00:24:06.560 | So if you are gonna maintain being just you

00:24:10.080 | or you and your spouse in the business,

00:24:12.040 | the solo 401(k) is gonna be a better option.

00:24:15.240 | The reason why it's a better option

00:24:16.600 | is there's more flexibility within the solo 401(k).

00:24:19.480 | The max contribution for both is $66,000 per year.

00:24:24.120 | Solo 401(k), once you're above age 50,

00:24:26.920 | you also have that catch-up provision

00:24:28.260 | where you can contribute a little bit more.

00:24:30.120 | Here's where the differences come into play.

00:24:32.000 | So with a solo 401(k), there's a combination

00:24:35.660 | of both employer contributions and employee contributions.

00:24:40.120 | What that leads to is more flexibility

00:24:42.080 | with how much you can contribute.

00:24:44.200 | As you can see there on the SEP IRA side,

00:24:46.080 | that max contribution, it's subject to your compensation.

00:24:49.600 | Your max contribution is subject to your compensation,

00:24:52.080 | 25% versus in the solo 401(k),

00:24:55.480 | you can contribute as an employee up to $22,500 per year.

00:25:01.840 | - So does it matter that this guy is a solo business owner?

00:25:05.320 | Does that come into play at all?

00:25:07.400 | - Yep, absolutely.

00:25:08.240 | So since he is solo,

00:25:10.200 | the solo 401(k) would be a better option.

00:25:13.240 | It allows for more flexibility.

00:25:14.600 | - Funny how that works.

00:25:15.440 | He's a solo business owner of a solo 401(k).

00:25:16.880 | It's almost like it was--

00:25:17.720 | - Go figure, yeah, go figure.

00:25:19.880 | The government doesn't wanna steer anyone

00:25:21.240 | in one direction, right?

00:25:22.240 | But there you go, a solo 401(k) right in the name.

00:25:25.400 | - Okay, so that makes sense.

00:25:26.640 | And the other thing is,

00:25:28.600 | so I personally have a 401(k) through work

00:25:30.880 | and I also have the SEP.

00:25:32.160 | So you have to take into account

00:25:33.120 | those personal 401(k) contributions as well

00:25:35.600 | so you don't go over, right?

00:25:36.480 | So that kind of eats into your max contribution.

00:25:39.160 | - Yeah, it's viewed as a whole.

00:25:41.120 | Yep, it's a whole.

00:25:42.640 | - So you have to look at them both.

00:25:43.720 | If you, not to brag,

00:25:45.240 | I have multiple retirement accounts, multiple.

00:25:47.920 | - Yeah, you can't do 66,000

00:25:51.280 | in two different type of accounts.

00:25:53.120 | - Right, yeah, it comes together.

00:25:54.880 | So I guess that--

00:25:55.720 | - It's not about everything.

00:25:57.720 | - So you mentioned that there's an employee,

00:25:59.440 | an employer contribution for the solo.

00:26:02.000 | If you're a solo practitioner, you're both, right?

00:26:04.000 | So you can, that means you can put more money in,

00:26:06.080 | potentially.

00:26:06.920 | - You are both, yeah.

00:26:07.760 | It just allows a little bit more flexibility.

00:26:09.720 | So let's say you make,

00:26:11.840 | it doesn't sound like this is the case,

00:26:13.120 | but if you make like $70,000 per year

00:26:16.000 | when you're starting out in the business,

00:26:17.200 | you can contribute from the employee side that 22.5.

00:26:20.800 | It's not subject to your income limits at 25%.

00:26:25.320 | - Gotcha, okay.

00:26:26.840 | Duncan, I just say that your transition to middle age

00:26:28.960 | is gonna be wonderful,

00:26:30.080 | with that shirt and the beard and the hat.

00:26:32.200 | You're already there, basically.

00:26:33.920 | - Yeah, no, I like to think that, yeah,

00:26:35.960 | I'm pretty much there.

00:26:38.440 | - It looks wonderful.

00:26:39.280 | Okay, thank you to Ross for coming in.

00:26:41.600 | Ross put up a good fight,

00:26:43.680 | even though someone broke into his office

00:26:45.040 | and stole his microphone last night,

00:26:46.480 | which it must have been,

00:26:47.560 | is there a gang of like out of work podcast people

00:26:50.440 | that are going around taking people's microphones?

00:26:52.440 | - I bet that's it.

00:26:53.720 | - It was a strange morning trying to figure out

00:26:56.040 | what was going on here with just the microphone missing

00:26:58.480 | and nothing else.

00:26:59.920 | It's a little bit confused.

00:27:00.800 | Thought someone played a prank on me,

00:27:02.040 | but yeah, it turns out it was real.

00:27:04.200 | I also do wanna say that I think love to audit.

00:27:06.640 | I think they have a Subaru.

00:27:08.160 | That's my guess.

00:27:09.000 | - Ah, okay, Subaru, I can see that.

00:27:10.120 | - I can see that. - Outback.

00:27:11.120 | - Like a legacy or an Outback?

00:27:12.600 | No, I'm just kidding.

00:27:13.440 | - Probably an Outback, yeah, like a '90s Outback.

00:27:15.840 | - All right, remember.

00:27:16.680 | - I forgot to throw in the doc,

00:27:17.920 | but I wanted to say Tony wrote in

00:27:19.960 | and said it's he and his wife Melissa's

00:27:22.240 | one year wedding anniversary

00:27:23.440 | and watching the compound helped them save up

00:27:25.160 | for their wedding.

00:27:26.440 | So yeah, congrats. - Oh, wow.

00:27:27.560 | Wanted to say congrats. - Kudos.

00:27:28.680 | Lot of congrats all the way around.

00:27:29.840 | All right, remember, you can email us

00:27:31.040 | at thecompoundshow@gmail.com.

00:27:34.120 | Check out idontshop.com for all of your compound

00:27:37.120 | shopping needs, leave us a review, like.

00:27:39.760 | We're up to 120,000 subscribers on the Compound channel now,

00:27:42.880 | which is very exciting. - Yeah, almost 121, yeah.

00:27:44.840 | - Yeah.

00:27:46.240 | See you next time.

00:27:47.200 | - See you, everyone.

00:27:48.680 | (upbeat music)

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How Much Money Do You Need to Save?

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