How do I balance enjoying life now and saving for the future?

00:00:00.000 | Welcome to Portfolio Rescue. Each week we get tons of questions sent to our inbox from

00:00:22.560 | YouTube viewers, blog readers, podcast listeners, and we decided, "Why don't we make a show

00:00:26.760 | to answer these questions?" That's what this show is. Remember, if you have a question,

00:00:30.400 | email us, askthecompoundshow@gmail.com. With me, as always, is Duncan. Duncan, how's it

00:00:34.980 | going, man? Good, good. How are you? Last week, I learned that Duncan broke up a fight

00:00:39.760 | in Brooklyn, and are we ready to start a neighborhood watch yet? Is that the next step? Yeah, I

00:00:44.720 | mean, we could. We could. Technically, I think it was an attack, not a fight. I was thinking

00:00:49.280 | more about it. That's even better. Okay. One quick comment here, if you send us an email.

00:00:53.840 | We've been getting tons of detail from people, which is great. How much money they make,

00:00:57.800 | how much they have saved, different types of investment accounts they have. If you could

00:01:01.760 | do us a favor, if you're going to give us one of these three or four-paragraph emails,

00:01:05.260 | put it in a TL;DR at the end, three or four sentences, what you're looking for. We can

00:01:10.360 | impart the details a little bit in the questions when we answer them, but if you can just break

00:01:13.920 | those down for us, that's helpful. Again, we love the details. I think the first one

00:01:17.840 | is actually a short question. Duncan, what do we got here?

00:01:19.560 | Yeah, on that note, we have a very short question from Patrick in Dublin, Ireland, which is

00:01:24.480 | very cool. Patrick says, "I'm a 20-year-old college student from Dublin. My question is,

00:01:29.440 | how should young people like me balance saving money to invest with traveling and enjoying

00:01:34.000 | life in our 20s?"

00:01:35.000 | First of all, I'm very jealous here, because I would love to go to Ireland. My family is

00:01:39.880 | Irish. My parents have been there before. This is the conundrum, right? You want to

00:01:45.200 | enjoy yourself a little bit, but you also have this whole idea of compounding when you're

00:01:49.200 | young. Everyone has seen the examples where you say, "Tom begins saving $300 at age 22.

00:01:55.280 | He saves for 10 years, then he stops altogether. Then Greg, on the other hand, begins saving

00:01:59.740 | $300 a month at age 35, but he keeps saving all the way through retirement at 65. Who

00:02:03.500 | ends up with more money? Let's say an 8% annual return." I ran the numbers here. Tom

00:02:08.400 | wins by a wide margin, over $200,000 more, because he started early and you have that

00:02:12.560 | compounding effect.

00:02:13.560 | But, you're in your 20s. You don't want to look back and say, "Geez, that's great.

00:02:17.480 | I saved all this money, but now what did I do with my life? I want to do that stuff now

00:02:21.720 | and I have more responsibilities." That's certainly something that I thought about in

00:02:25.720 | my 20s. My wife and I thought, "Hey, by our 30s, we'll have kids. We'll have responsibilities.

00:02:30.640 | Let's travel as much as we can." Our whole thing was, we want to go to as many weddings

00:02:34.400 | as we can, because in our 20s, everyone has those three or four years where they have

00:02:38.160 | the wedding season. We said, "Let's travel when we can go to these places, and let's

00:02:42.280 | go on trips, too."

00:02:43.280 | There was one time when we took a trip to Mexico on a 10-day notice. I passed the CFA,

00:02:48.480 | not to brag, I did. But, after I passed, I didn't want to plan out something in advance

00:02:53.200 | and then fail and go on a trip and be miserable. But, I passed, and within 10 days, we decided

00:02:57.360 | just to go to Mexico on a whim. That's stuff you can do in your 20s.

00:03:00.360 | I want people to still have fun. I think a simple way of doing this is just starting

00:03:06.040 | out small. When I first started working, I made nothing. My salary was $30,000. I made

00:03:12.360 | no money. I started saving $50 a month in a Target Day Fund. Then, I worked my way up

00:03:16.840 | as I made more money, and I worked my way up in my career.

00:03:19.600 | I think you also have to think about trade-offs here. I lived in a very shaky apartment my

00:03:23.320 | very first year out of school. It was not a great situation. I could have paid $200

00:03:27.320 | or $300 more a month to move across town and go into a nicer, newer apartment. But, instead,

00:03:32.120 | I wanted to have that money to save and spend and have fun with, so I had my $50 a month

00:03:36.400 | that I'm saving. Then, I saved some money by living in a crappy place.

00:03:39.600 | I think when you're in your 20s, you have to have some of those trade-offs. If you want

00:03:42.520 | to enjoy yourself and also give yourself some good spending and saving habits, you can start

00:03:46.960 | out saving small and work your way up, but also have some trade-offs where if you're

00:03:50.440 | going to want to enjoy yourself, then maybe somewhere else in life you're going to have

00:03:53.080 | to cut back a little bit. What do you think, Duncan?

00:03:57.200 | Do you think a lot of this comes from the FIRE movement? I see a lot of these questions

00:04:02.200 | coming in now. I think people feel pressure from a young age now to try to retire by 50

00:04:07.380 | or something like that.

00:04:08.520 | I think there could be some middle ground between not saving anything and saving 80%

00:04:12.160 | of your income and making your own shampoo in your backyard using wheatgrass or something.

00:04:16.120 | You don't have to take it that far. I think there has to be a middle ground where you

00:04:19.940 | still enjoy yourself. I certainly am glad that I did that in my 20s, because it's really

00:04:24.340 | hard for us to travel now that we have three kids. It's just not as easy to do. So, do

00:04:28.520 | it in your 20s when you don't have as many responsibilities and things holding you back.

00:04:31.440 | Yeah, I think that's good advice.

00:04:33.480 | Alright, next one.

00:04:35.120 | Okay, so next up we have a question from Ender who writes, and I left the compliments in,

00:04:41.580 | you know, but, "Hey guys, thanks for the dope content." I think there was an expletive

00:04:44.900 | too, but I took that out. "I watch and re-watch like it's Breaking Bad. My mom has $50,000

00:04:49.600 | of cash that I just found out about. I wonder if she's the real Walter White." Dot, dot,

00:04:54.380 | dot. "She's 62 and still working as a nurse. Healthy and an amazing person. I would like

00:04:59.300 | to help her invest this cash, but I can't decide if I should do something like a dividend

00:05:03.960 | ETF for her or 70% VTI and 30% QQQ or something else altogether. It definitely needs to be

00:05:10.960 | something that she can set and forget. If anyone's going to be checking it, it'll be

00:05:14.220 | me. Thoughts?"

00:05:15.220 | So, Duncan, before we hop down here, you admitted that you've never seen Breaking Bad before.

00:05:19.380 | Yeah, I quit like one or two episodes in because of that bathtub scene. I couldn't handle it.

00:05:24.220 | Okay, so just since we're on the subject here, I went back and looked and found some great

00:05:28.540 | money quotes from Breaking Bad. So, John, show the picture here. This is in the storage

00:05:34.100 | container where Skyler, his wife, says, "There's more money here than we could ever spend in

00:05:38.860 | 10 lifetimes. Please tell me how much is enough? How big does this pile have to be?" And of

00:05:41.780 | course, for him, it was too much. One of my favorite lines, "Jesse, you asked me if I

00:05:45.940 | was in the meth business or the money business? Neither. I'm in the empire business." That's

00:05:50.460 | like a businessman, business comma man kind of thing. Here's my other favorite one. "I

00:05:55.020 | am not in danger, Skyler. I am the danger." I thought that was a good investing one, too,

00:05:58.460 | because it kind of works for this idea, right? "It depends" is a good way of thinking about

00:06:04.380 | this, but I think that there could be potential toxic relationship issues when investing money

00:06:09.620 | for your family. Here's something that happens. I've worked in the nonprofit endowment foundation

00:06:14.860 | space my whole career, and those funds are typically run by a committee. The biggest

00:06:20.820 | problem I've seen in those committees, besides all the politics that's involved, is that

00:06:25.220 | the individuals on the committee try to invest the money like it is their own personal risk

00:06:30.380 | profile and time horizon, instead of using the one for the organization and the beneficiaries

00:06:34.860 | of where that money is going. Because a lot of these foundations and endowments are set

00:06:38.140 | up to run in perpetuity. They're supposed to last forever. There's this great story

00:06:41.140 | where BlackRock CEO Larry Fink once said he's having dinner with one of the largest sovereign

00:06:45.960 | wealth fund managers in the world, and the fund's objectives, the manager told him, were

00:06:51.700 | generational. "We're saving for future generations," and Fink asked, "Well, how do you measure

00:06:55.240 | performance?" He said, "Of course, quarterly." That's the idea, that you can mix up your

00:07:00.100 | own time horizon and risk profile. I think the most important thing here is understanding

00:07:05.620 | your mom's risk profile and time horizon. What has she done in the past? How does she

00:07:10.020 | handle losses? How does she handle volatility? Did she sell out in the past? When does she

00:07:13.980 | need this money? I think you have to understand what the money's for, the purpose of it. How

00:07:18.860 | much risk does she need to take? How much risk does she want to take? I think the simplest

00:07:23.260 | boring bent answer is figure out a target date fund, potentially. But I think you have

00:07:26.820 | to understand what is going to work for her and not just work for you. Because I think

00:07:31.780 | if you make the wrong decision here, and your mom gets angry with you, you're the one where

00:07:36.460 | the buck stops at if you're making this decision for her, even if you're the one looking at

00:07:39.580 | it. Because she's certainly going to look if things go bad. So I think you just have

00:07:42.900 | to figure out what's right for her, not what's right for you.

00:07:46.220 | Yeah, it could make Thanksgiving very uncomfortable, right, if a portfolio's been cut in half or

00:07:51.660 | something like that. Yeah, for sure. All right, one more.

00:07:57.220 | Okay, so next up. "As we get closer to the end of the year, I'm debating the true value

00:08:03.740 | of tax loss harvesting as a strategy for my portfolio. I appreciate the ability to lower

00:08:07.780 | my tax liabilities this year, but the strategy seems more like a tax deferral than a tax

00:08:11.940 | write-off. If I believe taxes will go up generally, and my personal tax bracket will go up, for

00:08:17.220 | context, I'm in my early 30s and expect to have a higher tax bracket later in life. Does

00:08:21.220 | tax loss harvesting make sense for me? It seems like I'd be passing on taxes at a lower

00:08:25.740 | bracket today to potentially pay them at a higher tax bracket in the future."

00:08:28.900 | All right, and as we're getting on the end of the year, we got another one that's similar

00:08:33.980 | to this, right? So let's do them both. Let's run it back.

00:08:36.580 | Yeah, and so then we also have, "I'm buying a house closing on January 13th. I have to

00:08:41.920 | sell stock to pay for it. I'll have the same income in 2021 and 2022. Should I sell in

00:08:48.660 | 2021 or wait until 2022?"

00:08:50.820 | Now, Duncan, this is something that surprised me. We've gotten a lot more questions about

00:08:54.900 | taxes than I ever would have assumed we would, and I think there's one simple reason. People

00:08:58.260 | hate paying taxes. You could make tens of thousands or hundreds of thousands of dollars

00:09:03.220 | or millions of dollars for a wealth management client that you work with, but if you save

00:09:07.300 | them $500 on their taxes, they are your client for life. People hate taxes. So for this one,

00:09:13.980 | because I always think, "Do you make tax decisions? Do you let that be the tail that wags the

00:09:18.700 | dog and make these decisions explicitly on taxes, or do you think about the other ramifications?"

00:09:22.620 | So I want to bring in my personal tax consultant, our CFO, Bill Sweet.

00:09:28.300 | Gentlemen, welcome to suburban New York where the trees are big and the coffee is warm.

00:09:33.020 | I agree, Ben. People generally hate paying taxes more than they like making money. That's

00:09:38.140 | something I've observed throughout my career. But listeners spot on. I mean, tax loss harvesting

00:09:42.520 | is simply a deferral mechanism. What you do when you tax loss harvest is you step up your

00:09:47.460 | basis from the respect that you generate a loss. In theory, sometimes using that to offset

00:09:52.400 | gains, sometimes using it to offset ordinary income up to $3,000 a year. But the problem

00:09:57.240 | with that is if your future expected tax rate is higher, you could effectively be doing

00:10:01.600 | some negative arbitrage, sort of realizing a small gain in the future in exchange for

00:10:05.760 | a larger pain in the present in the future. And that's not a good thing. So John, can

00:10:10.520 | you pull up the chart for me, a little chart we put together here? So if you take a look

00:10:14.240 | at the tax brackets, focus on the blue here. The tax bracket for capital gains, if your

00:10:18.760 | joint married income is below roughly $106,000, it's actually zero. So more or less at that

00:10:24.620 | tax rate, it doesn't make any sense. If I'm going to deduct 12%, but my income's going

00:10:29.500 | up in the future, I'm going to be paying 15, 18, maybe 24% of my gains in the future. Tax

00:10:35.560 | off hard loss harvesting, generally not a good idea. So I think this list is spot on.

00:10:40.100 | That's why we don't advocate a TLH for every single client that we have at Rittenholz Wealth.

00:10:44.980 | It really depends. And this is why tax does not scale. It's something that I think needs

00:10:49.040 | to be specifically analyzed for each individual client and situation.

00:10:52.360 | How hard do you think it is for people to actually predict their taxes in the future,

00:10:57.000 | unless they're in the lowest income tax bracket? That helps if you know where you are now,

00:11:01.040 | but I always see this where people say, "Well, I know I'm going to be paying more in the

00:11:03.960 | future." And we just don't know, right?

00:11:05.940 | Correct. Yeah. The future is not just unknown. It's unknowable. So a lot of things could

00:11:10.040 | change. The Build Back Better plan could come in and raise taxes. That was something discussed

00:11:14.280 | that we had an episode back a couple months ago on that very topic. So you're exactly

00:11:19.120 | right, Ben. But that would probably lend itself to things like this strategy, because if you

00:11:24.100 | know you're getting a benefit today, the indeterminate future, who knows? If the taxpayer takes a

00:11:28.940 | year off, maybe that's a great year to realize that gain in the future. It really depends.

00:11:33.000 | It depends on each specific client, and there's no real way to predict it in advance.

00:11:36.840 | What do you think about this person who's got to sell stock to pay for a house that

00:11:39.480 | they're closing on in a few weeks, it sounds like? Does it make sense to do it now and

00:11:43.920 | rip the Band-Aid off? Or can it potentially be better to wait and then put those taxes

00:11:47.640 | off to future you, right? Yeah, future me.

00:11:50.640 | Exactly, future me take care of it. Yeah, I think it goes back to that chart. So again,

00:11:54.800 | if my income for the year is $80,000, if I'm married, I can realize up to $20,000 a gain

00:12:00.680 | is completely federal tax-free. Maybe there's some consequences at the state, but that's

00:12:04.580 | not usually that large. So I think splitting it amongst tax years makes a lot of sense.

00:12:08.700 | But Ben, you brought up a great point before. If you don't have visibility of this, there's

00:12:12.080 | two weeks left here in the year to make any changes, right? And you have to make these

00:12:15.400 | decisions relatively quickly. So that's why I think working with a professional always

00:12:19.280 | makes some sense, especially if they're forward-looking. My big criticism of a lot of the accounting

00:12:23.760 | industry is they're always driving like the rearview mirror. They don't care about what's

00:12:26.960 | going to happen next year. They care about what's happening now. So finding a good tax

00:12:30.120 | advisor, I think, is part of this process.

00:12:32.560 | All right. Yeah. Talking to your own book here, but you're right.

00:12:36.720 | Exactly. I'm a company man.

00:12:39.760 | We got Bill here. Let's do one more tax question.

00:12:41.560 | OK. I was going to say, I think we might be getting so many tax questions because people

00:12:45.440 | like hearing Bill's answers too.

00:12:47.120 | It's true.

00:12:48.120 | I'll take it.

00:12:49.120 | The flattery will get you everywhere, Duncan.

00:12:51.280 | So this is a really long one, but bear with me. I live in the San Francisco Bay Area where

00:12:55.600 | homes are very expensive. We've heard this a lot from viewers. In the state of California,

00:13:00.400 | if you own a house for five years and use it as your primary residence for at least

00:13:03.560 | two years during that time, you don't need to pay taxes on the first $500,000 of capital

00:13:08.120 | gains when selling your home for a married couple. As you can imagine, depending on where

00:13:12.840 | you live in the Bay Area, it doesn't take long to have a home appreciation of $500,000.

00:13:17.360 | If I live in an expensive area like this, am I crazy for trying to move every five years

00:13:23.040 | or so to minimize my tax burden? I suppose I can just buy a neighbor's home as to not

00:13:27.400 | switch communities or school districts for my kid. What other considerations are there

00:13:31.160 | to such a strategy? I feel like this is pretty ingenious, but there's got to be a catch.

00:13:36.560 | My one initial thought on this, the catch is, it sounds like a lot of work.

00:13:40.600 | A lot of moving.

00:13:42.120 | A lot of moving.

00:13:43.120 | Moving is terrible.

00:13:44.120 | There's a lot of frictions involved when you buy and sell a house. There's closing costs,

00:13:47.160 | there's realtor fees, there's all these things. I understand the idea here, but Bill, from

00:13:53.120 | a tax perspective, aren't there better tax advantage ways of making real estate work

00:13:56.680 | for you, like cashing out refinance or a HELOC where you can take some money out? Is it really

00:14:01.680 | that big of a deal if you're trying to take these gains quicker than try to offset some

00:14:06.480 | of it? Does that make sense to you?

00:14:08.100 | It does from the respect that assuming that you're able to generate a $500,000 capital

00:14:12.780 | grant on your property, I get that that's been the case in the West Coast specifically,

00:14:18.460 | but that's it. This is a unique thing in the tax code. That's a very large number for a

00:14:23.340 | joint couple. It's $250,000 for an individual. These are large numbers, but Ben, I think

00:14:27.900 | you hit on it. It's really transaction costs in real estate that are really painful. I

00:14:31.900 | did a refinance recently. I know you and Michael talk about this all the time on the Animal

00:14:35.780 | Spirits podcast. It's expensive to purchase and sell a house. Just talk about the real

00:14:40.700 | estate commission alone. If you happen to be lucky enough to get a $200,000 to $500,000

00:14:45.060 | gain in your property, it probably means it's worth a million dollars. You're paying somebody

00:14:48.900 | $50,000. You need to run the math and make sure the tax consequences actually outweigh

00:14:54.380 | the benefits, but it's not going away, I don't think, in the tax code. It hasn't for as long

00:14:59.180 | as it's been in the-- at least it's since '86 to my knowledge. The problem is that number's

00:15:03.920 | indexed for inflation, or it's not indexed for inflation. It's been around that number

00:15:07.700 | since I've been aware of it. But yeah, I think that's it. The thing that I might add as a

00:15:11.980 | planning point, which is kind of interesting to think about, is you could potentially leverage

00:15:15.940 | this arbitrage with a rental property, a business property, in that if you happen to move out

00:15:20.900 | of your primary residence, and let's say rent it for two years, again, as long as you're

00:15:24.660 | within the window and the timeframe, you're able to effectively convert that to a real

00:15:28.980 | estate residential property. You need to adjust for the fact that it's part use, but that

00:15:33.480 | to me is the most interesting thing. And that's where I see the most innovation in this space.

00:15:37.140 | But would I move simply to take advantage of this every two years? Absolutely not. You

00:15:41.500 | and I both have young kids. I moved all the time in the Army, on average, every two years.

00:15:46.780 | I don't ever want to do it again. So if the personal price is worth the tax benefit, sure,

00:15:51.780 | I guess, but I wouldn't recommend this as a strategy, no.

00:15:55.860 | This also shows just how strong the real estate market has been, that someone thinks getting

00:15:58.900 | a $500,000 gain can be managed every five years. I mean, I don't know how much-

00:16:04.580 | More power to you. Yeah, I'll drink to you tonight if you can pull this off every two

00:16:08.660 | years.

00:16:09.660 | All right, one more question for Bill. This is a big one. Real tree or fake tree in the

00:16:12.220 | background?

00:16:13.220 | A hundred percent fake. Have you guys ever, at the end of the year, taken that thing out

00:16:17.580 | to the fire pit, thrown a match in that? I mean, it is gone in like 10 seconds.

00:16:21.980 | I told this story in Animal Spirits. I'm a real tree person. My family's always been

00:16:25.660 | a real tree, and we got one, and it immediately died in nine million pine needles all over

00:16:31.820 | the house. Every time the dog walked by it, it was like a big version of the Charlie Brown

00:16:35.780 | Christmas.

00:16:36.780 | But it smelled awesome.

00:16:37.780 | They do. They smell good. But yeah, you're right. My wife said, "All right, that's it.

00:16:39.540 | We tried it. We're getting a fake tree. We got one now."

00:16:41.780 | I got a bunch of candles for the smell. That's good enough for me, man.

00:16:45.940 | We're a fake tree family now. I can't believe it, but we are.

00:16:48.020 | I'm a big real tree person.

00:16:49.220 | That's awesome.

00:16:50.220 | And Bill, I thought you would literally go out and cut it down with that saw that you

00:16:53.260 | displayed in the past.

00:16:55.100 | It's in the basement. It's ready to go. My chainsaw, though, needs a little bit of work.

00:16:58.420 | So if you're a small parts mechanic, small machine, give me a shout. I need some help.

00:17:02.980 | All right. Thanks to Bill, as always, for his helpful tech expertise. Remember to have

00:17:06.660 | some thoughts on the questions today. Leave us a comment. A bunch of people are already

00:17:09.380 | in the live stream giving some comments. Have a question for the show, email us, askthecompoundshow@gmail.com.

00:17:14.580 | Don't forget to subscribe. Check out idontshop.com for all of your compound shopping needs. We're

00:17:20.860 | gonna be back here next Wednesday for our last show of 2021. We'll see you then. See

00:17:27.180 | you.

00:17:27.260 | [Music]

How do I balance enjoying life now and saving for the future? | Portfolio Rescue

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