Is It Too Late for a 401(k)?

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00:01:50.640 | Okay, up first today.

00:01:53.000 | We have new question here.

00:01:54.400 | With the possibility of interest rates dropping in a year or so,

00:01:57.340 | should a long-term investor looking for reasonable yield

00:01:59.720 | and capital gains be looking to buy bonds right now?

00:02:02.800 | If so, what would you look at?

00:02:04.440 | Thanks.

00:02:05.280 | - Not a new question in the slightest, I say.

00:02:08.240 | I think most investors don't really pay much attention

00:02:10.480 | to the bond market.

00:02:11.300 | I think for a long time, they didn't really have to.

00:02:13.520 | But I think the past few years,

00:02:15.080 | the bond market has been way more interesting

00:02:16.520 | than the stock market, right?

00:02:17.560 | We had a huge bear market last year in bonds.

00:02:19.720 | Bond yields got to their lowest levels in history in 2020.

00:02:23.440 | I wrote a few months ago about how T-bills

00:02:25.120 | were like the biggest no-brainer investment that there was.

00:02:28.140 | So John, throw up the first chart here.

00:02:29.540 | Do a chart on of the yield curve.

00:02:31.500 | This is as of April, 2023.

00:02:34.400 | You can see the low end.

00:02:35.440 | It was three to six months, we're yielding over 5%.

00:02:39.020 | And then if you go out 10, 20, 30 years,

00:02:41.420 | we're talking still well below 4%.

00:02:44.100 | And so T-bills to me were a no-brainer.

00:02:45.620 | Like whereas the Fed had been forcing

00:02:47.980 | fixed income investors way out on the risk curve

00:02:50.500 | since great financial crisis,

00:02:51.580 | now investors are being punished for duration

00:02:54.160 | in a rising rate environment.

00:02:55.420 | Plus short-term T-bills had a higher yield to boot.

00:02:57.420 | So you were getting lower volatility

00:02:59.160 | and a much higher yield.

00:03:01.080 | It made a lot of sense.

00:03:02.260 | And I still think T-bills look pretty darn attractive.

00:03:04.980 | You know, since they're still above 5%,

00:03:06.860 | pretty much 12 months and below.

00:03:08.580 | So if the Fed raises rates again, T-bill yields will rise.

00:03:12.100 | The thing is, the one risk you do have in T-bills

00:03:14.140 | is reinvestment risk.

00:03:15.380 | You can't lock in those 5% T-bill yields

00:03:17.340 | for more than a year right now, right?

00:03:19.060 | I even looked, I went to Marcus

00:03:20.620 | where I have my short-term online savings account.

00:03:23.240 | I looked at a five-year CD rate there this week.

00:03:26.300 | What do you think?

00:03:27.140 | For five years, how long can you lock it in for a CD, Duncan?

00:03:30.680 | - For five years?

00:03:31.940 | - Yeah, what kind of yield?

00:03:32.980 | - I mean, I would hope that it would be close to Treasuries.

00:03:36.180 | - That's like 3.8%.

00:03:38.500 | - Okay.

00:03:39.340 | - So not bad, but you can't get these five,

00:03:40.520 | five and a half percent yields and lock them in forever.

00:03:42.180 | And that's the same thing with T-bills.

00:03:43.860 | If we have a recession or if inflation keeps falling

00:03:46.500 | and the Fed decides to cut rates,

00:03:48.180 | eventually those T-bill yields are gonna go down

00:03:49.580 | and the reinvestment risk is what gets you there, right?

00:03:51.860 | So now look at the updated yield curve, John.

00:03:53.580 | Let's take a look at it now through this week.

00:03:55.980 | You can see those T-bill yields are still high

00:03:57.340 | and they've gone up a little bit,

00:03:58.180 | but the long end of the curve has come up more, right?

00:04:00.700 | One, two, three, five, seven, 10, 20, 30 years

00:04:04.060 | are all well above 4% now,

00:04:06.060 | way better than they were in April.

00:04:07.780 | That's meant for more pain for the bond world

00:04:10.940 | because rates have risen, so prices have fallen.

00:04:12.820 | But now you can earn, and you still get, again,

00:04:15.740 | a premium in the T-bills,

00:04:17.120 | but I think intermediate-term bonds

00:04:19.020 | are looking way more interesting

00:04:19.900 | from a combination of higher yields and falling inflation.

00:04:22.020 | I'm not a bond trader, but let's look at the case

00:04:24.420 | for adding some duration here.

00:04:25.940 | John, throw up my table here.

00:04:27.780 | So this is a table of the duration

00:04:29.940 | and average yield maturities for various bond ETFs.

00:04:32.300 | So one to three-year treasuries, yielding almost 5%.

00:04:35.300 | Duration is almost two years.

00:04:36.900 | Three to seven-year treasuries,

00:04:38.500 | little lower average yield maturity,

00:04:40.220 | about four years of duration.

00:04:41.760 | Seven to 10 years is seven years of duration.

00:04:44.820 | Then the ag, which is like a total bond index,

00:04:47.300 | is yielding about 5% at 6.2 years for duration.

00:04:50.920 | So just as a reminder,

00:04:53.460 | duration is just a measure of interest rate sensitivity

00:04:56.180 | to bond prices.

00:04:57.420 | So Duncan, if interest rates rise 1%

00:05:00.180 | and you have a duration of five years,

00:05:02.300 | your bond prices will go down 5%.

00:05:05.480 | - Right. - And the inverse is true.

00:05:06.820 | If rates fall 1%, your bond prices go up 5%.

00:05:10.020 | Now the thing is, when bond yields were 1%

00:05:12.980 | and rates went up 1%,

00:05:14.300 | you got dinged 5% for that duration,

00:05:16.740 | but your 1% yield barely gave you any cushion.

00:05:19.140 | Now, if you have a 5% yield,

00:05:21.580 | in a year, you're breaking even.

00:05:23.620 | So yes, it would sting if bond rates went up from here

00:05:27.140 | 'cause the economy accelerated

00:05:28.300 | or the Fed kept raising rates or inflation stays high,

00:05:31.540 | but you have a much bigger margin of safety now

00:05:34.140 | in these intermediate-term bonds.

00:05:36.260 | And oh, by the way, if your rates rise 1% from here,

00:05:39.020 | now we're talking about 6% starting yields.

00:05:41.380 | So I think now that yields are higher,

00:05:44.180 | the break-even and margin of safety is much bigger,

00:05:46.340 | so bonds could have some short-term downside,

00:05:48.940 | but 90% to 95% of expected returns five and 10 years out

00:05:53.940 | for intermediate-term bonds comes from the starting yield.

00:05:56.180 | Whatever the starting yield is,

00:05:57.500 | plus or minus a little bit of wiggle room,

00:05:59.800 | that's gonna tell you your future return.

00:06:01.500 | So expected returns are way higher

00:06:02.940 | 'cause we went through the pain of 2022

00:06:04.540 | in the bond bear market.

00:06:06.500 | So I actually think that you're in a much better place now,

00:06:10.340 | and if you want to hedge for recession risk

00:06:12.780 | or deflation risk or rates falling in the Fed cutting,

00:06:15.680 | intermediate-term bonds look pretty good.

00:06:16.940 | Another positive development is tip seal.

00:06:18.780 | John, throw this up there.

00:06:19.700 | This is Treasury Inflation Protected Securities.

00:06:21.740 | This is the 10-year.

00:06:23.420 | I was taught early in my career,

00:06:25.340 | anything in the 2% to 3% yield range for these,

00:06:28.380 | this is nominal yields, is a good development.

00:06:31.540 | And what this means is you're getting that yield

00:06:34.740 | plus the inflation kicker.

00:06:36.780 | So that's a pretty good deal.

00:06:37.620 | You can see in 2020, 2021, and 2022,

00:06:41.020 | it was negative nominal yields,

00:06:42.900 | meaning you were accepting yields that were less than 0%.

00:06:47.480 | All you were hoping for was inflation there.

00:06:48.880 | And those bonds got killed 'cause rates rose too.

00:06:50.720 | So I guess my thinking here is I don't pretend

00:06:53.720 | to have the ability to predict where rates are gonna go,

00:06:55.840 | but I don't think you need to bank on capital appreciation

00:06:58.600 | for bonds to do well here.

00:06:59.880 | If rates just stayed where they were at 4% or 5%,

00:07:03.040 | you're doing way better than you were

00:07:04.880 | over the last 15 to 20 years.

00:07:06.720 | So I think you have some options.

00:07:07.840 | If you're worried about rising rates or inflation,

00:07:09.840 | T-bill yields are still nice,

00:07:11.080 | and if rates rise more, they will rise too.

00:07:14.500 | If you're worried about deflation or recession

00:07:16.580 | or falling rates, intermediate-term bonds look good.

00:07:19.140 | You could go way out on the risk curve

00:07:20.740 | and do 20 or 30-year bonds,

00:07:21.820 | but that's too much volatility for my liking.

00:07:25.020 | And then if you're worried about purchasing power,

00:07:26.700 | you have TIPS, where you have yield

00:07:29.060 | plus the inflation kicker.

00:07:30.460 | So I don't know.

00:07:32.060 | I think if you're diversified in a fixed income space,

00:07:34.500 | your options haven't been better in, I don't know,

00:07:37.300 | 20 years or so in this space.

00:07:39.040 | So I think you're pretty good.

00:07:39.880 | And you don't have to have yields fall to do well here.

00:07:42.880 | You just have to have rates stay where they are,

00:07:44.300 | and you're gonna be fine and clip those 5% coupons.

00:07:47.060 | - I used to buy that junk, JNK, I think was the ETF,

00:07:52.060 | because it had such a nice, juicy yield.

00:07:54.540 | What is that at these days, you think?

00:07:56.380 | - So that's 7% or 8%, I guess, something like that.

00:08:01.460 | But then you take away any default risk.

00:08:03.100 | We're talking mostly treasuries here.

00:08:04.220 | The ag is like 40% or 50% treasuries,

00:08:06.300 | so that's not all treasuries.

00:08:07.740 | They don't have any junk bonds in there.

00:08:09.500 | But based on your tolerance for risk,

00:08:11.960 | that doesn't really surprise me

00:08:13.280 | that you're into junk bonds.

00:08:14.720 | That's more like equity risk, though,

00:08:16.180 | when the excrement hits the fan.

00:08:18.460 | But yeah, no, I think you're in a much better position

00:08:21.600 | for fixed income in terms of having options now

00:08:24.100 | than you did before.

00:08:25.660 | - Right.

00:08:26.660 | Also, rest in peace, IBONs.

00:08:28.960 | Haven't heard anything about those in a long time.

00:08:29.800 | - Yeah, that was fun for like nine months.

00:08:31.980 | - Yeah.

00:08:32.820 | - Remember how many questions we got about that?

00:08:34.900 | - I know, that was like weekly.

00:08:36.220 | Every week we had IBON questions.

00:08:38.060 | - Now nothing.

00:08:38.900 | - Yep.

00:08:40.060 | So yeah, that was Roger.

00:08:41.060 | Up next, we have a question from David.

00:08:43.480 | First off, thank you for all that you do

00:08:47.220 | and all the insightful content you put out.

00:08:49.440 | I'm 24 years old and have managed to save up

00:08:51.500 | roughly $135,000.

00:08:53.900 | Half in a high-yield savings account

00:08:55.660 | and half in--

00:08:56.500 | - Nailed it, Duncan.

00:08:57.320 | - Roth accounts.

00:08:58.260 | Yep.

00:08:59.100 | I don't have any equity buildup in a house,

00:09:02.580 | nor do I have a 401(k).

00:09:04.380 | I'll be taking the Series 65 and CFP later this year

00:09:07.460 | and will hopefully land a job with a 401(k) in benefits.

00:09:10.380 | Did I ultimately screw myself by not having

00:09:12.580 | a 401(k) earlier or am I okay for now?

00:09:16.540 | This is a 24-year-old.

00:09:18.620 | - Yeah.

00:09:19.460 | - Asking if it's too late.

00:09:20.460 | - Yeah, you're doing just fine.

00:09:21.420 | Obviously, like the personal finance gurus

00:09:23.660 | have got to this person, to David.

00:09:26.580 | My first job, I worked in the industry,

00:09:28.980 | I was there for three years or so.

00:09:30.140 | My salary was buckus.

00:09:31.400 | I didn't make anything.

00:09:32.820 | There was no 401(k) plan.

00:09:34.340 | I had no dental insurance.

00:09:35.340 | I had health insurance, but it was bare bones.

00:09:38.020 | And, I mean, I just got out of college, so let's be honest.

00:09:39.880 | I didn't go to the doctor, right?

00:09:41.560 | Never.

00:09:42.400 | Who goes to the doctor when they get out of college?

00:09:43.440 | Unless something's really wrong.

00:09:44.860 | Even then. - Still.

00:09:45.880 | - So it was a small business.

00:09:47.420 | There was five of us.

00:09:48.240 | There was one main guy and there was four younger people

00:09:50.320 | who were just kind of learning.

00:09:51.900 | And I learned a ton on that job,

00:09:53.940 | so it was definitely worth it.

00:09:54.780 | It was more about learning than earning for me, right?

00:09:57.240 | So I learned a ton of stuff that I still use to this day

00:09:59.800 | about asset allocation and investing guidelines

00:10:01.740 | and client communications and setting expectations.

00:10:03.940 | It was great.

00:10:04.900 | But I didn't have a 401(k)

00:10:05.940 | for the first three years of my career.

00:10:07.940 | And I had no 401(k)s.

00:10:10.460 | I think I mentioned this before.

00:10:11.300 | I opened up an IRA, target date fund, obviously,

00:10:13.980 | and put $50 a month into it.

00:10:15.420 | That's all I could afford.

00:10:16.520 | As my career progressed, I started to make more income.

00:10:19.140 | I slowly but surely increased that.

00:10:21.460 | I got a 401(k) for my second job.

00:10:22.840 | I started putting money into that.

00:10:24.540 | I know we have a lot of super savers

00:10:27.060 | who write into the show, especially young people

00:10:29.300 | in their 20s and 30s, like I'm maxing out my 401(k),

00:10:31.660 | my IRA, my HSA, 529 for my unborn child,

00:10:34.780 | whatever it is.

00:10:35.600 | We have a lot of these super savers who write in.

00:10:37.800 | I applaud those people.

00:10:38.640 | You're so far ahead of the game.

00:10:39.900 | You're money and you didn't even know it, right?

00:10:43.040 | I just turned 42 this month.

00:10:44.500 | I don't think I started maxing out my 401(k)

00:10:46.500 | till my early to mid 30s, right?

00:10:49.780 | Seems late.

00:10:50.620 | Like, Ben, how could you?

00:10:51.440 | What is wrong with you?

00:10:52.660 | Like I said, I didn't make a lot of money early in my career.

00:10:54.780 | So I've been playing catch up

00:10:55.620 | for the last eight or nine years, pretty much.

00:10:58.540 | And life got in the way so many times.

00:11:00.260 | Saving for a house, paying for home renovation.

00:11:02.380 | I've mentioned before, my wife and I had infertility issues

00:11:04.300 | that cost a lot of money.

00:11:05.680 | All that stuff held back our retirement savings.

00:11:07.300 | So I couldn't, you know, I got close,

00:11:08.420 | but I never, I couldn't really do it.

00:11:09.420 | I think I was maybe 33 or 34

00:11:11.380 | by the time I could finally max out.

00:11:13.860 | And guess what?

00:11:14.780 | I don't worry about it.

00:11:15.620 | It's fine.

00:11:16.460 | It happens.

00:11:17.280 | Life gets in the way.

00:11:18.120 | This person, David, you're still 24.

00:11:19.860 | Yes, saving early and often can help you

00:11:21.460 | in terms of like compounding,

00:11:22.620 | but you're certainly not screwed.

00:11:23.740 | You've managed to save six figures already

00:11:25.580 | in these other accounts before you're able to rent a car.

00:11:28.420 | That's pretty good.

00:11:29.260 | That's still 25, right?

00:11:30.100 | For renting a car?

00:11:31.140 | - I think so.

00:11:31.960 | I was about to make that joke, actually.

00:11:33.380 | It never made sense to me.

00:11:35.220 | I don't get it.

00:11:36.900 | The 25 thing.

00:11:37.920 | People are living longer than ever these days.

00:11:40.580 | So young people in their twenties,

00:11:42.060 | you have many, many decades ahead of you.

00:11:44.800 | I don't know.

00:11:45.640 | Once you get that 401k,

00:11:46.460 | you can start funneling money in there.

00:11:47.300 | But I mean, if you have an IRA and a brokerage

00:11:49.500 | or a high yield savings account, you're fine.

00:11:51.400 | I mean, you obviously have developed some pretty good habits

00:11:53.260 | by putting that money away already.

00:11:54.820 | And the fact that you're worrying about this stuff

00:11:55.980 | at age 24 means either way,

00:11:57.460 | you're probably going to be fine.

00:11:58.540 | So no, the 401k isn't like the be all end all.

00:12:01.260 | - David's probably depressing

00:12:02.340 | a lot of our younger audience watching right now.

00:12:05.020 | Because yeah, it sounds like he's doing pretty well.

00:12:07.860 | - We had Nick Majulian probably over a year ago

00:12:09.800 | talking about how you shouldn't max out your 401k.

00:12:13.340 | And just keeping your money

00:12:14.180 | in a brokerage account with index funds

00:12:15.820 | gets you to pretty much the same place anyway.

00:12:18.180 | So I think you'll be fine.

00:12:19.380 | Once you get one, you can always put one in there,

00:12:21.340 | get your tax deferral or whatever.

00:12:24.020 | Bill Sweet would probably tell you to get a Roth 401k

00:12:26.580 | if you have the option.

00:12:27.500 | But no, you're fine.

00:12:28.840 | Don't worry about it.

00:12:29.680 | You'll have plenty of time.

00:12:31.660 | - And series 65, that's like,

00:12:33.820 | that's something trading related or?

00:12:36.980 | - Yeah, so you can sell securities.

00:12:38.180 | So he's somehow going to sell securities,

00:12:40.660 | working in the finance world.

00:12:41.580 | He's going to be fine.

00:12:42.700 | - Gotcha.

00:12:43.680 | - All right, next question.

00:12:45.500 | - Hey, up next we have a question from Micah.

00:12:48.420 | I'm in my late 20s, single, no kids,

00:12:50.660 | rent an apartment and hold a stable

00:12:52.420 | federal government job, knock on wood.

00:12:54.380 | I keep the lower end of the three to six months

00:12:57.500 | of emergency fund because of the stability of my job.

00:13:00.560 | And I have access to $60,000 in a taxable brokerage account

00:13:03.880 | that God forbid I would ever have to use.

00:13:06.000 | Am I crazy for only holding an emergency fund

00:13:08.040 | of three months?

00:13:09.560 | - All right.

00:13:10.900 | All these people in their 20s so worried.

00:13:12.240 | I never really looked at anything in my 20s, right?

00:13:14.520 | - Yeah, yeah.

00:13:15.360 | - Not a care in the world.

00:13:16.600 | I've never really agreed with the whole

00:13:19.000 | personal finance trope of you have to have 12 months

00:13:21.280 | of savings in your emergency fund

00:13:22.600 | before you can move on to saving for this.

00:13:24.080 | And like, I don't know, especially when you're young,

00:13:26.080 | it's basically impossible to save that much.

00:13:27.940 | I don't know how many people actually have the ability

00:13:29.580 | to save that much without just living on bread and water

00:13:31.900 | and not doing anything ever.

00:13:33.940 | Plus the good news is at Micah's stage in life,

00:13:38.100 | you have so few responsibilities.

00:13:39.660 | Let's look at your situation.

00:13:41.060 | I think emergency fund levels should be circumstantial

00:13:43.140 | to the responsibilities you have.

00:13:44.300 | So he holds a stable government job.

00:13:46.380 | I know people who work for the federal government.

00:13:47.980 | It's basically impossible to get fired.

00:13:49.940 | I heard a story one time about someone actually

00:13:52.260 | literally bringing a gun in on accident

00:13:54.340 | and leaving it in the bathroom counter

00:13:56.000 | and they did not get fired.

00:13:57.080 | They worked for the federal government.

00:13:57.920 | - Hate when that happens.

00:13:58.920 | - Right?

00:14:00.500 | No kids, no mortgage, no spouse.

00:14:02.480 | Why do you need 12 months in emergency savings?

00:14:04.480 | Plus you have three months, it sounds like,

00:14:06.700 | and you have this contingency plan

00:14:08.080 | of a $60,000 brokerage account

00:14:09.600 | to break in case of a true emergency.

00:14:10.960 | Plus if you're a single person,

00:14:13.000 | altering your life is so much easier.

00:14:14.920 | Like if something really does hit the fan here

00:14:17.760 | in your finances, your job, something ever does go wrong,

00:14:21.200 | you can cut back mercilessly in your lifestyle

00:14:23.160 | as a single person.

00:14:24.000 | That's much harder to do when you have responsibilities

00:14:25.760 | in your 30s and 40s, when you have a mortgage

00:14:27.660 | or a family or someone else to support.

00:14:29.640 | So I'd be more worried about taking trips

00:14:32.320 | and enjoying yourself in your 20s,

00:14:34.040 | doing stuff that you're not gonna be able to do

00:14:35.480 | when you have those responsibilities in your 30s and 40s.

00:14:37.400 | So it sounds to me like he's already a good saver.

00:14:39.860 | You know, you don't need the fortress balance sheet

00:14:41.360 | like Berkshire Hathaway.

00:14:42.720 | When you're in this situation, you're single

00:14:44.960 | and you have all this stuff

00:14:45.800 | and you already have saved money.

00:14:47.640 | As long as you have the backup plan,

00:14:48.960 | 12 months is overkill.

00:14:50.300 | Three months to me is fine.

00:14:52.600 | I would say worry more about enjoying yourselves.

00:14:54.760 | And I don't know.

00:14:57.080 | All these people in their 20s are so worried.

00:14:59.160 | - Does Dave Ramsey talk about having really--

00:15:01.720 | - A lot of personal finance people think

00:15:03.760 | this is a rule of thumb.

00:15:04.680 | And again, I think it's circumstantial.

00:15:07.280 | - To be clear, I'm not knocking.

00:15:08.500 | It definitely makes more sense

00:15:09.760 | than not having any emergency savings.

00:15:12.160 | But yeah, it sounds like it could get a little--

00:15:14.800 | - And again, it also depends on your other backup,

00:15:17.800 | plan B, plan C, plan D, in terms of I have this other money

00:15:21.240 | or whatever I can tap.

00:15:22.440 | - I don't think you need to do it

00:15:23.280 | just because you have to hit the checkbox

00:15:25.080 | because some personal finance guru said you had to do it.

00:15:27.720 | - Right.

00:15:28.560 | - Doesn't make sense to me.

00:15:29.440 | You're fine.

00:15:30.280 | - And you're a personal finance guru.

00:15:31.840 | So you said that now.

00:15:32.880 | So that counters wherever they heard this.

00:15:35.720 | - That's a Trump card.

00:15:36.680 | I'm on YouTube, so it has to matter.

00:15:38.560 | - It's true.

00:15:39.660 | - All right, one more.

00:15:41.140 | Next question.

00:15:41.980 | - Up next, we have a question from Scott.

00:15:43.900 | I'm in my, wait.

00:15:48.240 | Yeah, that's the same one I was about to say.

00:15:50.560 | The next time you have Jonathan Novy on the show,

00:15:52.480 | can you have him go into further detail

00:15:54.280 | about long-term care insurance?

00:15:56.200 | My wife and I are in our 50s

00:15:57.480 | and each have a family history with medical issues.

00:16:00.080 | How do we determine if long-term care

00:16:03.080 | makes sense for our financial plan?

00:16:05.040 | - All right, we go from 20s to 50s here.

00:16:06.800 | - Spoiler alert, who's on the show?

00:16:08.640 | - Yeah, well, yeah.

00:16:09.640 | If someone gets called out by name,

00:16:11.300 | we'll bring them on the show.

00:16:12.140 | Jonathan Novy, one of our advisors in insurance,

00:16:15.240 | expert extraordinaire at Rithold's.

00:16:16.920 | - Hey guys.

00:16:18.080 | - Jonathan, I'm honestly not too familiar

00:16:19.960 | with this type of insurance

00:16:20.800 | 'cause I haven't had to use it before.

00:16:22.920 | So why don't you just start with the basics,

00:16:24.160 | like what is it, how does it work,

00:16:25.300 | and like when should you think about getting it?

00:16:28.480 | - Okay, so there's a really big backstory

00:16:31.640 | with long-term care insurance

00:16:33.920 | and how the insurance industry got it really wrong

00:16:37.320 | and how they built policies.

00:16:40.480 | Suffice to say that no one's caffeinated enough

00:16:42.800 | listening now to actually sit through the entire story.

00:16:45.200 | So I'll cut to what's happening now.

00:16:48.960 | The industry looks nothing like it did many years ago.

00:16:51.720 | And there are almost no, what's known as standalone,

00:16:54.760 | long-term care policies available anymore.

00:16:57.600 | By standalone, what I mean is you pay a premium

00:17:00.140 | and then eventually if you make a claim, great,

00:17:02.340 | they'll pay it for you, or the money goes away.

00:17:04.360 | A lot like homeowner's insurance or something like that.

00:17:07.280 | So there's only a very, very small number

00:17:10.120 | of standalone carriers left.

00:17:12.160 | The carriers that used to sell this kind of insurance,

00:17:14.760 | whether it be Genworth or John Hancock

00:17:16.600 | or Metropolitan Life, they're all out of the business.

00:17:19.920 | And all they're doing is choking

00:17:21.440 | on these existing books of businesses

00:17:23.040 | they are struggling to pay for.

00:17:24.620 | - Is that because, 'cause I've seen the health studies

00:17:27.880 | before that show the percentage of spending for healthcare

00:17:30.640 | in your later years before you die,

00:17:31.980 | that's like the majority of the money gets spent then.

00:17:34.040 | Is that why?

00:17:34.880 | Was it just too expensive?

00:17:36.240 | - So that's one of the three reasons

00:17:37.920 | that insurance companies got the pricing wrong.

00:17:40.160 | The cost of care absolutely exploded.

00:17:42.080 | It also has to do with the fact that nobody lapses

00:17:44.360 | long-term care insurance.

00:17:45.520 | I mean, anecdotally, if anyone has a history

00:17:47.880 | in their family where someone made a claim

00:17:49.440 | on long-term care, it's terrible.

00:17:51.320 | People live for a very long time.

00:17:53.840 | The care is unbelievably expensive.

00:17:55.780 | So nobody lapses long-term care like they typically do

00:17:58.520 | with things like permanent life insurance.

00:18:00.280 | - What exactly does it, if you have it,

00:18:01.760 | what exactly does it get you?

00:18:02.880 | It gets you the ability to pay--

00:18:05.240 | - So it's a very good question.

00:18:07.400 | All long-term care insurance contracts have built into them

00:18:10.080 | that if an insured cannot satisfy two of the activities

00:18:13.760 | of daily living, whether that's feeding yourself

00:18:16.440 | or traveling or taking medication or bathing yourself

00:18:19.440 | or something like that, if a doctor says you cannot satisfy

00:18:22.440 | two activities of daily living, then you can make a claim

00:18:25.040 | on a long-term care policy.

00:18:26.600 | And they will pay for, some will pay for in-home care,

00:18:29.200 | some will pay for care in facilities.

00:18:31.440 | There's all these different bells and whistles

00:18:32.940 | on the contracts.

00:18:34.180 | Suffice to say that generally speaking,

00:18:36.280 | when you can't satisfy two activities of daily living,

00:18:39.000 | you can make a claim on a policy.

00:18:40.800 | And there's like 90-day elimination periods

00:18:42.700 | or 180-day elimination periods.

00:18:44.520 | But we can get rid of all of the kind of small details there.

00:18:48.640 | If you can't take care of yourself anymore,

00:18:51.040 | then you can make a claim on a policy.

00:18:52.920 | - When I'm no longer able to tweet,

00:18:54.240 | that's the ring the bell for?

00:18:55.960 | - Yes.

00:18:56.880 | Yeah, that actually may count in disability

00:18:59.140 | more than long-term care.

00:19:00.160 | So at your age, so this is a really good question.

00:19:02.660 | So this guy's, you're in your fifties

00:19:05.120 | who asked the question here,

00:19:06.580 | asking what is a good time for you to look into it?

00:19:10.240 | - Well, that's what I was gonna ask is,

00:19:11.640 | so like life insurance, if you buy it when you're younger,

00:19:14.560 | obviously it's way cheaper.

00:19:15.840 | Does the same thing apply here?

00:19:17.060 | If you buy it in your fifties as opposed to your sixties

00:19:19.120 | or maybe your seventies, it has to be cheaper, right?

00:19:21.240 | Does that make sense or not?

00:19:23.400 | - Well, a little bit.

00:19:25.000 | So the thing about long-term care is

00:19:28.220 | with some of the new contracts available,

00:19:30.320 | these what's known as asset-based contracts,

00:19:32.520 | people can't buy it before they reach 50 or 55

00:19:36.400 | 'cause carriers won't sell it to them

00:19:37.680 | because then what they have to do

00:19:38.800 | is accommodate a rising benefit, an inflated benefit,

00:19:42.760 | and it's more risk for the insurance carrier.

00:19:44.600 | So some of these you can't buy when you're young.

00:19:46.900 | Other kinds of contracts you can.

00:19:49.000 | Most of what you can buy now is a life insurance chassis

00:19:53.020 | with a long-term care rider or capability attached to it.

00:19:56.660 | So when you think about what the right time is to buy it,

00:20:01.640 | most importantly, it should be grounded

00:20:03.200 | in your financial plan.

00:20:04.420 | Most people like Ben, you, like me, I'm in my early fifties,

00:20:08.080 | I'm busy paying term insurance premiums.

00:20:10.320 | I'm busy paying for disability insurance

00:20:13.000 | because the bigger risk right now to my family

00:20:15.360 | is that I die or I'm disabled and I'm saving for college.

00:20:18.840 | And I'm doing all of that stuff.

00:20:20.740 | And once I have all of those things paid for,

00:20:23.320 | if there's any money left over,

00:20:25.600 | then I'm probably gonna be investing it in something else.

00:20:28.960 | So long-term care comes in when all of a sudden

00:20:31.760 | you probably don't need to pay

00:20:32.800 | for disability insurance anymore

00:20:34.520 | or term insurance isn't necessarily a thing

00:20:36.680 | because people buy insurance

00:20:38.880 | 'cause there will be a financial impact on their family

00:20:41.560 | in the event they were to die

00:20:43.200 | or in the event they were to need long-term care.

00:20:45.640 | There's a time when it fits

00:20:47.720 | into your individual financial plan.

00:20:49.840 | And that's what somebody should pay attention to

00:20:52.440 | is when it becomes reasonable for them to think about,

00:20:56.400 | one, how they can afford it

00:20:57.720 | and two, when it fits into their plan.

00:20:59.480 | Now, the older you get, obviously the more expensive it is.

00:21:03.200 | So fifties is actually a reasonable time to look at it.

00:21:06.200 | But I wanna point out one other thing in this question.

00:21:09.740 | With a family history of cognitive issues,

00:21:14.640 | insurance carriers, many of them

00:21:16.360 | will underwrite those issues

00:21:19.360 | and limit an individual's ability to be insured

00:21:23.040 | based on a family history of cognitive issues,

00:21:27.440 | whether it be dementia, Alzheimer's, Parkinson's disease,

00:21:30.480 | stuff like that.

00:21:31.680 | - So how do you do the cost benefit on this then?

00:21:34.240 | 'Cause at a certain point, you'd have to say,

00:21:36.320 | well, if they're gonna jack the rates on me

00:21:38.080 | because I have a family history,

00:21:40.000 | is it better for me to just set aside some money

00:21:41.700 | as opposed to buying the insurance?

00:21:44.000 | - It might be.

00:21:45.460 | It might not be.

00:21:47.000 | With insurance, if you make a claim,

00:21:50.000 | you can point out that once you've paid your premiums,

00:21:52.000 | how long it will take you to have made your money back

00:21:55.000 | or how long it will take you for it to have been worth it.

00:21:57.280 | Now, there's other thing that goes along

00:21:58.480 | with long-term care insurance.

00:22:01.400 | All carriers provide care coordination services.

00:22:04.820 | So what that means is if all of a sudden,

00:22:08.800 | let's say one of our parents or something needs care.

00:22:13.240 | Most people, when they need some sort of custodial care,

00:22:17.120 | they have absolutely no idea who to call or what to do.

00:22:19.920 | It's like, yeah, there's like a nursing home in town

00:22:22.560 | or something like that.

00:22:23.840 | Or do you go to your doctor and say, all of a sudden,

00:22:26.360 | I need someone to come in here and care for my mom

00:22:28.720 | or my dad because they can't care for themselves anymore?

00:22:31.080 | - That's what happens a lot.

00:22:31.920 | It usually falls on the family, right?

00:22:33.440 | The family has to take care of people, right?

00:22:35.840 | - Right, but nobody knows what to do.

00:22:37.360 | And families need to bring in professionals to do this.

00:22:40.160 | So insurance contracts come

00:22:42.160 | with care coordination services.

00:22:44.100 | I'm not saying that this is the best coordination

00:22:46.200 | in the world, but at least it's something.

00:22:49.400 | And at least it's links to services that are available

00:22:52.600 | to help you understand it.

00:22:53.840 | In addition to that, there are a couple kind of bits

00:22:56.480 | of information that you can get free on the internet

00:22:59.600 | to understand this.

00:23:00.560 | There's two places if you want to learn

00:23:02.000 | about long-term care that you would check.

00:23:04.000 | One of them is--

00:23:04.840 | - You're answering my next question.

00:23:05.680 | Like what do people start if they want to learn about this?

00:23:07.840 | - So go to your state insurance commissioner

00:23:10.360 | or state department of insurance.

00:23:11.800 | Just use the Google machine and look up long-term care.

00:23:15.480 | There's a lot of good information on things

00:23:17.640 | like your state partnership program.

00:23:20.080 | That's a thing.

00:23:20.920 | It has to do with Medicaid.

00:23:22.240 | You want to look at state partnership programs.

00:23:25.120 | You want to look at the possible deductibility of premiums.

00:23:28.100 | All this stuff will exist on your state website.

00:23:30.400 | In addition to that, the NAIC,

00:23:32.520 | which is the National Association

00:23:33.920 | of Insurance Commissioners,

00:23:35.400 | publishes a really informative pamphlet.

00:23:38.100 | There it is.

00:23:38.940 | The Shopper's Guide to Long-Term Care Insurance.

00:23:42.140 | I would say have a very big coffee before you read it,

00:23:46.700 | but there's very good information in that thing.

00:23:49.560 | And that's the good place to start.

00:23:51.480 | - So I think the reason someone wants to learn this,

00:23:53.600 | someone in the comments says that their mom's nursing home

00:23:56.480 | was $7,500 a month.

00:23:57.840 | So like this stuff is crazy expensive, obviously.

00:24:00.580 | - At 7,500 a month, I'd say you're getting a bargain.

00:24:05.480 | It is so expensive.

00:24:07.320 | - Do our viewers in Canada not have to worry about this?

00:24:10.060 | We have a big audience there.

00:24:10.900 | - I'm sure we have viewers in Canada and Europe

00:24:12.380 | who say like, you Americans are crazy.

00:24:13.760 | This is like a discussion for another time.

00:24:15.080 | But like, why do you have to worry about this even?

00:24:17.160 | Obviously that's a whole bigger policy question, but.

00:24:21.320 | - So regarding that policy question,

00:24:23.200 | the state of Washington was last year or the year before,

00:24:26.200 | actually it mandated that citizens own

00:24:29.760 | a state sponsored long-term care insurance policy.

00:24:33.080 | It's not a very big one.

00:24:34.160 | And they're paying for it through a payroll tax,

00:24:36.640 | a 0.58% payroll tax.

00:24:38.840 | There are two other states right now

00:24:40.040 | that are considering doing that.

00:24:41.660 | I think it's New York and California.

00:24:43.980 | There are ways to opt out of that insurance contract

00:24:46.200 | if you can prove that you want a policy yourself.

00:24:48.720 | But this is a thing now legislatively,

00:24:51.540 | and people are recognizing that the cost of care

00:24:53.760 | is unbelievably high.

00:24:55.680 | - Especially with people living longer.

00:24:57.440 | And we have all these 70 million baby boomers

00:24:59.600 | and like, that's a...

00:25:01.520 | Around my house with like a five mile radius,

00:25:03.200 | I swear I've seen six old folks homes go up

00:25:06.600 | in the last 10 years or so.

00:25:08.880 | Like they know the wave of people is coming.

00:25:11.560 | - You can't believe the cost to do things

00:25:13.400 | like reserve beds in there.

00:25:15.240 | The costs continue to go up.

00:25:16.940 | And as a result, like insurance carriers

00:25:19.880 | for existing policies and things like that,

00:25:22.120 | they're raising premiums on policies

00:25:23.740 | that have been enforced for years.

00:25:25.120 | And anecdotally, my mom and dad own a contract

00:25:28.160 | where the cost of it has doubled

00:25:30.320 | to maintain the same benefits that they had

00:25:32.360 | when they started.

00:25:34.040 | - Okay, we'll include a link to that.

00:25:36.400 | Some stuff on the YouTube, but good stuff.

00:25:39.480 | I honestly didn't know much about this.

00:25:40.900 | So let's do another one, Duncan.

00:25:42.440 | - Okay.

00:25:43.760 | Last but not least, we have a question from Alan.

00:25:46.440 | And Alan says, "I see a lot of annuity companies

00:25:50.160 | "offering 5% plus for five years.

00:25:52.500 | "Got one for 5.2% right now.

00:25:55.120 | "These are selling like hotcakes all over advisor land.

00:25:58.120 | "Why do you think annuity companies can go out five years

00:26:00.960 | "at these rates while banks are all stuck

00:26:02.980 | "offering 12-month CDs?

00:26:04.940 | "Do insurance companies know something

00:26:06.300 | "about the future interest rates?

00:26:08.520 | "I'd like to hear your thoughts on how they can profitably

00:26:10.700 | "offer these competitive rates for so long

00:26:12.760 | "and pay me a commission."

00:26:14.580 | - Okay, this gets back to our first question, right?

00:26:16.540 | I said, you can't lock in T-bill yields right now.

00:26:18.700 | Whereas annuity salesmen say, uh-uh, yes I can.

00:26:21.700 | So I guess part of it is the pooling of assets, right?

00:26:25.880 | - So there's the pooling of assets.

00:26:29.360 | Now that applies to what I believe

00:26:30.780 | is a different kind of annuity

00:26:31.900 | than he's talking about in this question.

00:26:33.540 | So there's lots of annuities out there.

00:26:35.420 | - Also, before we get into this,

00:26:36.780 | I'm actually surprised that these things

00:26:38.720 | are selling like hotcakes

00:26:39.560 | because you can get decent yields and bonds.

00:26:41.580 | - Right, that surprised me, reading that.

00:26:43.780 | - I guess people just love the certainty

00:26:45.780 | of having something locked in.

00:26:47.820 | - Yes, people love certainty.

00:26:49.420 | So that's something with annuities.

00:26:50.660 | I have no idea if they're selling like hotcakes or not.

00:26:54.100 | I guess that depends where you are

00:26:55.260 | and what your incentives are to sell them.

00:26:57.140 | I guess we can get into that a little more in a minute,

00:26:59.180 | but there's a lot of different kinds of annuities out there

00:27:02.280 | from this kind that he's talking about,

00:27:04.640 | which is just a simple fixed annuity.

00:27:07.360 | We can get into things like variable annuities

00:27:09.740 | and QLAX and SPIAs and all of that nonsense later

00:27:14.220 | if anybody wants to.

00:27:15.060 | But in this specific case, a simple fixed annuity,

00:27:20.060 | the reason, and it's a term of time, let's say five years,

00:27:23.260 | the reason an insurance company

00:27:24.620 | can pay a little bit more than a bank

00:27:26.940 | is because an insurance company

00:27:28.940 | can invest its general account slightly more aggressively

00:27:33.740 | than a bank can with its reserves.

00:27:35.980 | So an insurance company can do more

00:27:39.640 | than just own like government bonds and some mortgages.

00:27:42.760 | They can own corporate bond portfolios.

00:27:44.520 | They can own some, I believe, some small equities.

00:27:47.120 | They can not have to worry about the same need

00:27:50.440 | for liquidity that banks do.

00:27:52.060 | So because of that,

00:27:52.920 | if you're going slightly out on the risk ladder

00:27:55.100 | and you can match some liabilities,

00:27:56.640 | like it used to be,

00:27:58.120 | and this points to a question you had earlier in the show,

00:28:01.400 | used to be that yields that were further out

00:28:03.900 | were higher than yields that were closer in.

00:28:05.980 | - They should be, yeah.

00:28:07.200 | - Right, they should be.

00:28:08.200 | So if you have a longer time horizon,

00:28:11.240 | typically insurance carriers can match the liability

00:28:13.560 | to something that's a longer date.

00:28:15.160 | And as long as there are decent credits

00:28:16.640 | in what they're owning,

00:28:17.520 | you can just offer a better yield.

00:28:19.440 | Now, there are trade-offs with everything.

00:28:21.640 | At the end of a fixed annuity,

00:28:25.320 | you're gonna pay income tax

00:28:26.640 | on like all of the yield in there.

00:28:28.960 | It just is the way it is.

00:28:30.000 | That's the way an annuity is set up.

00:28:32.200 | So.

00:28:33.160 | - Plus there's a liquidity issue.

00:28:35.020 | There's the built-in fees.

00:28:36.120 | There's a lot of this.

00:28:36.960 | So like if you wanted that money before the term is up,

00:28:39.780 | there's gonna be a penalty.

00:28:40.620 | - You're gonna pay a hefty surrender.

00:28:42.940 | You're gonna pay a really hefty surrender.

00:28:44.760 | - So that's part of it too,

00:28:45.600 | 'cause if it's a five-year annuity,

00:28:48.120 | you're giving up that liquidity.

00:28:49.240 | And that's one of the reasons, too,

00:28:50.500 | that they can pay a higher yield

00:28:51.480 | because they know they don't have to pay you back

00:28:53.000 | in 12 months if you want the money.

00:28:54.600 | Otherwise, you have to pay a fee

00:28:55.760 | and your yield goes down, obviously.

00:28:57.600 | - So it's essentially, it's a contract.

00:28:59.120 | You're signing a contract.

00:29:00.240 | And to get out of it, you have to pay to break the contract.

00:29:03.160 | - Yeah, it's a contract with an insurance company.

00:29:04.480 | And to be fair,

00:29:05.720 | granted, you wouldn't be that worried

00:29:09.040 | about a reputable insurance carrier paying you back,

00:29:12.600 | but there is slightly more risk to an annuity

00:29:15.280 | than there is a CD, because a CD is FDIC insured.

00:29:18.960 | - Right, you have the counterparty risk.

00:29:20.880 | I think the one thing we've learned today

00:29:22.680 | from you, Jonathan, is that insurance products

00:29:24.880 | are complicated, right?

00:29:27.680 | I think we-- - So they can be.

00:29:30.360 | They can be very complicated.

00:29:32.300 | There's, again, there's another discussion

00:29:35.040 | about annuities to be had here

00:29:36.520 | that we can get into if you guys want to.

00:29:39.040 | - Something I'd mentioned to you off the show, Jonathan,

00:29:43.120 | is with defined outcome ETFs,

00:29:45.200 | which everyone's been talking about so much lately.

00:29:47.560 | Yeah, I mean, what role really do these products play?

00:29:50.680 | Do annuities play?

00:29:52.480 | - Okay, so defined outcome ETFs are different

00:29:56.440 | than annuities that give you guaranteed income.

00:29:59.600 | I think defined outcome ETFs are great

00:30:03.000 | because people hate uncertainty.

00:30:05.340 | And it's the hating of uncertainty

00:30:06.600 | that is the reason, generally speaking,

00:30:08.560 | that people buy annuities.

00:30:11.000 | But annuities give you guarantees.

00:30:13.520 | Now, there's gonna be a lot of discussion

00:30:14.960 | about whether those guarantees are worth it,

00:30:17.680 | but that's not a financial plan discussion.

00:30:19.840 | That's an individual discussion.

00:30:22.360 | That's a planning-as-key discussion.

00:30:23.200 | - Right, so some people simply can't handle the risk

00:30:25.340 | of having a diversified portfolio

00:30:26.800 | and seeing it go down in value

00:30:27.960 | or seeing it go up and be volatile,

00:30:29.800 | and they just want something like this

00:30:31.360 | that just gives them money

00:30:32.360 | and tell me how much money I'm gonna get.

00:30:34.280 | And obviously, it doesn't have to be all or nothing,

00:30:36.560 | but I think that's the idea.

00:30:37.600 | Some people just don't want to have that uncertainty.

00:30:40.680 | - Right, and there's a lot of research out there,

00:30:43.000 | whether it be from Wade Pfau or Michael Kitsis,

00:30:46.440 | that say that people with guaranteed income,

00:30:48.720 | meaning annuities,

00:30:50.340 | they tend to spend more in their retirement

00:30:52.760 | than people who don't have guaranteed income.

00:30:54.600 | And they intend to have a much more

00:30:56.760 | kind of psychologically comfortable retirement

00:30:59.320 | like spending path.

00:31:00.560 | - Which is another topic that's come up on this show a lot,

00:31:02.600 | is people who have all this money

00:31:04.600 | and they can't force themselves to spend it.

00:31:06.000 | So an annuity, you're right,

00:31:07.640 | it gives you a stream of income.

00:31:08.800 | Even if it's a bad deal and it makes you spend more,

00:31:10.960 | for some people, maybe that psychological hurdle

00:31:12.640 | is worth it.

00:31:13.760 | - Right, and generally, annuities do have

00:31:16.240 | a terrible reputation, they're well-deserved.

00:31:19.640 | 'Cause the problem with annuities,

00:31:21.440 | like I've said before on here,

00:31:23.400 | it's not the contracts themselves,

00:31:25.300 | it's the people who are incentivized to sell them.

00:31:27.880 | - Right.

00:31:29.120 | - They come with big commissions.

00:31:30.400 | So anytime you have an incentive structure

00:31:32.960 | built in like that, there's gonna be a loser.

00:31:35.840 | And it's typically the person who's buying the thing

00:31:37.800 | with the high commission.

00:31:39.400 | - Right, and maybe that's what the person

00:31:41.560 | asking this question should think about,

00:31:42.720 | is like, is this a product that's right

00:31:45.760 | for some people in some situations?

00:31:47.120 | Yes, but is it right for every person

00:31:48.520 | in every situation?

00:31:49.360 | Of course not.

00:31:50.400 | - You're absolutely right.

00:31:51.240 | - That's the way you have to approach it.

00:31:52.120 | - Yep.

00:31:52.960 | - Yeah, all right, that makes sense.

00:31:55.000 | Good stuff, Jonathan.

00:31:56.100 | All right, thanks for joining us, as always.

00:31:57.840 | We get a lot of insurance questions,

00:31:58.920 | so this is helpful stuff.

00:32:00.440 | Remember, you can email us--

00:32:01.280 | - Happy to come on any time.

00:32:02.600 | - Askthecompoundshow@gmail.com.

00:32:04.320 | I saw we had a couple questions in the live show today,

00:32:06.280 | we'll have to pull some of those out.

00:32:07.840 | Leave us a question or comment on YouTube.

00:32:09.760 | Give us a rating, review.

00:32:11.320 | What else, Duncan?

00:32:12.160 | Subscribe.

00:32:12.980 | All that good stuff.

00:32:14.080 | - Yeah, and just a reminder,

00:32:15.640 | we don't have a TCAP this week,

00:32:16.960 | so we'll be back next week.

00:32:18.560 | - Okay, nothing tomorrow.

00:32:19.840 | All right, watch everything again one more time.

00:32:22.040 | Askthecompoundshow@gmail.com.

00:32:23.440 | We'll see you next time.

00:32:24.480 | - Thanks, everyone.

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