Is Whole Life Insurance Ever Worth It?

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00:00:13.720 | - Welcome back to Future Proof.

00:00:18.640 | What?

00:00:19.480 | Welcome back to Portfolio Rescue.

00:00:20.520 | Duncan, I don't know what I'm talking about here.

00:00:22.480 | - You're jumping into the ad.

00:00:23.900 | - Yeah, good segue.

00:00:26.080 | We're this week responsible by Future Proof.

00:00:27.660 | I'm just so excited about it still.

00:00:30.380 | Biggest wealth festival there is,

00:00:31.660 | September 10th through 13th,

00:00:32.780 | Huntington Beach, California.

00:00:34.780 | We're gonna have thousands of people there.

00:00:36.760 | It's gonna be fun.

00:00:38.060 | Last year we did a,

00:00:39.180 | Duncan and John filmed us doing a,

00:00:41.880 | recreating a rocky scene on the beach.

00:00:43.260 | That's how nice the beach is.

00:00:44.940 | That was fun.

00:00:45.780 | Can't believe I actually ever did that.

00:00:47.300 | - I'm glad you mentioned that.

00:00:48.140 | I was gonna ask what we're gonna do

00:00:49.580 | to one up that this year.

00:00:51.500 | - I don't know.

00:00:53.340 | I don't think it's possible to top it.

00:00:54.460 | If you want to check it out,

00:00:55.300 | if you want to register,

00:00:56.120 | I think if you register early now,

00:00:57.100 | you can get a decent deal.

00:00:58.340 | Futureproof.advisorcircle.com.

00:01:01.820 | All right, so we're back into the good part

00:01:04.060 | of the stock market.

00:01:04.900 | John, throw up my chart here.

00:01:05.840 | I looked at the monthly returns for the S&P

00:01:08.740 | and I realized I did January 2022 twice on here,

00:01:11.820 | but the last one's supposed to be January 2023.

00:01:13.980 | So this year to date,

00:01:16.260 | as of this morning,

00:01:17.100 | we're up like five something percent in the S&P.

00:01:19.820 | And if you look at the monthly returns over the last,

00:01:21.620 | this is 13 months or so.

00:01:23.340 | Call it a year and change.

00:01:24.300 | We have down five, down three, up four,

00:01:27.700 | down nine, down eight, up nine, down four,

00:01:30.740 | down nine, up eight, up six, down six, up five,

00:01:34.700 | and who knows where we're gonna finish.

00:01:36.320 | It's all over the place.

00:01:38.460 | And I just thinking about all of this back and forth

00:01:42.500 | and volatility and it's,

00:01:44.940 | even though there's been a downtrend in the market,

00:01:46.700 | there's been a lot of snapback rallies

00:01:48.820 | and it's very confusing to people.

00:01:51.260 | And it just reminds me of the John Bogle quote

00:01:53.340 | that the stock market is a giant distraction

00:01:54.940 | to the business of investing.

00:01:56.300 | In the last year, really last three years or so,

00:01:58.300 | we've had so much volatility and booms and busts

00:02:01.180 | and things going in different directions.

00:02:04.460 | I think it's easy to lose sight of the fact that

00:02:06.740 | like over the longterm,

00:02:08.500 | these huge moves on a daily, weekly, monthly basis

00:02:12.500 | kind of get smoothed out.

00:02:14.380 | And I think even when it's going really well,

00:02:16.740 | is it going a little bit better lately?

00:02:18.460 | You still have to kind of zoom out and realize like,

00:02:20.020 | this is not the way things are gonna be over the longterm.

00:02:23.700 | So I do think it makes sense for most people

00:02:25.780 | to just kind of ignore the stuff that's happening

00:02:28.020 | on a daily, weekly, monthly basis

00:02:29.620 | in terms of performance, especially.

00:02:31.420 | - Yeah, no, I mean, I think that the takeaway for me

00:02:36.540 | is that I've learned now why people are obsessed

00:02:38.820 | with year-to-date,

00:02:40.100 | because year-to-date is feeling great right now, you know?

00:02:42.660 | So--

00:02:43.500 | - All we need to do is turn over the calendar

00:02:44.940 | and look what happens.

00:02:46.020 | - Right, right.

00:02:46.940 | Also, there is a firearm test going on in the background,

00:02:49.620 | so hopefully it's not too loud.

00:02:51.580 | - Okay, good timing.

00:02:53.020 | Thanks, guys. - Great, yeah.

00:02:53.860 | - All right, let's do the first question.

00:02:55.220 | - Okay, up first we have a question from Mike.

00:02:57.620 | I've been considering shifting 20 to 30%

00:02:59.740 | of my all-stock ETF portfolio to bonds,

00:03:02.260 | but I haven't yet because the market

00:03:03.460 | is still well below the highs of 2022.

00:03:05.820 | My thought is that I have a long enough time horizon

00:03:08.020 | to wait until the stock market reaches new highs

00:03:09.820 | before making this shift.

00:03:11.340 | I recognize that this is a type of market timing,

00:03:13.420 | which generally doesn't work and should be avoided,

00:03:15.740 | but I don't see any gaps in this rationale,

00:03:18.100 | so I'd like to hear your thoughts.

00:03:20.140 | I find it interesting they admit

00:03:22.180 | that it usually doesn't work,

00:03:23.940 | but they think that this might work for them.

00:03:27.380 | - I guess any sort of market timing,

00:03:28.660 | there has to be some sort of gap in rationale.

00:03:30.700 | Now, I'm not sure the exact reason here,

00:03:32.540 | but since Mike is a viewer of the show,

00:03:34.260 | I'm guessing he analyzed his risk profile

00:03:37.620 | and time horizon and his plan,

00:03:39.020 | and he said, "You know, I need a more balanced portfolio.

00:03:41.020 | "I'm going from all-stock to bonds.

00:03:42.480 | "I realize I need more balance," for whatever reason.

00:03:44.420 | So he wants to go from 100% in stocks

00:03:46.980 | to more of an 80/20, 70/30 portfolio.

00:03:49.780 | Now, some people prefer the glide path,

00:03:51.340 | which is just slowly moving from all-equity

00:03:53.220 | to something more balanced.

00:03:54.420 | So that could mean, I don't know,

00:03:55.260 | 5% or 10% per year you move.

00:03:57.180 | So you go 100% to 95% to 90%, whatever, in a slow...

00:04:00.340 | That's how the target date funds do it, right?

00:04:02.100 | They do it in a slow manner.

00:04:03.720 | They slowly...

00:04:04.620 | Other people would rather just rip off the Band-Aid

00:04:06.320 | and, like, "If this is the allocation I want,

00:04:08.180 | "I'm just gonna go to it now."

00:04:10.020 | It sounds like Mike wants to rip off the Band-Aid,

00:04:12.080 | but he's not quite there yet

00:04:13.360 | because he thinks stocks can snap back.

00:04:16.140 | Now, the rationale here

00:04:17.140 | that stocks are more attractive than bonds,

00:04:19.540 | it makes more sense,

00:04:20.580 | 'cause even if stocks just go back to all-time highs,

00:04:22.460 | they'd probably have more upside.

00:04:23.520 | The problem here, as always,

00:04:25.100 | that even if you're right directionally,

00:04:26.960 | that stocks do have more upside,

00:04:29.100 | you might not nail the timing.

00:04:30.140 | So, John, throw up the table I made here.

00:04:31.980 | So these are the drawdowns as of yesterday.

00:04:34.100 | It might be a little better

00:04:34.940 | after a little bit of rally today,

00:04:36.020 | but the S&P from all-time highs is down 16%.

00:04:38.340 | The Russell 2000 index of small caps was down 22.

00:04:42.060 | NASDAQ 100 is still down 28%.

00:04:44.320 | Just to break even,

00:04:45.420 | we gotta see gains of 19, 28, and 38, respectively, right?

00:04:49.380 | Now, if that happens in less than a year,

00:04:51.160 | you're talking great annualized returns.

00:04:52.780 | It's gonna be awesome.

00:04:53.620 | Of course that's gonna beat the bond market.

00:04:55.520 | But I'd say it takes a little longer.

00:04:57.420 | I looked at what the annualized returns would be here

00:04:59.340 | over two, three, four, or five years.

00:05:01.800 | If we're talking four years,

00:05:04.980 | it could be more of a 4% return

00:05:07.500 | for the S&P to get back to that break even.

00:05:09.760 | And now we're looking pretty similar to bond yields.

00:05:12.300 | Now, I'm not saying it's going to take that long,

00:05:13.940 | but if you look at the history of bear markets,

00:05:15.800 | some of them have taken that long to break even.

00:05:18.220 | I hope it doesn't take that long, but you never know.

00:05:20.060 | So I think the whole point of setting an asset allocation

00:05:23.600 | in the first place is not necessarily to optimize

00:05:25.960 | for the highest returns possible.

00:05:27.400 | If you're gonna optimize for the highest returns possible,

00:05:29.700 | you invest in the stock market

00:05:30.880 | and maybe add some leverage on there, right?

00:05:32.320 | That's like a textbook.

00:05:33.560 | That's how you'd wanna optimize.

00:05:34.920 | But I think the asset allocation really is about trying

00:05:38.280 | to earn the highest return for a given level of risk.

00:05:40.720 | And if you've figured out that a given level of risk for me

00:05:43.120 | is 80/20 or 70/30,

00:05:45.780 | the longer you stay in an all-stock portfolio,

00:05:47.960 | the longer there's a risk mismatch.

00:05:49.480 | So I think you might be fine

00:05:51.720 | since you've already dealt with an all-stock portfolio

00:05:54.600 | for this long, but I think that there's a few options.

00:05:57.120 | So you could wait it out

00:05:58.400 | and sell some of your stocks after a big rebound.

00:06:01.120 | The only caveat here is that you might just need

00:06:02.500 | to be a little more patient.

00:06:03.340 | If the market is doing great now,

00:06:04.840 | it could fall again next month, who knows?

00:06:06.680 | We could be back here next month and say,

00:06:07.720 | "Hey, we're back to a down 6% month."

00:06:10.060 | Wouldn't surprise me.

00:06:11.220 | You could rip the bandaid off

00:06:12.120 | and just move to that stated asset allocation.

00:06:14.000 | The bad news is you're selling some stocks at a loss,

00:06:16.240 | probably in the midst of a drawdown.

00:06:17.280 | The good news is you're buying bonds

00:06:18.480 | at a much higher yield here.

00:06:19.560 | So maybe bonds provide a little bit of a boost

00:06:21.560 | 'cause you have higher yields.

00:06:22.880 | The third option, if you want to split the difference,

00:06:24.760 | is just my glide path, dollar cost average, right?

00:06:27.120 | Do 5% every three months, every six months,

00:06:29.440 | every nine, 12 months, whatever it is.

00:06:31.080 | Pick a time, do it at a predetermined intervals,

00:06:33.500 | and then just ease into it.

00:06:35.240 | And because if the stock market falls,

00:06:37.720 | then you're gonna think, "Well, what am I waiting for?"

00:06:40.360 | And then you could just have to double down

00:06:41.760 | and do it at a different time.

00:06:42.580 | So it's possible we could slingshot back

00:06:44.680 | to new all-time highs.

00:06:45.520 | It wouldn't surprise me.

00:06:46.340 | It's also possible that we could just kind of drift sideways

00:06:48.340 | for a while and who knows what happens.

00:06:49.960 | So I would just have a contingency plan

00:06:52.480 | if you're gonna stick in all stocks

00:06:53.680 | that you want to get to this other allocation,

00:06:55.640 | just in case stocks roll over again

00:06:56.920 | or they go sideways for a while

00:06:57.960 | and then you're kind of stuck and go, "Now what do I do?"

00:07:01.280 | - But to be clear, what's your market prediction

00:07:03.280 | for the year overall?

00:07:04.440 | - I give my S&P 500 levels in December.

00:07:09.760 | - Okay, okay. - I wait.

00:07:11.100 | - I'm trying to get you on CNBC, you know?

00:07:13.200 | - I put all my predictions through Michael.

00:07:17.640 | He's like my puppet.

00:07:19.420 | Let's do another one.

00:07:20.820 | - Okay, up next we have a question from Joe.

00:07:23.860 | "If I have a pension and an annuity,

00:07:25.920 | "is that a substitute for bonds?"

00:07:28.160 | - Good question.

00:07:29.000 | I've received some variation of this question for years.

00:07:31.140 | This was actually another follow-up

00:07:32.140 | to our discussion last week on the pros and cons

00:07:34.300 | of having 100% all-stock portfolio.

00:07:36.740 | And what did you say?

00:07:38.100 | 70% of the people in the chat last week

00:07:39.660 | said that they actually have all their money in stocks?

00:07:41.700 | Something like that?

00:07:42.540 | - Something like that, yeah.

00:07:44.140 | - Okay, pretty good.

00:07:45.260 | Another one people ask is if Social Security

00:07:47.640 | should count as a bond.

00:07:48.480 | 'Cause Social Security really is a form of annuity.

00:07:50.280 | I've seen estimates in the range of,

00:07:52.440 | 'cause you take those payments

00:07:53.720 | and the present value of any investment

00:07:56.080 | is take the future cash flows,

00:07:58.000 | discount them back at some reasonable discount rate.

00:08:00.600 | If you did that for Social Security,

00:08:02.060 | depending on how much you made

00:08:03.480 | and how long you live and all these things

00:08:05.080 | that they change from person to person,

00:08:08.160 | the present value of even Social Security as an annuity

00:08:10.600 | could be something like 300 to $500,000.

00:08:13.680 | Like that would be the present value

00:08:15.140 | of trying to buy an annuity stream like that.

00:08:17.540 | Obviously, it's impossible to come up with a precise value

00:08:20.180 | for these things 'cause rates are always changing

00:08:21.780 | and no one knows how long they're gonna live.

00:08:23.660 | But let's say you made some reasonable assumptions

00:08:25.780 | and you discount your periodic payments from your annuity

00:08:28.100 | or your pension back to give yourself a range

00:08:30.820 | of the current value of those payments.

00:08:32.180 | Let's say you have like a $600,000 portfolio

00:08:35.300 | and you realize that these annuity payments

00:08:37.060 | and this pension payment is worth

00:08:38.100 | something like 400 to 600,000.

00:08:40.660 | So does that mean that you now have a 60/40 portfolio

00:08:44.520 | or a 50/50 portfolio and then you can go all in on stocks

00:08:47.520 | 'cause that other piece is your bonds?

00:08:49.520 | I don't necessarily like to look at it that way.

00:08:52.260 | I prefer to approach this

00:08:53.480 | from more of a financial planning perspective

00:08:55.360 | than a portfolio management perspective

00:08:57.600 | because think about it, if you had no,

00:08:59.600 | let's pretend you have no pension income and no annuity

00:09:01.920 | and you retire, would you rely strictly,

00:09:03.320 | and you're relying strictly on your portfolio

00:09:05.180 | for your spending purposes.

00:09:06.200 | You decide, all right, I can spend maybe 4% to 5% per year

00:09:09.080 | from this portfolio for withdrawals

00:09:10.780 | and that's gonna get me through things.

00:09:12.920 | Now, let's say you run the numbers

00:09:14.560 | and you realize you do have this pension,

00:09:15.720 | you do have the annuity,

00:09:16.560 | and it takes your spending from your portfolio down

00:09:18.240 | from 4% to 5% to 2% to 3%.

00:09:20.600 | So that gives you the ability to potentially

00:09:22.560 | take more risk in your portfolio,

00:09:24.520 | but the question then becomes,

00:09:25.880 | do you want to take more risk?

00:09:27.360 | Like you can take more risk, but do you really need to?

00:09:31.080 | And you might not need to anymore, but you could want to.

00:09:33.400 | So I think that's what it really comes down to.

00:09:35.360 | Like a lower spending rate

00:09:36.400 | gives you the ability to take more risk.

00:09:37.840 | It doesn't necessarily force you to take more risk.

00:09:39.600 | It doesn't require you to.

00:09:40.600 | So I think you still,

00:09:42.320 | if you have a hard time dealing with volatility,

00:09:44.600 | having an all stock portfolio,

00:09:46.000 | even if you have that other income coming in,

00:09:48.020 | it's probably not gonna help much.

00:09:48.860 | 'Cause think about it, if you're still working

00:09:51.320 | and you're getting a paycheck and income coming in,

00:09:52.720 | does that make it easier to sit through the volatility

00:09:54.600 | in the stock market?

00:09:55.520 | For some people it might,

00:09:56.440 | 'cause they know they have future savings.

00:09:57.560 | Other people say, no, I can't do this.

00:09:59.440 | I need an emotional hedge.

00:10:00.280 | I need cash or bonds.

00:10:01.160 | So I just think you have to decide

00:10:02.800 | whether you're comfortable taking more risk.

00:10:04.080 | If you have that annuity and the pension coming in,

00:10:07.300 | obviously you're in a much better spot.

00:10:09.000 | It makes your life more predictable and easier

00:10:10.840 | in terms of spending needs.

00:10:12.500 | But I think it really depends on how you handle volatility.

00:10:15.440 | - Well now, maybe I'm wrong here,

00:10:20.200 | but I feel like I've read before about pensions

00:10:22.540 | not actually coming to fruition, right?

00:10:24.320 | Isn't that a thing that happens?

00:10:25.960 | So are they 100% given?

00:10:28.800 | - You mean if a company goes under?

00:10:30.600 | - Yeah, yeah.

00:10:31.440 | I feel like I've heard of them getting cut in half

00:10:33.480 | or being like, yeah.

00:10:35.720 | - Well, there's some insurance there

00:10:37.180 | and it'd be hard to cut it in half immediately

00:10:39.240 | for some people.

00:10:40.080 | But your future benefits could be taken down

00:10:42.320 | if you're a young person right now.

00:10:43.380 | Say you might not get the same benefits as if you're a teacher

00:10:46.360 | and your benefits are a little,

00:10:47.560 | you have to put more money in

00:10:48.400 | or you don't get as much as the other teachers.

00:10:49.720 | But yeah, for some people, I guess it would be,

00:10:52.280 | can I really bank on this?

00:10:55.080 | But yeah, if you're in the position

00:10:56.880 | of getting a pension income,

00:10:57.920 | you're in a better spot than a lot of people

00:10:59.080 | 'cause a lot of people don't have those anymore.

00:11:00.920 | - Right.

00:11:02.000 | - By the way, I heard the fire alarm.

00:11:03.440 | Nicely done.

00:11:04.280 | It's getting louder and louder, it feels like.

00:11:07.080 | - All right, let's do another one.

00:11:08.320 | - Okay, up next we have a question from Casey.

00:11:11.280 | I've heard you guys say quite a few times

00:11:12.840 | that trees don't grow to the sky

00:11:14.500 | and you're usually talking about a particular company

00:11:16.640 | or Bitcoin or maybe ARK, et cetera.

00:11:19.240 | But could the same be true for the stock market in general?

00:11:21.840 | Does it hit a point where it simply can't grow anymore?

00:11:24.540 | After all, money is scarce and limited.

00:11:26.520 | If everyone invests in the stock market,

00:11:29.640 | we can't all become millionaires, right?

00:11:33.080 | - So I've only read one Jonathan Franzen book in my life.

00:11:35.640 | Are you a Franzen fan at all?

00:11:37.840 | - I actually have a book or two, but I haven't read them.

00:11:40.680 | - Okay, I think the one was called "Freedom," I think.

00:11:42.560 | I read it, I don't know, probably eight or nine years ago.

00:11:45.720 | The only thing I remember about the book,

00:11:46.760 | it was a really long book,

00:11:47.640 | was that the whole basic premise was

00:11:50.080 | why do we need to have so much economic and personal growth?

00:11:52.480 | Why can't we just chill

00:11:53.440 | and be happy where we are for a while?

00:11:55.340 | And that sounds great until you realize

00:11:57.800 | that this machine that we're in,

00:11:59.680 | it kind of rests on the fact that growth.

00:12:01.760 | Listen, if we all woke up one day and decided

00:12:03.840 | we're not gonna prove ourselves anymore,

00:12:05.280 | no more innovation, we're happy where we are,

00:12:07.360 | sure, the stock market will stop growing,

00:12:09.480 | corporations will stop throwing off profits,

00:12:11.800 | and we'll probably descend into Mad Max territory

00:12:15.400 | or something, and people will be very angry.

00:12:18.180 | - So you're that optimistic?

00:12:21.100 | - No, I just don't think, I think as a species,

00:12:24.240 | the one thing that sets us apart

00:12:25.280 | is that we like to move forward

00:12:26.580 | and improve and have progress.

00:12:28.360 | It's kind of just in our DNA, right?

00:12:30.840 | So Buffett, in 2008, wrote his "Buy American IM" thing

00:12:34.400 | in October, 2008.

00:12:35.920 | He was like 30% too early, but so be it.

00:12:37.960 | He said, "Over the long term,

00:12:38.800 | "the stock market will be good news.

00:12:40.540 | "In the 20th century,

00:12:41.380 | "the United States has endured two world wars,

00:12:43.220 | "other traumatic and expensive military conflicts,

00:12:45.160 | "the depression, a dozen or so recessions,

00:12:47.180 | "financial panics, oil shocks, a flu epidemic,"

00:12:49.400 | which was one of two now,

00:12:51.240 | "and the resignation of a disgraced president.

00:12:52.980 | "Yet the Dow rose from 66 to 11,497."

00:12:56.280 | That was in the fall of 2008.

00:12:57.280 | The Dow is now over 33,000.

00:12:59.080 | "Since then, we've had wars, a pandemic,

00:13:00.920 | "skyrocketing inflation and insurrection of the capital.

00:13:03.600 | "Things are still moving forward.

00:13:04.500 | "People are still innovating.

00:13:05.340 | "Despite all the bad stuff, people just keep moving forward.

00:13:06.760 | "So I do, however, think it makes sense

00:13:08.800 | "to temporary expectations of future returns."

00:13:10.640 | So John Thrope, this is one of my favorite charts,

00:13:12.280 | courtesy of the Credit Suisse yearbook.

00:13:14.120 | This shows the relative size of equities markets

00:13:16.640 | around the globe in 1899 and 2022.

00:13:20.920 | The US made up 15% of the equity markets in 1900.

00:13:24.780 | They now make up 60%.

00:13:26.120 | It's eating it like Pac-Man, basically,

00:13:28.040 | eating the rest of the world.

00:13:29.280 | (crowd cheering)

00:13:32.420 | Nice sound effect.

00:13:33.320 | Way to go.

00:13:35.840 | And we still can't beat the rest of the world in soccer.

00:13:38.160 | - True.

00:13:39.000 | - So we're up like 10% per year for the last 100 years.

00:13:41.560 | So they say the winner writes history books.

00:13:43.000 | We're definitely the winner here.

00:13:44.320 | I just don't think that's sustainable.

00:13:45.960 | So if you look at valuations over time,

00:13:47.720 | they've been trending higher.

00:13:48.640 | Dividend yields have been trending lower.

00:13:50.660 | It would make sense that returns are lower going forward.

00:13:53.680 | Now, is that because trees don't go to the sky?

00:13:55.440 | I think not necessarily.

00:13:56.320 | The reason that valuations used to be so much lower

00:13:58.960 | and returns used to be so much higher

00:14:00.280 | is because the stock market used to be way riskier.

00:14:02.740 | During World War I, the stock market closed for six months

00:14:04.900 | 'cause liquidity all but dried up

00:14:06.280 | 'cause people went away to war.

00:14:07.920 | The Federal Reserve was created a year before that happened.

00:14:10.080 | During the Great Depression,

00:14:10.920 | they basically made the depression worse.

00:14:12.600 | They were raising rates.

00:14:13.700 | The stock market fell something like 85%.

00:14:15.680 | Do you think that the government or the Fed

00:14:17.040 | would allow the stock market to fall 85% today?

00:14:20.520 | No way.

00:14:21.360 | There's no way they would ever let that happen.

00:14:22.720 | So I think if you take the Great Depression

00:14:24.400 | left-tail risk off the table,

00:14:26.000 | risk premiums should compress.

00:14:28.180 | Now--

00:14:29.020 | - What if a bunch of Congress people

00:14:30.200 | were shorting the market, though?

00:14:32.320 | I could see that happening.

00:14:33.920 | - Don't they do that anyway?

00:14:35.320 | So I think if you don't have to worry

00:14:38.600 | about this Great Depression

00:14:39.440 | 'cause there's now a good lender of last resort,

00:14:41.240 | you probably don't have to ask for as high returns

00:14:44.440 | on the stocks.

00:14:45.280 | So obviously, I'm not saying

00:14:46.280 | that the risk of a market crashes off the table.

00:14:48.120 | It's obvious volatility in the stock market

00:14:49.680 | is still here to stay.

00:14:50.500 | Just look at the last three years.

00:14:51.640 | It's not like it's gotten a ton easier.

00:14:53.800 | I think we've taken the Armageddon situation off the table,

00:14:56.400 | unless we get an actual Armageddon.

00:14:58.260 | In that scenario, though,

00:14:59.580 | we have Bruce Willis and Ben Affleck, just in case.

00:15:02.200 | However, even if I'm right

00:15:03.940 | that future returns will be lower,

00:15:06.880 | the only thing that matters to actual investors

00:15:08.440 | is net returns, not gross returns, right?

00:15:10.320 | So I think gross returns

00:15:11.600 | will probably be lower in the future.

00:15:13.200 | Why?

00:15:14.040 | Because costs were so much higher in the past.

00:15:15.000 | In the past, it could cost anywhere

00:15:16.680 | from 1% to 3% in commissions to buy a stock, right?

00:15:19.960 | Then May Day came along in 1975.

00:15:22.000 | They made it so that they didn't have a set prices

00:15:23.960 | for brokerages, cheap brokerages, discount brokerages,

00:15:28.260 | like Charles Schwab came along.

00:15:30.400 | Costs have been completely wiped out.

00:15:31.440 | Obviously, now it's free to trade a stock.

00:15:33.400 | From 1900 to 1975, the average CAPE ratio

00:15:35.960 | for the U.S. stock market was less than 15 times.

00:15:38.240 | Since 1976, it's 22 times on average, right?

00:15:42.560 | So valuations have gone up.

00:15:43.760 | I think lowering costs helped that.

00:15:45.320 | Bid-ask spreads have collapsed.

00:15:47.100 | You said these wide bid-ask spreads.

00:15:48.600 | Back in the day, people used to trade stocks

00:15:50.700 | using fractions instead of decimal points.

00:15:52.340 | You used to have guys in funny jackets

00:15:54.520 | on a trading floor yelling at each other.

00:15:56.600 | Now, we trade using computers, right?

00:15:58.000 | - Those were the days.

00:15:59.320 | - Index funds didn't exist until the 1970s, right?

00:16:02.080 | You used to have to pay an upfront fee

00:16:03.280 | called a load to buy a mutual fund.

00:16:04.640 | It could cost anywhere from 5% to 10%.

00:16:06.680 | The very first index fund in 1976 from Vanguard

00:16:09.440 | had an 8% load.

00:16:10.480 | You had to pay 8% of your purchase price

00:16:12.140 | to buy an index fund.

00:16:13.720 | 401(k)s have only been around since 1978.

00:16:15.920 | Roth IRAs were created in 1997.

00:16:18.240 | First ETF was also in the 1990s.

00:16:19.760 | So it's never been easier to invest in the stock market

00:16:22.660 | at a low cost using tax-deferred accounts.

00:16:25.100 | So I think even if gross returns are lower going forward,

00:16:27.500 | it's not 10% anymore.

00:16:28.420 | Let's say it's 6, 7, 8.

00:16:31.020 | On a net basis, they might actually be higher

00:16:32.980 | because it's so much easier to invest now.

00:16:35.020 | So that's my positive spin on it.

00:16:36.780 | Gross returns had to be higher in the past

00:16:38.940 | to incentivize people to invest in stocks

00:16:40.700 | 'cause they were so much scarier.

00:16:42.720 | That's not the case anymore.

00:16:44.140 | - What's the highest fee you remember

00:16:47.820 | for placing a trade for stocks,

00:16:50.640 | calling up a broker or something?

00:16:52.540 | - I mean, I don't know, Duncan.

00:16:53.420 | The first trade I ever made was a target date fund.

00:16:55.380 | So it's always been pretty free for me.

00:16:58.020 | - I feel like I've heard people talk about the 40s,

00:16:59.940 | like $40 or something, which is pretty hard to imagine.

00:17:03.620 | - Yeah, it was pretty high back in the day.

00:17:06.100 | And I mean, the thing is, though,

00:17:07.020 | people back in the day were more buy and hold investors.

00:17:08.860 | They didn't trade as much.

00:17:09.700 | So maybe that was a barrier

00:17:11.780 | from an emotional, behavioral perspective.

00:17:16.740 | But it used to be really, really expensive.

00:17:20.180 | And the other thing is the trees don't grow to the sky thing

00:17:22.620 | is more about outperformance.

00:17:24.500 | So the reason that a strategy can't outperform at all times

00:17:28.180 | is because if such a strategy existed,

00:17:31.060 | so much money would just plow into it

00:17:34.020 | that eventually sizes the enemy of outperformance

00:17:36.220 | and it wouldn't work anymore.

00:17:37.220 | That's what happens.

00:17:38.060 | That's the trees don't grow to the sky thing.

00:17:39.260 | It's not just that things can stop growing.

00:17:41.380 | Obviously, again, if we stop having progress

00:17:43.540 | and innovation and that stuff, all bets are off.

00:17:46.740 | But I tend to believe that people

00:17:48.700 | are still gonna wake up in the morning

00:17:49.820 | hoping to get better.

00:17:50.860 | - I see Oliver in the chat says

00:17:54.620 | they remember $80 to buy and sell.

00:17:57.660 | - Jeez.

00:17:58.500 | - It's pretty crazy.

00:17:59.700 | - Yeah, it used to be really, really high.

00:18:01.300 | The funny thing is you used to not have any sort of scale.

00:18:03.720 | So if you were buying 100 shares of stock,

00:18:06.140 | it would cost the same as buying 100,000 shares,

00:18:08.140 | which seems ridiculous, right?

00:18:10.020 | But that's what it used to be.

00:18:11.540 | - I think I just thought of a way to fix Robinhood.

00:18:14.580 | They just charge $80 a trade.

00:18:16.280 | - Sold.

00:18:18.280 | - Okay.

00:18:20.220 | - Let's do another one.

00:18:21.140 | - Up next, we have a question from Joe.

00:18:24.280 | At what point does whole life insurance make sense?

00:18:27.160 | Many advisors seem to have a pretty negative opinion

00:18:29.300 | about it, but when does it actually make sense?

00:18:31.700 | My wife and I are in our mid 30s.

00:18:33.300 | We have $135,000 in brokerage account

00:18:36.300 | and about $200,000 between our 401ks.

00:18:39.100 | Our house is halfway paid off and we have no other debt.

00:18:41.900 | Our combined annual salary is roughly $210,000 gross.

00:18:45.980 | We also do not have any, we do not plan on having children.

00:18:49.300 | Our financial advisor is suggesting a whole life policy,

00:18:52.220 | but we're having a hard time determining

00:18:53.660 | if our situation would warrant it.

00:18:55.740 | My wife's big thing is that because we won't have children,

00:18:58.340 | she wants to be able to pay for top nursing facilities,

00:19:00.980 | et cetera, down the road.

00:19:02.300 | Wow, they are planning like way out,

00:19:05.600 | thinking about nursing facilities in your 30s.

00:19:08.060 | Yeah, it's a good thought.

00:19:09.220 | It's expensive.

00:19:10.060 | This one is beyond my pay grade.

00:19:11.080 | So let's bring an insurance expert in.

00:19:12.300 | This is Jonathan Noby, he's gonna join us.

00:19:14.500 | He helps run our insurance business at Ritholtz.

00:19:16.660 | Hey, Jonathan.

00:19:17.700 | What's up, fellas?

00:19:19.020 | All right, before we get into the specifics here,

00:19:20.500 | which these people have, as Duncan said,

00:19:22.700 | really thought hard about this,

00:19:24.300 | just give me the main differences

00:19:26.220 | between whole life and term insurance.

00:19:28.100 | 'Cause I was always told when I got my first insurance,

00:19:30.100 | when my daughter was born, I got life insurance.

00:19:31.780 | Everyone said due term, it's easier, it's cheaper.

00:19:34.140 | I think I pay $23 a month or something for it.

00:19:36.900 | Really cheap, it was easy.

00:19:38.500 | Didn't have to think too much about it.

00:19:39.900 | Tell us, explain the differences there.

00:19:41.780 | Sure, I'll explain those in one second.

00:19:43.700 | It's just that this question reminded me

00:19:45.300 | of my favorite New Yorker cartoon of all time.

00:19:49.000 | John, if you could bring that up.

00:19:50.820 | So what's the best time to buy whole life?

00:19:53.380 | Never, how's never?

00:19:55.260 | All right, bring that down.

00:19:59.040 | I'm only partially kidding.

00:20:01.020 | Okay, so first let's talk about whole life

00:20:04.080 | in the spectrum of what insurance is.

00:20:06.980 | There's generally two different kinds of life insurance.

00:20:09.460 | There's term insurance and there's permanent insurance.

00:20:14.060 | Term insurance, the kind that you own and I own

00:20:16.100 | and most people own and the kind that we generally recommend.

00:20:19.620 | It's there for a term of time,

00:20:20.940 | whether that be 10 years or 15 years or 20 years

00:20:23.920 | or sometimes 30, but I don't love that.

00:20:26.440 | You pay a level premium and it's there for that entire term.

00:20:29.680 | And when the term is up, it's gone and that's it.

00:20:32.280 | And it's generally, if you're young and healthy,

00:20:34.880 | not very expensive.

00:20:36.740 | Permanent insurance on the other hand,

00:20:39.180 | is the kind of insurance that is there until,

00:20:41.900 | at best case scenario, till the end of your life.

00:20:46.740 | Whole life insurance was the first kind

00:20:50.500 | of permanent insurance.

00:20:52.460 | And it's one of a few different kinds.

00:20:55.180 | Now, most people don't know any more about insurance

00:20:58.600 | than like term versus whole

00:21:00.420 | and they mistake whole life

00:21:02.580 | for all kinds of permanent life insurance.

00:21:06.240 | Whole life is a kind of permanent life insurance.

00:21:08.620 | It's not the only one.

00:21:09.780 | And there's things like universal life

00:21:11.780 | and variable universal life and indexed universal life

00:21:13.980 | and stuff like that.

00:21:16.580 | Now, we're not necessarily gonna get

00:21:18.180 | into what all of those are here.

00:21:19.800 | So for our purposes, we're just going to assume

00:21:22.620 | term insurance versus permanent insurance.

00:21:27.660 | One thing I wanna say about this here,

00:21:29.980 | I'm gonna use quotes around the advisor

00:21:31.980 | who's recommending this to you, Joe.

00:21:34.300 | He's very likely an insurance salesman,

00:21:37.740 | doubling as an advisor sometimes,

00:21:40.740 | 'cause the only people who generally recommend whole life

00:21:43.660 | are people who are insurance salesmen

00:21:45.140 | and worked for captive insurance companies

00:21:46.980 | who get paid to sell it.

00:21:48.100 | - Right, the way that I've,

00:21:49.020 | I guess the way that I've heard about it is,

00:21:50.860 | you can make a lot of promises

00:21:52.780 | and it sounds great in a pitch,

00:21:54.860 | but most advisors, especially who are fiduciaries

00:21:58.380 | and they're not earning commissions,

00:22:00.100 | they're not huge fans of this

00:22:01.700 | because there's a huge difference

00:22:03.280 | between an insurance product

00:22:04.780 | and something that works in an investment portfolio.

00:22:07.540 | - I generally agree with you.

00:22:10.500 | So let's talk a little bit specifically

00:22:12.820 | about the problem that Joe's trying to solve

00:22:15.260 | and let's understand insurance.

00:22:16.940 | 'Cause I think this is gonna be helpful for everybody.

00:22:18.920 | People buy insurance generally for one reason

00:22:24.100 | and one reason only.

00:22:25.820 | It's 'cause there will be a financial impact

00:22:27.660 | on their family were they to die.

00:22:29.860 | Now there's disability that comes into it

00:22:31.340 | in long-term care and we'll get to the long-term care thing

00:22:33.260 | in a second because that's what they're asking about here.

00:22:35.580 | But our job as advisors is to actually help somebody

00:22:40.580 | figure out what the financial impact

00:22:42.820 | on their family will be were they to die

00:22:45.060 | or their spouse to die or something like that.

00:22:47.680 | That's the job.

00:22:48.920 | The job is not to say,

00:22:50.300 | "Boy, do I have a product that's in search of a problem."

00:22:54.100 | The job is to say,

00:22:54.940 | "What problem are you trying to solve?"

00:22:56.340 | But I think a lot of times the way these are sold,

00:22:58.500 | at least that I've seen is you buy this kind of product

00:23:01.980 | and you don't have to worry

00:23:02.820 | about the stock market's ups and downs

00:23:03.940 | and you're gonna be guaranteed a return.

00:23:05.260 | And that's the kind of thing where people go,

00:23:06.720 | "Oh, that sounds pretty good."

00:23:08.260 | - Right, so in a vacuum,

00:23:10.140 | permanent insurance generally does the things

00:23:12.500 | that advisors will say that it's gonna do.

00:23:14.540 | But one, nobody lives in a vacuum.

00:23:16.720 | And two, like especially with Whole Life,

00:23:18.660 | I say it's a series of things,

00:23:20.540 | like it's a product in search of a problem

00:23:23.020 | and no one really ever has that problem.

00:23:25.540 | So I simply never, I should say rarely recommend it.

00:23:30.540 | Now for an individual, not this person, not for you, Joe,

00:23:33.280 | but for someone who has a permanent insurance need,

00:23:37.700 | meaning throughout the course of somebody's lifetime,

00:23:40.960 | if their death would cause financial challenges

00:23:44.800 | for their family,

00:23:46.260 | then that person has an insurance need late in their life.

00:23:49.060 | We'll use an example.

00:23:50.340 | Take someone who has a defined benefit pension

00:23:52.540 | from their job and they can't take something

00:23:55.020 | like a joint life payout on that pension.

00:23:57.740 | And that pension goes away when that person dies.

00:24:00.500 | If that person's spouse is gonna rely on that pension,

00:24:03.740 | well, then they need to own insurance

00:24:05.620 | or something like that,

00:24:06.740 | just to make sure that you could recreate the income

00:24:09.540 | that you lose.

00:24:10.720 | That is a permanent need.

00:24:13.400 | But for Joe, it sure doesn't look like

00:24:17.500 | they have a permanent need.

00:24:19.040 | To have a mortgage they'd like to pay off.

00:24:22.060 | What they should figure out is what the impact is

00:24:24.160 | if either of them were to die on their family.

00:24:26.780 | And then they should own some term insurance

00:24:29.060 | to manage that impact.

00:24:30.620 | It's much less expensive.

00:24:32.940 | It solves the problem over what seems

00:24:34.820 | to be a fairly short period of time.

00:24:36.300 | It's probably only a 15 year risk for them

00:24:38.140 | or a 20 year risk.

00:24:39.460 | So term insurance seems like a much better idea.

00:24:41.860 | - And it sounds like they care more too.

00:24:43.260 | Their long-term worry is long-term care insurance, right?

00:24:47.500 | - Right, right.

00:24:48.380 | So it's an interesting way to think about long-term care.

00:24:52.340 | And we could spend a lot of time talking about

00:24:54.240 | how that industry got it wrong really badly

00:24:56.760 | in any number of ways.

00:24:58.560 | The original kind of long-term care contracts

00:25:00.480 | that were issued by insurance carriers,

00:25:02.200 | there were these standalone long-term care contracts

00:25:05.320 | and they were dramatically underpriced

00:25:08.920 | because insurance companies didn't realize

00:25:11.280 | that no one would lapse their long-term care.

00:25:14.160 | They assume, 'cause there's, you know,

00:25:17.080 | insurance is based on the law of large numbers.

00:25:18.800 | So what insurance carriers can come up to terms with

00:25:21.680 | is everybody basically dies at the same time

00:25:24.160 | and everybody lapses the same,

00:25:25.840 | like insurance lapses at a certain rate.

00:25:27.520 | So a certain percentage of people

00:25:28.840 | will just stop paying for their policies.

00:25:31.200 | They assumed the same lapse rates on life insurance

00:25:33.480 | as they did for long-term care.

00:25:35.080 | Turns out nobody lapses their long-term care

00:25:37.400 | because everyone has an anecdote about how awful it is

00:25:40.080 | when a family member needs care and how expensive it is.

00:25:42.640 | - So that's something that people wanna keep having.

00:25:44.760 | - Right.

00:25:45.600 | So long-term care is now delivered a little bit differently

00:25:49.040 | than it used to be.

00:25:50.480 | It is possible to wrap long-term care

00:25:53.600 | into a life insurance chassis.

00:25:56.400 | That's generally speaking how we do it for people

00:25:58.840 | who are looking at long-term care contracts.

00:26:00.680 | And there's different kinds of contracts,

00:26:02.080 | whether there's asset-based or there's like universal life

00:26:04.880 | with a long-term care rider or things like that.

00:26:07.320 | There's only very few standalone long-term care policies

00:26:11.480 | left in the market.

00:26:13.120 | And the ones that have been around for a while

00:26:14.880 | have seen dramatic increases in premium.

00:26:17.800 | I mean, I'll simply use my parents' policy as an example.

00:26:20.640 | Their premiums on the long-term care contract

00:26:22.680 | they bought like 15 years ago or 20 years ago

00:26:24.720 | or something like that have doubled since they bought it.

00:26:27.680 | So, and that's different than other kinds of insurance

00:26:31.240 | where insurance carriers always reserve the right

00:26:33.480 | to raise long-term care premiums.

00:26:35.160 | And they have, and people are suffering.

00:26:37.080 | I imagine there's even--

00:26:38.640 | - For something like this case,

00:26:40.480 | it doesn't sound like they have too many

00:26:41.440 | extenuating circumstances.

00:26:43.160 | The simple advice is just keep it simple.

00:26:45.560 | Don't go into anything too complex

00:26:47.280 | unless there's a really good reason for it.

00:26:49.360 | - Exactly.

00:26:50.200 | That seems like term insurance is the right thing here.

00:26:52.440 | And if they're really wanna plan for a long-term care risk,

00:26:56.920 | then what they would consider might be one

00:26:59.520 | of the standalone long-term care contracts.

00:27:01.440 | Because what that'll have is it will add an inflation factor

00:27:05.960 | to the benefit that they buy right now.

00:27:08.560 | And if they have 30 years, I mean,

00:27:10.600 | they're in their mid thirties.

00:27:11.720 | You're literally talking potentially 50 years

00:27:14.440 | before they would make a claim on that.

00:27:16.680 | You have to have a reasonable inflation factor to that

00:27:20.440 | in order for it to make sense 50 years from now.

00:27:23.040 | So I'm not even convinced that's--

00:27:24.640 | - They can probably worry about this later.

00:27:26.400 | My long-term care plan is I'm gonna eat healthy

00:27:29.600 | and work out all the time, and I'm just gonna live forever.

00:27:32.520 | - Good luck with that.

00:27:33.600 | - Yeah, I mean--

00:27:36.040 | - It's like the guy in Bloomberg.

00:27:36.880 | - Sounds like--

00:27:37.700 | - Let's do another one.

00:27:38.540 | Let's do another one, Duncan.

00:27:39.380 | - One thing I was gonna say about that,

00:27:40.200 | the positive about the high commissions on Whole Life

00:27:42.440 | is that I've seen some really good commercials.

00:27:44.560 | So they're putting that money to good use,

00:27:46.320 | the companies that are bringing in big commissions on this.

00:27:48.600 | - That's right.

00:27:49.440 | - They're employing a lot of film industry people.

00:27:50.920 | So I mean, that's the, you know, your money's--

00:27:52.840 | - You're Mr. Culling, Duncan.

00:27:53.800 | - Yeah, yeah.

00:27:55.040 | - You know, the person who generally wins

00:27:57.000 | from the sale of a Whole Life contract

00:27:58.400 | is the person who sold it.

00:27:59.680 | So keep that in mind.

00:28:01.320 | - Right.

00:28:02.400 | Okay, last but not least, we have a question from Johnny.

00:28:05.400 | - We're gonna get a lot of hate mail

00:28:06.320 | from insurance people on this one.

00:28:08.360 | - Well, yeah, it always happens.

00:28:10.000 | That's what I said in the chat.

00:28:10.840 | Every time a Whole Life comes up,

00:28:12.680 | there's like a little, a war breaks out, but yeah.

00:28:15.880 | - That's all right.

00:28:16.720 | - Okay.

00:28:17.560 | - Last question.

00:28:18.380 | - Yeah, so this question is from Johnny.

00:28:20.160 | I have a soon-to-be two-year-old daughter

00:28:21.840 | and would like some opinions on options for savings.

00:28:24.520 | There seem to be many paths, 529, Roth,

00:28:26.920 | normal investment account, trust.

00:28:29.280 | I feel like a 529 is limiting for the unknown future

00:28:32.540 | and ties funds to education only.

00:28:34.860 | I hear people setting up Roths for their child,

00:28:37.840 | but tying income to a two-year-old sounds a bit sketchy.

00:28:40.560 | I would tend to agree.

00:28:42.400 | I also hear the compound team mentioned

00:28:44.240 | lift-off accounts for children.

00:28:45.480 | I assume these are just normal taxable accounts.

00:28:47.880 | My wife and I both have lift-off accounts,

00:28:49.680 | so I feel like this would be an easy option,

00:28:51.780 | but is there a tax benefit

00:28:52.920 | that might make others a better option?

00:28:55.360 | Is there a reason to contribute

00:28:56.680 | to a separate account for our daughter

00:28:58.260 | versus just adding that savings

00:28:59.960 | to the accounts we already have?

00:29:01.960 | If it matters, we live in Michigan,

00:29:03.520 | and in 2022 made about $230,000 of income.

00:29:07.360 | And my quick follow-up to that is,

00:29:09.480 | I think this is something I've wondered before is,

00:29:11.400 | yeah, what is the exact advantage

00:29:13.140 | of putting the money into an account for a child

00:29:16.080 | as opposed to just having that money

00:29:17.920 | in your own account for your child?

00:29:20.720 | - Right, I guess I'll answer the lift-off stuff first.

00:29:23.560 | Yeah, I have an account at lift-off.

00:29:24.880 | I just chose the easy option.

00:29:26.200 | I have a 529 for my kids, too.

00:29:28.240 | I didn't wanna go down the route

00:29:29.560 | of creating some sort of income for them,

00:29:32.260 | and then I think the taxes is probably the biggest deal

00:29:34.720 | if you wanna jump through the hoops.

00:29:36.040 | My whole thinking was keep it easy,

00:29:37.680 | but Jonathan, I guess if people wanna jump through some hoops

00:29:41.800 | what kind of accounts make sense

00:29:44.560 | if they wanna save some taxes?

00:29:46.040 | - So if taxes are the driving consideration,

00:29:51.000 | the first thing I would say is

00:29:52.360 | don't let taxes be the driving consideration.

00:29:54.980 | But with accounts like this,

00:29:57.280 | like everything in financial planning,

00:29:58.600 | everything's a trade-off.

00:29:59.840 | I know that those pesky child labor laws

00:30:03.160 | get in the way of funding a Roth for your kids,

00:30:04.840 | so that's kind of off the table,

00:30:06.640 | but you can start something like that.

00:30:07.480 | - I've been pounding the table for years

00:30:08.760 | saying that you should be able to open a Roth as a baby.

00:30:11.040 | For every child in America.

00:30:12.700 | - That'd be great.

00:30:13.600 | Or we should just be able to put 'em back to work again,

00:30:16.760 | like I should go to a farm and employ my kids.

00:30:19.100 | So the one thing I'm not gonna include in this

00:30:23.520 | is given that we probably have insurance people

00:30:25.440 | watching this, they're gonna be screaming

00:30:26.760 | you should buy insurance on kids

00:30:28.200 | because the cash values that grow

00:30:29.920 | inside insurance contracts are tax-preferred.

00:30:32.840 | I'm not even going to dignify that with a discussion.

00:30:35.240 | I'm going to say we're not considering it.

00:30:36.680 | - Jonathan, you're compounding the insurance hate mail here.

00:30:39.220 | - Trying to.

00:30:40.640 | - Okay, so here's generally the trade-offs you make

00:30:43.600 | with putting money in accounts for kids.

00:30:46.000 | So there's the traditional brokerage option

00:30:48.320 | where you basically just earmark the money for your children,

00:30:51.460 | whether it be a lift-off account

00:30:52.680 | or your own taxable account or something like that.

00:30:55.520 | - That's basically what I've done.

00:30:57.160 | - I think that's probably the best idea.

00:30:59.440 | But we're also gonna leave out

00:31:00.560 | the big estate planning questions here

00:31:01.880 | and trust account for kids and all that,

00:31:03.120 | 'cause that's a different conversation.

00:31:05.320 | What they're also maybe asking about are custodial accounts.

00:31:09.240 | Things like, now, does UTMAs or UTMAs?

00:31:11.880 | Here's the problem with custodial accounts,

00:31:13.840 | and I don't love them.

00:31:14.800 | And I consulted our resident tax ninjas as well on this one,

00:31:18.800 | and they tend to agree with me,

00:31:20.220 | or should I say I agree with them?

00:31:22.560 | Problem with custodial accounts is that that money,

00:31:25.840 | the money that's transferred into there is irrevocable.

00:31:29.280 | It is now your children's money.

00:31:30.800 | You just happen to be the custodian of it.

00:31:33.980 | When that kid turns 18, whether they know it or not,

00:31:36.960 | or whether they're prepared, that money is theirs.

00:31:39.800 | Now, I don't know anyone who's funded custodial accounts

00:31:42.760 | with tons of money where they're saying to themselves,

00:31:44.640 | oh my God, my 18-year-old

00:31:45.840 | has hundreds of thousands of dollars in this,

00:31:48.360 | and now they're not going to college.

00:31:50.280 | But that's the challenge,

00:31:51.520 | is that they're not flexible at all.

00:31:54.760 | - Right, you wanted to have some control over the money.

00:31:57.280 | - Right, you're giving up control.

00:31:59.020 | In addition to that,

00:32:00.360 | if ever you're gonna be applying for financial aid,

00:32:03.240 | the expected family contribution,

00:32:06.320 | you fill out the FAFSA form.

00:32:08.320 | Expected family contribution

00:32:09.840 | counts custodial money like that at a higher percentage

00:32:13.800 | than they do things like parents' money.

00:32:15.560 | So that would reduce the chance of getting financial aid.

00:32:17.520 | That comes straight from the bills, the tax team.

00:32:20.160 | It's another reason not to use custodial accounts.

00:32:23.280 | Regarding 529s, it's actually become a bit

00:32:26.920 | of a better option, was already a very good one.

00:32:29.960 | I understand they're not perfect because you say you need,

00:32:32.280 | but someone says they don't want to lock them

00:32:34.000 | and to have to use them for education,

00:32:35.640 | but they're great anyway.

00:32:37.240 | And they just became better

00:32:38.840 | with the recent omnibus spending bill.

00:32:41.440 | Says that in 2024, people now have the ability

00:32:46.960 | to convert 529 money to Roth money.

00:32:51.120 | Now it's subject to the same funding options every year.

00:32:53.640 | So you can only convert up to 6,500 bucks a year

00:32:56.760 | to a total of $35,000 over a person's lifetime.

00:33:01.600 | But Ben, as an example,

00:33:02.520 | let's say your kids get scholarships

00:33:03.880 | and you have money in their 529s.

00:33:06.240 | If the money's been in there for more than 15 years,

00:33:08.280 | they can convert that to Roth money eventually.

00:33:10.720 | So that's a fan.

00:33:12.560 | Yeah, it's a fantastic kind of little extra kicker

00:33:15.720 | that's rewarding savers along the way.

00:33:17.880 | So I love 529 money.

00:33:21.400 | And in the end, if 529 money is tax preferred as it grows,

00:33:25.400 | even if you can't use it, your kid gets a scholarship,

00:33:29.720 | doesn't go to college, whatever, you can't end up using it.

00:33:33.280 | So you pay a penalty and you get the money out

00:33:34.960 | or you give it to somebody else.

00:33:35.800 | You still have the money.

00:33:37.240 | Right, it's a fantastic way.

00:33:39.000 | And what I really like about a 529 is my experience

00:33:43.200 | is that it's something that people know they have to fund,

00:33:47.280 | so they do it.

00:33:48.440 | We talk about how the great thing about financial goals

00:33:51.360 | is that it creates good behavior.

00:33:53.760 | It's that it gives you the habits you need.

00:33:55.520 | And Ben, you talk a lot all the time

00:33:56.720 | about automating everything.

00:33:58.960 | 529 contributions are almost always automated for people.

00:34:03.560 | It's for savings.

00:34:04.400 | Yeah, and if you don't use it,

00:34:05.560 | you can help your kids out down the line.

00:34:06.920 | That way, you can pay a penalty.

00:34:07.880 | So it's still a decent amount of money.

00:34:10.340 | All right, I wanna thank Jonathan for coming on the show.

00:34:12.960 | If you have any hate mail for insurance people,

00:34:14.800 | send it to Duncan.

00:34:15.800 | He's gonna sort through all of those.

00:34:19.280 | If you have any other insurance questions,

00:34:20.520 | anything else financially related,

00:34:21.920 | askthecompoundshow@gmail.com, leave us a review,

00:34:25.160 | go to idontshop.com for all of your merchant needs.

00:34:27.560 | Duncan, we got anything new in there yet?

00:34:29.600 | - Actually, just right before the show,

00:34:31.440 | Josh had me drop a new sticker.

00:34:33.880 | So there's a new TCAP sticker on there,

00:34:37.460 | inspired by TGI Fridays.

00:34:39.480 | So yeah, go check that out.

00:34:40.880 | Also, one thing I should mention on this note.

00:34:43.380 | Yeah, TGIF instead of TG, you know, yeah.

00:34:47.800 | But yeah, one thing that I wanted to mention

00:34:50.240 | is if you have a coupon code from us,

00:34:52.080 | it might not work on some things in our shop.

00:34:53.840 | It's because we aren't marking up stuff much at all.

00:34:56.840 | And our platform that we use won't let you

00:34:59.200 | undercut base price of items.

00:35:01.480 | So that's something a couple people have encountered.

00:35:03.560 | I just wanted to let everyone know what's going on there.

00:35:05.160 | It's not a bad code.

00:35:06.600 | It just means there's not enough of a markup

00:35:08.760 | for you to actually take that

00:35:09.880 | without going into the base cost.

00:35:11.520 | - Duncan is doing this as slave labor.

00:35:13.480 | Zero margins, just like Amazon.

00:35:16.560 | Keep those questions and comments coming.

00:35:18.720 | Thanks to everyone who showed up in the live chat.

00:35:20.120 | Remember to leave us a question in YouTube comments as well.

00:35:22.800 | And we'll see you next week.

00:35:24.280 | - See you, everyone.

00:35:25.160 | - Cheers, guys.

00:35:26.600 | (upbeat music)

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Is Whole Life Insurance Ever Worth It? | Portfolio Rescue 61

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