Does the Debt Ceiling Matter to the Market?

00:00:00.000 | Welcome back to Portfolio Rescue, where, during bull markets, we had questions about leveraged

00:00:20.280 | ETFs, and during bear markets, we had questions about bonds and Roth IRAs. So, we'll see if

00:00:26.000 | that transition happens. We're still in the latter half, in terms of questions, but we'll

00:00:30.480 | see if that changes, because things have been going a little better lately.

00:00:32.880 | Yeah, I'm feeling good.

00:00:33.900 | How are we feeling better? Good?

00:00:36.040 | Yeah, yeah. Feeling good.

00:00:38.920 | You know, it's funny, because everyone says, "Why should the stock market change just because

00:00:42.840 | the calendar flipped to a new year?" And look what happened. It worked. That's all we needed

00:00:46.720 | to do, change the calendar.

00:00:48.480 | Is this still the Santa Claus rally?

00:00:51.360 | I think this is just the New Year's Resolution rally. So, we're going into February. Things

00:00:55.280 | are going well. Just remember this feeling the next time stocks are down like 10% in

00:00:59.000 | a month. It could happen. Alright, let's do some questions.

00:01:03.800 | Okay. Up first today, we have a question from Larry. "Without getting into the politics

00:01:09.360 | of throwing the U.S. government into default, the threat is very real. How about a discussion

00:01:14.080 | on how retirees should position themselves to protect their portfolio? Us old guys don't

00:01:19.680 | have years to recover from a political sabotage of the markets and the economy. You know old

00:01:23.680 | folks read and listen to your stuff too!"

00:01:26.000 | Yes. Fair point, Larry. I think our YouTube audience definitely eschews younger. I think

00:01:32.240 | podcasts, if we're doing an over-generalization here, are probably more Gen X. And then, my

00:01:37.080 | blog actually does have a decent percentage of baby boomers. How do I know this? Because

00:01:40.560 | a lot of them ask me, "How do I print it out on regular paper to read it?" So, that has

00:01:44.960 | to be boomers, right?

00:01:45.880 | I would think.

00:01:46.880 | Obviously, there's some overlap. Okay. So, obviously, the market doesn't seem to care

00:01:49.160 | about the debt ceiling. Now, as of this recording, I got the S&P up almost 9% year-to-date. NASDAQ

00:01:54.360 | 100 up almost 17% in 2023. Bonds are also rallying. So, the stock market doesn't care

00:01:59.680 | about the debt ceiling debate yet. I think part of the reason the markets don't really

00:02:03.280 | seem to care is because -- we've been through this before. It's basically political theater.

00:02:07.280 | I think a lot of it, the debt ceiling stuff, is just, it makes politicians feel important.

00:02:10.960 | They use it as leverage. It's a negotiating ploy. Could we see some crazy politician get

00:02:15.720 | into office and take this too far and possibly lead to a default? It wouldn't surprise me

00:02:21.280 | with the people that we have as our politicians these days. But I think a default caused by

00:02:24.640 | a politician, that's not like some crazy financial crisis.

00:02:26.280 | Be careful there. We have people on Capitol Hill that watch the show.

00:02:29.120 | I know. I'm just saying, could someone take it too far in the future? Yes, I think. But

00:02:33.480 | that seems like a more of a short-term problem than a long-term one to me. But even if you

00:02:37.680 | know how badly a politician's going to screw this up someday, I don't know that you could

00:02:40.840 | position your portfolio for it.

00:02:42.040 | So back in the summer of 2011, Standard & Poor's downgraded the U.S. credit rating, right?

00:02:46.080 | This is from -- it felt like a big deal at the time. This is from a BBC story at the

00:02:48.920 | time. I'm going to read this. One of the world's leading credit agencies, Standard & Poor's,

00:02:52.480 | has downgraded the United States' top-notch AAA credit rating for the first time ever.

00:02:56.160 | S&P cut the long-term U.S. rating by one notch to AA+, with a negative outlook citing concerns

00:03:00.840 | about budget deficits. Correspondents say the downgrade could erode investors' confidence

00:03:05.200 | in the world's largest economy. It's already struggling with debts. Unemployment of 9.1%

00:03:08.920 | and fears of a possible double-dip recession. The downgrade is a major embarrassment for

00:03:13.240 | the administration of President Barack Obama and could raise the cost of U.S. government

00:03:17.200 | borrowing. This, in turn, could trickle down to higher interest rates for local governments

00:03:20.800 | and individuals. That sounded pretty scary at the time. I think a lot of people were

00:03:23.080 | worried about that, right?

00:03:24.080 | John, let's do a chart on bond returns over the ensuing year. Bonds went nuts after this

00:03:29.920 | happened. Long-term Treasuries were up almost 30%. The AG was up over 6%. Ten-year Treasuries

00:03:36.080 | were up over 10%. Now, why did this happen? Interest rates actually fell. And they not

00:03:40.560 | only fell a little bit, they fell a lot, and they fell immediately. So, this is the 10-year.

00:03:45.280 | You can see, look, it dropped almost immediately from the time they downgraded the credit rating.

00:03:48.920 | It was like 2.6%. It went down to 1.4%. And, okay, how about the stock market? Things did

00:03:54.840 | get weird in the stock market in the short term. So, the Monday after the downgrade -- and

00:03:59.200 | I remember this period, it was crazy -- the stock market fell 6% in a day. Right? John,

00:04:03.000 | you can do a chart off for a sec here. I'll get back to this one. The day after that,

00:04:07.320 | it was up more than 5%. The day after that, it was down more than 4%. And the day after

00:04:11.840 | that, it was up 5%. This is back-to-back-to-back-to-back days of down 6, up 5; down 4, up 5. It was

00:04:18.680 | a crazy week.

00:04:19.680 | Lewis: Michael Scott would call, "Snip, snap, snip, snap."

00:04:21.560 | Lewis: To be fair, at the time, we were going through the European debt crisis. People were

00:04:24.800 | worried about a double-dip recession. We were already in the midst of a correction. And

00:04:29.600 | the stock market actually bottomed in October. So, John put this up. This is including that

00:04:33.240 | down 6% day to start things. The S&P was up almost 20% a year later. So, the stock market

00:04:38.840 | did not really care. Could we see some short-term volatility if we have a prolonged debt ceiling

00:04:44.040 | discussion and debate and close to a default? Sure. Markets could get spooked. But I think

00:04:49.400 | that has more to say with the current trends and rates and economic growth and the stock

00:04:52.720 | market and what's happening than the political theory in D.C. Maybe people would use that

00:04:55.880 | as an excuse. We have a huge rally here, and then the politicians decide they want to do

00:05:00.360 | something crazy, and that causes some stock market volatility, and we see some short-term

00:05:03.840 | volatility. Sure. Does that mean you should change your portfolio because of it? No. Short-term

00:05:08.460 | volatility in the markets is always going to be a thing. That's always a risk, whether

00:05:12.360 | it's political, economic, or otherwise. So, I don't think you change your portfolio because

00:05:16.680 | of it. I think you always have your portfolio gauged to figure out that short-term risk.

00:05:21.520 | The other thing to mention here, every time this happens, people complain about how much

00:05:23.880 | debt we have in this country. So, John, do a chart on. This is the U.S. debt clock. Now,

00:05:27.960 | this looks like a website from 1994. It's still going. You can calculate all this stuff

00:05:33.280 | on this debt. You can see that I highlighted here that U.S. national debt is more than

00:05:36.400 | $31 trillion. That sounds like a lot of money. Now, I'm not even going to try to figure out

00:05:41.040 | how much the United States is worth in terms of assets, beyond the tax revenue we're bringing

00:05:45.080 | in. I think I've seen estimates that, if you include all the land we own, like federal

00:05:48.960 | land and state land, I think the U.S. government owns 25-30% of all land in this country. So,

00:05:55.100 | if you really wanted to offset the liabilities with the assets, the United States has a lot

00:06:00.680 | of assets. But, even beyond that, let's look at the interest we pay as a percentage of

00:06:05.040 | GDP. So, John, chart on here. This is interest expense as a percentage of gross domestic

00:06:09.880 | product. Look back in the 1980s and '90s. It was way higher than it is today. It's going

00:06:13.600 | up because rates are going up and debt has gone up. But, we're still able to service

00:06:17.440 | this debt, even with higher rates. And, obviously, the debt was much lower back then, but rates

00:06:22.160 | were higher, and GDP was obviously much lower. So, John, throw up the next chart on GDP.

00:06:25.560 | This is the latest GDP reading as of Q4 2022. $26 trillion and growing. And it's not like

00:06:32.080 | the GDP is an accumulated amount like the debt is, right? GDP is something that we produce

00:06:38.900 | year in and year out. So, this year, it's probably going to be bigger than $26 trillion,

00:06:43.080 | if it looks like the economy is on strong footing, which it is. So, I know that the

00:06:47.160 | debt number is scary, but I just think that people have been worrying about government

00:06:50.360 | spending forever. This is a cover story from 1972 in time. Is the U.S. going broke? I think

00:06:58.280 | as long as the economy continues to grow, federal debt is going to--

00:07:01.800 | That's a good cover.

00:07:02.800 | It really is. And people were scared. This is 1972. I think as long as the economy continues

00:07:07.120 | to grow, and federal debt is going to grow as well, as long as the pie gets bigger. And,

00:07:11.960 | unfortunately, unless the politicians get rid of the debt ceiling thing, it's always

00:07:15.960 | going to be an argument every few years when we get to this. So, I think you have to get

00:07:19.240 | used to it. But I also think that people probably worry too much about government debt and the

00:07:24.600 | implications that it could have. I think this is something that we're going to look back

00:07:27.720 | at another 10, 20, 30 years, and it's going to be, I don't know, $70 trillion, and people

00:07:33.280 | are going to go, "$70 trillion is too high!" I think people just have to get used to it.

00:07:37.200 | If debt is growing, it probably means that the economy is growing as well. And that's

00:07:41.080 | a good thing.

00:07:42.080 | - Also, can't we just make a giant platinum coin or something?

00:07:46.040 | - Sure. Pay it off. Here's the other thing, though. I've seen people say, "We should get

00:07:50.960 | rid of all debt. Just abolish United States debt. Get rid of it. Pay it all off." That

00:07:55.400 | debt is an asset to someone else. Retirees, pension plans, who own bonds, who own treasuries,

00:08:02.620 | those liabilities that the United States is creating is an asset for someone else. Those

00:08:05.560 | T-bills you're earning 4 or 5% on right now, which we're going to talk about in a few questions

00:08:09.320 | later here, that's an asset from U.S. government borrowing. So you take that away, then we

00:08:14.040 | don't have any bonds for people. I mean, you have to go further than risk for bonds, different

00:08:17.440 | types of bonds, but those are assets, too.

00:08:20.160 | - Right.

00:08:21.160 | - Let's do another one.

00:08:23.640 | - Okay. Up next, we have a question, I think, from Twitter?

00:08:26.760 | - Yeah, someone on Twitter posted this.

00:08:29.280 | - Okay. "What's it going to take to right-size the Treasury yield curve from its current

00:08:33.480 | inverted state? Isn't that what we're all waiting for, when 10-year and 30-year Treasuries

00:08:37.800 | have higher rates than 2- and 5-year? Also, why do we need or want that? I presume it's

00:08:43.000 | because it signals that the markets think long-term returns will be higher than short-term

00:08:46.840 | returns, but I'm not entirely clear on it."

00:08:49.200 | - So he's staying on the theme that bond questions are coming in hot and heavy lately, still.

00:08:53.000 | - Right. This is a question I've seen other people have before, too.

00:08:56.400 | - So, John, give me the chart of the change in yield curve. This is over the past 13 months.

00:09:00.060 | The blue curve on the bottom, that's as of 12/31/2021, so 13 months later, the gray curve

00:09:05.280 | happens. You can see the bottom curve, it's upward-sloping. So shorter-term yields, 1,

00:09:09.960 | 2, 3, 6-month T-bills, are much lower than longer-term yields, 10-year, 20-year, 30-year.

00:09:15.960 | Now look at the line above it, the gray line, that's as of February 1st. Shorter-term yields,

00:09:22.080 | 1 month, 2 months, 3 months, 6 months, are much higher than 3, 5, 7, 10, 20, 30-year

00:09:29.160 | Treasury bonds, right? And you can see that upward-sloping curve, that's the normal, that's

00:09:34.480 | what we want. And that makes sense, because why? You should earn higher rates of return

00:09:37.680 | when you extend your time horizon and fixed income, because you're taking on more interest

00:09:41.020 | rate risk, more inflation risk, more economic risk. More things can happen the longer your

00:09:44.760 | time horizon goes, and not always in a good way, so investors typically require higher

00:09:48.440 | yields for going further on that risk curve. And now that it's inverted, that doesn't make

00:09:52.960 | any sense, right? Because you're being paid higher yield to take less risk, and the people

00:09:57.700 | further on the risk curve are being paid less. So typically, you use the yield curve as a

00:10:02.280 | way to gauge the health of the economy, right? When longer-term yields are higher than shorter-term

00:10:06.320 | yields, that typically shows signs of healthy economic progress, right? People think things

00:10:10.960 | are going to get better in the future, higher growth potentially, higher inflation, things

00:10:15.080 | are going to be better. An inverted yield curve, or narrower yield, signals that things

00:10:19.760 | could get worse. And if you look back at it, it's got like an 8 out of 8 in terms of predicting

00:10:24.520 | an oncoming recession. Yield curve inverts, in the next, call it, 6 to 18 months, we get

00:10:30.640 | a recession. Today, I think things are a little trickier because of the role the Fed is playing

00:10:34.760 | here in the yield curve. So Cam Harvey is the guy who -- the Duke professor who came

00:10:38.560 | up with this signal, actually thinks it might not work this time. So John, he wrote a research

00:10:41.720 | piece -- throw this up here real quick -- he gave some reasons why he thinks his own signal,

00:10:45.680 | the inverted yield curve might not work, and he talks about the strength of the labor market,

00:10:50.680 | the fact that people being laid off, especially in the tech sector, are finding jobs much

00:10:53.800 | easier because they're more highly skilled. Consumers are just in a much better position.

00:10:57.880 | The financial sector is much healthier, and they've taken steps because of the regulations

00:11:01.720 | to be fine. And obviously, the Fed. The Fed is the one that is increasing short-term rates.

00:11:08.360 | And so I guess that explains what's going on in the yield curve. But what's going to

00:11:12.480 | happen to bring it back in line? Well, I think the easy answer just is the Fed. Long-term

00:11:15.800 | yields don't seem to believe that inflation is going to be a long-term problem, and so

00:11:19.640 | they haven't moved up much at all. So we have 30-year yields that are basically the lowest

00:11:24.760 | on the whole yield curve. So I think a recession would probably help us get back there, unfortunately.

00:11:29.880 | Maybe inflation falling a little bit would help, too. But it's basically the Fed lowering

00:11:32.880 | short-term rates. That's what's going to have to happen unless inflation continues to -- starts

00:11:38.560 | going back up again and long-term rates decide to go up. It is kind of crazy, though, if

00:11:42.920 | you think that. We had 9% inflation, and long-term bond yields didn't go much above 4%. So if

00:11:49.040 | that's not going to do it, I don't know what is. So it's basically the Fed. The Fed is

00:11:51.760 | going to have to lower short-term rates. That's going to take us out of an inverted yield

00:11:54.840 | curve.

00:11:55.280 | Harjes: It all comes down to the Fed.

00:11:58.040 | Lewis: Everything does, right?

00:11:59.760 | Harjes: Seems like it.

00:12:01.200 | Lewis: This is a nice segue into the next one, which I think is kind of related here.

00:12:04.480 | Harjes: Up next, we have a question from Matt. "Everyone is talking about T-bills paying

00:12:09.440 | around 4%. But why would you lock up money in T-bills for 2, 10, or 20 years when you

00:12:13.920 | have these high-yield savings accounts paying out basically the same while keeping your

00:12:17.480 | funds fully liquid? I've researched it and have yet to uncover some catch. They're FDIC-insured,

00:12:23.420 | and the biggest downside I found is that they're typically online banks and don't have physical

00:12:26.840 | branches or their own ATMs. So you have to sync up a regular bank account to transfer

00:12:30.840 | money, which takes about five minutes. Am I missing something? Why would you purchase

00:12:35.100 | T-bills when you can get the same returns with one of these high-yield savings accounts?"

00:12:38.440 | This is a good question.

00:12:39.600 | Lewis: We've been getting, actually, a lot of questions like this. Some people say it's

00:12:42.200 | crazy to keep your money in a savings account when T-bill yields are actually higher. Some

00:12:46.880 | people say it's crazy to go through the process of buying T-bills when savings accounts are

00:12:50.480 | easier. That's what this one is saying. Before we get into that, I need to give some nerdy

00:12:53.400 | bond definitions to this person here. Matt, just so you know, you can't call everything

00:12:59.000 | a T-bill. T-bills have a maturity of one month to one year. Treasury notes or Treasury bonds

00:13:04.360 | have a maturity of two years to 30 years. The way that it works is, the biggest difference

00:13:08.000 | is if you buy a T-bill, you say you want to get $1,000, you put $950 in on day one, and

00:13:14.820 | let's say you buy a 12-month T-bill, a year later you're going to get $1,000 at par. You

00:13:18.560 | don't actually get those coupon payments like you do from a bond or a Treasury note. That's

00:13:23.320 | the difference. I just wanted to make sure our guy knows what he's talking about here.

00:13:25.960 | If he's going to school someone, he knows his T-bills versus T-bonds. That's how that

00:13:30.280 | works.

00:13:31.200 | The good news is, because of the Fed's actions, these short-term rates are about as attractive

00:13:34.400 | as they've been on a relative basis in decades, I guess. So John, do a chart on. This is three-month

00:13:39.400 | T-bill yields versus 30-year Treasury yields, right? So you can see the changes over time.

00:13:45.520 | Obviously, they've been falling. This is since 1981. So I calculated the difference. So going

00:13:50.400 | back to 1980, early 1980s, the average difference between long-term yields, these 30-year Treasuries,

00:13:55.680 | and short-term yields, which is three-month T-bills, the average yield has been a little

00:13:59.680 | more than 2% higher for long-term rates, right? Long-term rates have averaged 2% more than

00:14:03.840 | ultra-short-term rates.

00:14:05.480 | Right now, T-bills yield 1% or more than 30-year Treasuries, which is basically the highest

00:14:10.880 | I could find in that time frame. So in over 40 years, this is the highest spread between

00:14:14.760 | ultra-short yields and ultra-long yields. So that's pretty good. So anyone parking their

00:14:20.140 | cash in money markets, CDs, savings accounts, and I'm talking online savings accounts here,

00:14:24.800 | not necessarily bank savings accounts and T-bills, are being given a gift from the Fed

00:14:28.400 | right now. So you don't have to take a lot of risk on your cash right now.

00:14:32.680 | So which option is better, an online savings account, T-bills, maybe money market, or CD?

00:14:37.080 | I think they all have pros and cons, and it probably doesn't really matter. T-bills' yields

00:14:40.440 | currently are higher than online savings accounts. So we're talking 4.5% to 4.6% for T-bills

00:14:46.560 | right now, depending on what month and what duration we're talking. And I've found 3.3%

00:14:52.080 | to 3.5% for online savings accounts. So that's a pretty decent, you can get over 100 basis

00:14:56.480 | points more in T-bills. And you can buy those T-bills directly from Treasury Direct, from

00:15:01.400 | the government, or you can just buy any of them.

00:15:03.200 | Not to brag, but my high-yield savings account is paying 4.03% right now.

00:15:06.720 | 4.03%, okay.

00:15:07.720 | That 0.03% is important.

00:15:08.720 | Okay, so you're earning 4%. You've told us it's some ... Are you sure this isn't a Ponzi

00:15:14.160 | scheme? No.

00:15:15.160 | I mean, who knows? But yeah, they're not so far.

00:15:17.560 | No, 4% is ... Because T-bills are where they are, that makes sense, right? And as the Fed

00:15:23.160 | continues to raise rates, these rates should continue to go ... Because the Fed just raised

00:15:25.880 | another 25 basis points yesterday. So online savings accounts are probably easier to deal

00:15:31.360 | with in terms of moving cash in and out of your account. That's, for me, the ease of

00:15:35.480 | access, I think, is the biggest thing for me.

00:15:38.880 | Both of these yields can and will change. So if the Fed keeps raising rates, they're

00:15:41.360 | going to go up. So again, if the Fed does another 25 basis points at the next meeting,

00:15:44.840 | these yields are going to continue to go up. And even if bond yields on the longer end

00:15:48.440 | don't move, these are going to have to follow the Fed funds rate, even if they don't follow

00:15:53.080 | it one for one. So you could lock in higher rates with CD yields, because these yields

00:15:57.680 | are going to fall if the Fed does decide to cut rates and take us out of the inverted

00:16:02.200 | yield curve. These rates are going to fall, too, and probably in a hurry. They're going

00:16:05.520 | to go down a lot faster than they went up. That's for sure. So when the Fed does decide

00:16:09.180 | to cut rates, whenever that is, it's going to happen. But as long as you don't have your

00:16:13.520 | money sitting in a brick-and-mortar bank earning 20 basis points right now, I don't think it

00:16:17.440 | really matters all that much. If you have T-bills or online ... It's probably not that

00:16:21.640 | much of a difference.

00:16:22.480 | Yeah. Years ago, my PNC account, a couple years ago, was like 0.01%. It was like what

00:16:28.160 | the savings was getting.

00:16:29.400 | Especially if you're buying an ETF, there's a T-bill ETF, you're not locking your money

00:16:34.280 | up in that. You're not necessarily locking it up. Even if you buy the actual bonds, you

00:16:38.960 | can still sell them at a premium discount.

00:16:40.960 | To be clear on that, that's something I don't quite understand. Is the yield on that ETF

00:16:44.880 | going to be the same as what the actual T-bills would be yielding? Or will there be a spread?

00:16:50.500 | It's going to be pretty close. Depending on the day you buy the actual T-bill, it might

00:16:53.860 | be a little more or less. But the T-bill yields right now on those ETFs are pretty close.

00:17:00.540 | I would just say enjoy this while it lasts, because the situation where short-term rates

00:17:04.420 | are way higher than long-term rates, it simply can't last. The Fed can hold on for a while,

00:17:09.660 | but that's not normal. So I'd say just enjoy it while it lasts.

00:17:13.780 | Good advice.

00:17:14.780 | All right. Let's do another one.

00:17:17.940 | Up next, we have a bit of a bummer, but it's a good question I think a lot of people can

00:17:22.580 | relate to. It's from a longtime listener. I'm not going to name them because of the

00:17:27.820 | topic. This question is, "My mother recently told me a story about a family friend. Let's

00:17:33.580 | call her Anna. Anna and her husband were well off, fully paid off house, and about to enjoy

00:17:37.900 | their golden years. No kids and a sizable nest egg. Anna's husband, probably due to

00:17:42.160 | some kind of dementia, began to compulsively gamble. Anna knew next to nothing about the

00:17:46.580 | family finances, as her husband had done a good job managing the books for their entire

00:17:50.580 | marriage. He gambled everything, from their retirement funds, to jewelry, to the title

00:17:54.720 | of their car. Long story short, they lost everything, and he disappeared. She ended

00:17:58.980 | up dying alone in a cheap nursing home paid for by Medicaid. My parents are getting up

00:18:03.120 | there in age, and I wonder what kind of safeguards I could help them put in place in case something

00:18:06.900 | happened to them mentally. For instance, how do I make sure they won't get cleaned out

00:18:10.460 | by a Nigerian Prince email scam?"

00:18:14.180 | This is something that you don't really think about. Longevity is a huge risk in retirement,

00:18:19.100 | but people don't think about the fact that you could have huge cognitive decline. Part

00:18:22.620 | of that could be because some sort of brain problem. You have dementia, Alzheimer's, or

00:18:27.780 | something, and that's something you have to think about. To me, this is very much a financial

00:18:31.580 | planning question, more than anything. Let's bring in a financial planner. Kevin Young

00:18:36.620 | has been on the show before. Hey, Kevin. How's it going?

00:18:39.220 | Hey, Kevin. Hey, guys. Thanks for having me.

00:18:40.900 | My sister-in-law was recently telling me a story about someone in her family who skimped

00:18:44.900 | and saved, didn't take any risks their entire career, worked for 40 years at the same company,

00:18:49.620 | saved six figures, was ready for retirement, and the first week they retired, handed their

00:18:54.260 | money over to someone who turned out to be a scam artist and took their life savings.

00:18:57.900 | Unfortunately, the people with the biggest targets on their backs for some type of scam

00:19:02.420 | is people with the most money. The people with the most money tend to be older people.

00:19:07.980 | These are risks that you don't really think about in terms of people worry about interest

00:19:11.460 | rates and all the other stuff, people, debt defaults, and recessions, and all this other

00:19:16.080 | stuff. This is a true problem for a lot of people. As your faculties decline with age,

00:19:21.700 | it's much easier to get taken advantage of. Kevin, what are some ways to, if you're looking

00:19:26.220 | at your parents and saying, "Listen, I just want to make sure that we keep them safe and

00:19:29.940 | their money safe. How do we do that?" What are some safeguards we can put in place?

00:19:35.700 | This is a really tough situation to hear about. It's hopefully avoidable for a lot of people.

00:19:46.820 | There are some aspects to this. That's obviously a very extreme case, but even in a less extreme

00:19:52.220 | case where the money just isn't being managed properly. Maybe the person, "Okay, well, my

00:19:59.260 | husband or my wife has always taken care of this, and as time goes on, you think everything's

00:20:04.060 | still being done properly, but oops, the person in charge of it hasn't switched you out of

00:20:10.580 | being 100% equities in 20 years." Maybe that worked out really well, but it's not going

00:20:16.620 | to work out so well into the teeth of a 2022 if you're retired.

00:20:22.700 | As little as the portfolio just being managed properly out to this obviously very extreme

00:20:28.460 | case of the money being all gone, there are a couple of things you can do at increasing

00:20:33.640 | levels of security. The first thing they could do for your parents is if they've got a brokerage

00:20:42.020 | account, an industry-wide thing now is something called a trusted contact. That's somebody

00:20:48.060 | that could be yourself, it could be a family member, somebody you trust that is just privy

00:20:53.860 | to the very basics of the account. The person would have no control over the account. They

00:20:59.580 | can call up and make any changes. But for me as an advisor, if I have a client that

00:21:04.840 | calls me up and asks me to do something kind of out of character, let's say they're living

00:21:08.280 | on $10,000 a month and they call me up and say, "I need $100,000 right now. Wire it right

00:21:13.560 | away." If that person's son is on the account as a trusted contact, I might call the son

00:21:19.780 | and just say, "Hey, got this request from your mom and just seemed a little out of character.

00:21:24.600 | Is everything okay?" They can't stop the withdrawal, but that might be somebody who can just sort

00:21:30.560 | of put out a speed bump and call and make sure everything's okay. And that way as the

00:21:35.160 | advisor and certainly as a loved one, you're aware of what's going on.

00:21:39.640 | Well, that to me sounds like another form of diversification. So we talk about the perils

00:21:43.560 | of concentration in portfolio investing. We've had a lot of people come to us and say, "I've

00:21:48.920 | been managing the finances my whole career. I want an advisor because I want the rest

00:21:52.440 | of the family to understand that something's going to be okay if I get hit by a bus or

00:21:55.320 | I keel over or I get dementia or whatever it is." So I think that, to your point, it's

00:21:59.560 | kind of diversifying the people involved in the account and maybe just opening up the

00:22:03.920 | lines of communication to other people.

00:22:05.800 | Yeah, exactly. I talk a lot about, and I stole this line from one of our other advisors,

00:22:11.960 | Paul, but we talk a lot about eliminating a single point of failure. And in some cases,

00:22:17.760 | that might be working with somebody that is all by themselves in an office. I've seen

00:22:24.420 | it before where somebody has an accountant and the accountant dies suddenly and he never

00:22:29.060 | had an assistant. Nobody has any clue where his files are. It's a huge mess. Similar to,

00:22:33.560 | "Hey, my dad always managed the account and now he's gone and nobody knows the passwords.

00:22:37.840 | Nobody knows where the money is," et cetera. So eliminating that single point of failure

00:22:42.240 | is really important.

00:22:44.080 | The next layer of protection you could do is if your parents are good with it, either

00:22:49.320 | they can have power of attorney on each other's accounts or they could name a sibling, somebody

00:22:57.600 | else, again, somebody who is responsible. The power of attorney takes the trust of-

00:23:02.440 | Not to brag, I'm the power of the attorney for my parents and my in-laws as well because

00:23:06.480 | I'm the finance guy.

00:23:07.800 | There you go. And probably Michael's accounts too. So the POA is a step above that trust

00:23:15.640 | of contact. That person actually can make changes to an investment portfolio. They can

00:23:20.160 | stop a withdrawal. They can take money out, in and out, et cetera. So that person you

00:23:25.000 | definitely want to make sure is somebody that is of sound mind and is accountable.

00:23:31.840 | The next level of that is sort of the same thing, but it would just be a trust. If you

00:23:35.960 | don't have somebody in the family or you don't want to take on that burden yourself or put

00:23:39.400 | that on your mom or your dad or vice versa, you can hire a corporate trustee. You could

00:23:45.840 | either hire a corporate trustee or again, have somebody that you trust do it. And basically

00:23:50.680 | you just put the assets in a revocable trust. I'm making this way simpler and sound easier

00:23:56.000 | than it actually is and probably less expensive. But having that trustee there to make those

00:24:02.560 | decisions and make sure that things are being done properly is a good way to go.

00:24:08.080 | That's just a legal document drafted up by an attorney?

00:24:12.160 | Yep, exactly. And you would need an attorney to do a POA as well. So an attorney would

00:24:19.240 | probably be a very good person to talk to about this kind of stuff and figuring out

00:24:22.560 | ways to protect assets from a variety of potential issues. And then the last thing being, and

00:24:30.160 | I'm kind of talking my book here, but a fiduciary advisor. This again, serves two purposes.

00:24:36.840 | One is you're removing that single point of failure just from an asset allocation perspective,

00:24:42.000 | to say nothing of the extremes of the money was misused. But I know in our case, if something

00:24:48.720 | like this starts to happen and the advisor sees odd behavior or sees things that don't

00:24:55.800 | look quite right, we have safeguards in place as a firm, as do good fiduciary advisors across

00:25:02.820 | the country. They will go to their compliance officer and say, "Hey, something's up. What

00:25:07.760 | are the steps we need to do to make sure that this is all okay?" That all goes back to making

00:25:12.040 | sure again, having a good trusted contact, having people in place to help you out with

00:25:16.400 | these things.

00:25:17.400 | I do think the first step could be, I agree with you on all those. Outsourcing is the

00:25:20.760 | big one, obviously. But just having a conversation, I think money is such a taboo subject. Most

00:25:25.240 | people probably don't have those conversations with their kids or vice versa with their parents.

00:25:29.480 | Taking that first step and having the conversation, saying, "I want to be involved. I want to

00:25:32.200 | help," just in case something does happen to one of you or both of you. I think simplicity

00:25:37.080 | is the other thing. If you just reduce the number of accounts that you have, don't have

00:25:41.600 | accounts all over the place, maybe reduce the number of holdings. If you have fewer

00:25:44.800 | funds in your portfolio, I think the simpler the better in terms of the plan and the process.

00:25:50.680 | I think all that stuff can help too, so it's easier if someone else does have to take over.

00:25:55.220 | But yeah, it's scary to think about this stuff, but people my parents' age, they've got two

00:26:01.260 | or three different friends from college that they've known their whole lives who are now

00:26:04.400 | in nursing homes because of some sort of Alzheimer's or dementia. This is the kind of thing that

00:26:08.520 | you'd never want to see happen to someone you know or love, but it's a real possibility.

00:26:11.880 | Yeah, and a lot of people, you're right. A lot of people, I feel like my parents' generation,

00:26:18.000 | and I'm generalizing here, so I apologize if I offend anybody, but it's not a generation

00:26:23.600 | that really talked about money a lot. Oftentimes, bringing that third party in, whether it be

00:26:29.300 | a trustee or a financial advisor, can just help to make those conversations a little

00:26:34.840 | less emotional.

00:26:35.840 | Yes, right. Yeah, even outside third party that can look at it objectively, I agree,

00:26:41.120 | because if you keep it in the family, it can make things tough.

00:26:43.880 | Yeah, I'm sure whatever emotional issues or cost of setting something like this up, I'm

00:26:50.240 | sure this person in the example would have gladly spent that either emotional or actual

00:26:56.400 | capital to ensure that this didn't happen.

00:27:00.280 | It seems like in a lot of cases, people wait until it's almost too late, where it's a really

00:27:04.800 | awkward or difficult conversation to have. Someone's already having cognitive decline,

00:27:08.820 | and so it's kind of like trying to get someone to give up their keys to their car when they're

00:27:13.360 | no longer fit to drive. Yeah, it seems like this works so much easier if someone has the

00:27:18.920 | forethought to go ahead years in advance and say, "Okay, just in the event something were

00:27:23.720 | to happen, I want to go ahead and make sure that this is taken care of," because otherwise

00:27:27.880 | it becomes kind of a messy situation, it seems like, or has the potential to become one.

00:27:32.440 | Right. I've already said it. If I decline cognitively, Michael cannot day trade anything

00:27:37.680 | in my portfolio. It's all target date funds. That's it.

00:27:40.880 | Roger in the chat said that he wanted to make you his POA.

00:27:43.560 | All right. Bring it, Roger. All right, let's do one more question.

00:27:47.560 | Last but not least, we have a question from Alex.

00:27:52.720 | Is the HSA underrated and underdiscussed as a retirement vehicle? The 2023 family max

00:27:58.600 | is $7,750. If you use HSA funds for non-healthcare expenses in retirement, those funds are treated

00:28:04.920 | like a 401(k). No penalty, but you pay income tax. In 2023, a maxed out 401(k) in HSA is

00:28:12.000 | over $30,000, a significant sum for tax-deferred retirement investments. The HSA allows you

00:28:17.640 | to supplement your 401(k) contributions by another 34%. Obviously, HSA funds used for

00:28:23.280 | health-related expenses come out as tax-free as well, which is a huge bonus. But I've never

00:28:27.860 | heard anyone discuss the HSA as a second 401(k), given its tax treatment in retirement. Would

00:28:32.800 | love to hear your thoughts.

00:28:34.120 | This is what they call a leading question. I have to be honest, I don't utilize an HSA,

00:28:39.880 | and for the simple reason that it feels like I have too many accounts already. But I know

00:28:42.360 | that there are people who ride or die for these things. So, Kevin, what are your thoughts?

00:28:44.760 | My wife has one, so I'm an expert.

00:28:46.760 | Okay.

00:28:47.760 | I'm just kidding. I don't understand.

00:28:48.760 | Ben, you have a bunch of kids. I have a bunch of kids. The HSA is, forget for a retirement

00:28:54.840 | vehicle, they're great for young families too. Because as we know, even if you've got

00:29:00.040 | great health insurance, that deductible has got to get hit. And if you've got money set

00:29:04.920 | aside that comes out of the paycheck every couple of weeks, it's a really nice thing

00:29:08.600 | to have as a father of three little kids who visit doctor's offices as a sport, apparently.

00:29:18.440 | But to the question around using HSA as a retirement vehicle, I've got a graphic I wanted

00:29:26.560 | to throw up. John or Duncan, perfect. Thank you. One thing to think about is just that

00:29:33.840 | people have it in their minds that retirement is, "Oh, healthcare, the government's going

00:29:38.800 | to take care of me. It's Medicare. No problems." I don't really have to think about it. Out-of-pocket

00:29:46.280 | medical expenses in retirement are a real thing. They're not insignificant. Yes, you

00:29:50.520 | get your Part A theoretically free. Again, it depends on where you are with tax brackets.

00:29:57.180 | But that basically covers if you're in a car wreck and need to go to the hospital. It doesn't

00:30:02.520 | cover much else. Then you've got your Part B premium, then you've got your Medigap, then

00:30:07.840 | you've got your prescription drugs. All that can add up to $13,000, $15,000 a year for

00:30:14.320 | a married couple. All of a sudden, you start to think, "Well, $15,000 a year." And even

00:30:20.040 | before this recent bout with inflation that we've all been living with, if you looked

00:30:24.760 | back pre-last year, the things that were inflating the highest, healthcare was one of them. Healthcare

00:30:30.280 | and education and childcare, which is great. But for a retiree, having a bucket of money

00:30:37.880 | that you can say, "Hey, this bucket of money is going to be specifically for my healthcare."

00:30:43.040 | I think mentally and emotionally, that makes a lot of sense and gives people some comfort

00:30:47.440 | knowing that, "Hey, if there are out-of-pocket costs, I'm not dipping into my 'real' retirement

00:30:52.880 | funds."

00:30:53.880 | Obviously, it does seem like one of the biggest selling points here is just flexibility. If

00:30:58.480 | you need to spend it on healthcare, you can, and it's tax-free dollars. If you want to

00:31:04.000 | carry it over and use it for that extra retirement boost, you can too, and that's not a bad option.

00:31:09.000 | Yeah, exactly. It is flexible. Obviously, the triple tax-free aspect of it, getting

00:31:14.080 | a deduction, the money grows tax-free, and then when you pull it out for healthcare needs,

00:31:19.520 | it's tax-free. That's wonderful. To this person's point, if you don't use it for healthcare

00:31:28.360 | issues, yeah, you could use it for retirement. My only pushback on that would potentially

00:31:34.440 | just be around why you wouldn't fund other types of accounts, whether it be a backdoor

00:31:39.600 | Roth. If you're already maxing your 401(k), it probably means you make too much to do

00:31:45.320 | a regular Roth, so maybe a backdoor Roth, or maybe just putting in a regular taxable

00:31:49.040 | account that, down the road, you're going to pay long-term capital gains on instead

00:31:53.160 | of ordinary income, which you would on the HSA if not used for healthcare.

00:31:58.760 | Now, even though I bad-mouthed politicians earlier, if someone wants to make me the financial

00:32:03.760 | retirement czar, I would just say, "Let's just make these rules generalized to all retirement

00:32:09.520 | accounts. Put the HSA, and the 401(k), and the IRA together, and the Roth, and just put

00:32:13.640 | it all together. Give them all the same rules. Give everyone the same contribution limit.

00:32:17.320 | Let's make it easy." I'm getting roasted in the comments here for not having an HSA.

00:32:21.200 | I just want people to know here, I have a SEP IRA, too, so I'm taking advantage of as

00:32:24.600 | many tax deferrals as I can. If I fill that bucket up, maybe I'll look at an HSA sometime.

00:32:28.400 | - Also, you have a Roth for each of your kids, right? Because they help out with your work.

00:32:33.360 | - Yeah, right. Something like that. - They're holding the boom above their head.

00:32:38.720 | - Right, right. - But I can definitely see the benefits of

00:32:41.240 | the HSA. It makes sense. My daughter had to get braces this year. Could you do dental

00:32:47.120 | out of this, too? Does that count? - Yeah, yeah. Maybe you can tell, this side

00:32:54.900 | of my face is a little puffy because I just had a tooth extracted on Tuesday morning.

00:32:59.520 | I'm sure that's going to go over the yearly limit on our health care.

00:33:03.040 | - Should I use some tax-free dollars to pay for my daughter's braces?

00:33:06.120 | - Yeah. I got my HSA ready to go for that bill. - The only catch, if there is a catch,

00:33:12.720 | is that you just have to have a high-deductible insurance plan, right?

00:33:16.560 | - Correct. Yep, yep. Exactly. High-deductible health care plan.

00:33:18.920 | - See your tax return, Duncan. - I wasn't kidding. My wife does have one,

00:33:22.520 | so I know a little bit about them. - Yeah. High-deductible health care plan. Again,

00:33:28.040 | I think if you're a young person starting a family, I can't recommend them enough because

00:33:35.920 | having children, the actual act of having children is extremely expensive. Raising them

00:33:41.080 | is expensive. Doctors are expensive. You never know what's going to come down on you. It's

00:33:46.440 | a great thing early in life, and if you don't need it, and some of that money compounds

00:33:50.240 | for 35 years, you're in really great shape. - All right. Great questions today. We appreciate

00:33:56.520 | everyone who always writes in. It is kind of nice. We get a total diversification of

00:34:00.680 | questions. It's always something new that people are keeping us on our toes, right?

00:34:03.520 | - They're great questions. I love these. - After this week, I'm anticipating a bunch

00:34:06.960 | of TQQQ and biotech questions for next week. - Yeah, but those are all coming from you,

00:34:11.800 | Duncan. - That's true.

00:34:12.800 | - So, remember, hit that subscribe button. Idontshop.com for compound needs. Compounded

00:34:17.760 | friends tomorrow. Tune in, and we will see you next week.

00:34:21.680 | - See you, everyone.

00:34:22.520 | (upbeat music)

Does the Debt Ceiling Matter to the Market? | Portfolio Rescue 62

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