Will Stock Returns Be Lower Going Forward?

00:00:00.000 | (beeping)

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

00:00:13.760 | Our email here is askthecompoundshow@gmail.com.

00:00:17.480 | Great questions as always.

00:00:18.600 | We got our first audio question this week,

00:00:21.040 | which we're very excited about.

00:00:21.880 | - Exciting.

00:00:23.140 | - Today's show is sponsored by Future Proof.

00:00:25.760 | Futureproof.advisorscircle.com.

00:00:28.680 | Got a couple things were mentioned here.

00:00:30.600 | The Hyatt is already sold out.

00:00:31.760 | The rest of the hotel rooms are selling out fast.

00:00:34.200 | So hurry up and get there and book your hotel

00:00:36.960 | because you're not gonna have a spot.

00:00:38.800 | I think there's like four hotels there.

00:00:39.960 | I liked the Paseo last time.

00:00:41.260 | That was my favorite. - That was cool.

00:00:42.100 | I liked that, yeah.

00:00:42.940 | - There's plenty of good ones.

00:00:44.400 | Qualifying advisors, $200 off at futureproof.advisorscircle.com/downtown.

00:00:49.400 | We're going to have a live Animal Spirits there.

00:00:52.360 | We're gonna have a live Compound and Friends there.

00:00:54.820 | We're gonna have a live Ask the Compound there.

00:00:57.480 | It's gonna be great.

00:00:58.320 | Gonna be tons of good speakers.

00:00:59.880 | Good food, good drinks, good weather, good scenery.

00:01:03.720 | It's gonna be, and plus for me living in Michigan,

00:01:05.480 | it's like an extension of summer

00:01:06.740 | 'cause it happens in, what, the middle of September?

00:01:09.580 | - Right. - And so it's another way

00:01:11.200 | to like keep that summer going a little bit.

00:01:13.380 | - Also, yeah. - Great time.

00:01:14.680 | - Hit the Rocky, hit the Rocky video.

00:01:16.480 | Maybe, maybe this will jog some memories

00:01:19.840 | from our long time Animal Spirits viewers.

00:01:22.560 | But last year we had Mike and Ben do the Rocky,

00:01:25.640 | the classic Rocky scene.

00:01:26.680 | So yeah, we're already thinking about

00:01:28.160 | what we're gonna do this year.

00:01:29.080 | So keep your eyes peeled. - Rocking Apollo on the beach.

00:01:30.980 | Yeah, that was, I still can't believe

00:01:32.480 | you guys talked me into doing that.

00:01:33.320 | - My favorite part is this one.

00:01:35.880 | - Yeah, we really did it.

00:01:37.920 | All right, let's do our first question.

00:01:39.720 | - Okay, up first today we have a question from,

00:01:44.720 | oh, I don't have their name here.

00:01:47.320 | Okay, my target date fund does a lot worse than SPY.

00:01:51.080 | Should I just move to an index fund for my 403B?

00:01:55.160 | - Great question, and I think one

00:01:57.360 | a lot of investors grapple with.

00:01:59.120 | So the S&P 500 is doing better than my portfolio.

00:02:02.080 | Why don't I just put all my money in there?

00:02:03.760 | Why don't we look at an example of why a target date fund

00:02:06.360 | is underperforming the S&P 500?

00:02:07.720 | So John, do a chart on it. - Did this hurt your feelings

00:02:08.760 | a little bit, though, that they're kinda taking a shot

00:02:10.560 | at target date funds?

00:02:11.400 | - No, I don't think it's a shot

00:02:12.220 | because I think a lot of people

00:02:13.440 | don't understand benchmarking,

00:02:14.560 | which is what I wanna talk about.

00:02:15.440 | So John, do this chart on.

00:02:16.640 | I just, I don't know what target date fund

00:02:18.680 | this person is in, so I just picked a Vanguard 2055 fund

00:02:22.180 | to see what's under the hood.

00:02:23.440 | So this is roughly 90% in stocks,

00:02:26.020 | split between 60% U.S. stocks, 40% international stocks,

00:02:29.960 | which is about the global weighting of the market cap,

00:02:32.640 | 10% in U.S. bonds and international bonds.

00:02:35.360 | So now, John, go to the next chart here.

00:02:37.160 | This just shows the gains this year.

00:02:39.640 | The S&P's up like 14%.

00:02:41.440 | This target date fund's up 11% or so.

00:02:44.160 | So why is this the case?

00:02:45.480 | Well, it's pretty simple.

00:02:46.440 | Bonds are only up around 3% this year,

00:02:48.280 | U.S. and international.

00:02:49.600 | Stock market's up 14 to 15%.

00:02:52.060 | International stocks are up like 10 to 12%.

00:02:54.600 | So listen, if your target portfolio

00:02:57.960 | is a 100% asset allocation

00:03:00.440 | to the largest stocks in the United States

00:03:01.920 | and you're underperforming the SPY,

00:03:03.720 | then something is wrong.

00:03:04.760 | There's a problem there, right?

00:03:05.760 | You're underperforming.

00:03:06.960 | But if your target allocation is something different

00:03:09.520 | and you're using the S&P 500 as a benchmark,

00:03:12.220 | then you're comparing apples to oranges here.

00:03:14.240 | It's not the same thing, right?

00:03:16.400 | That's one specific market.

00:03:18.520 | It's one specific style of investing.

00:03:21.120 | Now, it could be the case

00:03:21.960 | that you need to take more risk, right?

00:03:23.180 | Most target date funds cap out at 90% equity exposure.

00:03:26.340 | I looked, if you went up to 2070,

00:03:28.540 | I think is the furthest Vanguard one,

00:03:30.220 | it's still 90% stocks.

00:03:31.420 | So I think that's as high as they go.

00:03:32.540 | So if you want to be 100% invested in stocks,

00:03:36.180 | then a target date fund is not for you.

00:03:38.060 | I'm a big proponent of them.

00:03:39.080 | You mentioned it, Duncan.

00:03:39.920 | They're low cost.

00:03:40.740 | They're probably diversified.

00:03:41.780 | They're rebalanced automatically.

00:03:43.260 | They're simple.

00:03:44.100 | It's like a single fund of funds.

00:03:45.500 | And then they're professionally managed.

00:03:46.820 | So the asset allocation will change

00:03:48.180 | and get more conservative as you age.

00:03:49.820 | If that's a problem for you,

00:03:50.720 | maybe you need a portfolio that's 100% invested in stocks.

00:03:53.340 | All of my retirement funds

00:03:54.960 | are invested fully in the stock market, 100%, right?

00:03:58.260 | I take those RPMs all the way to the top.

00:04:00.660 | I'm not in the leveraged versions like you

00:04:02.900 | on some funds, Duncan.

00:04:03.860 | But if you have the intestinal fortitude

00:04:06.980 | to have 100% of your money in stocks, that's fine.

00:04:09.620 | And that's the one to compare to, that's fine.

00:04:11.380 | But even within stocks, I diversify by international

00:04:15.700 | and I have different strategies

00:04:16.740 | and I have different types of stocks.

00:04:17.740 | So I still diversify that way.

00:04:19.260 | So if you want to have everything

00:04:22.140 | in the biggest stocks in the US,

00:04:24.460 | then that's a decent benchmark.

00:04:25.540 | I think, I just think for most people,

00:04:28.700 | that's not the benchmark that they have.

00:04:30.980 | And I think a lot of times my worry is this person

00:04:33.380 | is talking about performance chasing, right?

00:04:35.020 | The perfect portfolio is pretty clear in hindsight.

00:04:37.620 | It's never clear ahead of time, right?

00:04:39.820 | So diversification means your portfolio

00:04:41.300 | is never gonna be invested

00:04:42.300 | in the best performing asset class or strategy or style,

00:04:44.700 | but that's a feature, not a bug.

00:04:46.020 | So the question really boils down

00:04:47.740 | to how you're benchmarking in the first place.

00:04:49.220 | I'm not a fan of benchmarking portfolio performance

00:04:52.480 | to a benchmark simply because it's doing well

00:04:54.360 | or because financial media talks about it

00:04:56.260 | or someone else has invested that way.

00:04:58.340 | Because sometimes a diversified portfolio

00:04:59.780 | will be the S&P 500.

00:05:01.780 | Anything you diversified last year, you did much better.

00:05:04.500 | Right, if you had some value stocks in your portfolio

00:05:06.460 | or high quality stocks or something else,

00:05:08.140 | international stocks, you did better than the S&P last year.

00:05:10.020 | So nothing works always and forever.

00:05:11.980 | I think you just have to figure out

00:05:12.820 | if that's the right benchmark for you.

00:05:14.540 | I look at it like this.

00:05:15.380 | The only benchmark you should really care about

00:05:17.020 | is whether or not you're on track

00:05:18.260 | to achieve your financial goals.

00:05:20.100 | That's it.

00:05:21.060 | Any performance numbers or risk measured

00:05:22.660 | should be compared to that goalpost alone.

00:05:24.800 | If you're trying to beat the market

00:05:26.220 | and you're a stock picker, sure, benchmarks matter.

00:05:28.380 | But I think it matters what your risk profile

00:05:31.220 | and time horizon are.

00:05:32.100 | And if you set an asset allocation, that's your target.

00:05:33.980 | And I actually think it's kind of funny.

00:05:36.220 | I actually think a target date fund

00:05:37.580 | is a good benchmark to have.

00:05:39.180 | If you have an 80/20 allocation to stocks and bonds

00:05:42.380 | and you measure that against an 80/20 target date fund,

00:05:46.060 | I think that that's actually a pretty good benchmark.

00:05:47.700 | That's a better benchmark than the S&P 500.

00:05:50.100 | I also think, I also just think the idea

00:05:52.460 | of constantly measuring yourself

00:05:53.660 | against those kind of indexes

00:05:55.820 | means you're always gonna be chasing something else.

00:05:57.960 | 'Cause it could be the NASDAQ 100 one year,

00:05:59.860 | it could be international stocks one year,

00:06:01.220 | it could be bonds one year, you never know.

00:06:03.560 | I also, I just, the whole thing about beating the market

00:06:07.100 | is always kind of funny to me.

00:06:07.940 | Jason Zweig wrote a piece

00:06:09.020 | for the Wall Street Journal a number of years ago

00:06:11.140 | about beating the market.

00:06:12.080 | And I love this part.

00:06:12.920 | He said, I'm gonna read it here.

00:06:14.220 | "I once interviewed dozens of residents in Boca Raton,

00:06:16.460 | "one of Florida's richest retirement communities.

00:06:18.700 | "Amid the elegant stucco homes, the manicured lawns,

00:06:20.860 | "the swaying palm trees, and the sun and the sea breezes,

00:06:22.820 | "I asked these folks, mostly in their 70s,

00:06:24.980 | "if they'd beat the market

00:06:25.820 | "over the course of their investing lives.

00:06:26.900 | "Some said yes, some said no.

00:06:28.780 | "Then one man said, 'Who cares?

00:06:30.040 | "'All I know is my investments earn enough

00:06:31.620 | "'for me to end up in Boca.'"

00:06:33.180 | I think that's the idea.

00:06:34.020 | You don't judge your performance against the stock market

00:06:37.180 | or whatever you think it is.

00:06:38.580 | You judge it against whatever asset allocation fits for you

00:06:41.820 | and your personality and your disposition.

00:06:43.820 | And that asset allocation should always be tied

00:06:45.580 | to your risk profile and time horizon.

00:06:46.820 | That's the thing.

00:06:47.860 | I think first you figure out

00:06:49.980 | if that's the right asset allocation for you.

00:06:51.900 | And then you figure out what the right benchmark is

00:06:54.140 | to judge yourself against.

00:06:56.140 | - Yeah, it kind of becomes a keeping up

00:06:57.540 | with the Joneses thing, right?

00:06:58.780 | It's exhausting to constantly be judging yourself like that.

00:07:01.740 | - So your benchmark is TQQQ, right?

00:07:04.700 | - Yeah, I mean, hey, I actually, new experience.

00:07:07.580 | I started selling covered calls a while back

00:07:10.460 | because I was looking for something

00:07:12.720 | to help offset my horrible losses.

00:07:15.340 | - Not that good.

00:07:16.180 | - And I just got some pulled away from me

00:07:18.820 | at a very unfavorable price that I wasn't expecting.

00:07:22.260 | So I just found another way to get chopped off.

00:07:25.500 | - But you earned some premium in the meantime, I hope.

00:07:27.420 | - I did, I did.

00:07:28.700 | - Okay.

00:07:29.540 | - Not worth it though, but yeah.

00:07:30.940 | - Right, that's the kind of strategy

00:07:32.340 | that always seems better in a bear market, right?

00:07:33.780 | And that's the whole problem here

00:07:34.980 | with any of this stuff is anytime there's a bear market,

00:07:37.740 | you're gonna be kicking yourself saying,

00:07:39.300 | "I wish I would have gone into this with way less risk."

00:07:41.860 | And when there's a bull market,

00:07:42.740 | you're gonna be kicking yourself and going,

00:07:44.000 | "I wish I would have gone to this with way more risk."

00:07:46.460 | Unfortunately, I think for most people,

00:07:48.100 | you figure out the asset allocation

00:07:49.340 | that you can hold during both of those environments

00:07:51.300 | and everything in between,

00:07:52.780 | and that's the one you have to be,

00:07:53.780 | find your, make yourself comfortable with.

00:07:55.140 | Otherwise, you're always gonna be chasing something.

00:07:57.180 | - Right, and the way I make myself comfortable

00:07:59.020 | with something like that scenario,

00:08:00.440 | just described as, like Josh says,

00:08:02.180 | it's like your tuition to the market, right?

00:08:03.780 | You know, like I didn't go to school

00:08:04.920 | for finance and investing.

00:08:06.900 | So, you know, sometimes you pay a little tuition.

00:08:09.100 | - You went to film school

00:08:09.940 | so you could record Michael and I

00:08:11.020 | running on a beach in slow motion.

00:08:12.220 | - Right, exactly.

00:08:14.020 | - All right, next question.

00:08:15.820 | - Okay, up next, we have a question from Pascal,

00:08:18.940 | or Pascal, I'm not sure.

00:08:20.980 | "Thanks to you, I am now really interested

00:08:23.020 | "in personal finance.

00:08:24.760 | "I have money to invest in a low-cost index fund,

00:08:27.340 | "but I have serious doubts that the market can generate

00:08:29.700 | "around 8% returns over the next few decades.

00:08:32.620 | "We can't replicate the industrial revolution

00:08:34.640 | "of the last century, and the climate crisis

00:08:36.560 | "will have a massive impact on the world economy.

00:08:39.500 | "World population growth slowing is a mega trend,

00:08:41.660 | "and future generations cannot sustain

00:08:43.580 | "the pace of growth we witnessed in the last century.

00:08:46.360 | "In general, the earth is a finite system,

00:08:48.660 | "so indefinite growth is impossible.

00:08:50.740 | "Isn't this a mathematical reality?"

00:08:53.160 | - So this was the TLDR, this one,

00:08:56.980 | Pascal is actually from Germany, I guess,

00:08:58.620 | and he gave like eight more paragraphs,

00:09:00.820 | so I actually read 'em all,

00:09:01.820 | and kind of went bullet point by bullet point

00:09:04.040 | going through this.

00:09:05.100 | I understand the thinking here,

00:09:06.340 | even if I don't agree with it.

00:09:07.540 | Like, is there a ceiling of the amount we can grow?

00:09:11.420 | I guess eventually, like the United States

00:09:13.140 | was once an emerging market,

00:09:14.100 | so the fact that we've grown so much in the last,

00:09:15.940 | whatever, 150, 200 years,

00:09:18.060 | can we grow that much going forward?

00:09:19.260 | No, just like China has had 10% growth

00:09:20.940 | for the last 30 to 40 years or whatever,

00:09:22.500 | they can't do that forever.

00:09:24.560 | So I think the low-hanging fruit has probably been picked

00:09:26.740 | in terms of growth and innovation, sure.

00:09:28.820 | But I still think we have some work to do.

00:09:29.820 | John, give me a chart on here.

00:09:31.060 | This is from Our World in Data.

00:09:32.780 | Shows the share of the population living in poverty.

00:09:35.440 | 25% of the world still lives on less than $3.65 a day.

00:09:40.580 | 47% of the world lives on less than $6.85 a day.

00:09:44.560 | 84% of the world lives on less than $30 per day,

00:09:47.420 | which is the poverty line

00:09:48.320 | reflective of like high-income countries.

00:09:50.800 | So there's still plenty of work to do

00:09:52.220 | and plenty of emerging markets

00:09:53.500 | that I think are gonna come up and have their day

00:09:55.100 | and can provide some growth,

00:09:56.460 | even if it doesn't come from the US.

00:09:58.620 | But I don't know.

00:10:00.060 | Do I think people are gonna wake up in the decades ahead

00:10:01.900 | and not want to improve their standing in life?

00:10:04.360 | No.

00:10:05.200 | Do I think innovation is gonna plateau

00:10:06.620 | and stop happening from here?

00:10:07.820 | No, I think it's probably only gonna get better.

00:10:10.500 | Do I think people are gonna stop

00:10:11.460 | spending money in the future?

00:10:13.080 | I think, if anything,

00:10:13.920 | we've shown that that's probably never gonna happen

00:10:15.860 | for the United States.

00:10:17.340 | And do I also think corporations

00:10:18.580 | are gonna try to stop creating profits?

00:10:19.860 | No.

00:10:20.700 | What drives stock market returns over the long run?

00:10:23.220 | Profits and dividends.

00:10:24.420 | So could returns be lower in the future?

00:10:26.660 | You could certainly make that case.

00:10:29.020 | But does that necessarily mean

00:10:30.620 | that everything's gonna grind to a halt

00:10:33.120 | and things are gonna stop?

00:10:34.180 | I think if that's the bet you're making,

00:10:35.780 | that growth is gonna stop completely

00:10:37.820 | because we've already rung everything,

00:10:40.060 | all the water out of it that we can.

00:10:42.620 | I think the least of your worries in that situation

00:10:44.940 | is your stock market portfolio.

00:10:46.380 | 'Cause it's not gonna matter

00:10:47.340 | what you do with your money at all.

00:10:48.620 | If the economy just completely stops

00:10:50.640 | and the gears grind to a halt,

00:10:52.460 | then your investments aren't gonna matter anyway

00:10:54.460 | because we're probably gonna have hyperinflation

00:10:56.340 | or something and things will go really wrong.

00:10:58.220 | Now, on the climate change front,

00:11:00.520 | like a lot of people are worried about that,

00:11:03.340 | but I mean, can you imagine the amount of government

00:11:06.000 | and private spending that might be necessary

00:11:07.500 | to combat climate change in the future?

00:11:09.540 | Electric vehicles and charging stations

00:11:11.420 | and wind and solar and batteries.

00:11:13.120 | I actually think that's kind of bullish

00:11:15.220 | for the stock market because we're gonna have to--

00:11:17.320 | - I agree.

00:11:18.160 | This is one of the areas I'm most interested in.

00:11:19.540 | I'm constantly reading about battery storage

00:11:22.180 | and electrifying the grid

00:11:23.940 | and moving away from fossil fuels and that kind of thing.

00:11:26.500 | Yeah, I see it as something that could actually

00:11:29.180 | turn a negative into a positive from an economic standpoint.

00:11:33.300 | - Yeah, I think it could be more government spending

00:11:35.780 | and I think that could actually be helpful.

00:11:38.460 | I think, like what's the higher probability bet here?

00:11:42.200 | Like is there a non-zero chance

00:11:43.980 | that stock market returns are awful going forward?

00:11:45.580 | Of course, that's always a possibility,

00:11:47.300 | but do you really want to bet your future on that,

00:11:50.080 | your kid's future?

00:11:50.920 | Like I think stock market returns

00:11:52.640 | being pretty decent or terrible,

00:11:55.340 | the baseline for me is stock returns

00:11:56.740 | are gonna be pretty decent.

00:11:57.580 | I wouldn't have terrible as my baseline

00:11:59.620 | because it's kind of like if you make that bet,

00:12:02.100 | what good is it gonna do anyway?

00:12:03.540 | You're screwed either way.

00:12:04.860 | So you might as well bet that stock market returns

00:12:06.580 | are gonna be okay going forward.

00:12:08.280 | Maybe they won't be as great as they were,

00:12:10.580 | but betting that they're okay, I think is,

00:12:12.880 | otherwise, what's the point?

00:12:14.060 | Just spend everything you own now.

00:12:15.660 | - Yeah, thinking about like don't look up style scenario,

00:12:18.540 | what's the alternative if you're like,

00:12:20.100 | yeah, humans won't be able to inhabit the earth in 50 years?

00:12:23.900 | Well then, I mean, what are you gonna do anyway then?

00:12:26.740 | So to me, I like to be optimistic about it

00:12:28.580 | and think that we're gonna harness technology,

00:12:31.140 | we're gonna innovate, we're gonna find ways.

00:12:33.780 | Everyone's gonna care more and more, right?

00:12:35.300 | As things start to become more and more obvious

00:12:37.140 | about the climate and the future.

00:12:40.100 | And I don't think it'll be as politicized in the future,

00:12:42.360 | that kind of thing.

00:12:43.200 | So yeah, I'm hopeful.

00:12:44.640 | - And do we kick the can down the road

00:12:46.080 | and wait to the last minute

00:12:47.000 | to solve these kinds of things?

00:12:48.680 | Probably.

00:12:49.520 | - We love procrastination.

00:12:52.360 | - Yeah, but then we're just gonna spend a ton of money

00:12:53.960 | and get a really crazy bull market in a year,

00:12:56.640 | and then we're gonna have a crash and another bull market,

00:12:58.480 | and so goes life.

00:13:00.440 | - Yep, or we'll move to Mars.

00:13:02.560 | - There you go.

00:13:03.880 | All right, another question.

00:13:05.360 | Okay, up next, we have a question from Justin.

00:13:08.880 | Hello, I'm a regular watcher of the show and other content.

00:13:11.760 | I really enjoy all, I really enjoy you all,

00:13:15.120 | and find you entertaining and educational.

00:13:16.680 | Thanks, Justin.

00:13:17.720 | That being said, uh-oh.

00:13:19.960 | I'm confused why you continually push Roth IRAs.

00:13:22.960 | Why do you and Bill want everyone to pay taxes up front

00:13:25.800 | and to avoid them later?

00:13:27.960 | Or yeah, to avoid them later.

00:13:30.200 | The idea of low earning years early

00:13:32.560 | and higher later is nonsense.

00:13:34.240 | Isn't the goal to live off the proceeds of your investments

00:13:36.600 | and leave the principal alone?

00:13:38.160 | Is your 75% principal going to outpace my 100%?

00:13:41.520 | When you die, you'll have paid taxes

00:13:43.500 | and pass on substantially less.

00:13:45.080 | When I die, my family will pay no taxes.

00:13:47.480 | Wealthy people go out of their way to avoid taxes.

00:13:49.800 | Why are you recommending people pay them up front?

00:13:52.200 | Shots fired.

00:13:53.160 | - Justin went hard in the paint here on the Roths.

00:13:56.040 | All right, let's get Bill Sweet in here to defend his honor

00:13:58.520 | because Justin went hard in the paint on the Roth.

00:14:01.120 | - Ooh, wow.

00:14:02.080 | - That's rough, Bill.

00:14:03.120 | - Yeah, I had to take the jacket off

00:14:04.960 | 'cause it's heating up a little bit in here.

00:14:06.240 | Justin, my man.

00:14:07.760 | - Now, Bill, as much as you love the Roth

00:14:10.360 | as a tax-deferred vehicle,

00:14:11.440 | you have stated in the past on many occasions

00:14:13.000 | that it's not right for every circumstance.

00:14:14.380 | So before we, Justin laid out a lot.

00:14:17.320 | He laid his case out here pretty,

00:14:18.720 | I mean, this is like Stephen A. Smith style here.

00:14:21.560 | Before we get into anything you disagree with here,

00:14:25.040 | anything that he said here that you actually agree with

00:14:27.760 | that makes sense.

00:14:28.840 | - Yeah, well, first off, Justin,

00:14:30.600 | if you come at the king, you best not miss.

00:14:32.880 | But I do agree, Ben, with Justin.

00:14:36.280 | He's got a bunch of great points.

00:14:38.220 | And Ben, we covered this on the last Ask the Compound

00:14:41.200 | two weeks ago, as you recall,

00:14:42.880 | where I did moderate my stance a little bit

00:14:44.560 | on the Roth IRAs due to some listener feedback like this.

00:14:47.220 | But Justin, guns blazing, I give you a lot of credit.

00:14:50.480 | He's got a lot of great points.

00:14:51.520 | I do think I've overstated the benefits of Roth IRAs.

00:14:53.560 | They're not applicable in all circumstances

00:14:56.280 | to all taxpayers.

00:14:57.500 | If you're in a high-income situation now

00:14:59.640 | and you expect to be a low-income situation in retirement,

00:15:01.780 | Roth ain't for you.

00:15:03.080 | That's what traditional IRAs and 401ks are for.

00:15:06.000 | And when choosing between Roth and traditional,

00:15:08.520 | I advocate that there's no reason to do both,

00:15:11.000 | to do one or the other.

00:15:12.160 | Like that is a fallacy.

00:15:13.600 | And so, John, can we just pull up the first chart real quick?

00:15:16.060 | This is a chart I shared two shows ago,

00:15:17.560 | two Ask the Compounds.

00:15:18.740 | If you're in the 12% bracket or less,

00:15:20.600 | Roth makes all the sense in the world.

00:15:22.040 | If you're at 32% or above,

00:15:23.640 | generally depending on path dependence,

00:15:25.640 | I would say thou shalt not Roth.

00:15:27.380 | And that's it.

00:15:28.220 | I think that's it, not applicable for everybody.

00:15:30.000 | John, can we take the chart away?

00:15:31.960 | - The simple one would be,

00:15:34.000 | your younger, low-earning years,

00:15:35.680 | Roth makes a ton of sense.

00:15:37.200 | Older, higher-earning years,

00:15:38.600 | Roth doesn't make as much sense.

00:15:39.840 | Is that fair?

00:15:40.680 | - Yeah, more or less.

00:15:41.500 | And I think the 12% tax bracket is more or less it,

00:15:43.480 | that right around there, it tends to be a slam dunk,

00:15:45.560 | unless you expect to be indigent in retirement

00:15:47.480 | without Social Security, without RMDs.

00:15:49.720 | So, Ben, if you will indulge me,

00:15:51.640 | can I get to some points, some retorts for a moment here?

00:15:54.280 | - The floor is yours because, yeah, I figured.

00:15:57.760 | So, Justin, a couple of things.

00:15:59.280 | First off, in your presumptions that you're not gonna,

00:16:01.520 | your heirs aren't gonna pay any tax, that's not right.

00:16:03.800 | Like, if your heirs inherit your traditional 401(k) IRA,

00:16:07.020 | they have to distribute the balance within 10 years,

00:16:08.840 | and that's 100% taxable to them.

00:16:10.560 | And so, if you don't care about your heirs paying tax,

00:16:13.660 | I mean, I just, I wouldn't do that,

00:16:14.720 | but there's no step-up in basis

00:16:16.600 | that occurs with a traditional asset.

00:16:17.920 | So, that's a big one.

00:16:19.040 | Another point that I wanna just debate a little bit,

00:16:21.520 | behavioral finance shows,

00:16:22.800 | this is a Harvard University paper,

00:16:24.200 | does front-loading taxation increase savings from 2015?

00:16:27.560 | It shows that when given the option,

00:16:29.160 | people save the same amount in a Roth 401(k)

00:16:31.280 | as they do in a traditional 401(k).

00:16:33.020 | - I was thinking that.

00:16:33.860 | So, he was saying your 75% principal versus my 100%.

00:16:36.780 | Most people who do that don't then save the difference.

00:16:39.540 | - That's it, that's exactly it.

00:16:40.920 | And so, if you're choosing between Roth or traditional,

00:16:42.920 | and you have the discipline to go out and save

00:16:44.840 | the balance that you would have otherwise invested,

00:16:46.780 | then yes, I think it's close,

00:16:48.140 | and in many cases, the traditional 401(k) wins out.

00:16:51.600 | But, where we live in the real world,

00:16:53.360 | with real people that don't do this,

00:16:55.220 | don't know there's life on a spreadsheet,

00:16:56.720 | they tend to save the same amount,

00:16:57.880 | and so, when you look back in hindsight,

00:16:59.300 | when you get to retirement and distribution age,

00:17:01.240 | if you have a traditional and Roth IRA,

00:17:03.100 | your Roth IRA is worth about 20 or 30% more

00:17:05.320 | because it's all post-tax, right?

00:17:06.980 | - I did this recently.

00:17:07.840 | When I switched to a Roth 401(k) a few years ago,

00:17:10.400 | I saved the exact same amount.

00:17:12.200 | - Exactly.

00:17:13.040 | - I didn't change what I saved.

00:17:14.240 | - And so, exactly your point, Ben,

00:17:15.640 | if you're cramming more dollars into the Roth

00:17:17.680 | that are post-tax,

00:17:18.520 | it ends up being worth more in retirement,

00:17:20.540 | assuming that you don't save the difference,

00:17:22.280 | and that's the key point.

00:17:24.020 | Next is, I'm not optimizing personally for my net worth.

00:17:27.100 | That is a heresy in financial planning,

00:17:30.020 | where people play this video game

00:17:31.500 | where they wanna see their net worth go up every year.

00:17:33.820 | I don't give a flying hoot.

00:17:35.180 | I am optimizing in my retirement

00:17:36.940 | for how much money can I spend,

00:17:38.500 | and therefore, I am very comfortable,

00:17:40.580 | early in my life, in early years,

00:17:42.540 | filling up those low tax brackets,

00:17:44.140 | stuffing the Roth into there,

00:17:45.540 | because when I get to retirement,

00:17:46.800 | I'm gonna get to take all those distributions tax-free

00:17:49.080 | and live happy, and buy my cars,

00:17:51.460 | and go on vacations, and have a good time.

00:17:53.520 | So that is very important.

00:17:54.660 | In my experience in financial planning work,

00:17:56.340 | 15, 16 years of experience,

00:17:58.340 | retirees taking distributions

00:17:59.680 | still feel the pain of taxable distributions.

00:18:01.760 | It is still painful for them,

00:18:03.180 | especially lump-sum distributions,

00:18:05.220 | which, assuming you have Social Security,

00:18:06.740 | assuming you have, let's say, a modest pension,

00:18:08.880 | assuming you have some investment income,

00:18:10.640 | you're probably not gonna be in the 12% bracket.

00:18:12.380 | - Oh, so you think people have a way easier time

00:18:14.380 | spending Roth dollars?

00:18:15.580 | - Yes, and that has been my experience,

00:18:17.300 | and we're gonna get to that question, Ben,

00:18:18.620 | another listening question here in a moment,

00:18:20.540 | but if you're pushing into a higher tax bracket,

00:18:22.780 | then you may blow up the math,

00:18:24.160 | and furthermore, it doesn't account

00:18:25.720 | for things like Medicare surcharges,

00:18:27.280 | which begin to kick in at about $140,000, $160,000

00:18:30.560 | of net income, and so that's a big deal.

00:18:32.920 | So I'm not optimizing for net worth,

00:18:34.520 | I'm playing a different game, and that's okay, right?

00:18:36.720 | So for people that wanna see their net worth

00:18:38.680 | go up every year, Roth errors are not for you.

00:18:40.720 | You will definitely be better served

00:18:42.400 | with a traditional pre-tax dollar.

00:18:44.540 | And then, again, I just recommend

00:18:46.840 | filling up less tax brackets.

00:18:48.040 | Last point, John, can we go to chart number two?

00:18:50.640 | So I'm gonna reveal some of my bias,

00:18:52.680 | but without any bias or anything like this,

00:18:54.760 | I wanna show you guys a chart of,

00:18:56.040 | this is federal government expenditures

00:18:58.160 | on the top line, and receipts on the blue line.

00:19:00.440 | And those numbers have not been in balance

00:19:02.640 | since roughly the late '90s.

00:19:04.720 | And that's okay, because, Ben, you've said this before,

00:19:06.920 | and I agree, the government is not a household,

00:19:08.720 | it doesn't have to balance the books,

00:19:10.320 | but when I look at these numbers, they are disconnected,

00:19:13.160 | and one of the primary reasons is, John,

00:19:15.200 | this next chart that I wanna show the listeners,

00:19:18.040 | this is a history of federal tax brackets,

00:19:20.140 | effective tax rates, not the highest marginal rate.

00:19:22.640 | My opinion and my bias is,

00:19:24.200 | we're living in a low-tax nirvana right now,

00:19:26.120 | and we just don't realize it.

00:19:27.460 | I have no expectation that tax rates are gonna jump up

00:19:30.040 | in the next couple of years, but I don't have to,

00:19:32.240 | because absent action by Congress,

00:19:34.960 | every taxpayer's gonna be paying about 3% more in 2026

00:19:38.520 | because of the expiration of the Tax Cuts and Jobs Act.

00:19:41.240 | And so that's a bias of mine,

00:19:42.920 | that's an assumption that's built in,

00:19:44.440 | but I do think that we're living

00:19:45.820 | in this low-tax environment right now,

00:19:47.340 | and we just don't realize it.

00:19:48.800 | - That's why I noted that I was gonna ask you, Bill,

00:19:50.660 | 'cause a lot of people I feel like always assume

00:19:53.260 | that we know that tax rates are gonna be XYZ in the future,

00:19:58.140 | 20, 30, 40, 50 years, but I mean,

00:20:00.260 | there's nothing really stopping massive increases

00:20:02.700 | in taxes down the road, right?

00:20:03.940 | - I think that's correct, and that's a scare tactic,

00:20:05.960 | but if you look across the world

00:20:08.020 | and look at other OECD, the major countries,

00:20:10.020 | the U.S. is in the bottom third of taxes.

00:20:12.520 | I think there's a conservative argument

00:20:14.100 | that that's part of what makes our economy dynamic, right?

00:20:16.220 | People are out there reinvesting that capital elsewhere,

00:20:18.980 | but the government spending is just so outpaced revenues,

00:20:22.900 | and there's not a political will to increase taxes.

00:20:25.820 | I do not think spending is gonna go down,

00:20:27.780 | so I think just by hook or crook,

00:20:29.380 | this is gonna have to work itself up one way or the other,

00:20:31.580 | and I think higher taxes are in our future.

00:20:33.020 | - Sean in the chat wants to know

00:20:34.820 | if you actually drew that last graph on Etch-a-Sketch.

00:20:37.780 | - I didn't, but it might've been a big improvement.

00:20:40.860 | That's actually, I wanna shout out a guy, Mike Bostic.

00:20:42.740 | I read that article a couple years ago.

00:20:44.460 | It's a really, really good article on observable.com.

00:20:47.060 | - But yeah, to the point of not knowing

00:20:48.800 | what the future holds,

00:20:49.640 | that's the whole point of tax diversification

00:20:51.220 | and why I preach the benefits of diversification

00:20:53.580 | in everything that you do.

00:20:54.620 | I think income diversification is helpful.

00:20:56.660 | Investment diversification, tax diversification,

00:20:58.460 | all this stuff, I think you rarely ever

00:21:01.860 | wanna be concentrated in one thing

00:21:03.460 | because you're betting on the future's

00:21:04.860 | gonna turn out this way,

00:21:05.680 | so I'm gonna concentrate anything I do in one bucket.

00:21:09.020 | - Yep, and we had a great listener question last week, Ben,

00:21:10.860 | that we addressed two weeks ago on Asset Compound.

00:21:12.540 | Please go back and take a look,

00:21:13.500 | but it was should I ever have 100% Roth,

00:21:15.340 | and my answer's no.

00:21:16.180 | You should not always leverage,

00:21:17.400 | unless you're 25 years old

00:21:18.840 | and you plan to shift to traditional later.

00:21:21.060 | I'm probably about a year or two out,

00:21:22.640 | and I'm gonna shift gears,

00:21:23.600 | but probably, Ben, the last point on this for me,

00:21:25.720 | I've been 100% Roth since I got into this game,

00:21:28.520 | and I'm 43 years old,

00:21:30.160 | and I'm probably mid-career right now,

00:21:31.720 | so I can't say more about what I'm doing with my own assets

00:21:35.400 | and what I help clients recommend with than that.

00:21:38.080 | - Right.

00:21:40.300 | - So great question, Justin, thanks for the question.

00:21:43.520 | I appreciate it.

00:21:44.360 | - No, we don't mind a little pushback here, right?

00:21:45.880 | - Bring it on.

00:21:46.700 | - Bring it on.

00:21:47.540 | - Bring it on. - Yeah, that's fun.

00:21:48.380 | - Absolutely.

00:21:49.200 | - Yeah, there's nothing like Bill spitting facts

00:21:52.160 | with a tank shell over his shoulder there.

00:21:54.240 | - Exactly, that is an M82 high-explosive anti-tank round.

00:21:58.000 | It's not real, just to be very clear.

00:22:00.200 | Don't come and arrest me.

00:22:01.640 | But I bring the heat.

00:22:02.800 | I bring the heat, too.

00:22:03.960 | - I like it.

00:22:04.800 | Okay, up next, we have our first ever audio question

00:22:08.840 | submitted, and it's a really good one,

00:22:10.840 | and it's from Joshua, and he really took time.

00:22:13.760 | He got it perfect.

00:22:14.980 | It's a very good recording.

00:22:16.260 | - Let's do it.

00:22:17.100 | - So I'm gonna hit play on this thing.

00:22:17.920 | Let's listen.

00:22:18.760 | - I have a question about HSAs.

00:22:22.360 | I know Ben isn't fully sold out

00:22:24.600 | on the health savings account,

00:22:26.320 | but we're fairly keen on the triple tax advantage.

00:22:30.080 | We opened our account in 2006

00:22:32.280 | and have fully funded it every year since.

00:22:35.400 | We paid for one set of braces,

00:22:37.000 | but paid all other medical bills out of pocket.

00:22:40.080 | With the long-term in mind, we invested in 90% equities,

00:22:43.520 | low-cost index funds, but alas,

00:22:45.920 | no target date funds were available.

00:22:48.440 | It's been a good 17 years for stocks,

00:22:50.800 | and not to brag, it's $250,000 now.

00:22:55.200 | The question is this.

00:22:56.420 | How much is too much in an HSA?

00:22:59.240 | We're millennial empty nesters.

00:23:01.360 | Barely 40, one child in college.

00:23:04.280 | House is paid for, college is all sorted,

00:23:06.920 | retirement is on track.

00:23:09.160 | My wife has a long-term chronic health condition,

00:23:11.940 | so healthcare is super important to us,

00:23:14.440 | but if we keep funding the HSA at the annual maximum,

00:23:17.440 | it'll just grow.

00:23:19.320 | We know it can be used as a pre-tax account after 65,

00:23:23.560 | and we've heard the inheritance situation is pretty rotten,

00:23:28.060 | but we just struggle to turn away

00:23:30.240 | from the triple tax advantage.

00:23:32.800 | Do we keep on funding it,

00:23:34.100 | or find something else to do with these funds?

00:23:37.240 | Thank you.

00:23:38.880 | - Bravo, Joshua, great question.

00:23:41.200 | Very eloquent reading skills, way better than I could do.

00:23:43.760 | The recording quality was perfect.

00:23:45.320 | Yeah, he did sound very, maybe he can--

00:23:48.080 | - Eloquent.

00:23:48.920 | - He can do my next audio book for me, I think.

00:23:51.280 | - Yeah, this is good.

00:23:52.800 | - Let's see, so first of all, I'm not anti-HSA.

00:23:55.320 | I honestly just don't have the bandwidth for another account

00:23:57.980 | because I have 401ks and IRAs and SEP IRAs

00:24:01.640 | and corporate accounts and 529s.

00:24:03.640 | It's not the HSA's fault.

00:24:06.080 | So having said that, I know very many smart people

00:24:09.040 | who swear by the triple tax benefit.

00:24:11.480 | Blair Duquene has been on this show before.

00:24:12.880 | She's talked about the benefits of the HSA.

00:24:15.280 | - Joey Fishman, our guy in Portland.

00:24:17.000 | - Yeah, love the HSA.

00:24:18.680 | Bill, what say you?

00:24:19.560 | First, how much is too much?

00:24:20.600 | 'Cause they have a big amount in there.

00:24:22.280 | Is that ever a problem if it's overfunded?

00:24:25.120 | Is there problems down the road from that?

00:24:27.640 | - Yeah, wow, Josh, I don't know that I've ever seen

00:24:29.800 | an HSA of that magnitude.

00:24:31.320 | I have seen six figures, but not 250K.

00:24:33.880 | So that is some fantastic investing.

00:24:36.080 | And one of the things I don't like about HSAs sometimes

00:24:38.400 | are higher fees.

00:24:39.240 | So I'm presuming that you've just got a great, great deal

00:24:41.520 | and a lot of discipline between you

00:24:42.840 | and your wife and your family.

00:24:44.520 | For me, Ben, the only thing better than a Roth IRA,

00:24:48.000 | in my opinion, is that HSA

00:24:49.440 | because of the triple tax exemption that Josh mentioned.

00:24:52.260 | It's such a powerful savings vehicle,

00:24:54.080 | and it's very rare to see any amounts of this magnitude.

00:24:57.020 | So how much is too much in the context

00:24:59.280 | of somebody's net worth?

00:25:00.480 | Really hard to answer, but Josh, I think,

00:25:02.040 | hit on something towards the end of his question

00:25:04.000 | that to me was so important,

00:25:05.040 | that if you've got some chronic health issues going on,

00:25:07.800 | like, that's what those assets are going to be used for.

00:25:10.400 | And ultimately, as we age,

00:25:13.000 | and we do this in financial planning a lot,

00:25:15.400 | people really tend to underestimate

00:25:16.960 | their medical spending, right?

00:25:18.000 | And a lot of times when we do these mining card simulations

00:25:20.200 | going forward, what tends to happen is people age,

00:25:22.240 | their medical needs increase,

00:25:23.480 | and that ends up being a quality of life thing, typically,

00:25:26.120 | or a quantity of life.

00:25:27.740 | But ultimately, my guess is those assets

00:25:29.840 | are just doing exactly what they need to do.

00:25:31.880 | I would have no qualms dumping in another $6,000 a year

00:25:35.080 | into a balance of 250K with the plan of being

00:25:37.360 | the distribution of the future.

00:25:38.680 | And Ben, I want to mention before we close

00:25:40.200 | that the coolest thing about HSA

00:25:42.560 | is that the year of distribution

00:25:43.600 | does not have to match the year of the expenses incurred.

00:25:46.640 | And so if you incur a $10,000 medical bill, unfortunately,

00:25:50.080 | or brace, as you mentioned, in a single year,

00:25:52.000 | you can hold on to that reimbursement from the HSA

00:25:54.280 | for five years, for 10 years,

00:25:55.800 | allowing that compound effect to occur.

00:25:57.960 | So that to me, it's like,

00:25:59.280 | I don't know that an HSA balance could be too large

00:26:01.680 | for me to be concerned about it

00:26:03.120 | due to all the factors that Josh laid out.

00:26:05.120 | - Right, this fact that they already know at 40

00:26:07.800 | his wife has a chronic health.

00:26:09.560 | - Yes, very sure to hear that, yeah.

00:26:11.080 | - Yeah, this is a huge fallback plan for them.

00:26:12.680 | This is like a big time margin of safety.

00:26:15.240 | I also want to talk about how they're 40

00:26:16.640 | and kid is already in college.

00:26:18.320 | - Yeah, wow, what's that all about?

00:26:19.400 | - Started young, that's, I had a friend from who,

00:26:22.800 | him and his wife got pregnant like the summer

00:26:24.820 | after our high school senior year.

00:26:26.720 | - Okay.

00:26:27.600 | - And their kids are out of the house already.

00:26:30.160 | It's like a total backwards,

00:26:31.640 | and they're reliving their youth.

00:26:32.680 | So hopefully that the Joshua, or this is a,

00:26:35.240 | who's this one?

00:26:36.200 | Is this another Josh? - That's Josh.

00:26:37.360 | Yeah, that's Josh.

00:26:38.200 | Our guy Josh, yeah, definitely.

00:26:39.400 | - Can live it up a little bit too.

00:26:40.920 | And obviously they've saved enough money,

00:26:42.580 | so they're in pretty good position.

00:26:43.960 | - Yeah, exactly.

00:26:44.800 | But I think you're gonna have a lot of flexibility

00:26:46.360 | as time goes forward.

00:26:47.300 | And again, my guess is you are gonna use that.

00:26:49.080 | But if I'm you, Josh,

00:26:50.160 | I'm saving every single medical receipt.

00:26:51.640 | You go to CVS, you pay that $3 copay,

00:26:54.040 | that's going to a drawer somewhere

00:26:55.480 | or put it in a PDF for a future tax return.

00:26:57.680 | Because you're right, ultimately--

00:26:58.600 | - You're gonna need a lot of drawers

00:26:59.640 | if you're saving CVS receipts 'cause they're so big.

00:27:02.000 | 'Cause they're this long.

00:27:02.880 | But yeah, but I'd be stacking those things

00:27:04.720 | as high as you can go,

00:27:05.760 | because ultimately you are gonna wanna access that cash

00:27:07.840 | at some point and use it to fund other goals.

00:27:09.600 | And the best way to do that is to get that money tax-free.

00:27:11.800 | - Here's a question from the comments.

00:27:14.560 | Can you use HSAs for nursing care if you need it?

00:27:16.520 | - Get me to it.

00:27:17.360 | I was gonna say something.

00:27:18.700 | - To the best of my knowledge, yes, I'm not an expert,

00:27:20.960 | but I'll dig into that.

00:27:22.040 | And Ben, if you maybe wanna follow up an update next week,

00:27:24.080 | we can do so.

00:27:25.000 | But yeah, to the best of my knowledge, yeah,

00:27:26.240 | it's pretty broad on what HSAs can be used for.

00:27:29.080 | - Cool, all right.

00:27:30.840 | Great, great audio.

00:27:32.120 | Everyone doesn't have to do that,

00:27:32.960 | but that was a good first one.

00:27:34.640 | He broke us a good one.

00:27:35.480 | - I wanna rap next time, if you can drop a beat.

00:27:38.560 | - Oh, true, yeah, yeah.

00:27:40.120 | Just not licensed music.

00:27:41.400 | - Next question about Roth IRAs.

00:27:42.880 | Someone else likes Roth IRAs too.

00:27:45.720 | - Let's do it.

00:27:46.560 | - Okay, up next we have a question from Sam.

00:27:48.620 | I have a question about how to view my Roth IRA

00:27:50.800 | now that I'm older than 59 1/2.

00:27:53.320 | I don't need the money for anything this time,

00:27:55.240 | so should I view it as something

00:27:56.560 | that should only be used as a last resort,

00:27:58.760 | or should I now be okay with using some of the money

00:28:00.960 | to pay for things like a vacation or a car,

00:28:03.640 | or even if I could pay for those things with other money?

00:28:07.280 | If the answer is that I should never touch the money

00:28:09.120 | unless I absolutely have to,

00:28:10.520 | it seems like I may never actually get to spend any of it.

00:28:13.520 | - Okay, we kinda started down this path earlier

00:28:15.720 | about is a Roth, and I never thought about that, Bill,

00:28:18.160 | but you're right.

00:28:19.480 | We've had countless conversations with clients

00:28:22.020 | and with our advisors about the fact

00:28:23.760 | that people have an easy time building wealth and saving

00:28:27.240 | because they compound slowly and it builds up,

00:28:29.740 | but then when they have to turn around the other way,

00:28:31.360 | like turn the battleship and spend it,

00:28:33.200 | it's very psychologically challenging for people

00:28:35.240 | because I don't know how I'm gonna live,

00:28:37.000 | I don't know what my healthcare expenses are gonna be,

00:28:39.000 | and people have a hard time spending their money.

00:28:41.320 | So I like the idea of the psychology

00:28:42.640 | behind spending Roth dollars.

00:28:44.860 | Now Sam here, it sounds like, is going the other way,

00:28:47.180 | saying what if I never spend these?

00:28:48.840 | So what do you think?

00:28:49.960 | How should they view that in terms of spending?

00:28:52.380 | - Yeah, I've got two answers for Sam.

00:28:53.880 | First off, Sam, very strong name.

00:28:55.480 | It's the name of my firstborn son,

00:28:57.240 | just doesn't get much better.

00:28:58.280 | We're gonna talk about Sam Sweet in a couple minutes,

00:29:00.500 | but moving forward with Sam, I've got two answers for you.

00:29:02.720 | Number one is if I have a bucket of Roth,

00:29:05.880 | in addition to my traditional IRA,

00:29:07.280 | in addition to my Social Security,

00:29:08.120 | in addition to my pension, et cetera,

00:29:09.480 | for me, that lends itself

00:29:10.720 | to these types of lump sum distributions

00:29:12.920 | because what happens is if you right-size your life

00:29:15.360 | based on, again, your Social Security, recurring income,

00:29:17.580 | let's say your RMDs when you hit age 73,

00:29:19.740 | if you right-size your life around those,

00:29:21.260 | you're paying your bills,

00:29:22.080 | you're paying your gas bill, blah, blah, blah,

00:29:24.120 | every once in a while,

00:29:24.960 | you're gonna wanna buy a new car.

00:29:26.640 | Every once in a while, you're gonna want a fancy dinner.

00:29:28.460 | Every once in a while,

00:29:29.300 | you're gonna get on a plane and fly to Paris,

00:29:30.320 | wherever you wanna go, Bogota, whatever's up to you.

00:29:32.740 | For me, those distributions really, really lend themselves

00:29:35.000 | to all the Roth IRAs

00:29:35.960 | because they don't disrupt your tax picture.

00:29:37.520 | John, can we pull up chart number one

00:29:39.280 | if you still have that thing handy?

00:29:40.440 | - That's true, so you can look at the Roth

00:29:41.960 | as a bonus spending.

00:29:43.760 | I wanna take all the whole family,

00:29:46.040 | the grandkids and my kids on a huge trip to Italy this year.

00:29:49.080 | We're gonna take it from the Roth

00:29:50.400 | because it's bonus money.

00:29:51.600 | - And kids, we're gonna do it tax-free.

00:29:54.000 | The taxman doesn't get a piece of that.

00:29:55.640 | So just looking at the charts,

00:29:57.120 | you can see where these step-ups are.

00:29:58.560 | So if you're right-sizing your life,

00:29:59.840 | let's say hypothetically,

00:30:00.880 | somewhere at the high end of the 24% bracket,

00:30:02.920 | you've got a lot of income, pension, whatever else,

00:30:05.040 | you don't wanna jump up in that 32% bracket

00:30:07.400 | by taking $100,000 distribution to buy a new truck

00:30:10.120 | or a Tesla or whatever it is you want.

00:30:11.680 | So that perfectly lends itself to a Roth

00:30:14.000 | because furthermore, it doesn't mess up with your IRMA,

00:30:16.120 | your Medicare expenses on a monthly basis.

00:30:18.480 | So that's answer number one.

00:30:20.040 | Answer number two for me is if, if, if,

00:30:22.040 | you've got all your needs funded

00:30:23.400 | and if you don't need that asset at all,

00:30:24.960 | it is a fantastic estate planning,

00:30:27.120 | pass it on to the next generation asset, right?

00:30:29.080 | So I would not,

00:30:29.920 | I would not have that at bullet point number one,

00:30:31.640 | but assuming that all of your lifestyle needs are cared for

00:30:33.920 | and you're taking your kids out to nice dinners,

00:30:35.400 | you're enjoying the retirement that you so richly deserve

00:30:38.000 | after working and saving for years and decades

00:30:40.280 | and doing it all right.

00:30:41.840 | On the back end, the Roths are great

00:30:43.480 | because on your passing,

00:30:44.860 | the kids have another 10 years to distribute that asset.

00:30:47.240 | They leave it to another account.

00:30:48.280 | It comes from them completely tax-free.

00:30:49.960 | Going back to question number one for Justin,

00:30:51.680 | it was a great question.

00:30:52.560 | Your heirs are going to pay tax

00:30:53.880 | on your traditional IRA balance.

00:30:55.440 | - Does that work like an RMD

00:30:56.640 | where you have to take 1/10 every year?

00:30:58.840 | - You do not is the way it works

00:31:00.400 | for most taxpayers on the Secure Act.

00:31:02.000 | There's a technicality there, Ben.

00:31:03.440 | If you're, if you inherit an asset

00:31:05.280 | where the person had already been receiving an RMD,

00:31:07.240 | you do have to continue those, but not at 1/10.

00:31:09.400 | It's based on your life expectancy.

00:31:10.960 | But so really there's just a final RMD at year 10.

00:31:13.760 | If I inherit an IRA today, 2023,

00:31:17.400 | I need to distribute all the balance by December 31st of 2033

00:31:21.320 | or I've broken the law.

00:31:22.720 | - So your children are going to learn

00:31:24.520 | to love Roth someday, right?

00:31:26.000 | They're going to be getting

00:31:26.840 | a lot of Roth dollars coming to them.

00:31:27.720 | - Well, I mean, you would think so.

00:31:29.440 | If I have an untimely passing, then yes.

00:31:31.340 | But my goal, Ben, is to spend every freaking dollar

00:31:33.560 | that I'm saving here.

00:31:35.000 | My kids are on their own.

00:31:36.020 | I'm going to help them pay for college.

00:31:37.440 | I'm going to get them on a good feed.

00:31:38.680 | I might help them out with a vehicle or something like that.

00:31:40.840 | But after that, they're out of the house

00:31:42.620 | and they're on their own.

00:31:43.520 | And they've got to do it the American way, exactly.

00:31:45.960 | Yeah, I just, I do push back a lot on clients

00:31:48.680 | and taxpayers generally.

00:31:49.980 | This goal of passing money onto the kids,

00:31:51.640 | it's insane to me.

00:31:52.540 | Go out and earn your own money.

00:31:53.560 | Do it the right way.

00:31:54.820 | I think that's the way to raise children in 2023.

00:31:58.160 | - It's Shaq that said, that told his kids,

00:32:00.440 | you know, that's not your money.

00:32:01.600 | It's my money, right?

00:32:02.700 | Famously.

00:32:03.600 | - Yeah, and if you have a lot of traditional air balance,

00:32:05.800 | at least 24% of that's the IRS's money.

00:32:08.000 | So again, back to Justin, great question.

00:32:10.560 | But yeah, tax-free.

00:32:12.320 | I want to, if I pass on assets,

00:32:13.900 | I'm going to do it through Roth.

00:32:15.920 | - Perfect, okay.

00:32:16.920 | - It's beautiful.

00:32:17.760 | - A lot of Roth stuff as usual.

00:32:18.600 | I think we've landed in a good spot with a Roth here.

00:32:21.640 | - Yeah, it was a good, and again,

00:32:22.860 | Justin, totally support the feedback.

00:32:24.760 | I've been way overzealous.

00:32:26.240 | Can I give my man Sam Sweet a shout out?

00:32:28.540 | - Yeah. - Let's do it.

00:32:29.380 | - So speaking of, you know, a gentleman named Sam John,

00:32:31.220 | can you pull up that photo?

00:32:32.780 | Sam Sweet's kindergarten graduation was today.

00:32:35.380 | He graduated with about 18 of his buddies.

00:32:37.380 | I'm just very, very proud of him.

00:32:38.700 | A quick story, in his preschool graduation a year ago,

00:32:40.820 | he melted down to a puddle of goo and began crying.

00:32:43.860 | But what he told me, I said, Sam, what do you want to do?

00:32:45.820 | What do you want to do this weekend?

00:32:46.780 | I said, Dad, I want to go camping.

00:32:48.720 | And if you see a bear, I want you to punch him in the heart

00:32:51.420 | and then kick him in the privates.

00:32:52.980 | And then he ran away to play with his friends.

00:32:54.940 | And I have never been so proud.

00:32:57.100 | And I just wanted to share that for posterity.

00:32:59.000 | 10, 20 years from now, I'm gonna show this to him.

00:33:00.620 | - The great thing is, my kids are done

00:33:02.740 | with kindergarten this year too.

00:33:03.700 | We didn't have a graduation.

00:33:04.620 | I didn't get to go that route.

00:33:07.140 | But our kids are gonna graduate high school the same year.

00:33:08.900 | My twins are both moving on to first grade as well.

00:33:10.980 | - Oh, congratulations, Ben.

00:33:11.980 | Our teacher tried to pull that crap and we were like, no.

00:33:14.580 | We're coming in on this day and we're gonna gather

00:33:16.820 | and we're gonna celebrate.

00:33:17.900 | And the kids got candy and it was awesome.

00:33:20.660 | - Okay. - Congratulations.

00:33:21.900 | - Participation trophies still.

00:33:23.460 | - Congratulations, proud dad.

00:33:25.100 | - All right, way to go. - Awesome.

00:33:27.180 | - All right.

00:33:28.020 | We always appreciate your comments and emails.

00:33:29.380 | Remember, askthecompoundshow@gmail.com.

00:33:32.060 | Keep them coming.

00:33:32.900 | Every week we get a full inbox.

00:33:34.220 | We really appreciate it.

00:33:36.080 | Voice memo works too, if you want.

00:33:37.780 | And if you're listening in podcast form,

00:33:40.820 | please leave us a review.

00:33:42.340 | YouTube, subscribe, like, all that good stuff.

00:33:45.060 | - Even if you're not listening,

00:33:46.300 | if you're in the chat right now,

00:33:47.340 | go and still leave us a review

00:33:48.860 | on Apple or Spotify or whatever.

00:33:50.780 | - We would really appreciate it.

00:33:51.620 | - And thanks, as always,

00:33:52.460 | to the people who show up in the live chat.

00:33:53.480 | We always appreciate it.

00:33:54.460 | - Thanks, Sean. - See you next time.

00:33:55.300 | - Et cetera. - Thanks, everyone.

00:33:56.120 | - I got you, Justin.

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