How Much Do You Need to Retire Early?

00:00:00.000 | (beeping)

00:00:02.180 | - Welcome back to Ask the Compound.

00:00:13.480 | You have questions, we have answers,

00:00:15.040 | we have experts, we have me and Duncan.

00:00:17.320 | Ask the Compound show at gmail.com is the email.

00:00:21.240 | Today's show is sponsored by our friends at Bird Dogs.

00:00:24.680 | Duncan, I have a family trip planned for tomorrow.

00:00:27.000 | We're going up to beautiful Mackinac Island,

00:00:28.400 | kind of an annual tradition for us now.

00:00:30.360 | You have to take a ferry to the island

00:00:34.640 | and there's no cars on the island.

00:00:36.640 | Right? - Sounds nice.

00:00:37.480 | - It's on a horse and carriage,

00:00:38.300 | but there's also a lot of bikes.

00:00:39.140 | You bike around, it's pretty beautiful.

00:00:40.400 | You go all the way around the outside of the island.

00:00:42.920 | But I have to figure out what I'm wearing, right?

00:00:44.180 | I'm checking the weather.

00:00:45.480 | And so I'm packing last night and guess what I packed?

00:00:47.800 | All Bird Dogs for my lower half.

00:00:49.840 | Bird Dog shorts, Bird Dog pants.

00:00:52.680 | And because I'm thinking I'm gonna be on a bike,

00:00:54.060 | I'm gonna be a little active.

00:00:55.240 | But then I also have to dress nice

00:00:56.560 | because my mother's birthday is this weekend.

00:00:58.640 | So we're going out to a nice dinner.

00:00:59.660 | So I have the nice seersucker ones, right?

00:01:01.760 | Then of course, when I'm on the bike,

00:01:02.880 | I don't wanna be uncomfortable

00:01:04.120 | and have the George Costanza with a wallet

00:01:05.680 | that I'm sitting on.

00:01:06.520 | So the wallet's on the side.

00:01:07.960 | So Bird Dogs has me hooked up.

00:01:09.480 | I have a full suitcase, full of them.

00:01:11.320 | I'm ready to go to be biking, walking,

00:01:13.080 | versatile, but stylish, right?

00:01:15.720 | So if you go to birddogs.com/atc

00:01:19.160 | for ask the compound, obviously.

00:01:21.120 | Get yourself one of these free tumblers,

00:01:22.360 | Bird Dog tumblers, right?

00:01:24.320 | Pretty nice.

00:01:25.200 | - You know what I did in my Bird Dogs other day?

00:01:26.920 | Some shorts.

00:01:28.280 | Went for a run.

00:01:29.640 | They were great.

00:01:30.480 | - I've been working out of them this summer too.

00:01:31.880 | It is, it's nice.

00:01:32.760 | It's breathable, it's stretchy, right?

00:01:34.120 | It's very nice.

00:01:35.600 | Birddogs.com/atc.

00:01:38.440 | All right, a lot of questions today.

00:01:40.520 | Let's do it.

00:01:41.640 | - Okay, so first up,

00:01:43.960 | we have the following.

00:01:48.000 | Can you guys speak to if you think the market

00:01:49.720 | is skewed towards benefiting the large players

00:01:52.200 | more than the small players,

00:01:53.600 | if not being downright rigged against the small players?

00:01:56.360 | - Get this question a lot.

00:01:58.280 | So they're pulling up here.

00:01:59.560 | There was a movie coming out this fall

00:02:00.720 | about the GameStop saga.

00:02:02.280 | Seems like it happened pretty quick.

00:02:03.780 | They pulled it together.

00:02:04.620 | It's called "Dumb Money."

00:02:06.520 | I watched the trailer.

00:02:07.440 | It actually looks pretty good, I think.

00:02:09.280 | - Yeah, I thought it looked good, yeah.

00:02:10.680 | - So, and they have like a pretty good cast.

00:02:12.160 | So Seth Rogen plays Gabe Plotkin,

00:02:14.800 | the guy who shorted GameStop.

00:02:16.360 | It's kind of funny.

00:02:17.200 | In the past, he definitely would have been

00:02:18.240 | on the other side of this,

00:02:19.300 | but now he's playing the man.

00:02:21.200 | Paul Dano is Roaring Kitty.

00:02:23.120 | Remember that guy, the YouTube guy who bought GameStop.

00:02:26.120 | Pete Davidson is his brother.

00:02:27.200 | I don't know if he actually had a brother.

00:02:28.320 | They made it up for the movie.

00:02:29.200 | Shanley Woodley is his wife.

00:02:30.520 | Nick Offerman is playing Ken Griffin,

00:02:32.040 | which I never really would have thought,

00:02:33.380 | but based on the trailer,

00:02:35.600 | the premise here is the stock market

00:02:37.920 | is rigged against the little guy

00:02:39.480 | and in favor of the big whales,

00:02:40.560 | like hedge fund managers like Ken Griffin

00:02:42.240 | and Steve Cohen and Gabe Plotkin.

00:02:44.120 | Vincent D'Onofrio as Steve Cohen.

00:02:46.700 | That was interesting, too.

00:02:48.080 | But this is the story, a heartwarming tale,

00:02:50.120 | about the little guy finally taking down the big guy, right?

00:02:53.440 | David beat Goliath.

00:02:55.660 | And I'm sure the movie would be fine,

00:02:57.440 | if not a little bit embellished,

00:02:59.000 | because it's the same guy who wrote the movie,

00:03:01.360 | or the book that the Social Network was based on.

00:03:02.880 | It's called The Accident of Millionaires,

00:03:03.940 | that Ben Mezrich guy.

00:03:04.900 | Pretty good books, actually.

00:03:06.160 | They're a little embellished.

00:03:07.760 | So the problem is,

00:03:09.800 | Goliath is still doing pretty well these days.

00:03:12.000 | I saw the following headline just last month on CNBC.

00:03:14.880 | Michael Jordan is selling his stake

00:03:16.640 | in the Charlotte Hornets.

00:03:17.480 | He's probably gonna bet it all on the golf course,

00:03:19.280 | and Blackjack Tables, I think he spent $275 million for it,

00:03:23.120 | and he made $3 billion or something.

00:03:25.280 | So I look in the fine print down there,

00:03:27.760 | and wait, who's buying his stake from him?

00:03:29.680 | Gabe Plotkin is poised to become a majority owner,

00:03:33.900 | pending league approval.

00:03:35.640 | So the guy who got taken down by the GameStop,

00:03:39.320 | Reddit people, is literally gonna be an NBA owner.

00:03:42.480 | He's probably still worth hundreds of millions,

00:03:44.000 | or maybe a billion dollars.

00:03:45.460 | They did force him into shutting his hedge fund down,

00:03:47.980 | but it does feel like one of those,

00:03:50.500 | oh wait, the guy lost a bunch of money on GameStop,

00:03:53.480 | but he got to keep all the fees that he already made

00:03:55.480 | from his two and 20 hedge fund,

00:03:57.000 | and they didn't get clawed back.

00:03:57.960 | So it does feel a little bit like,

00:03:59.440 | heads I win, tails you lose type of situation.

00:04:01.900 | Even though in this situation, the little guy won,

00:04:04.040 | the big guy still won.

00:04:05.240 | They're fine.

00:04:06.200 | I'm not sure that's gonna make it into the movie.

00:04:08.840 | That probably wouldn't help with the story,

00:04:11.040 | but it does kind of feel like the market is stacked

00:04:13.760 | against little guys in some ways.

00:04:14.760 | So there are some ways it is, right?

00:04:16.340 | So you're never gonna, as a little guy,

00:04:18.440 | and I'm using this as just regular normal,

00:04:20.280 | I'm a little guy too, right?

00:04:21.660 | - Right.

00:04:22.800 | - Literally--

00:04:23.640 | - I'm definitely a little guy,

00:04:24.460 | and a much smaller guy after my 25% loss in early today.

00:04:29.460 | - Tough break for you, Duncan.

00:04:31.920 | You're in a bull market too.

00:04:33.920 | So the things of being a little,

00:04:36.200 | you're never gonna get the sweetheart deals

00:04:37.520 | like Warren Buffett got in the financial crisis

00:04:39.440 | with the Goldman Sachs and Bank of America deals.

00:04:41.240 | You're not gonna be able to invest in the best hedge funds

00:04:42.960 | or venture capital deals or private equity deals.

00:04:45.480 | You're not gonna be able to get two and 20

00:04:47.200 | and keep that 20,

00:04:48.640 | even if you lose half of your investor's money.

00:04:51.200 | If you try to take on Ken Griffin

00:04:52.600 | in the high-frequency trading,

00:04:54.080 | no matter which way your position goes,

00:04:55.640 | you could lose 25% notely, or you could make 25%.

00:04:58.320 | Ken Griffin's probably gonna make money either way.

00:05:01.080 | So in that sense, it does feel like

00:05:02.560 | the markets are stacked against the little guys.

00:05:04.180 | - We couldn't even buy the Constitution, you know?

00:05:06.840 | You had to come in and sweep in and take that, buy that.

00:05:09.680 | - I forgot about that, yeah.

00:05:10.520 | - You couldn't let the little guys have one win.

00:05:11.640 | - It feels like the big guys win all the time.

00:05:13.040 | But in other ways, the individual investor

00:05:15.220 | has all sorts of advantages over Wall Street, right?

00:05:17.400 | You get to invest in index funds, if you want to,

00:05:19.640 | with low fees that basically guarantees

00:05:22.060 | that you're gonna outperform 75 to 90%

00:05:24.360 | of professional investors in the stock market.

00:05:27.640 | You can ignore short-term performance numbers if you want.

00:05:29.880 | When I worked in the endowment industry,

00:05:31.640 | these funds, foundations and endowments,

00:05:33.960 | were set up, in most cases, in perpetuity.

00:05:35.740 | They wanted to last forever and leave a legacy.

00:05:38.020 | So their time horizons were measured

00:05:40.640 | in multiples of decades,

00:05:42.440 | yet they obsessed over monthly

00:05:44.400 | and quarterly performance numbers, right?

00:05:46.360 | As an individual investor,

00:05:47.400 | you don't have to have some made-up benchmark

00:05:49.720 | that you have to try to beat every month.

00:05:51.680 | Your only benchmark that matters is,

00:05:53.520 | are you on track to achieving your financial goals, right?

00:05:55.920 | There's no investment committees to answer to.

00:05:59.320 | There's no outside investors

00:06:00.320 | that are breathing down your neck

00:06:01.160 | because you underperformed for a quarter or two.

00:06:03.380 | There's no alumni or donors

00:06:04.880 | that are forcing you to make investments

00:06:06.640 | in managers that they roomed with in college

00:06:09.080 | because they want to keep things on the up and up.

00:06:11.640 | So you can set it and forget it

00:06:13.080 | and ignore macro predictions

00:06:14.320 | and stop looking at your statements if you want to, right?

00:06:17.120 | Professional big guys cannot do that.

00:06:19.120 | So I think probably the biggest advantage you have

00:06:22.280 | is just keeping a long time horizon.

00:06:23.720 | So I use this in some of my presentations.

00:06:26.700 | My time horizon, on a daily basis,

00:06:28.880 | the market is up a little bit more than it's down.

00:06:30.960 | 56% of all days, the stock market is up.

00:06:33.920 | 44% it's down.

00:06:36.120 | But if you extend your time horizon

00:06:37.280 | one, five, 10, 20, 30, 40 years,

00:06:40.040 | you know, the probability of seeing a gain goes up.

00:06:42.360 | And I love this chart because it shows

00:06:43.840 | that like Wall Street wants to play

00:06:45.080 | in the short-term sandbox.

00:06:46.400 | You have the ability to play in the long-term sandbox.

00:06:50.040 | Right?

00:06:50.880 | So I just, I think that's your advantage

00:06:53.560 | as the little guy in the markets.

00:06:54.480 | If you try to play the short-term game of Wall Street,

00:06:56.640 | unless you get lucky,

00:06:58.400 | let's be honest, the Roaring Kitty guy got lucky.

00:07:00.160 | He made a great pitch on this stock, but he got lucky.

00:07:02.860 | Throw up the chart here.

00:07:04.600 | GameStop? - Well, that's the thing

00:07:05.420 | about Roaring Kitty that I actually always found interesting

00:07:07.920 | is if you look, he was much more nuanced.

00:07:09.860 | Like his initial reason that he was buying a stock

00:07:12.360 | was like based on fundamentals and things.

00:07:14.160 | - Yes, it wasn't a meme stock thing.

00:07:15.000 | - He did a bunch of research.

00:07:16.120 | He wasn't just like, I randomly picked a company, you know.

00:07:19.000 | - The funny, so throw up the chart.

00:07:20.240 | The funny thing is since pre-pandemic days,

00:07:22.760 | even though it's down 75% from the highs

00:07:24.600 | of a meme stock mania,

00:07:26.560 | it's still up like 1400% since the start of the pandemic.

00:07:29.740 | So it's still, I think he took a bunch of chips

00:07:32.600 | off the table.

00:07:33.440 | I hope he did.

00:07:34.260 | So anyways, in some ways,

00:07:36.340 | like the market's always gonna seem unfair

00:07:38.200 | and biased towards billionaires

00:07:39.860 | who seemingly win no matter what.

00:07:41.340 | But I think that's just certain areas of life

00:07:43.540 | that's always going to happen.

00:07:44.880 | But in other ways, I really do think

00:07:46.260 | that the little investor has the upper hand

00:07:48.300 | because you have the ability to invest in strategies

00:07:50.980 | and not pay two and 20 and be more tax efficient

00:07:54.900 | and not trade short-term all the time if you don't want to.

00:07:57.620 | So I still think that you have an upper hand

00:08:01.500 | if you're willing and able to use it.

00:08:03.260 | If you try to play the short-term game,

00:08:05.460 | they're probably going to beat you

00:08:06.960 | either through taking your fee,

00:08:08.160 | either through taxes or some other way.

00:08:09.740 | But over the long-term,

00:08:11.320 | if you're willing and able to play the long game,

00:08:14.280 | that's where Wall Street has a hard time

00:08:16.040 | sticking with that type of strategy.

00:08:17.920 | - Right.

00:08:18.760 | I feel like it's also gotten fair

00:08:20.140 | for the little guy with free trading, right?

00:08:23.540 | I mean, imagine back in the day,

00:08:25.100 | like I remember when I was first buying stocks

00:08:27.200 | back in college,

00:08:28.260 | I was paying like $8 to buy like one share

00:08:31.280 | of Microsoft or something.

00:08:32.300 | You know what I mean?

00:08:33.140 | It's like, that's stupid.

00:08:33.960 | - You can buy fractional shares now.

00:08:35.480 | Yeah.

00:08:36.320 | You can put anything you want in the market now.

00:08:38.320 | - The barriers for entry are way smaller now

00:08:40.320 | than they would have been in the past.

00:08:41.520 | So in that way, it's not really stacked.

00:08:43.400 | I think things have gotten appreciably better

00:08:45.900 | for the individual investor over the last 20 years

00:08:47.720 | than they have for the professional investor.

00:08:49.320 | That's for sure.

00:08:50.160 | - Right.

00:08:51.000 | And also when a retail person goes up 80%

00:08:54.160 | on their small account,

00:08:55.680 | they're not like buying a Ferrari.

00:08:56.840 | You know what I mean?

00:08:57.680 | But like Ken Griffin can buy a Ferrari with his winnings.

00:09:00.520 | And so I think it's more like ostentatious and showy.

00:09:03.280 | I think that's what people hate

00:09:04.320 | is they just see these people

00:09:06.120 | that they see as like Wall Street succeeding

00:09:08.480 | and doing really well.

00:09:10.200 | - Yes.

00:09:11.040 | - And even if they do well, it's not gonna compare, right?

00:09:12.880 | Because the scale is so different.

00:09:14.400 | - Yes.

00:09:15.240 | Which unfortunately is probably always gonna be the case.

00:09:16.800 | - Right.

00:09:17.640 | - Right.

00:09:18.480 | Let's do another one.

00:09:19.300 | - Okay.

00:09:20.140 | Up next we have a question from George.

00:09:22.840 | How do you know- - Great name.

00:09:23.940 | - Yeah.

00:09:24.960 | - It's my son's name.

00:09:26.480 | - Oh, right.

00:09:27.480 | And my favorite Beatle.

00:09:29.400 | Okay.

00:09:30.240 | How do you know when US government bonds are cheap?

00:09:33.080 | I bought some during the US debt ceiling brinksmanship

00:09:37.040 | or brinkmanship.

00:09:37.880 | I haven't heard that word.

00:09:39.080 | I think it was a good time to buy when others were fearful,

00:09:42.160 | but they have gone down more.

00:09:43.880 | Also, I noticed on Fred that from 1871 to 1932,

00:09:48.400 | US stocks were flat.

00:09:49.760 | Same with the German market from 1872 to 1913.

00:09:53.360 | And of course, Japan since 1990.

00:09:55.640 | I think I've been lucky but foolish

00:09:57.280 | the last 41 years being 100% stocks.

00:10:00.400 | Thoughts?

00:10:02.000 | - This is a loaded question.

00:10:02.840 | A lot to go on here.

00:10:04.240 | Lots to unpack here, as I say on podcasts.

00:10:06.120 | - Yeah, I feel like he's subtweeting you a little bit

00:10:07.880 | because you've said a lot about long-term horizons

00:10:10.940 | and things being good,

00:10:11.960 | but he's showing us a 41 and 61 year horizon that-

00:10:14.680 | - You don't think I came prepared here, Duncan?

00:10:16.440 | Come on.

00:10:17.280 | So the first one is fairly simple.

00:10:19.720 | No one knows except at the extremes.

00:10:21.720 | So I wrote a post in March 2020 saying,

00:10:24.640 | I was way more worried about bonds than stocks,

00:10:26.720 | but that was pretty easy

00:10:27.560 | because rates were zero to 1% for treasuries.

00:10:32.040 | That was pretty simple, right?

00:10:33.240 | I didn't know how it was gonna play out,

00:10:34.340 | but you knew that things in bonds,

00:10:36.440 | the outcomes weren't gonna be that great, right?

00:10:39.720 | Look at that.

00:10:40.600 | Timestamp.

00:10:41.440 | I didn't know that they were gonna go

00:10:43.480 | from 0% to 5% in a year,

00:10:45.360 | but you knew it was unhealthy.

00:10:46.540 | I guess my problem with this question

00:10:47.760 | is that you're trying to play the bond market

00:10:49.120 | in the short term.

00:10:50.280 | And bond market, it's way easier

00:10:52.880 | to predict the bond market in the long term

00:10:54.240 | because you take your starting yield,

00:10:55.240 | especially in government bonds,

00:10:56.900 | and that'll get you something like 95% of the way there

00:10:59.900 | for long-term returns, call it five, seven, 10 years.

00:11:02.860 | But in the short run,

00:11:03.700 | you're dealing with changes in interest rates

00:11:05.140 | and inflation and GDP growth and Fed policy

00:11:07.220 | and expectations and all this stuff.

00:11:08.540 | Unless you're a hedge fund manager,

00:11:09.420 | I would not think of bonds being cheap or expensive,

00:11:11.580 | especially if you're buying them for the yields now

00:11:13.780 | where you're getting five or 6% or whatever it is.

00:11:16.860 | I wouldn't worry much about the short-term fluctuations

00:11:18.700 | 'cause the yield is gonna win out over the long-term.

00:11:20.820 | I think bonds are for patient people.

00:11:22.180 | Bonds are not for like, are they cheap or expensive?

00:11:24.180 | I'm gonna be greedy even though there's a fear for whatever.

00:11:26.820 | Like that doesn't work as well in the bond market

00:11:28.700 | as it does in the stock market.

00:11:29.580 | For the second question,

00:11:31.180 | I will summarize what he said here in a few short words.

00:11:33.860 | Stocks are risky, right?

00:11:36.020 | I'm not surprised at all that US stocks went nowhere

00:11:38.500 | from whatever, 1871 to 1932,

00:11:40.580 | because the year ending 1932,

00:11:42.380 | the stock market had fallen 85% from the highs in 1929,

00:11:46.260 | right?

00:11:47.100 | That's pretty, it had to be down after that, right?

00:11:51.380 | And there's plenty of periods

00:11:52.620 | where the US stock market has gone nowhere.

00:11:54.080 | We talked about the lost decade a couple of weeks ago,

00:11:56.060 | but from the start of 1998 through February of 2009,

00:11:59.220 | the S&P 500 had a total return

00:12:01.420 | with dividends invested of negative 9%.

00:12:03.260 | So that's like 11 years and change where stocks went nowhere.

00:12:05.740 | All your returns back to 1998 were gone, right?

00:12:09.740 | That's pretty recent.

00:12:10.580 | The total return for the MSCI Emerging Markets Index

00:12:13.140 | since the start of 2008 through this year is up just 28%.

00:12:18.140 | Essentially a lost decade and a half.

00:12:22.220 | S&P is up 330% by comparison, just so you know.

00:12:25.140 | So you don't earn the risk premium without the risk, right?

00:12:28.140 | I do wanna mention something about the Japan situation

00:12:30.460 | because it always irks me.

00:12:31.620 | Every time I post a stat about buying hold

00:12:33.480 | or stocks for the long run,

00:12:34.840 | someone always shows up looking like Leonardo DiCaprio,

00:12:37.540 | like this, scratching their chin saying,

00:12:39.220 | "Now show Japan, I got you, I'm so clever."

00:12:42.180 | Right?

00:12:43.020 | I wanna debunk this.

00:12:44.620 | MSCI Japan Index, 1990 to today is up 40% in total,

00:12:48.780 | 1% per year.

00:12:49.740 | So three decades and change where you lost out to T-bills.

00:12:52.580 | I think T-bills were up 2.5% per year over that time.

00:12:55.540 | So Japanese stock investors underperformed

00:12:58.300 | over three decades.

00:12:59.340 | And people say, "See, stocks for long and ha, ha, ha."

00:13:02.100 | But is it a myth, right?

00:13:05.320 | These are the total returns from 1970 to 1989

00:13:08.040 | for the MSCI Japan Index.

00:13:09.260 | 6,000% total returns, 22.9% annual returns for two decades.

00:13:14.260 | $10,000 in 1970 invested in Japanese stocks

00:13:17.980 | is worth $616,000 by 1989.

00:13:21.300 | Easily, I think the biggest financial asset bubble

00:13:23.620 | in history.

00:13:24.460 | We can mash these two together.

00:13:25.740 | - Do you have those numbers in yen though?

00:13:27.420 | Can we have those in yen?

00:13:28.780 | - I did not do the currency calculation, sorry.

00:13:32.380 | I'm pretending we're hedged here.

00:13:34.660 | If we go from 1970 to today,

00:13:36.680 | we're talking an 8,600% total return or 8.7% per year.

00:13:40.760 | Guess what stocks for the long run in Japan worked?

00:13:43.780 | You just had to go really long, right?

00:13:45.220 | And the reason that stock returns have been so awful there

00:13:49.140 | from 1990 is 'cause they were so unbelievable

00:13:51.860 | and you pulled forward all those returns

00:13:54.300 | and the P/E ratio got to 150 or whatever it was, or 100,

00:13:57.700 | and the bubble just ate up all the future returns.

00:14:00.100 | And so you had this period of 30 years

00:14:01.700 | where you had to work off that bubble.

00:14:03.200 | The long, long returns are still pretty darn good,

00:14:05.180 | almost 9% per year in Japan, right?

00:14:07.360 | Stocks for the long run worked there.

00:14:09.180 | It just depended on when you started.

00:14:10.420 | Now, back to the question at hand.

00:14:11.440 | If you've been investing for 40 years, as George said,

00:14:14.500 | and portfolio has been 100% in stocks,

00:14:17.100 | he's done pretty well for himself, right?

00:14:18.500 | In the 40 years leading up to 2022,

00:14:20.780 | this doesn't even include this year

00:14:21.820 | where we've got a snapback.

00:14:22.660 | The S&P 500 was up 11.1% per year.

00:14:25.860 | MSCI World XUS was up 9% per year.

00:14:28.420 | So whether it was lucky or foolish or whatever

00:14:30.220 | for keeping all your money in stocks,

00:14:31.960 | at this point, you probably won the game

00:14:33.500 | and it makes sense to diversify your portfolio.

00:14:35.220 | That could be as simple as holding some cash,

00:14:36.920 | maybe some short-term bonds,

00:14:38.420 | just to see you through a few years worth of spending.

00:14:40.260 | You could obviously hold some other asset classes

00:14:42.140 | or strategy, but the whole point is

00:14:44.460 | you've picked out these periods where you see

00:14:47.280 | the stock market can be very risky.

00:14:49.500 | And I'm not here to pretend that I know

00:14:52.020 | if or when that's gonna happen again,

00:14:53.300 | but the whole point of diversification,

00:14:55.580 | especially when you're retired,

00:14:56.700 | is to avoid bad things happening

00:14:59.060 | at the worst possible moment.

00:15:00.300 | And history has shown that bad things can

00:15:02.900 | and will happen in the stock market on occasion.

00:15:05.060 | That's why you diversify

00:15:05.980 | and hold some other sort of asset class

00:15:08.860 | or something to see you through

00:15:10.660 | if you happen to be unlucky enough

00:15:12.540 | to live through one of those periods.

00:15:14.820 | - Yeah, yeah, well, and like they point out,

00:15:17.340 | the market was all over the place throughout that time.

00:15:19.380 | So that was a very, very cherry-picked,

00:15:21.980 | as you guys say, but fair, fair for them to point out.

00:15:24.260 | But yeah, it all happens, right,

00:15:26.020 | on when you would have been retiring,

00:15:27.780 | when you would have been withdrawing.

00:15:29.420 | And yeah, scary still to think about.

00:15:31.340 | But yeah, that's why you diversify.

00:15:33.700 | - Give a shout out to Duncan's mom in the chat again.

00:15:35.700 | Pam, welcome.

00:15:37.540 | And all the other regulars, we always appreciate it.

00:15:40.180 | Everyone likes your new hat today, Duncan.

00:15:41.500 | I didn't know we had more new hats.

00:15:43.660 | - This is a one-of-one.

00:15:45.180 | It didn't come out quite how we were wanting, so.

00:15:47.140 | - Oh, okay.

00:15:48.380 | So you're kind of like the team

00:15:49.420 | that lost in the NBA finals

00:15:50.420 | when they sent the shirts to Africa.

00:15:52.100 | - Right, exactly, yeah, yeah, yeah.

00:15:55.060 | We do have a new teacap hat, though.

00:15:56.620 | It's a black hat with the full-color stitching.

00:16:00.700 | So that's the one you can actually pick up.

00:16:03.380 | - All right, next one.

00:16:04.220 | - Okay, next one.

00:16:05.420 | I'm gonna omit the name here

00:16:06.940 | just because of the nature of the question.

00:16:09.540 | But we've gotten questions from them before,

00:16:11.700 | so thanks for writing in again.

00:16:13.300 | I'm 33 years old and have accumulated $1 million of SPY.

00:16:17.020 | I can live a modest life on $40,000 a year

00:16:19.820 | here in Lithuania.

00:16:21.140 | I've almost paid off my mortgage and have no other debt.

00:16:24.020 | Thinking about the 4% rule, can I retire?

00:16:27.060 | I'm not saying I will, but is this an option?

00:16:30.140 | - I'm impressed.

00:16:30.980 | This is the not-to-brag-of-the-day, obviously.

00:16:31.820 | - I was just asking myself this question the other day,

00:16:33.100 | you know, I was just wondering.

00:16:34.660 | - So $1 million in an S&P 500 ETF.

00:16:37.860 | We don't know what else they have,

00:16:38.700 | but this is impressive.

00:16:39.540 | So I could run all the numbers

00:16:40.860 | on the 4% rule that you want.

00:16:42.580 | And if you wanna search 4% rule on my blog, you can.

00:16:45.360 | I've written about it a number of times.

00:16:46.620 | But I think this idea goes beyond the idea of investing.

00:16:51.620 | Obviously, the returns and stuff are gonna be important,

00:16:53.460 | but I think a lot of it is also the financial planning

00:16:55.500 | aspect of retiring early.

00:16:56.620 | And there's a lot more boxes you have to check off

00:16:58.680 | if you're gonna retire early at that age,

00:17:00.740 | at 40, than otherwise.

00:17:02.540 | So let's bring a financial advisor into the chat here.

00:17:07.540 | Nick Sapienza, who is an excellent financial advisor

00:17:10.640 | for us at Riddles. - Hey, Nick.

00:17:11.900 | - Representing Bayou down in Louisiana for us.

00:17:14.300 | - Yep.

00:17:15.620 | - Nick, there's obviously all sorts of different things

00:17:19.460 | you have to think through when you retire,

00:17:20.800 | but I think the calculus is a lot different

00:17:22.980 | if you're going from age 60, 65, 70, versus age 40, right?

00:17:27.620 | So what are some of the other,

00:17:29.220 | if you're a financial advisor and someone sits you down

00:17:31.420 | and says, "Here's the pile of money I have.

00:17:33.300 | "Here's kind of how much I spend."

00:17:34.820 | And it just so happens that this person can live

00:17:37.820 | on the 4% out of the million dollars.

00:17:40.760 | What are your thought process

00:17:44.500 | when you're having the conversation with someone

00:17:45.780 | where they basically say,

00:17:46.620 | "Am I gonna be okay if I do this?

00:17:47.980 | "If I take this leap, what do you think?

00:17:50.000 | "Can I do it?"

00:17:51.380 | - Yeah, I mean, I'm gonna go through the trade-offs first

00:17:56.380 | and some of the things that he might not be thinking about.

00:17:59.700 | But first, I just wanna start off with some context

00:18:01.540 | about the 4% rule and it'll kind of lead into this.

00:18:04.540 | So it kind of starts off with a story.

00:18:06.460 | The 4% rule is an assumed withdrawal rate

00:18:08.460 | that should survive the worst possible 30-year period

00:18:12.340 | of market conditions.

00:18:13.540 | I think that's what a lot of people don't realize

00:18:14.980 | when the first study was done to show

00:18:17.420 | what's the floor here, not the average situation,

00:18:20.100 | but the 4% was used as this would allow you

00:18:23.540 | to see through the 1930s or whatever,

00:18:25.940 | whatever the worst possible, like we talked about earlier.

00:18:29.020 | That's what it can see you through.

00:18:30.700 | - Yeah, exactly.

00:18:31.540 | The example that Kitsis uses,

00:18:33.220 | so I go to basically Kitsis for a lot of research

00:18:36.300 | on the 4% rule or the 3.5% rule or the 3% rule,

00:18:38.940 | which will kind of tie into this.

00:18:39.880 | But if you think about that,

00:18:42.700 | whether or not you wanna trust the data

00:18:44.180 | from this time period, you can say the world is different,

00:18:46.140 | but he uses the 1890s as an example, as a starting point.

00:18:50.300 | In that 30-year period,

00:18:51.900 | there's a lot of differences in the world today,

00:18:55.380 | but maybe human nature is a constant.

00:18:57.520 | There were two financial panics, a severe depression,

00:19:00.500 | the assassination of a president, the Spanish flu,

00:19:04.220 | the entirety of World War I.

00:19:06.040 | And at the same time, we had no central bank.

00:19:08.580 | We were still backed by the gold standard.

00:19:10.300 | So less stability, more volatility, more bank runs.

00:19:14.860 | You can read more from Jamie Catherwood on that.

00:19:16.540 | It's a pretty fascinating topic.

00:19:17.620 | But regardless, the 4% rule still worked

00:19:20.440 | in the most severe economic and financial times.

00:19:23.860 | The average rate of return on that time period

00:19:26.220 | was actually like 4.7%.

00:19:28.020 | So yes, technically 4.7 versus four, the rule will still work

00:19:31.520 | but there's an extremely high possibility for failure.

00:19:35.260 | And when you go more into the data,

00:19:37.380 | like for in this guy's case, he's 33 years old.

00:19:39.820 | He has an extremely long runway.

00:19:42.300 | As Paul Zoettner likes to say,

00:19:44.500 | more people die on the way down from Everest

00:19:45.980 | than on the way up.

00:19:46.820 | And I think he stole that from "Into Thin Air,"

00:19:48.620 | but the same is true.

00:19:50.380 | Like he's got one skillset for accumulation

00:19:53.420 | and it's a different skillset for decumulation,

00:19:55.740 | especially when it comes to

00:19:57.220 | how diversified his portfolio is.

00:19:59.280 | So what matters above-

00:20:00.780 | - The funny thing too that I like about this example

00:20:02.780 | is I've done examples on my website

00:20:05.260 | where I talk about if you had a million dollars

00:20:07.300 | in the stock market, would it work?

00:20:08.820 | And most people don't actually have that.

00:20:10.700 | This person actually does literally have a million dollars

00:20:13.900 | in the S&P 500.

00:20:14.820 | So the diversification- - He's the textbook example.

00:20:16.540 | - Yeah, the diversification piece

00:20:17.900 | obviously kind of worries me here

00:20:18.980 | that maybe you want to have some more diversification.

00:20:21.340 | But the other piece is if you try out 40,

00:20:23.460 | the 4% rule is looking at like 30 year time periods, right?

00:20:26.860 | You may have to let this last, you know,

00:20:29.420 | 50, 60, 70 years potentially.

00:20:31.980 | So I think that's what we have to think about

00:20:33.580 | is the time.

00:20:34.420 | - Just imagine if they were leveraged,

00:20:35.700 | you know what I mean? - Yeah, exactly.

00:20:37.060 | - I mean, well, to use a more relevant,

00:20:38.900 | a more recent example, you can look at .com.

00:20:40.860 | Like if you retired at the peak of the market in 2000,

00:20:43.300 | which is everyone's greatest fear, right?

00:20:45.620 | You would have, in his case,

00:20:48.020 | you would have run out of money following the 4% rule

00:20:50.260 | in I think like 15 years.

00:20:52.140 | So mistakes compound, right?

00:20:54.780 | There's no, the savings spigot is turned off.

00:20:57.940 | There's no additional shot.

00:20:59.180 | There's no extra time to recoup.

00:21:01.180 | It's, he's basically effectively like in 2000, 2003,

00:21:04.540 | he might've even doubled his withdrawal rate.

00:21:07.100 | So having 100% of your money.

00:21:09.100 | - If you're selling when stocks are crashing

00:21:11.260 | and you're keeping your amount of spending

00:21:13.740 | just as high, you're right.

00:21:14.580 | You could easily spend all your money.

00:21:16.580 | I think that's the biggest thing here is that

00:21:18.740 | this is why I think the financial planning aspect

00:21:20.380 | is so important because

00:21:21.940 | you have to be very flexible, I think.

00:21:23.740 | And so if it's a really bad year

00:21:26.180 | or a bad stretch in the markets,

00:21:27.780 | you may have to rein it in a little bit

00:21:29.980 | and dial down your spending.

00:21:31.620 | And maybe when things are up

00:21:32.660 | and you have a great bull market,

00:21:34.300 | then you can go back a little bit.

00:21:35.940 | That's hard for people to do, I'm sure though,

00:21:37.300 | is have volatility in their spending,

00:21:39.260 | just like in the markets.

00:21:40.380 | - And look, people will make adjustments,

00:21:41.700 | but to cut to the chase,

00:21:42.620 | like, which is to the point that you're getting at,

00:21:44.020 | the earlier you retire,

00:21:45.340 | the lower that withdrawal rate needs to be

00:21:46.820 | just to give you more flexibility.

00:21:48.100 | So in his case, like he's really towing the line,

00:21:50.060 | a million dollars, 4% rule,

00:21:51.660 | can live on $40,000 a year,

00:21:53.380 | but we're not accounting for taxes.

00:21:54.620 | I don't know if Lithuania,

00:21:55.500 | I think they have like some sort of

00:21:57.220 | social security system in place,

00:22:00.740 | or maybe some sort of pension benefit,

00:22:02.260 | or maybe it's just for elder care

00:22:04.300 | and you're below the poverty level,

00:22:05.780 | not a person nailed down on that.

00:22:08.020 | But the bottom line is like,

00:22:08.980 | he has such an extremely long runway.

00:22:11.140 | There's two things,

00:22:11.980 | and Kitsis highlights this pretty well.

00:22:14.060 | Like there's a, maybe a 10% chance

00:22:16.460 | that he retires and he's not prepared,

00:22:19.180 | and he doesn't make any adjustments,

00:22:21.020 | and he retires into a secular bear market.

00:22:24.580 | Okay, and his sequence of returns,

00:22:26.020 | like the order in which he got that bear market,

00:22:27.780 | it's not a matter of if he's gonna experience

00:22:30.260 | a bear market, it's just a matter of when,

00:22:32.180 | or a period of like flat returns

00:22:33.980 | or sideways markets, it's when.

00:22:35.780 | And if he front loads that,

00:22:37.900 | that's an extreme disadvantage for him,

00:22:39.780 | so he has to make adjustments.

00:22:40.780 | So the key takeaway to answer this question

00:22:43.660 | is that he needs to start off with possibly,

00:22:46.620 | like he can do it.

00:22:47.620 | It's not a matter of if he can,

00:22:48.620 | it's a matter of how.

00:22:50.220 | Start off with like a 3% withdrawal rate,

00:22:51.980 | have a higher cash buffer,

00:22:53.460 | but also part-time work.

00:22:55.180 | Like I like the idea,

00:22:56.220 | I'm not big on the idea of fire,

00:22:58.100 | lean fire, fat fire,

00:22:59.500 | but coast fire is kind of a new one,

00:23:01.340 | and that's where you would basically--

00:23:03.460 | - I've never heard of this,

00:23:04.300 | what does that mean?

00:23:05.140 | - So you retire,

00:23:06.500 | you have a job that you don't necessarily like,

00:23:08.700 | you're not gonna do it forever.

00:23:10.500 | It's not, you know,

00:23:11.340 | it's just a means to an end.

00:23:12.500 | You retire early,

00:23:14.060 | but then you go and you like start a vegetable garden,

00:23:16.660 | sell it out at a farmer's market--

00:23:17.500 | - Kind of like how all the fire people

00:23:18.420 | just start a blog and live off the blog.

00:23:20.340 | - Exactly.

00:23:21.620 | Exactly right.

00:23:22.460 | - The other thing is,

00:23:23.300 | this person has accumulated a million dollars

00:23:24.780 | in 33-- - It's impressive.

00:23:25.620 | - At 33, and if they're talking about retiring at 40,

00:23:28.500 | they still have some time to save and invest

00:23:29.940 | and maybe grow that nest egg a little larger as well.

00:23:32.420 | I think that-- - Yeah.

00:23:33.260 | - So they obviously have very good financial habits.

00:23:35.180 | - Yeah.

00:23:36.020 | - But yeah, kudos to them anyway.

00:23:37.020 | - Dynando's one,

00:23:37.860 | Dynando's chart,

00:23:38.860 | I didn't hear it referenced specifically.

00:23:40.860 | - Yeah, chart on,

00:23:41.700 | there we go. - I got this, yeah.

00:23:43.500 | - Growth of a million dollars in retirement,

00:23:44.900 | so this is breaking down the fact

00:23:46.700 | that he has a 10% chance of running out of money,

00:23:50.140 | and this is over a 45 year,

00:23:51.700 | or I'm sorry, 50 year time horizon,

00:23:54.040 | so I think he's even a little further out,

00:23:55.660 | but a 10% chance that he runs out of money,

00:23:59.180 | but there's an equal chance that he ends up

00:24:01.940 | with 9.3 times what he started with,

00:24:03.900 | so he ends up with $9.3,

00:24:05.900 | and so you have to manage that upside risk too

00:24:08.140 | of all this money unspent

00:24:09.580 | and kind of towing it too close to the line.

00:24:11.940 | So in his case, that dynamic withdrawal strategy

00:24:14.740 | is a fancy way to say that you just make adjustments

00:24:16.660 | every year or maybe even every quarter.

00:24:18.300 | If the markets are up,

00:24:19.860 | you can maybe spend a little bit more

00:24:21.460 | or save a little bit more,

00:24:22.420 | put a little extra pay in the barn.

00:24:24.340 | If markets are down, you cut back,

00:24:26.020 | and ideally you cut back permanently.

00:24:28.460 | I don't like the psychology behind that

00:24:30.420 | of kind of your lifestyle ebbs and flows with the market,

00:24:34.260 | but that seems to be a reasonable adjustment

00:24:36.380 | to make an alternative

00:24:37.740 | that I've done with some clients as well

00:24:39.060 | is you look at the balance.

00:24:41.060 | This is a guardrail strategy,

00:24:42.220 | so you look at the balance at the end of the year,

00:24:44.100 | beginning of the year.

00:24:45.200 | What can we spend?

00:24:46.100 | What's sort of the ceiling and the floor?

00:24:48.580 | So we end up with a range rather than a hard and set 4%.

00:24:51.780 | Well, 4% is just the starting point.

00:24:53.740 | It's good that he knows about it,

00:24:54.780 | but his situation's gonna be much more nuanced than that.

00:24:58.820 | - I like it.

00:24:59.660 | - It's kind of like how Buffett

00:25:00.500 | gets a different breakfast sandwich

00:25:01.780 | depending on what the market's doing that day, right?

00:25:04.060 | - That's the exact analogy that I used, yeah, exactly.

00:25:06.780 | The Buffett withdrawal strategy.

00:25:08.700 | - All right, next question.

00:25:09.980 | - Okay, up next we have a question from Jacob.

00:25:12.620 | The worst-kept secret in my industry at the moment

00:25:15.260 | is that the private equity-owned tech company I work at

00:25:18.180 | is about to be sold.

00:25:19.620 | Rather than granting RSUs or ISO or NSOs,

00:25:24.620 | like many companies,

00:25:26.100 | my company grants an instrument

00:25:27.340 | called profit interest, PIUs.

00:25:30.100 | I'm granted these at a basis of $0,

00:25:32.460 | and I understand there's some tax advantage

00:25:34.780 | to this particular type of grant upon sale

00:25:37.620 | with some or all units being taxed

00:25:40.020 | at the long-term capital gains rate.

00:25:41.780 | However, I find research on the internet to be very unqueer

00:25:44.920 | because they just aren't very common.

00:25:47.120 | Can you help a confused tech worker

00:25:48.700 | understand his tax implications this year?

00:25:50.900 | - The chat right now is going nuts

00:25:53.160 | for people coming with different names for FIRE,

00:25:55.700 | so anyway, all right, I gotta be honest here.

00:26:00.580 | I've never heard of the PIUs before either.

00:26:02.900 | Obviously, the cost basis of zero sounds appealing to me,

00:26:07.220 | but, and this person thinks

00:26:09.540 | that this company is about to be sold,

00:26:10.860 | so I'm sure they're starting to count these as well.

00:26:13.300 | So what are we dealing with here?

00:26:15.460 | - So this is an interesting thing.

00:26:17.780 | We have a client right now

00:26:18.980 | that we were just working through this with,

00:26:20.620 | profits interest units.

00:26:21.700 | So it's common in like RIAs, law firms, REITs,

00:26:25.340 | in this case, an up REIT.

00:26:26.500 | So imagine that you own a real estate portfolio

00:26:28.980 | and that rather than selling it and realizing taxes,

00:26:31.140 | you can exchange it for units in the company

00:26:33.940 | in this capital account that has a zero balance.

00:26:35.980 | So it's effectively worth $0 and you can defer taxes

00:26:39.540 | or get creative with your tax situation there.

00:26:41.680 | In another way, it's a way to turn

00:26:44.380 | what would normally be compensation.

00:26:45.900 | Like say that you make $500,000,

00:26:47.580 | you're a highly compensated executive

00:26:49.380 | at a publicly traded company, a REIT, for example,

00:26:53.580 | and 200 of that is in the form of PIUs.

00:26:56.700 | There's some risks associated with that,

00:26:58.140 | but you can effectively turn that compensation

00:27:00.660 | into capital gains.

00:27:01.980 | So that's the advantage.

00:27:03.180 | And it follows under the carried interest rule

00:27:05.520 | because you own an interest in the future appreciation,

00:27:08.540 | potential appreciation of the partnership.

00:27:10.460 | So there's other risks as well.

00:27:11.300 | - See, this is why the big guy always wins.

00:27:12.700 | - Yeah, exactly.

00:27:14.620 | They can sell their real estate portfolio to an up REIT

00:27:16.940 | and also their step up in basis.

00:27:19.860 | - So that sounds, so you're going to capital gains taxes

00:27:22.620 | as opposed to income tax.

00:27:23.560 | So that sounds like a pretty good deal then, obviously.

00:27:25.220 | - It's a pretty sweet deal if all goes well,

00:27:27.300 | if you hit the performance metrics or time metrics

00:27:29.460 | and so on and so forth.

00:27:30.620 | So, but it is being scrutinized or it has been,

00:27:33.340 | at least it was under the Inflation Reduction Act.

00:27:35.900 | I guess we'll see where that ends up.

00:27:38.160 | But so you own these units with a $0 balance

00:27:41.180 | and then whatever that appreciates to,

00:27:43.220 | and it can be exchanged for cash or stock.

00:27:46.420 | In his case though, he's wondering,

00:27:49.220 | if the business gets sold this year,

00:27:50.500 | what happens to my PIUs?

00:27:53.540 | And you're not finding it on Google

00:27:55.040 | because you're looking in the wrong place.

00:27:56.460 | Where you need to be looking is your plan document.

00:27:59.400 | You can probably download this from,

00:28:01.220 | or get this from HR, for example.

00:28:03.480 | Just open it up, search acquisition

00:28:05.640 | and see what that document spells out.

00:28:07.900 | If it's not there, it might be in the other documents

00:28:10.920 | from the sale of the business or potential sale.

00:28:13.040 | So I would talk to people there

00:28:14.620 | and see how that's going to transpire

00:28:16.360 | because the worst case scenario

00:28:19.160 | is that your PIUs are forfeited

00:28:20.760 | because of that acquisition.

00:28:23.520 | - That would be tough.

00:28:24.460 | - Yeah, that would kind of suck.

00:28:25.840 | I mean, he didn't pay anything for them though.

00:28:27.880 | And hopefully he filed an 83B

00:28:29.680 | to kind of mitigate some of these risks of forfeiture

00:28:31.880 | and like he started the clock early.

00:28:34.180 | But, and sometimes you're forced to file the 83B.

00:28:37.440 | But in his case, worst case, forfeiture.

00:28:40.360 | Other cases, which would probably,

00:28:42.880 | I would hope would be the situation

00:28:44.060 | was that you get to exchange them for either more PIUs,

00:28:46.900 | but potentially that might restart the clock.

00:28:50.640 | Or you get to exchange it for stock.

00:28:53.940 | And then how that's taxed is depending

00:28:55.840 | on how that all goes through.

00:28:57.600 | If it's going to be a capital asset

00:28:59.420 | or if it's going to be income.

00:29:00.800 | - You want to talk to an expert here.

00:29:03.160 | - Yeah, you want to download this document

00:29:04.600 | and send it over to your CPA and say,

00:29:06.560 | "Help me interpret this."

00:29:08.240 | Because yeah, there's a lot of jargon in there.

00:29:10.560 | - For our younger and new investors,

00:29:12.720 | can you just briefly explain why a company would issue these?

00:29:15.780 | What's the idea behind these?

00:29:19.560 | - With PIUs, so you don't have to come out of pocket

00:29:23.560 | for them, they're granted to you.

00:29:24.760 | It's kind of like a stock appreciation, right?

00:29:27.600 | They're granted to you at $0.

00:29:30.920 | You can file an 83B and pay zero tax.

00:29:33.520 | You just pay postage to send it in through certified mail.

00:29:37.240 | And then after three years,

00:29:39.920 | and it has to be three years instead of two,

00:29:41.480 | after three years, you can sell at a capital gains rate.

00:29:44.680 | And it's based on essentially, I think like the spread.

00:29:47.200 | So whatever that capital account balance is,

00:29:49.680 | if it's stock, if it's dividends, income,

00:29:51.800 | or just appreciation and growth,

00:29:53.640 | so it ties into performance.

00:29:54.600 | - So the company's giving you a priority.

00:29:55.440 | - Or tax deferred capital, right?

00:29:56.760 | - Yeah.

00:29:59.000 | - It's another form of conversation

00:29:59.820 | that can help you defer some taxes.

00:30:01.320 | And it sounds like a sweet deal.

00:30:02.560 | - Especially if you're recruiting somebody

00:30:04.120 | from Zillow to come over and you work for a REIT

00:30:08.360 | and you say, "We'll pay 30, 40% of your compensation

00:30:12.480 | "in the form of PIUs and it'll be taxed at capital gains."

00:30:17.160 | - Gotcha.

00:30:18.000 | - So Gabe Plotkin paying 15% carried interest

00:30:22.640 | on his 20% performance fees.

00:30:25.120 | - Yeah, can Gabe use these to buy the Hornets?

00:30:27.640 | I'm just trying to understand this.

00:30:29.140 | - Pretty sweet deal, unless you work for maybe Oatly.

00:30:31.880 | - Yeah.

00:30:33.080 | - Sorry, sorry Duncan.

00:30:33.920 | - All right, twisting the knife.

00:30:35.040 | All right, last question.

00:30:36.240 | - Okay, last but not least, we have a question from Colin.

00:30:41.240 | "My wife and I bought our home in 2020

00:30:43.840 | "and walked in a low-fixed 30-year mortgage

00:30:46.200 | "for first-time homebuyers.

00:30:48.380 | "We've been paying down the mortgage at a rate

00:30:49.980 | "where it would be off the books in 20 years

00:30:52.200 | "so we'd be mortgage-free at 45.

00:30:54.540 | "With lower returns in traditional markets expected,

00:30:57.420 | "does this make sense or does it make more sense

00:31:00.000 | "to pivot and invest that additional amount

00:31:02.180 | "in our retirement accounts?

00:31:03.240 | "We've been fortunate enough to max out our Roths and HSAs

00:31:06.480 | "but haven't reached the max on our 401(k) contributions.

00:31:09.640 | "We don't view our home as an investment

00:31:11.920 | "but we do view our time as one."

00:31:14.280 | - Yeah, I like that last line there.

00:31:15.400 | That's pretty good.

00:31:16.240 | So, low-rate mortgage, they wanna know if,

00:31:20.600 | they're thinking lower expected returns

00:31:22.480 | in the stock market going forward because of valuations.

00:31:25.440 | I don't know what the stock market returns

00:31:26.880 | are gonna be in the future, nor does anyone else.

00:31:28.240 | I can give you educated guess based on current valuations

00:31:31.940 | and dividend yields and historical earnings growth,

00:31:34.360 | but the people who were doing those calculations

00:31:36.400 | in the 2010s were wildly off on what the returns would be.

00:31:39.520 | So, Nick, I think one of the most important jobs

00:31:41.900 | for a financial advisor is setting expectations

00:31:44.260 | for future returns, especially when thinking

00:31:45.800 | through something like this,

00:31:46.680 | because you have not only the hurdle rate potential

00:31:49.640 | where you're saying, "Well, you probably have a three

00:31:50.980 | "or 4% mortgage, so it's a pretty low hurdle rate

00:31:52.820 | "to get over, and the house is illiquid, obviously,"

00:31:57.440 | but there's also the idea of setting expectations

00:32:00.000 | for like, "We have to plan about this

00:32:01.460 | "without knowing what the future returns are going to be."

00:32:03.220 | So, how do you handle this when dealing with clients

00:32:05.480 | in terms of setting expectations?

00:32:06.880 | You want it to be reasonable,

00:32:07.840 | but we don't know what they're going to be for sure.

00:32:10.400 | - Yeah, I like to just be really clear

00:32:13.320 | and about what you could potentially see.

00:32:15.680 | So, kind of stemming from the first question

00:32:17.640 | of there were these periods in the market

00:32:19.080 | where you had flat or negative returns, right?

00:32:21.160 | That very well could happen.

00:32:23.200 | But what it comes down to is that the best advice

00:32:25.480 | is going to be the right advice for your plan

00:32:27.320 | and for long-term.

00:32:28.200 | It's not always going to look great over the short-term.

00:32:30.620 | So, we could say, "The best thing for you to do

00:32:32.440 | "in this scenario is to not pay down that mortgage

00:32:35.160 | "at 3% to invest," because we think long-term

00:32:37.840 | in an 80/20 portfolio, let's say 7% is your average.

00:32:42.400 | That's a pretty good spread.

00:32:43.240 | And I'll take that all day.

00:32:44.080 | Plus, I've got the flexibility.

00:32:45.800 | It's not a liquid.

00:32:46.640 | And especially in this guy's case or girl's case,

00:32:51.280 | they're, what, 28 years old maybe at this point.

00:32:54.080 | They started the mortgage three years ago

00:32:55.520 | and it could be paid off in 20 years.

00:32:58.160 | I would be leaning more towards that,

00:33:00.400 | especially if valuations are lower,

00:33:02.200 | returns are lackluster, it's a land grab.

00:33:04.200 | I'm going to accumulate as many shares of VTI

00:33:07.320 | or whatever you choose to invest in over that time period.

00:33:10.000 | But setting that expectation is to say,

00:33:11.220 | "Hey, there could be an extended period

00:33:12.700 | "where this is going to look like a really bad decision."

00:33:15.800 | But sticking with it long-term, it'll even itself out.

00:33:18.600 | And then the growth years that follow will offset--

00:33:22.000 | - The other thing is that if they,

00:33:23.360 | sure, they want to be out of their house at 45

00:33:25.040 | and maybe retire early or something,

00:33:26.880 | but they can't touch the tax-deferred money anyway.

00:33:29.000 | So I think at that point, you want to,

00:33:32.680 | if we have a bad period for them in their late 20s,

00:33:35.360 | that's a good thing for them.

00:33:36.280 | They're picking up shares at a lower price.

00:33:38.320 | So if they think returns are going to be lower going forward,

00:33:41.600 | you want to be investing that cash.

00:33:43.340 | And I just think for young people,

00:33:45.100 | unless you just have an aversion to debt

00:33:47.260 | that's going to make you sick to your stomach if you have it,

00:33:49.620 | I don't see the point of giving up that low-rate debt,

00:33:52.760 | considering that the rate of inflation right now

00:33:54.780 | at 3% over the last 12 months

00:33:56.660 | is equal to those mortgage rates for most people,

00:34:00.500 | and you're earning more money in T-bills than you were.

00:34:02.860 | I mean, you can earn 5.5% in T-bills right now

00:34:05.180 | as opposed to paying down that mortgage.

00:34:06.980 | I would much prefer to let that mortgage stand

00:34:09.700 | and use that leverage now that we were given a gift

00:34:13.640 | of those low rates back then.

00:34:14.960 | I would be in no hurry to pay that off,

00:34:16.700 | especially if inflation is going to be higher

00:34:18.380 | and rates are going to be higher or whatever going forward.

00:34:19.900 | Who knows?

00:34:20.740 | You could always pay it off later,

00:34:23.980 | but I think the compounding effects

00:34:26.460 | from being in the stock market over the long-term

00:34:28.380 | far outweigh the ability to pay it on your mortgage

00:34:30.780 | and have it paid off.

00:34:31.660 | - Yeah, I mean, so that's where you start.

00:34:33.440 | With every question, this was a really popular question

00:34:36.260 | like over the last three years, right?

00:34:37.660 | So we start off with,

00:34:39.580 | there's an optimal versus reasonable scenario.

00:34:41.740 | What is optimal is going to be

00:34:43.180 | what I give you on this spreadsheet,

00:34:44.980 | and what is reasonable is going to be

00:34:46.740 | how you feel about debt

00:34:47.860 | and if you want to be financially free,

00:34:50.400 | or when you're 45 or if you want to retire,

00:34:52.780 | and then think about the difference between

00:34:54.740 | you're dumping, like in the scenario that I created,

00:34:57.100 | if the mortgage was five,

00:34:58.060 | if you bought a $500,000 house, put 100,000 down,

00:35:00.880 | and you put an extra 500 bucks a month onto the note,

00:35:05.800 | you'll pay it off in 20 years.

00:35:08.100 | But instead of investing that 120 grand into your house,

00:35:11.620 | why not put it in the market?

00:35:12.800 | Like, look at that scenario.

00:35:13.740 | Like, sure, you free up cash flow,

00:35:16.780 | but when you're 45, but then again,

00:35:20.860 | wouldn't you rather have that larger balance outside

00:35:22.900 | with more flexibility?

00:35:23.820 | And maybe it's not in a tax-deferred account.

00:35:25.260 | Maybe this is all in a brokerage account,

00:35:26.980 | so we can kind of knock down the returns a little bit

00:35:29.700 | than just for taxes.

00:35:30.620 | But still, it's an optimal versus reasonable scenario

00:35:33.460 | depending on what his goals are,

00:35:34.860 | what the plan looks like.

00:35:36.440 | So, that's where I end up with that one,

00:35:40.580 | and then just managing expectations.

00:35:42.880 | Going back to sequence of returns to be specific.

00:35:46.940 | - I think you wanna give yourself

00:35:47.780 | as much flexibility as possible.

00:35:49.020 | If you're looking at something to do in your mid-40s

00:35:51.420 | or early 50s or whatever.

00:35:52.780 | - And so many question marks about this case, too.

00:35:54.580 | Like, he's planning on having,

00:35:55.980 | or she or they are planning on having kids.

00:35:58.740 | I mean, you have two or three kids.

00:36:00.340 | Like, they might take all of your extra cash flow anyway.

00:36:03.460 | They might all go to daycare.

00:36:04.460 | So, this conversation is moot.

00:36:06.140 | And I mean, when I bought a house at 25,

00:36:09.020 | I wasn't thinking that I would be there

00:36:10.420 | for 40 years or even 20 years.

00:36:13.260 | So, there's a lot of different things that could change.

00:36:15.700 | - Yeah, so you wanna give yourself a margin of safety.

00:36:17.600 | - Are houses even built the last 40 years anymore?

00:36:20.300 | I don't even know.

00:36:21.120 | - I don't think so.

00:36:21.960 | They discontinued the packages from Stage, right?

00:36:24.740 | Or not Stage, Sears.

00:36:26.820 | You can't buy a house

00:36:27.660 | and have it charted over on a trolley anymore,

00:36:30.660 | and it lasts for a decade.

00:36:31.500 | - We'll check back in 40 years.

00:36:32.340 | - Century, yeah.

00:36:33.220 | - I sure hope so, Duncan.

00:36:35.100 | - Yeah, I mean, you would hope, but I'm just saying.

00:36:37.100 | I don't know, I have my doubts.

00:36:38.820 | - All right.

00:36:39.660 | I wanna thank Nick for coming on

00:36:40.620 | and helping us with some pension planning questions.

00:36:42.740 | We appreciate all your questions, as usual.

00:36:44.040 | Thanks to everyone in the chat for coming.

00:36:45.980 | We had a lot of fire stuff again today.

00:36:48.260 | Email us, askthecompoundshow@gmail.com.

00:36:50.420 | Leave us a comment or a question on YouTube.

00:36:52.220 | We're getting a lot of questions these days,

00:36:53.400 | not only in our inbox, but also on YouTube and Twitter.

00:36:57.140 | People yell at Duncan on the street sometimes.

00:36:59.820 | Remember, askthecompoundshow@gmail.com,

00:37:01.700 | and we will see you next time.

00:37:03.100 | - See you, everyone.

00:37:03.940 | - See you, guys.

00:37:05.300 | (upbeat music)

00:37:07.880 | (upbeat music)

00:37:10.460 | (upbeat music)

00:37:13.040 | (upbeat music)

00:37:15.620 | (upbeat music)

00:37:18.200 | (upbeat music)

00:37:20.780 | (upbeat music)

00:37:23.360 | (upbeat music)

00:37:25.940 | (upbeat music)

00:37:28.520 | [BLANK_AUDIO]

How Much Do You Need to Retire Early?

Chapters