Bogleheads® Conference 2024 Ask Us Anything Experts Panel with Rick Ferri, Mike Piper, Allan Roth

00:00:00.000 | (audience applauding)

00:00:03.160 | - But just to start with a couple of questions from me,

00:00:09.880 | most overrated issue in investing.

00:00:13.900 | Let's start with the thing that you think

00:00:16.040 | people make way too much out of

00:00:18.160 | that at the end of the day doesn't matter a lot.

00:00:20.460 | What is the question you get again and again

00:00:22.320 | and kind of go, doesn't really matter.

00:00:25.360 | - Is small cap value, can we include that in there?

00:00:28.680 | (audience laughing)

00:00:30.180 | But if we weren't gonna go down that road,

00:00:32.700 | I'd say rebalancing.

00:00:37.800 | By the financial industry, a lot of advisors say,

00:00:40.080 | well, we rebalance your portfolio

00:00:41.760 | and therefore we earn an extra 2% annualized return

00:00:45.100 | by doing it, which is nonsense.

00:00:46.860 | So I'd say that rebalancing is kind of overrated.

00:00:49.920 | - Adam, rather, yesterday touched on this.

00:00:55.240 | I have an analogy that I often use about asset allocation.

00:00:58.960 | If you've ever baked a cake before,

00:01:03.080 | then you know that you start with basically

00:01:05.700 | some dry white powdery stuff, right?

00:01:08.200 | Flour, sugar, salt, leavening, and some butter and eggs.

00:01:12.840 | And then when you mix them together

00:01:14.440 | in exactly the right proportions,

00:01:16.480 | cook it at exactly the right temperature

00:01:18.160 | for exactly the right length of time, magic happens, right?

00:01:22.080 | You go from butter, eggs, and powdery stuff to a cake.

00:01:26.120 | But if you mess it up, if you get the proportions wrong,

00:01:28.240 | the temperature wrong, you leave out the leavening,

00:01:30.040 | whatever, it's a disaster.

00:01:32.400 | And a lot of people will tell you

00:01:34.360 | that asset allocation is the same way, right?

00:01:37.760 | If you get the small cap value tilt exactly right,

00:01:40.560 | if you use a 10% retail allocation,

00:01:43.480 | or you make sure to use short-term treasury bonds

00:01:46.520 | instead of a total bond fund, or whatever it is.

00:01:49.840 | But asset allocation is not like baking a cake,

00:01:52.520 | it's like making a fruit salad, right?

00:01:54.520 | If you just increase your blueberry allocation

00:01:57.440 | a little bit, it's not a big deal.

00:01:59.520 | Like, there's no magic, it's no disaster,

00:02:02.080 | you just have more blueberries.

00:02:03.280 | And that might be good, or it might be bad,

00:02:04.640 | but it's not a big deal.

00:02:06.000 | And if you go to the grocery store,

00:02:08.520 | and the raspberries and blackberries look kinda iffy,

00:02:11.640 | and so you end up with a three-ingredient fruit salad,

00:02:15.000 | that's fine.

00:02:16.160 | (audience laughing)

00:02:19.160 | (audience applauding)

00:02:23.200 | - I'm gonna say I, is this on?

00:02:27.640 | Yeah, I'm gonna say I actually agree with Rick.

00:02:30.440 | When to rebalance, and looking at history,

00:02:33.840 | you could see a whole lots of reasons when to do it,

00:02:36.840 | but I think as long as you rebalance,

00:02:39.040 | as long as you buy when stocks are on sale,

00:02:42.320 | and sell when they're high,

00:02:44.280 | you're gonna get a boost of a return

00:02:46.400 | versus that average asset allocation.

00:02:48.600 | - Yeah, I'm severely disadvantaged here two ways.

00:02:53.240 | Number one is I'm the last to answer,

00:02:55.320 | so I agree with all three of these guys.

00:02:57.320 | And the second thing I've learned

00:02:58.400 | is to never match Sinalese with Mike Piper, so.

00:03:03.120 | (audience laughing)

00:03:06.120 | - We start on that side and go this way?

00:03:10.200 | - Yeah.

00:03:11.440 | - So Bill, this one's coming right at you.

00:03:13.720 | (audience laughing)

00:03:16.000 | You are all intelligent and great money managers.

00:03:19.680 | How do you treat yourself or blow money?

00:03:22.840 | Is it a trip, car, knowing you have plenty of money?

00:03:26.880 | What is it, what's your splurge?

00:03:30.000 | - I just paid $100 extra to fly business class

00:03:34.680 | back to Portland, and that's, you know,

00:03:38.400 | that's the first, that's almost as good

00:03:40.800 | as the threads you see on the board,

00:03:42.240 | which, you know, can I buy my Rolex now?

00:03:44.680 | Am I, you know, will I go to hell

00:03:46.280 | if I buy a Rolex to Boglehead L?

00:03:49.400 | - Do you pay for first class if you're going overseas?

00:03:52.600 | - That's a really good question.

00:03:55.200 | I haven't really faced that.

00:03:56.760 | I occasionally, we fly Iceland Air,

00:03:58.760 | and you can bib on first class,

00:04:01.360 | and sometimes I win and sometimes I lose.

00:04:03.760 | - I have a dysfunctional relationship with money.

00:04:08.680 | (audience laughing)

00:04:10.680 | - And I even wrote about this.

00:04:12.720 | As an Uber saver, it's hard to start spending money,

00:04:16.760 | and I've done a little research on that,

00:04:18.920 | and I'm very proud.

00:04:20.840 | We flew premium economy to Europe.

00:04:24.000 | It's been two weeks there, and it cost $20,000,

00:04:28.400 | and it's the first time I bragged

00:04:29.520 | about how much something costs.

00:04:31.200 | I'm usually bragging about the $1 tram ride

00:04:36.200 | from the airport to the hotel.

00:04:38.040 | (audience laughing)

00:04:40.640 | - I take a quick trip to Colorado Springs,

00:04:43.560 | have breakfast with Alan Roth,

00:04:44.880 | and then spend a little bit of time climbing.

00:04:46.840 | - So how do I splurge on money?

00:04:51.200 | - On yourself.

00:04:52.040 | What do you do? - I have a wife.

00:04:53.720 | (audience laughing)

00:04:56.720 | She, we did go to Europe last year,

00:05:03.760 | and of course I was all about the economy class,

00:05:06.800 | even though I was gonna be in the middle in row 87,

00:05:10.360 | and she was gonna be in the middle in row 76.

00:05:13.160 | She said, "We're flying business class,"

00:05:15.120 | or, "I'm not going."

00:05:17.360 | So we flew business class, which was great, by the way,

00:05:20.760 | and so we'll probably do that.

00:05:22.120 | In fact, I know we're gonna do that.

00:05:23.440 | If I ever wanna go to Europe again,

00:05:25.000 | we're gonna be flying business class.

00:05:26.360 | But the second thing that I do for myself

00:05:28.360 | is I buy really expensive pickleball paddles.

00:05:31.640 | (audience laughing)

00:05:32.480 | - How much do they run, a really good one?

00:05:34.280 | - 250, $250.

00:05:36.240 | - Here's a question.

00:05:39.200 | I've heard that many people who win the lottery

00:05:41.320 | lose it pretty quickly.

00:05:42.920 | Why is that?

00:05:44.000 | What is the best thing to do

00:05:45.360 | if you get a sudden windfall like that?

00:05:47.200 | Bill, how about you?

00:05:48.560 | - Well, there's actually, I think that's urban folklore.

00:05:52.240 | I think there is now accumulating peer-reviewed literature

00:05:56.040 | that says that people who win the lottery

00:06:01.800 | actually don't do badly.

00:06:03.280 | Obviously, some are going to,

00:06:05.320 | but they don't, they certainly,

00:06:07.560 | the peer-reviewed literature doesn't really support that,

00:06:10.160 | which is too bad.

00:06:11.240 | I mean, it's a great morality play

00:06:14.800 | to believe the urban folklore.

00:06:16.560 | - I don't know how they would get that data.

00:06:20.280 | I've heard other statistics that 25% of men on match.com

00:06:24.880 | are married, but I don't know how you get that data.

00:06:27.280 | (audience laughing)

00:06:29.640 | I've got some professional athletes as clients

00:06:32.440 | who earned a lot of money,

00:06:34.400 | and they're not the norm.

00:06:36.120 | They're not the ones that typically blow it all immediately.

00:06:41.120 | I think it's very hard to convince somebody

00:06:45.400 | that has always spent to start saving.

00:06:47.640 | Catching up on FI is a wonderful tool.

00:06:51.840 | - Mike, here's a question for you.

00:06:55.640 | Are reverse rollovers of IRA to 401(k) recommended,

00:07:00.200 | and maybe you can talk about what situations

00:07:03.000 | that that might be appropriate.

00:07:05.160 | - Sure.

00:07:06.760 | Number one would be if we are looking

00:07:10.040 | to do a backdoor Roth,

00:07:13.080 | so the problem, so if you have income

00:07:17.640 | that is too high to make regular Roth IRA contributions,

00:07:20.720 | and you can then contribute

00:07:23.800 | to a non-deductible traditional IRA,

00:07:26.000 | you can make that contribution,

00:07:27.840 | but if you then do a conversion,

00:07:30.440 | that's why we call it a backdoor Roth

00:07:32.000 | is that you would convert it immediately,

00:07:33.280 | but if you do that,

00:07:34.400 | when you have other traditional IRA balances,

00:07:37.340 | then you're gonna have to pay tax

00:07:38.320 | on most of that conversion anyway,

00:07:40.000 | so what we could do is take your existing

00:07:43.880 | traditional IRA balances,

00:07:46.080 | roll them into your 401(k),

00:07:48.360 | and then the new contribution,

00:07:51.240 | you have to wait a year,

00:07:52.080 | but the new contribution to the traditional IRA,

00:07:55.360 | the non-deductible contribution,

00:07:56.560 | then that's the only money there,

00:07:57.960 | so we can convert it right away,

00:07:59.320 | not have to pay tax,

00:08:00.240 | so that would be one reason.

00:08:02.000 | There could be potentially other reasons.

00:08:04.200 | You get creditor protection in the 401(k)

00:08:06.520 | that might not exist in an IRA.

00:08:07.840 | It depends at the state level.

00:08:09.340 | There could be better investment options in your 401(k).

00:08:13.080 | Every once in a while,

00:08:13.920 | you do actually see some things that don't exist.

00:08:16.240 | That's kind of backwards of what is usually the case,

00:08:19.100 | but sometimes, so there are some reasons.

00:08:21.600 | It's not something that you do usually, but yes.

00:08:26.400 | - I do wanna just pick up on something Mike said,

00:08:30.080 | and that is creditor protection,

00:08:31.960 | and this is state by state.

00:08:33.840 | There are some states where you have

00:08:36.280 | just the same creditor protection in your IRAs and Roth

00:08:39.640 | that you do in your qualified plan,

00:08:41.380 | like a 401(k) or 403(b),

00:08:43.640 | where creditors cannot attach to it,

00:08:46.180 | so there are a lot of states

00:08:47.440 | that you get the same creditor protection,

00:08:49.480 | but there are some states that you're in,

00:08:52.120 | and if you have money in an IRA,

00:08:54.680 | they might give you maybe the first 50 or 60,000 of that

00:08:59.680 | that you can keep, and the rest of it is open to creditors,

00:09:02.400 | so it depends on which state you live in.

00:09:05.240 | There's a website that I go to.

00:09:07.360 | I don't know how updated it is, but I look at it,

00:09:10.000 | and it's just creditor protection by state website,

00:09:12.920 | and you could look and see your particular state.

00:09:15.480 | I mean, there are some states that are horrible.

00:09:18.700 | I mean, I don't think I'd have any money in an IRA,

00:09:21.320 | but there are some states where it doesn't matter

00:09:23.080 | whether you have it in the IRA or the 401(k),

00:09:24.800 | so you really gotta look into that for your state.

00:09:28.080 | - It depends on a lot of things,

00:09:29.480 | but if I had access to the Government Thrift Savings Plan,

00:09:32.360 | boy, would I roll my IRAs into

00:09:34.640 | that incredibly good 401(k) type of savings plan.

00:09:38.940 | - Rick, just a quick follow-up for you

00:09:42.080 | on that earlier point about rebalancing being overrated.

00:09:46.880 | The question is, can you elaborate on that?

00:09:49.280 | - Yeah, so I was talking basically

00:09:51.480 | about the financial advisor community

00:09:53.440 | who is looking for a reason to collect fees, you know?

00:09:56.880 | We charge you 1%, and what do you do for that?

00:09:59.360 | Well, we come up with the optimal portfolio,

00:10:02.360 | which of course is impossible to do,

00:10:04.540 | and then we're also going to rebalance

00:10:07.000 | your portfolio frequently because they show you

00:10:12.000 | some chart that shows if you rebalance every quarter

00:10:15.360 | that you're going to get some sort of an excess return,

00:10:17.600 | and it's really inflated.

00:10:19.360 | So as I think Alan said it correctly,

00:10:24.360 | he said basically, you know, when the market's down,

00:10:27.760 | you probably want to rebalance,

00:10:29.040 | and when the market's way up,

00:10:30.440 | you probably want to rebalance.

00:10:31.680 | However, I'll caveat that with,

00:10:34.020 | if you're going to have to sell stock in a taxable account

00:10:37.040 | and you have no place,

00:10:38.920 | and you're going to have to take a gain

00:10:42.920 | because all of your retirement money

00:10:45.400 | is in bonds already, and your Roth money,

00:10:49.080 | you don't want to sell stock

00:10:50.360 | because, I mean, that's going to go to the kids,

00:10:52.080 | you want it to grow tax-free.

00:10:53.640 | So now you're left with, well,

00:10:56.160 | in order to keep my allocation 60/40

00:10:59.120 | between stocks and bonds,

00:11:00.240 | I have to sell stock in my taxable account,

00:11:02.320 | and it's going to generate gains.

00:11:04.240 | My answer would be,

00:11:05.760 | just do what's called a reverse glide path.

00:11:07.880 | I mean, don't worry about selling stock

00:11:10.040 | in your taxable account,

00:11:11.280 | unless you can do it at a very low tax rate.

00:11:13.080 | Maybe, Alan, maybe you want to comment on that.

00:11:15.000 | - Yeah, there are a lot of moving pieces here,

00:11:17.920 | and Rick just touched on one of them,

00:11:20.120 | namely that you certainly don't want to be doing

00:11:22.040 | rebalancing selling in a taxable account.

00:11:24.040 | That would completely more than wipe out

00:11:26.040 | by an order of magnitude any rebalancing bonus.

00:11:30.880 | And, of course, it's a risky process as well.

00:11:34.120 | I mean, there are places, there are asset class pairs

00:11:37.160 | that you certainly wouldn't want to be rebalancing

00:11:39.920 | U.S. versus Japanese stocks,

00:11:41.920 | for example, for the past 40 years.

00:11:44.960 | I think that the benefit of rebalancing

00:11:46.880 | is not financial, it's psychological.

00:11:49.400 | It gets you used to buying low and selling high.

00:11:54.400 | It keeps you in financial condition,

00:11:58.000 | and I put that in quotes,

00:11:59.320 | the condition being that it basically

00:12:02.000 | builds up your discipline,

00:12:03.080 | and it's a muscle that you need to be using

00:12:05.560 | from time to time to be able to act properly.

00:12:08.200 | - I've got a bit of a differing opinion.

00:12:11.320 | Asset allocation comes first.

00:12:13.280 | Asset location comes second.

00:12:15.720 | So if you're out of your investment policy,

00:12:18.920 | and you have no room to sell stocks

00:12:20.960 | in the tax-deferred or tax-free accounts,

00:12:24.280 | don't let the taxes wag your asset allocation.

00:12:28.720 | Go ahead and pay the taxes.

00:12:30.240 | Now, I mean, use common sense.

00:12:31.920 | If today it's a short-term gain,

00:12:33.440 | and tomorrow it's a long-term gain,

00:12:35.320 | I'd wait that day.

00:12:37.600 | But it's just like you don't move somewhere

00:12:40.960 | because there's no state tax.

00:12:44.120 | You don't pick an asset allocation

00:12:46.000 | to minimize the taxes.

00:12:48.040 | You want to maximize the probability

00:12:50.280 | that you can do what you want

00:12:51.360 | for the rest of your lives.

00:12:52.720 | - So here's a question I'd like each of you to tackle.

00:12:56.880 | What has been your biggest change of heart

00:12:59.000 | since you first started investing?

00:13:01.040 | Rick, let's start with you.

00:13:02.400 | - You know, we're talking like way back

00:13:06.760 | when I bought Dolly prints that were fake.

00:13:09.160 | (audience laughing)

00:13:12.600 | I'd say, okay, let's move forward then.

00:13:17.600 | (audience laughing)

00:13:19.360 | Or buying that timeshare that I had to give up.

00:13:22.720 | No, okay, my biggest change of heart

00:13:26.360 | has been moving from complexity to simplicity

00:13:30.800 | in a portfolio.

00:13:32.400 | I mean, you know, I listened to John Bogle

00:13:34.000 | and I had the epiphany of indexing back in 1996.

00:13:37.080 | I fell in love with the idea that it was great.

00:13:39.760 | But then I got a kind of overly wrapped up

00:13:42.240 | in the slicing and dicing of it all.

00:13:44.600 | And, well, we could have, again, small cap value.

00:13:48.960 | We could have international small cap value.

00:13:50.960 | Let's split Europe and Pacific.

00:13:52.720 | And, you know, it got to be this indexing,

00:13:55.680 | was all indexing, but it was all,

00:13:57.880 | it got to be an overly complex portfolio.

00:14:00.200 | And then I had a second epiphany, which I call simplicity.

00:14:03.600 | Which means, you know, getting back to Jack Bogle,

00:14:06.440 | he was right, and the three fund portfolio works.

00:14:11.520 | And you really don't need much more.

00:14:14.240 | And so my second epiphany with this was simplicity.

00:14:17.520 | - Similar answer in that I think that's kind of

00:14:22.760 | a normal progression for a Bogle head,

00:14:26.720 | is that you get into it, especially if it's a Bogle head

00:14:30.320 | who's hanging out on the forum, you can't help.

00:14:32.520 | I mean, you're bombarded with this information

00:14:34.600 | about I could do this or I could do that.

00:14:36.280 | And so you kind of dig into it a little bit.

00:14:38.760 | And it looks promising, which is not to say

00:14:41.560 | that any of these various things you could do

00:14:43.560 | with your asset allocation are a bad idea.

00:14:45.720 | But recognizing that this is not the most important thing.

00:14:50.240 | And investing, we can keep it simple.

00:14:52.480 | And that's beneficial 'cause it makes us

00:14:55.080 | less likely to make investing mistakes.

00:14:57.320 | But it's also beneficial because it frees up our time

00:14:59.640 | to, I mean, just deal with any other thing

00:15:02.280 | you want to do in your life.

00:15:03.400 | But also just within the financial planning picture, right?

00:15:06.000 | Like, you can keep the investing part simple,

00:15:08.680 | the tax part's never gonna be that simple.

00:15:10.520 | Estate planning's not necessarily gonna be very simple.

00:15:13.040 | So if you can keep one piece of it simple

00:15:14.760 | and that frees up your time and energy

00:15:16.200 | to tackle all the other parts, that's great.

00:15:19.280 | - I've changed my view on safe spin rates.

00:15:24.280 | A bit of a pessimist, I would say,

00:15:27.100 | 25, 30 year safe spin rate a few years ago

00:15:30.600 | was about 3% increasing with inflation.

00:15:33.120 | I even wrote a piece, why I disagreed with Morningstar's

00:15:37.600 | safe spin rates study, and two conferences ago,

00:15:41.680 | I apologized 'cause I no longer disagree.

00:15:44.280 | Suddenly, real interest rates shot up

00:15:47.480 | from minus 1% to over 2%,

00:15:50.340 | and that changed everything dramatically.

00:15:54.640 | And I agree with Morningstar's safe spin rates.

00:15:58.560 | - Yeah, two things that I've changed my mind about.

00:16:01.280 | One is a long-term concept,

00:16:03.600 | which is thinking about the riskiness of stocks.

00:16:06.960 | And I've come to realize over the decades

00:16:09.320 | that that's the wrong question unless you ask for whom.

00:16:14.320 | If you're a young person, stocks aren't all that risky

00:16:19.080 | because you're deploying a constant stream of savings,

00:16:23.440 | and eventually you're going to hit the jackpot

00:16:25.760 | in terms of buying low.

00:16:29.640 | The second thing I've been turned around about,

00:16:31.320 | and I really owe this to Jim Dolley.

00:16:33.560 | I used to think that real estate investing

00:16:36.880 | was three-mile island toxic you should stay away from.

00:16:41.360 | It wasn't an investment, it was a job.

00:16:43.640 | And I like to say that if you liked dealing

00:16:46.720 | with fixing toilets and drug-addled tenants,

00:16:49.720 | then go for it.

00:16:51.200 | But Jim did turn me around on that a little bit.

00:16:55.080 | So if you know what you're doing

00:16:56.400 | for a small subset of people,

00:16:58.840 | it's probably inappropriate activity,

00:17:01.960 | maybe 5% or 10% of people.

00:17:04.080 | I got a very interesting email from someone

00:17:08.360 | who was actually going to become a finance professional,

00:17:11.120 | and he thanked me for writing my books

00:17:13.920 | and convincing him that there was no way in the world

00:17:16.160 | he was going to be able to successfully pick stocks

00:17:18.680 | because he was competing against people

00:17:21.160 | with vast databases, IQs of 160,

00:17:24.320 | who were working 90 hours a week.

00:17:26.200 | But it was possible to make a good living

00:17:30.640 | dealing in real estate because there he was

00:17:32.760 | dealing with dentists from Lubbock.

00:17:34.520 | And so he knew who was on the other side of his trades

00:17:38.760 | and he could pick those trades.

00:17:40.160 | I thought that was a fairly profound observation.

00:17:42.600 | - Mike, here's a question for you.

00:17:45.440 | Can you please talk about mega backdoor IRA conversions?

00:17:49.600 | We just found out my husband's 401(k) plan allows these,

00:17:52.720 | I guess an after-tax 401(k),

00:17:54.600 | but it was never advertised as a benefit.

00:17:56.880 | Can you talk about what that is?

00:17:58.720 | - Yeah, so the mega backdoor Roth

00:18:01.560 | is a backdoor Roth that happens in a 401(k)

00:18:04.880 | instead of an IRA.

00:18:06.520 | So we have our regular, with a 401(k)

00:18:08.280 | we've got our regular deferrals, right,

00:18:10.960 | which you can make as pre-tax or Roth,

00:18:13.120 | and that's up to you.

00:18:14.320 | And then catch-up contributions,

00:18:16.600 | potentially, depending on your age.

00:18:18.320 | And then there's another type of contribution

00:18:20.720 | that the tax law allows you to make

00:18:23.600 | that your plan might allow you to make

00:18:26.280 | or might not allow you to make.

00:18:28.120 | And just like the person who wrote in

00:18:29.960 | with this question said,

00:18:31.080 | they don't often advertise it.

00:18:32.400 | In many cases, you are allowed

00:18:33.640 | to make this type of contribution,

00:18:35.240 | but they just don't tell you.

00:18:36.680 | And this is called an after-tax contribution.

00:18:40.000 | And so it's after-tax

00:18:41.040 | because you don't get a deduction for it.

00:18:43.640 | So it's a non-deductible contribution to your 401(k).

00:18:47.000 | And the contribution limit is much higher.

00:18:50.920 | I actually don't, I never memorized any of the limits.

00:18:52.560 | - It's like 65,000, I think, all in.

00:18:54.720 | - Okay.

00:18:56.040 | - Okay.

00:18:56.880 | - Thank you.

00:18:59.160 | So much higher contribution limit

00:19:01.560 | than the regular, even including catch-up.

00:19:04.080 | And so you can put all this money in,

00:19:06.080 | you don't get a deduction for it,

00:19:07.480 | but the mega backdoor Roth part of it

00:19:10.400 | is that then you're allowed to convert it immediately

00:19:13.040 | if, again, if your plan allows for one of two things.

00:19:16.160 | Number one is an in-plan conversion,

00:19:19.360 | which means that immediately after putting

00:19:21.000 | that after-tax non-deductible money in,

00:19:23.640 | you move it right over into the Roth 401(k)

00:19:25.680 | side of the plan, and it's not taxable.

00:19:28.160 | So you basically just got to make

00:19:29.280 | a enormous Roth 401(k) contribution

00:19:32.720 | way beyond the normal limit, with no downside particularly.

00:19:36.160 | The other thing that the,

00:19:37.120 | so sometimes the plan doesn't allow for that,

00:19:38.840 | but it will allow for you to roll that portion,

00:19:43.840 | and only that portion, over into a Roth IRA.

00:19:47.600 | So sometimes that's allowed, and again,

00:19:49.680 | it just depends on your plan document.

00:19:51.360 | And so the idea is you're just able to make

00:19:52.920 | much larger Roth contributions through a 401(k)

00:19:56.480 | than you would normally be able to.

00:19:59.040 | - So a 401(k), you can contribute currently,

00:20:02.360 | the total amount that can go into a 401(k) is 69,000,

00:20:05.920 | and if you're over the age of 50,

00:20:08.120 | I believe it's 76,000, okay.

00:20:13.120 | So you're putting, if you're under the age of 50,

00:20:15.920 | you're putting your 23,000 in as an employee,

00:20:18.720 | and then there's this bucket that's left

00:20:21.560 | that goes all the way up to 69.

00:20:23.040 | However, if your employer is putting money in,

00:20:26.440 | that uses up some of that bucket.

00:20:28.200 | So what's left, if you're able,

00:20:31.160 | is the amount that you could do this mega-backdoor Roth.

00:20:35.280 | I'll also say that if you're self-employed,

00:20:37.760 | you can do this with a solo 401(k),

00:20:40.960 | but you need a special type of solo 401(k),

00:20:43.240 | and Harry Sitt wrote a fantastic article

00:20:45.680 | that I refer to all the time.

00:20:48.000 | You can look it up,

00:20:48.840 | Harry Sitt's solo 401(k) mega-backdoor Roth,

00:20:52.120 | Google that, where he talks about as a solo,

00:20:56.800 | self-employed, if you open up a solo 401(k)

00:21:01.240 | with a kind of a custom firm,

00:21:05.840 | you could also do this mega-backdoor Roth.

00:21:09.120 | But generally, if you're just doing a prototype plan

00:21:11.240 | with like a censure, or fidelity, or Schwab,

00:21:16.240 | you can't do it.

00:21:18.480 | So it takes a custom plan.

00:21:19.840 | - It's one of those laws that's too good to be true,

00:21:23.200 | but it is true.

00:21:24.160 | If you have that option, seriously look at it.

00:21:27.400 | - I have a question, actually,

00:21:28.800 | that I'd like to direct to the three of you about this,

00:21:30.840 | 'cause this really is my area of expertise,

00:21:33.320 | which is, to the extent that you wanna prioritize

00:21:36.640 | charitable giving, and you are worried

00:21:39.440 | about long-term care expenses,

00:21:42.480 | should you be careful about Rothifying too much?

00:21:47.120 | - Should you be, in other words,

00:21:49.200 | concerned about using up all of your traditional IRAs,

00:21:52.000 | which you can basically pass tax-free

00:21:54.160 | to whatever charities you want at death,

00:21:56.400 | or to be able to use your traditional IRAs,

00:22:00.640 | that you're gonna get at least a partial deduction for

00:22:02.680 | if your long-term care expenses are high.

00:22:05.560 | - Well, the mega-backdoor Roth is using after-tax dollars

00:22:09.040 | to convert to pre-tax, convert to tax-free dollars.

00:22:13.200 | I think that's hard to go wrong.

00:22:16.480 | Could the government come up with laws to prove me wrong?

00:22:18.920 | Absolutely.

00:22:20.760 | - Well, Bill, as far as I'm understanding your point,

00:22:23.200 | though, is the long-term care costs

00:22:26.600 | are oftentimes quite deductible,

00:22:29.360 | and so the traditional IRA can be a really elegant,

00:22:33.040 | traditional pre-tax account can be an elegant asset

00:22:36.440 | to use to address those expenses.

00:22:38.720 | Is that what you're thinking about?

00:22:39.840 | - Precisely, and that goes double for charitable giving.

00:22:44.120 | If you give money out of your traditional IRA,

00:22:46.720 | that money has never gotten taxed at any point.

00:22:51.320 | - Yeah. - 'Cause if you Rothify,

00:22:52.680 | you've paid taxes on it.

00:22:54.360 | - With the charitable giving side of things,

00:22:59.040 | yes, it is very helpful to maintain,

00:23:02.680 | if you have charitable intent,

00:23:03.960 | to maintain some traditional IRA dollars,

00:23:07.360 | because charitable giving basically lets you

00:23:09.800 | turn a traditional IRA into an HSA

00:23:12.280 | in the sense that you got a deduction

00:23:13.440 | when the money went in, it grows tax-free,

00:23:16.000 | and then it comes out tax-free also,

00:23:17.640 | so that's a fantastic deal.

00:23:19.680 | And so, yeah, if you have charitable intent,

00:23:22.760 | eliminating your tax-deferred balances is not a good idea.

00:23:25.560 | Save some money for that purpose.

00:23:28.080 | I think it's a little different

00:23:29.480 | for the long-term care side of things.

00:23:32.920 | The long-term care costs, if they are deductible,

00:23:35.920 | then, yes, in those years,

00:23:37.800 | that can be bringing your taxable income down

00:23:39.840 | and letting you pull the money out of the traditional IRA

00:23:43.720 | at perhaps not a very high tax rate,

00:23:45.840 | but I struggle with explaining this.

00:23:49.040 | The deduction you get, it's fungible

00:23:53.960 | in the way that the money is fungible.

00:23:55.240 | You're gonna get that deduction

00:23:56.800 | even if you aren't pulling the money out of traditional,

00:24:00.960 | like, the deduction is because of the healthcare expense,

00:24:03.280 | not because you're taking money out of the traditional IRA,

00:24:05.960 | and so that deduction would be available

00:24:08.640 | to save money on other things

00:24:11.320 | regardless of where the money's coming from.

00:24:13.560 | So I think saving money in a traditional IRA

00:24:17.200 | or other tax-deferred place

00:24:18.800 | for charitable giving down the line makes a lot of sense.

00:24:23.360 | I don't think that's the case for the long-term care thing,

00:24:25.640 | although it is true that if you are going to be having

00:24:30.400 | significantly deductible long-term care expenses,

00:24:32.480 | yes, that is gonna be some tax savings.

00:24:34.800 | - But I agree with you, Bill.

00:24:35.880 | Tax diversification is important.

00:24:37.840 | And having some taxable, tax-deferred, and tax-free

00:24:41.080 | because we never know what life brings us,

00:24:43.160 | and we really never know

00:24:44.240 | what politicians are gonna bring us.

00:24:46.600 | - Here's a question just following up on long-term care.

00:24:49.720 | What is a basic strategy for financing long-term care?

00:24:54.000 | So assuming someone doesn't have insurance,

00:24:57.480 | and they're setting aside funds,

00:24:59.840 | presumably for long-term care,

00:25:01.800 | where, how invested, maybe even how large?

00:25:06.360 | Can you all talk about that?

00:25:07.800 | - Well, we guys don't live very long in long-term care.

00:25:13.160 | Women, you've got the bigger problem.

00:25:14.760 | You live a lot longer.

00:25:17.160 | You know, with most of my clients and for myself,

00:25:21.280 | we self-insure.

00:25:22.640 | I think if you don't have much in the way of savings,

00:25:26.720 | you're probably going to be in a Medicaid place.

00:25:28.880 | It's somewhere in between.

00:25:31.040 | You can buy long-term care insurance,

00:25:33.440 | but you can, a temporary policy,

00:25:36.440 | or pure long-term care,

00:25:39.280 | rates have increased incredibly,

00:25:41.320 | and that's just too much risk, in my opinion,

00:25:44.200 | and a permanent long-term care policy

00:25:46.200 | is mixed with a permanent insurance,

00:25:49.680 | whether it's whole life, or universal,

00:25:51.520 | or something like that, is very expensive.

00:25:54.200 | My clients tend to be very wealthy, so we self-insure.

00:25:58.800 | - You also have your home.

00:26:01.400 | Generally, the first person who goes into,

00:26:04.240 | if they have to go into assisted living or a nursing home,

00:26:07.400 | a lot of that could be self-funded,

00:26:09.160 | at least from a lot of the people

00:26:11.200 | who might have a couple million or more,

00:26:12.600 | you self-fund that portion of it,

00:26:14.360 | but you do have your home.

00:26:15.200 | You have the equity in your home.

00:26:16.200 | By this time, a lot of homes are paid off,

00:26:18.760 | so you could do a reverse mortgage.

00:26:22.680 | I don't know if we got a chance to talk that much about it,

00:26:26.720 | but they actually are useful for some people

00:26:29.320 | because you don't have to sell the home,

00:26:31.080 | and therefore, the equity in the home,

00:26:32.880 | if both spouses die, gets a step up on debt,

00:26:35.440 | so you could borrow from the house

00:26:37.320 | to fund the long-term care for one spouse or the other,

00:26:42.320 | if needed, so that's another option you have,

00:26:45.640 | or you could sell the house.

00:26:47.000 | Take the gain.

00:26:47.840 | You got $500,000 in gain for, if it's two people,

00:26:51.120 | filing jointly, 250,000 if it's a single person,

00:26:54.780 | after two years of death of the spouse,

00:26:56.400 | so you have the equity in the home

00:27:00.080 | that can be used towards long-term care,

00:27:02.160 | and I think a lot of people use their home,

00:27:03.720 | or could use their home,

00:27:05.000 | as a long-term care insurance policy,

00:27:07.160 | the equity in the home.

00:27:08.360 | - The people who bought it 20 years ago

00:27:11.880 | probably got a pretty good deal

00:27:14.300 | before the insurance companies discovered how

00:27:16.520 | or figured out how to price it properly,

00:27:18.640 | but I think in 2024, if you need it, you can't afford it,

00:27:22.120 | and if you can afford it, you don't need it.

00:27:24.320 | - It sounded to me, and maybe I was wrong,

00:27:27.540 | but maybe a part of that question was about

00:27:30.240 | if we are self-funding and setting aside,

00:27:33.040 | either mentally or literally, a part of the portfolio

00:27:35.560 | for potential future long-term care costs,

00:27:38.040 | how do we allocate it?

00:27:39.880 | And to me, that is a question that,

00:27:43.160 | I think it can be helpful to mentally set aside this money

00:27:45.440 | in the sense that we don't want to count on using it

00:27:48.240 | for other spending, but as far as asset allocation,

00:27:51.040 | I don't think there's a particularly useful way to say,

00:27:53.400 | oh, this money should be allocated that way,

00:27:55.520 | because we don't know when it's going to happen.

00:27:57.560 | If we knew when it would happen,

00:27:59.760 | then we could pick some asset allocation

00:28:01.440 | that's a perfect match, or tips that mature

00:28:04.080 | in exactly that year, or whatever, but we don't know,

00:28:06.420 | so I don't think there's a need to segregate it out

00:28:08.480 | from an asset allocation point of view.

00:28:11.000 | - And by the way, often, if the second spouse

00:28:14.340 | goes into long-term care, it's very expensive,

00:28:17.880 | but you no longer have a house,

00:28:19.440 | you no longer have a car, insurance, traveling,

00:28:22.140 | so there are some expenses that offset that.

00:28:26.480 | I have a question for whoever wants to jump on it

00:28:29.440 | that's related, I have heard from other financial planners

00:28:32.960 | that when clients don't have any sort of

00:28:35.360 | long-term care insurance, that sometimes

00:28:38.160 | those are the ones who dramatically underspend

00:28:40.760 | what they could spend, because they are very nervous

00:28:44.200 | about these potential costs hanging out there.

00:28:47.400 | What do you think about that, that even though

00:28:50.040 | the financing aspects of insurance aren't great,

00:28:55.320 | that there's a kind of a peace of mind allocation there

00:28:58.200 | that could help someone live well

00:29:01.040 | in those years that they're well?

00:29:02.680 | - Well, there's two sides of that.

00:29:05.260 | You've got a very expensive premium

00:29:07.160 | that could be going up, which might cause you

00:29:09.760 | to spend less as well, but it's like any insurance,

00:29:14.480 | the insurance company expects to make money from it,

00:29:17.840 | so your expected return is negative.

00:29:24.040 | Absolutely, if it makes you feel better,

00:29:27.240 | allows you to spend more, then yes, you should do it,

00:29:31.120 | even though it may not be economically optimal.

00:29:34.800 | - I will say for the young people in this room,

00:29:37.200 | okay, when you get to our age, not Mike,

00:29:41.340 | just have a lot of children, right?

00:29:45.120 | (audience laughing)

00:29:47.200 | I mean, one of them will take you in.

00:29:51.240 | Speaking of children, this question says,

00:29:54.360 | my son selected T. Rowe Price High Yield Bond Fund

00:29:57.080 | in his 401(k).

00:29:58.280 | He is 29 years old, so now he has 90% stock,

00:30:01.480 | Vanguard 500, and 10% junk bonds.

00:30:04.400 | Please give info of pros and cons

00:30:06.800 | of high-yield bond funds, junk bonds.

00:30:09.220 | - I did a talk on the language of investing,

00:30:13.520 | and the one term my industry got right

00:30:16.520 | are calling high-yield bonds junk bonds.

00:30:20.200 | Don't buy junk, take your risks with stocks,

00:30:23.480 | have your fixed income be the most boring part

00:30:26.040 | of your portfolio.

00:30:27.160 | - And I'll give you the other side of that.

00:30:32.920 | Okay, so it is part of the bond market, right?

00:30:36.480 | High-yield, Vanguard has a wonderful

00:30:39.680 | high-yield corporate bond fund.

00:30:40.960 | It's not C-rated, double C-rated.

00:30:44.200 | It's double B, B double B.

00:30:47.040 | And if you look at the risk and return of that portfolio,

00:30:49.600 | it has actually done very well relative to the risk.

00:30:52.960 | Now granted, Alan is right,

00:30:54.840 | it does have higher correlation with economic risk.

00:30:58.560 | So it does go down more than, say, a treasury bond fund

00:31:03.120 | when the economy goes down.

00:31:07.900 | But if you're gonna have this portfolio,

00:31:10.840 | if you're gonna add high-yield bonds to your portfolio,

00:31:14.200 | I think that Vanguard has probably one of the best

00:31:16.780 | high-yield corporate bond funds out there.

00:31:20.100 | And there is a little bit of an inefficiency

00:31:24.500 | in where they're investing in the market

00:31:26.220 | because they're buying B-rated, double B-rated.

00:31:28.660 | And so when something becomes a fallen angel

00:31:31.140 | and it drops from investment grade, which is triple B,

00:31:34.020 | down to double B, you've got a much bigger pot of people,

00:31:38.620 | a pot of portfolio managers who have to sell that bond.

00:31:41.660 | You get an awful lot of selling going on.

00:31:44.580 | And so it depresses the price.

00:31:46.220 | Vanguard is buying double B-rated bonds.

00:31:48.780 | They pick this bond up,

00:31:49.940 | and I think they actually get a premium for liquidity

00:31:52.780 | for being able to buy these bonds when that happens.

00:31:56.060 | And I think this is one of the reasons

00:31:57.200 | why I think that fund has done well.

00:31:59.140 | - Yeah, I mean, I think we're arguing

00:32:01.260 | angels on pinheads here.

00:32:02.900 | How much extra juice do you get

00:32:06.000 | from the equity risk premium

00:32:07.420 | you're actually getting from junk bonds

00:32:09.660 | versus you would actually getting from junk bonds?

00:32:13.660 | I mean, I used to play that game.

00:32:15.060 | I used to wait for the spread to increase to 10 or 15%,

00:32:19.520 | and then I would load up on junk bonds

00:32:20.860 | until I realized I would have done

00:32:21.940 | a whole lot better investing in stocks at that point.

00:32:24.540 | - Okay, we are right on time here.

00:32:27.340 | I think we are going to do this kind of

00:32:30.540 | ask us anything session at future conferences.

00:32:34.140 | I've loved this.

00:32:34.980 | We have a huge stack of things

00:32:37.260 | that we could have gotten to and didn't have time.

00:32:39.420 | So many great questions.

00:32:41.820 | We are going to have to leave it there.

00:32:43.460 | Please join me in thanking Rick, Mike, Alan, and Bill.

00:32:47.660 | - And Christine.

00:32:49.240 | (audience applauding)

00:32:52.500 | (audience applauding)

00:32:55.660 | [BLANK_AUDIO]

Bogleheads® Conference 2024 Ask Us Anything Experts Panel with Rick Ferri, Mike Piper, Allan Roth

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