Am I Saving Too Much?

00:00:00.000 | (beeping)

00:00:09.160 | (music)

00:00:15.960 | Welcome back to Ask the Compound, live from New York.

00:00:18.160 | I'm in the same room for the first time in a while.

00:00:20.160 | We've got 40 other people going through our Google Docs this week.

00:00:24.760 | A lot of good questions.

00:00:25.760 | I'm appreciative of the thought and effort that goes into these.

00:00:27.760 | I feel like a lot of the questions are similar in nature,

00:00:30.000 | but they're always different from the unique circumstances.

00:00:32.000 | So we really appreciate it.

00:00:33.000 | Keep them coming at thecompoundshow@gmail.com.

00:00:36.000 | Today's show is sponsored by Bird Dogs.

00:00:37.500 | I finally got the Bird Dog Polo.

00:00:39.760 | And it is muggy as all getup in Manhattan right now.

00:00:43.500 | We just walked from lunch and just sweating and hot.

00:00:48.260 | And this shirt is comfy.

00:00:50.660 | It's breathable.

00:00:51.660 | It's active.

00:00:52.660 | It's got the stretch material just like the shorts.

00:00:54.660 | It's stylish.

00:00:55.660 | I'd say good for golf, but I don't golf.

00:00:57.660 | It's an active -- maybe a dinner date if you want to wear a

00:00:59.660 | collar in the summer.

00:01:00.660 | And if you go to birddogs.com/atc,

00:01:03.660 | you get a free white tech hat.

00:01:05.660 | I don't have one because I was wearing it all weekend last week.

00:01:07.660 | I'm not a big hat guy.

00:01:08.660 | I used to wear more hats in college,

00:01:10.660 | but it was like backwards frat bro hats.

00:01:12.660 | Nice.

00:01:13.660 | And then I become a dad, and the rule is you cannot wear your hat

00:01:16.660 | backwards if you're a dad.

00:01:17.660 | Is that a rule?

00:01:18.660 | I don't know.

00:01:19.660 | I don't make them.

00:01:20.660 | That's the rules.

00:01:21.660 | So I'm not a big hat guy.

00:01:22.660 | You got to have a little more fun.

00:01:23.660 | You got to wear a hat backwards.

00:01:24.660 | You got to play golf.

00:01:25.660 | And you got to drink coffee.

00:01:26.660 | You could do it when you're doing a good shot, Duncan,

00:01:28.660 | like you turn the hat backwards.

00:01:29.660 | Sure.

00:01:30.660 | So that's just alone and over the top.

00:01:32.660 | Birddogs.com/atc, and you get a free tech hat.

00:01:35.660 | Check out the new polos.

00:01:36.660 | They've got a bunch of different colors.

00:01:37.660 | And, of course, the shorts, as always.

00:01:39.660 | Before we get into the questions,

00:01:40.660 | got a feedback from last week.

00:01:42.660 | Someone was wondering why do target date funds not have --

00:01:45.660 | how can you not get a 100% equity target date fund?

00:01:48.660 | Jeff says, "The likely reason target date funds for most people

00:01:51.660 | "retiring more than 40 years from now still maintain a small bond

00:01:54.660 | "position is because a fund with 100% equity position would not

00:01:58.660 | "qualify as a QDIA default fund in a retirement plan."

00:02:02.660 | I didn't know that.

00:02:03.660 | Sounds right.

00:02:04.660 | All right.

00:02:05.660 | I'll take him for his word.

00:02:06.660 | All right.

00:02:07.660 | First question.

00:02:08.660 | Okay.

00:02:09.660 | Also, I'm sorry.

00:02:10.660 | I told you I was going to cue you when we were live.

00:02:11.660 | I didn't.

00:02:12.660 | So everyone watched you for a couple of seconds.

00:02:13.660 | Sorry about that.

00:02:14.660 | But, yeah, we're doing this live.

00:02:15.660 | Okay.

00:02:16.660 | Up first today, we have a question from Matt.

00:02:18.660 | "I'm 38, and for most of my adult life,

00:02:20.660 | "I made just enough to survive with nothing left to invest.

00:02:23.660 | "Everything changed a few years ago.

00:02:25.660 | "My salary increased from $35,000 to $140,000 over four years.

00:02:29.660 | "At first, I spent everything.

00:02:31.660 | "For the last two years, I've done the opposite.

00:02:33.660 | "I save everything.

00:02:35.660 | "My monthly expenses, including mortgage, are less than $1,000,

00:02:38.660 | "and my after-tax savings rate is 80% to 90%.

00:02:41.660 | "In the last two years, I've saved about $150,000,

00:02:45.660 | "not including maxing my 401(k) and Roth.

00:02:48.660 | "My job isn't going anywhere, but I have a constant fear that

00:02:51.660 | "something is going to happen and everything will be ripped away.

00:02:54.660 | "The key thing is that I have no real skills,

00:02:57.660 | "but I hit the lottery at a company that has rewarded me

00:03:00.660 | "for a decade of hard work.

00:03:02.660 | "Most financial experts would probably say I'm saving too much,

00:03:04.660 | "but what do you think my situation justifies

00:03:07.660 | "regarding savings rate?"

00:03:09.660 | Not hyperbole here.

00:03:10.660 | I think this is one of the favorite questions that we've ever gotten.

00:03:13.660 | Because we've got this question before about,

00:03:15.660 | "Hey, I save too much, what do I do?"

00:03:17.660 | But this question just shows how it's way more about mind

00:03:19.660 | than money for a lot of people.

00:03:20.660 | And also, I'm very glad I'm wearing the bird dog shirt,

00:03:22.660 | because it's hot in here, Duncan.

00:03:24.660 | It is. I turned my AC off.

00:03:25.660 | That's okay. Got to go for the good sound.

00:03:29.660 | So I think a lot of the questions we receive are similar

00:03:31.660 | from a financial perspective, as I mentioned,

00:03:33.660 | but the circumstances are different.

00:03:34.660 | And this person has their own type of money trauma.

00:03:36.660 | So first of all, I say don't sell yourself short here, Matt.

00:03:38.660 | You do have a real skill. You work hard.

00:03:41.660 | And obviously, your company likes that,

00:03:44.660 | because they gave you a four-times raise in four years.

00:03:46.660 | You're obviously doing something right.

00:03:48.660 | Yeah, I find that refreshing, instead of the typical,

00:03:51.660 | "Oh, I just out-hustled everyone else."

00:03:53.660 | To be like, "I don't have any skills. I'm lucky," basically.

00:03:56.660 | Yeah, I do appreciate them being humble

00:03:58.660 | and having some self-awareness,

00:03:59.660 | but give yourself a little credit.

00:04:00.660 | You obviously do something right that your company values that.

00:04:04.660 | So I understand the trepidation for the spending, right?

00:04:06.660 | The lottery minds that I think can bring conflicting emotions.

00:04:09.660 | So most people spend their entire career,

00:04:11.660 | they slowly and methodically build up their income

00:04:13.660 | and their savings, and the wealth doesn't come all at once.

00:04:15.660 | So I think one of the reasons so many lottery winners end up broke

00:04:18.660 | is because it's not normal to experience this abrupt change in your wealth.

00:04:21.660 | So my favorite lottery anecdote, Duncan,

00:04:24.660 | every year, Americans spend more money on the lottery

00:04:26.660 | than they do on movie tickets, music, professional sporting events,

00:04:29.660 | video games, and books combined,

00:04:31.660 | which is why it's always on the news, I guess.

00:04:33.660 | I actually researched the psychology of winning the lottery

00:04:36.660 | for my book, "Don't Fall For It,"

00:04:37.660 | and they said one-third of all lottery winners end up bankrupt,

00:04:41.660 | declaring bankruptcy.

00:04:42.660 | And even the neighbors of people who win the lottery

00:04:45.660 | are more likely to declare bankruptcy than average,

00:04:47.660 | like the herd mentality kind of thing.

00:04:49.660 | So I think that first reaction of Matt--

00:04:51.660 | You seem like a big lottery person.

00:04:53.660 | I doubt I've ever played in my life.

00:04:54.660 | I got scratch-off tickets for Christmas.

00:04:56.660 | I used to be big into scratch-offs. That was fun.

00:04:58.660 | I don't know. I'm not a big fan.

00:05:01.660 | So I think that first reaction of his to spend everything he had made sense.

00:05:05.660 | But I think it's also understandable why he has the opposite extreme of,

00:05:08.660 | "I went from $35K to $140K.

00:05:10.660 | "I have this memory of making a much lower income.

00:05:12.660 | "What if it is all taken away from me?"

00:05:14.660 | So I think it makes sense that he whipsawed back to the other extreme.

00:05:17.660 | The good news is that he already has the ability to cut back.

00:05:20.660 | An after-tax savings rate of 80-90% would make Mr. Money Mustache blush.

00:05:24.660 | He's living on less than $12K a year, which is crazy.

00:05:27.660 | I think most of the flier people say $25K a year

00:05:30.660 | is what you should shoot for.

00:05:32.660 | So even if that biggest fear is realized

00:05:34.660 | and that new six-figure income is gone,

00:05:36.660 | you've already given yourself a margin of safety,

00:05:38.660 | a savings rate combined with a low burn rate.

00:05:40.660 | Most people can barely handle one, let alone both of those.

00:05:43.660 | Think about it. If he's got $150K sitting in a taxable account,

00:05:46.660 | that's, what, 13 years of current lifestyle expenses?

00:05:49.660 | If we include those 401(k) and Roth IRA max contributions,

00:05:53.660 | we're talking 18 years of living expenses.

00:05:55.660 | He's in fantastic shape financially, so he knows how to cut back.

00:05:59.660 | I think if he decided to give himself a little raise,

00:06:01.660 | he could double or triple his spending

00:06:03.660 | and still be well on the way to financial freedom.

00:06:05.660 | The only way he's truly going to be comfortable

00:06:07.660 | spending a little more money

00:06:09.660 | is by tapping into the feelings and emotions about money.

00:06:11.660 | It's always about trade-offs,

00:06:13.660 | and I think the biggest regret he's concerned about right now

00:06:17.660 | is what happens if this higher income goes away.

00:06:19.660 | But he also has to think about the regret you might feel

00:06:21.660 | if that extreme frugality makes you miss out on life.

00:06:24.660 | John, throw up this comment from Ramit on Twitter this week.

00:06:27.660 | He shared this Reddit comment,

00:06:29.660 | and it basically is someone who says,

00:06:31.660 | "Hey, I reached my fire number,

00:06:33.660 | "but I had this unhealthy fixation with money,

00:06:35.660 | "and I feel like I've missed out on life."

00:06:37.660 | So that's a regret, too.

00:06:39.660 | I think some people have this unhealthy fixation with spending,

00:06:41.660 | some people it's over-saving.

00:06:43.660 | I think we all have our own issues. No one's perfect in these things.

00:06:46.660 | But I think if we're looking at a psychological solution here,

00:06:49.660 | instead of going cold turkey and saying,

00:06:51.660 | "I'm going from 80% to 90% savings rate

00:06:53.660 | "down to 30% or 40% or 20% or whatever is more reasonable,"

00:06:56.660 | I would say instead of ripping the band-aid off,

00:06:58.660 | do it in a stair-step approach.

00:07:00.660 | Do 5% each paycheck or each month or each quarter or something,

00:07:03.660 | and slowly work yourself down and give yourself a slow raise

00:07:06.660 | so it's not going back the other way where you're spending a ton.

00:07:08.660 | But I also think you have to figure out

00:07:10.660 | what makes you happy prioritized in terms of spending.

00:07:13.660 | I think you have to pick a few categories.

00:07:15.660 | It can be anything, really-- going out to eat

00:07:17.660 | or going to a concert or buying clothes or shoes.

00:07:19.660 | Whatever brings you joy, and spend on those things without worry.

00:07:22.660 | Studies show that experiences and building relationships

00:07:25.660 | gives you the biggest bang for your buck.

00:07:27.660 | But even if you want to spend it on material goods, I don't care.

00:07:29.660 | I think the fact that you are such a good saver,

00:07:31.660 | you probably just want to budget for it ahead of time.

00:07:34.660 | Put aside a set amount or a set percentage

00:07:36.660 | and say, "This is my worry-free money. I'm going to spend it."

00:07:39.660 | Spending money on yourself doesn't bring fulfillment

00:07:41.660 | because you already tried that.

00:07:43.660 | I don't know, take your friends out for drinks every once in a while

00:07:45.660 | and buy a round, or take your family out to dinner once a month

00:07:48.660 | and pick up the tab.

00:07:50.660 | I think you just don't want to be living

00:07:52.660 | in that constant financial fetal position.

00:07:54.660 | At a certain point, you have to enjoy it a little bit.

00:07:56.660 | But you're doing great, so cut yourself some slack

00:07:58.660 | and enjoy some of your money.

00:08:00.660 | It sounds like they've got some imposter syndrome maybe going on too.

00:08:03.660 | Like you were saying, they obviously have some skills.

00:08:05.660 | They're being paid a lot of money.

00:08:07.660 | There's something going on there.

00:08:09.660 | Don't sell yourself too short.

00:08:11.660 | If it doesn't last, then you want to enjoy it while it's here.

00:08:13.660 | I think you've already put yourself in a good position.

00:08:15.660 | You're doing good.

00:08:17.660 | Alright, another one.

00:08:19.660 | Up next, we have a question from Colin.

00:08:22.660 | "I've always wanted to start a podcast,

00:08:24.660 | but the reality is that 90% of podcasts don't make it.

00:08:27.660 | I was fearful I wouldn't be able to keep up

00:08:29.660 | the pace of producing content

00:08:31.660 | and was hesitant to make the commitment.

00:08:33.660 | To overcome this, I started a podcast with my dad.

00:08:35.660 | We have zero expectations

00:08:37.660 | and are just trying to get some reps in.

00:08:39.660 | We meet once a week at the local library,

00:08:41.660 | use their recording equipment, and talk for an hour or so.

00:08:43.660 | We've tested different segments and topics

00:08:45.660 | and are trying to improve each episode.

00:08:47.660 | Our goal is to reach 100 episodes,

00:08:49.660 | and we're currently at 15.

00:08:51.660 | Worst case scenario, I spend an hour each week

00:08:53.660 | chatting with my father while learning a new skill.

00:08:55.660 | Are there any specific processes,

00:08:57.660 | habits, or strategies you've implemented

00:08:59.660 | that significantly improve your podcasting skills?"

00:09:02.660 | Alright, well, let's bring my fellow podcast host in here,

00:09:05.660 | who's got a great-looking shirt on.

00:09:07.660 | First of all, I didn't know

00:09:09.660 | that you could go to a library and do podcasts.

00:09:11.660 | That's pretty cool.

00:09:13.660 | I think a library isn't going to put you out of business,

00:09:15.660 | because if they have equipment there at the library,

00:09:17.660 | I did not realize that.

00:09:19.660 | It's true. All you need is the equipment.

00:09:21.660 | Michael, we probably shared our story a few times

00:09:23.660 | and that's your thing.

00:09:25.660 | - Two things. - Comes in ready, coming hot.

00:09:27.660 | One, how great do we look and feel?

00:09:30.660 | It's pretty nice.

00:09:32.660 | Actually, my friend came over the other day and saw this

00:09:34.660 | and said, "Let me feel that." Nice shirt. Great shirt.

00:09:36.660 | You guys should match more often.

00:09:38.660 | Number two, and this is a segue into what we're talking about.

00:09:40.660 | I want to pat you on the shoulder,

00:09:42.660 | on the head, on the back.

00:09:44.660 | You've gotten really good at this. I'm proud of you.

00:09:46.660 | It's not easy, right?

00:09:48.660 | Well, that was part of the thing with us, Randall Spirits.

00:09:50.660 | We froze.

00:09:52.660 | We didn't know what to do.

00:09:54.660 | Colin's question here.

00:09:56.660 | A little behind the curtain.

00:09:58.660 | We probably told this story before,

00:10:00.660 | but Ben and I, when we first started the podcast,

00:10:02.660 | I think our strategy was to turn blog posts into a podcast.

00:10:07.660 | It was a script. We were reading on a script.

00:10:09.660 | God, it was bad.

00:10:11.660 | All the best podcasts are read from a script.

00:10:13.660 | There's some people in life that are just naturally good at certain things,

00:10:17.660 | but for the rest of us, you have to put in the reps.

00:10:19.660 | I think the fact that he's doing that is good.

00:10:21.660 | I do like the idea of low expectations

00:10:23.660 | in terms of building an audience.

00:10:25.660 | We spent years building a blog audience

00:10:27.660 | before we ever started a podcast,

00:10:29.660 | so we had a little bit of a built-in base.

00:10:31.660 | I think your worst-case scenario

00:10:33.660 | of you're spending some quality time with your father

00:10:35.660 | and you have these recordings that you could potentially go back to

00:10:37.660 | years later and share them with the family,

00:10:39.660 | I think that's just a good starting point.

00:10:41.660 | I would just keep the expectations low.

00:10:44.660 | He asked if there's anything that we would recommend

00:10:47.660 | for him to improve his skills.

00:10:49.660 | There's no substitute for reps.

00:10:51.660 | Talking, as silly as it sounds,

00:10:55.660 | there's a big difference between

00:10:57.660 | shooting the breeze with your friends

00:10:59.660 | and talking into a microphone

00:11:01.660 | where you have to be coherent, where there's the light on.

00:11:03.660 | It's a lot of pressure.

00:11:05.660 | I have a lot more respect for DJs.

00:11:07.660 | Yeah, it's hard. It's difficult.

00:11:09.660 | So there's nothing that can replace reps,

00:11:15.660 | whether it's podcasting

00:11:17.660 | or any other walk of life.

00:11:19.660 | One specific thing that I can give advice on

00:11:22.660 | that helped us a lot,

00:11:24.660 | and I think we did this pretty early,

00:11:26.660 | was even though we don't have anything written out

00:11:29.660 | as far as, "Okay, when this happens, say this,"

00:11:31.660 | or "Segue to this,"

00:11:33.660 | we don't do any of that, but we have a Google Doc.

00:11:35.660 | And so we have topics, and we have articles,

00:11:38.660 | and quotes, tweets, whatever it is.

00:11:40.660 | Yeah, there's a structure.

00:11:41.660 | So there's a structure to the show,

00:11:42.660 | so we're not just completely rambling.

00:11:44.660 | I think that the most important thing

00:11:45.660 | is to keep your expectations low.

00:11:47.660 | You're getting an hour with your father,

00:11:48.660 | which you probably wouldn't have otherwise,

00:11:49.660 | which is a beautiful thing.

00:11:51.660 | And I encourage the hell out of this.

00:11:53.660 | Will anything come out of it? Who knows?

00:11:55.660 | But I like Patrick Arshonis's mantra

00:11:57.660 | of growth without goals.

00:11:59.660 | You do something for the sake of doing it.

00:12:01.660 | You don't know where it's going to go,

00:12:03.660 | and you see where it takes you.

00:12:04.660 | And I would talk about stuff you're interested in,

00:12:05.660 | because if you're doing content about stuff

00:12:07.660 | you don't care about, then that's going to come off.

00:12:09.660 | So do the stuff you're interested in.

00:12:11.660 | You have to enjoy it, too.

00:12:12.660 | Right, that's part of what makes all of our shows work,

00:12:15.660 | is that I think people can tell

00:12:16.660 | that you guys really enjoy it,

00:12:17.660 | and that you're doing it because you want to.

00:12:18.660 | We were basically doing this show with each other

00:12:20.660 | on the phone before we ever hit record.

00:12:21.660 | Love it.

00:12:22.660 | So we started this in November 2017.

00:12:24.660 | It's been almost six years.

00:12:25.660 | Yeah.

00:12:26.660 | I mean, we've been doing this a long time.

00:12:27.660 | All right, we've got a question

00:12:28.660 | from the Animal Spirits mailbag, actually,

00:12:30.660 | for the next one.

00:12:31.660 | Okay.

00:12:32.660 | I love this question.

00:12:33.660 | Oh, one other piece of advice

00:12:34.660 | I wanted to give the podcast person, though.

00:12:35.660 | Treat things like they're live.

00:12:37.660 | What I see too many people rely on

00:12:38.660 | is they just say, like, "Oh, we'll fix in post.

00:12:40.660 | "We'll edit. We'll do this or that."

00:12:42.660 | You'll do so much better if you treat things--

00:12:43.660 | I was on a podcast--

00:12:44.660 | Do we see somebody--

00:12:45.660 | I was on a podcast with someone,

00:12:46.660 | and every two minutes, he'd go,

00:12:47.660 | "Three, two, one, start over,"

00:12:49.660 | and I'd be like, "Whoa, I can't--"

00:12:50.660 | No, yeah, that's a recipe to have a really, like, disjointed,

00:12:53.660 | like, not a very free-flowing, nice podcast.

00:12:56.660 | Duncan, credit to all of us.

00:12:58.660 | How often would you say that we say, "Start over"?

00:13:01.660 | I would say never.

00:13:03.660 | Almost never.

00:13:04.660 | Because we want it to be more natural.

00:13:05.660 | Because I would just weave it in.

00:13:07.660 | No, I'm just kidding.

00:13:08.660 | [laughter]

00:13:09.660 | No, there's been some times where, you know,

00:13:11.660 | I might have crossed the line, but other than that--

00:13:13.660 | No, never.

00:13:14.660 | Yeah.

00:13:15.660 | Okay.

00:13:16.660 | Cool.

00:13:17.660 | Up next.

00:13:18.660 | But yes, you're a professional, and we never have to edit.

00:13:21.660 | Not to brag. Thank you, Duncan.

00:13:22.660 | Okay.

00:13:23.660 | This is my favorite question this week.

00:13:25.660 | Question three is from Dan,

00:13:27.660 | but maybe I shouldn't have named him

00:13:28.660 | because his friends are going to be hitting him up

00:13:30.660 | if they see this.

00:13:31.660 | "I'm the commissioner of a fantasy football league,

00:13:33.660 | "and every year, I get $1,300 from the rest of the league

00:13:35.660 | "that just sits in a Venmo account

00:13:37.660 | "waiting for whoever wins the league.

00:13:39.660 | "I've decided that this seems like a waste of capital.

00:13:41.660 | "Should I invest it in a six-month CD,

00:13:44.660 | "get like $30, and reduce my share of the pot to $70?

00:13:47.660 | "Or should I gamble everything and invest it into crypto,

00:13:50.660 | "knowing that I'll have to make up any difference

00:13:52.660 | "at the end of the season?"

00:13:54.660 | I love this question just because the other people in the league

00:13:57.660 | will be so pissed off if they knew he was thinking about this.

00:13:59.660 | Yeah.

00:14:00.660 | Nine-month targeted fund.

00:14:01.660 | I'm usually not a fan of speculation,

00:14:03.660 | but I want this guy to YOLO this just to see what happens.

00:14:06.660 | Because he already said he knows, like,

00:14:07.660 | "Listen, I'll have to make up the difference if I lose some money."

00:14:10.660 | I think he kind of has to do it now.

00:14:12.660 | Not financial advice. What do you got?

00:14:14.660 | What's on your mind?

00:14:15.660 | What are you bullish on these days?

00:14:16.660 | You're the one who's trying to bottom pick all the time.

00:14:18.660 | What are you putting your money in these days?

00:14:20.660 | Uh...

00:14:22.660 | I mean, come on, that's so tough.

00:14:23.660 | I know, but I like the idea,

00:14:25.660 | and I think that should be part of the fantasy league going forward,

00:14:28.660 | that everyone who holds the money has--

00:14:30.660 | like, the winner has to do this each year.

00:14:32.660 | And if they lose, they have to make--

00:14:34.660 | if they lose, the league has to make up the difference.

00:14:36.660 | Wait, that's a great idea.

00:14:37.660 | Have everyone involved.

00:14:39.660 | Whoever's in last place at the end of the year

00:14:41.660 | has to make up the difference if there's a loss.

00:14:44.660 | Well, that could work.

00:14:45.660 | But also, how about each person involved in the league

00:14:47.660 | gets to pick a stock,

00:14:49.660 | they put it in a portfolio for the season,

00:14:51.660 | and they see how they did.

00:14:53.660 | Winner takes the-- I don't know.

00:14:54.660 | I like it.

00:14:55.660 | The real answer is do not gamble this money away.

00:14:57.660 | I mean, come on.

00:14:59.660 | But the fun answer is--

00:15:01.660 | no, just come on.

00:15:02.660 | The real answer is don't tell anyone about your fantasy football team

00:15:04.660 | because no one cares.

00:15:05.660 | That's the real answer.

00:15:06.660 | Well, also, I like that their options are a CD or crypto.

00:15:10.660 | There's nothing in between.

00:15:13.660 | I would do NVIDIA puts weeklies and just keep rolling them.

00:15:16.660 | Oh my god.

00:15:17.660 | All right.

00:15:18.660 | Michael.

00:15:19.660 | Am I out of here?

00:15:20.660 | All right, well done.

00:15:21.660 | Thank you for having me.

00:15:22.660 | That was fun.

00:15:23.660 | Yeah, thanks, Michael.

00:15:24.660 | Next question.

00:15:25.660 | Okay, up next we have a question from Steven.

00:15:28.660 | I max out my pre-tax 401(k) and Roth IRA every year.

00:15:31.660 | I now have access to a Roth 401(k).

00:15:34.660 | If I move to a Roth 401(k), I'll take a big hit on taxes

00:15:38.660 | and miss the tax deduction every year moving forward.

00:15:41.660 | I have a decent pension coming to me when I retire in 25 years.

00:15:44.660 | It should cover my monthly expenses such as utilities and a mortgage.

00:15:48.660 | With that, the Roth IRA and Social Security,

00:15:51.660 | I won't make withdrawals until I'm forced to take RMDs in my 70s.

00:15:55.660 | I don't want to save too much money now and enjoy life less while I'm young.

00:16:00.660 | Am I thinking too much about today and hurting my future a little bit

00:16:02.660 | if I don't convert to a Roth 401(k)?

00:16:05.660 | All right, I'm surrounded by tax bills here.

00:16:07.660 | Our two tax experts at Ritholtz Wealth, Bill Sweet and Bill Alceronian.

00:16:12.660 | We get a lot of questions about Roth 401(k)s lately,

00:16:16.660 | and I think people do try to think of the Roth.

00:16:19.660 | The people who get this far and have this detailed question are thinking like,

00:16:23.660 | "Do I really want the benefit in the future or do I want it now?"

00:16:28.660 | What say you? We'll start with Mr. Sweet since he's been here longer.

00:16:31.660 | First, can I ask, who's playing the role of Michael now that Michael's left?

00:16:34.660 | Is it me or Bill?

00:16:35.660 | That's you.

00:16:36.660 | That's me, okay.

00:16:37.660 | So I'm going to Josh Spen about something silly.

00:16:39.660 | But notice, too, that tax guys don't get cool shirts.

00:16:42.660 | So kids, when you're out there picking careers--

00:16:44.660 | Well, you guys have the real collars on.

00:16:46.660 | Right.

00:16:47.660 | But no, I think Bill Alceronian is going to take this one.

00:16:50.660 | I do have a quick question, like why do we need to think about converting?

00:16:53.660 | That would be my question.

00:16:54.660 | But, Bill, your take on this.

00:16:56.660 | Unfortunately, we're not going to first take this,

00:16:58.660 | and Bill Sweet and myself are not going to go back and forth debating why.

00:17:01.660 | We're generally--

00:17:02.660 | So you're saying they're thinking about this question wrong, potentially.

00:17:05.660 | Well, I think so.

00:17:07.660 | There's no need for a conversion in this case

00:17:09.660 | because it sounds like this individual might have access to a Roth 401(k).

00:17:13.660 | They can make direct contributions to the Roth 401(k) in lieu of a conversion.

00:17:17.660 | They noted that they are eligible for a Roth IRA contribution,

00:17:21.660 | so that tells me that their income cannot be more than the 24% tax bracket.

00:17:25.660 | And a 24%--Bill, I think you showed a chart a few weeks ago--

00:17:28.660 | that 24%, it's kind of up in the air.

00:17:31.660 | Like, does a Roth conversion make sense?

00:17:33.660 | In this case, you can make the contribution instead of a conversion.

00:17:36.660 | You don't have to worry about paying the tax out of pocket.

00:17:38.660 | It's all going through your paycheck.

00:17:40.660 | And when it goes through the paycheck, you're less inclined to think about the tax bill.

00:17:43.660 | Amen.

00:17:44.660 | And my take on it is, look, Roth IRA, 401(k), you say it's maxing out a 401(k).

00:17:47.660 | We're doing a Roth IRA each year.

00:17:49.660 | That's $29,000 in 2023.

00:17:52.660 | So a pretty good saver here.

00:17:53.660 | That's a great savings rate.

00:17:54.660 | And if you're going to do that over 25 years, that's $725,000 of contributions.

00:17:58.660 | If you're lucky, you get roughly 7% annualized return.

00:18:01.660 | That's $2.1 million of annual Roth assets at the end,

00:18:05.660 | and that's going to support 4% rule, about $80,000 of spending a year.

00:18:08.660 | My take is, exactly like you said, Bill, start contributing to the 401(k).

00:18:12.660 | Max that sucker out every year.

00:18:13.660 | You're saving a lot.

00:18:14.660 | If you can support a lifestyle on $80,000 in today's spending plus Social Security,

00:18:18.660 | I think you're winning the game.

00:18:20.660 | I would focus on the balance.

00:18:22.660 | And this person has a pension also.

00:18:24.660 | You know that he has a pension.

00:18:25.660 | He's 25 years from retirement.

00:18:26.660 | It sounds like Stephen here is going to be set up well.

00:18:29.660 | So my point with Roth versus pre-tax, it doesn't have to be all or nothing.

00:18:32.660 | You can split the difference as well.

00:18:34.660 | And that's my big Ben Carlson takeaway from Asset Compound.

00:18:36.660 | Live your life.

00:18:37.660 | You can't take this money with you guys.

00:18:39.660 | Right, especially with a pension as a fallback.

00:18:41.660 | Amen.

00:18:42.660 | Podcast with your dad or your Bill.

00:18:45.660 | Duncan.

00:18:46.660 | That's what Rihanna says, right?

00:18:48.660 | Live your life.

00:18:50.660 | I thought it was Bon Jovi.

00:18:51.660 | Okay.

00:18:53.660 | Up next we have a question from Andrew.

00:18:56.660 | I inherited an IRA back in April worth $106,000.

00:19:00.660 | I'm 53 years old, married with two kids in college,

00:19:03.660 | and don't need to take my first minimum withdrawal until December 2024.

00:19:07.660 | I don't need the money now, so what should I do?

00:19:10.660 | Withdraw it all now and take a tax hit and reinvest it in a new Roth?

00:19:14.660 | We already have a 401(k) that we're way behind on.

00:19:17.660 | Keep as is for the maximum 10 years and take the minimum withdrawal annually,

00:19:22.660 | or should we take the final withdrawal at the 10-year mark,

00:19:26.660 | which would be a large withdrawal, meaning a large tax bill?

00:19:29.660 | I think you talked about this one before, but I didn't realize this.

00:19:31.660 | So you inherit an IRA, the stopwatch starts,

00:19:35.660 | and you have 10 years to divest of that money.

00:19:37.660 | Does it have to be in, like, a certain amount each year,

00:19:40.660 | or is it just by the end of 10 years it's gone?

00:19:42.660 | Yeah.

00:19:43.660 | Funny you ask.

00:19:44.660 | The IRS has not given us great guidance on this over the last couple years

00:19:47.660 | since some of the COVID tax changes.

00:19:50.660 | If you inherit from a spouse, generally those rules haven't changed,

00:19:53.660 | and you can take distributions over the rest of your life

00:19:55.660 | rather than the 10-year rule.

00:19:57.660 | Oh, okay.

00:19:58.660 | So it's different if it's a parent?

00:20:00.660 | Correct.

00:20:01.660 | And Andrew, sorry for your loss.

00:20:03.660 | If you inherited an IRA, that means you lost somebody very close to you.

00:20:06.660 | We're sorry to hear that.

00:20:07.660 | I know Bill put together some visual for this one.

00:20:10.660 | But the thing is, if you waited until the end of 10 years,

00:20:12.660 | if you really thought that, and you happened to, like,

00:20:14.660 | take it all at an inopportune time,

00:20:15.660 | then if you didn't dollar-cost average out or something, you're--

00:20:18.660 | Yeah.

00:20:19.660 | Well, that's the key question.

00:20:20.660 | So Andrew gives us some hints.

00:20:21.660 | There's two of them.

00:20:22.660 | One is that he needs to do RMDs next year.

00:20:24.660 | So it's actually, like, the worst of both worlds.

00:20:26.660 | He needs to continue RMDs.

00:20:27.660 | The rule there, Ben, is once you start an RMD,

00:20:29.660 | if you pass that on to someone, the RMDs need to keep going.

00:20:32.660 | Oh, so this person was over the age of--okay.

00:20:35.660 | And now 10-year, too, Andrew got whacked with the SECURE Act,

00:20:38.660 | meaning that by 2033 he's got to distribute 100% of the balance.

00:20:41.660 | The clock's ticking.

00:20:42.660 | So we did do some math here.

00:20:43.660 | I hate to scare you guys.

00:20:44.660 | John, can we pull up chart number 1, please?

00:20:46.660 | So what we're taking a look at here, if we take a look at the chart,

00:20:49.660 | is what the math looks like on a lump sum distribution

00:20:52.660 | on the left column versus an annual distribution.

00:20:54.660 | Don't need to go too much into details.

00:20:55.660 | You can hit pause or take a look at YouTube.

00:20:57.660 | But under a lump sum distribution,

00:20:59.660 | you end up with a larger account balance, about $201,000,

00:21:02.660 | versus doing annual contributions at roughly $12,000, $13,000 a year.

00:21:06.660 | You can take a look.

00:21:07.660 | If your goal is to minimize taxes,

00:21:09.660 | you're actually better off doing it annually,

00:21:11.660 | but if your goal is to increase your after-tax income,

00:21:14.660 | you actually want to wait and defer until the end,

00:21:16.660 | and that's making a couple assumptions.

00:21:18.660 | When we did the math, me and Bill in the office,

00:21:20.660 | the difference in tax-equivalent rates needed to be more than about 12%,

00:21:24.660 | meaning that your jump in that final year needed to be pretty large

00:21:27.660 | to get all the way to 37% versus the current rate.

00:21:30.660 | And your big risk there would just be you wait to the end of 10 years,

00:21:33.660 | the market crashes, and you're not diversified enough,

00:21:36.660 | and then your account goes down and you lost all that benefit.

00:21:38.660 | True, but it also depends on financial planning.

00:21:40.660 | Once you take a distribution and you can reinvest the assets,

00:21:42.660 | that brings us up, John, to chart number two.

00:21:44.660 | And so chart number two, the question Andrew asked is,

00:21:47.660 | "Should I take a distribution and put that into a Roth?"

00:21:49.660 | Bill, can we do that? Can we just take an RMD and put it into a Roth?

00:21:51.660 | No, at this dollar amount, even if the taxpayer has earned income,

00:21:55.660 | they can't make a direct Roth contribution north of $100,000.

00:21:58.660 | What if they did the traditional and then backdoored it?

00:22:00.660 | Can we not do that?

00:22:01.660 | No, I mean, we're talking six figures here,

00:22:03.660 | and there's no world in which they can put six figures into a Roth.

00:22:06.660 | Over that amount, yeah, right.

00:22:07.660 | Right, right.

00:22:08.660 | So what we did, though, as a model here in chart two

00:22:10.660 | is what would happen, hypothetically, if we took the traditional IRA,

00:22:13.660 | the inherited IRA distribution, invested the $7,500 max,

00:22:17.660 | because Andrew's 53, so he can make a catch-up contribution,

00:22:20.660 | and what would happen to that Roth?

00:22:21.660 | You actually do outperform the lump sum option,

00:22:24.660 | assuming a 6% flat rate of return, and obviously do better there.

00:22:27.660 | So that's actually an interesting option.

00:22:29.660 | Assuming he's not contributing to a Roth or traditional IRA right now,

00:22:33.660 | taking those distributions, reinvesting in the Roth,

00:22:35.660 | he actually comes out ahead by about $12,000 in my analysis.

00:22:38.660 | Is Rothification in the tax code?

00:22:39.660 | Rothification without representation

00:22:41.660 | is what we thought the Dawson P. Party thought.

00:22:43.660 | Here's the real kicker, though--tax changes.

00:22:46.660 | We don't know what's happening in the 2024 elections, future elections.

00:22:49.660 | We could be subject to different tax rates in the short term and the long term,

00:22:53.660 | and that is well outside of anything we can predict.

00:22:55.660 | Right, so stretching out 10 years could be a good thing or a bad thing.

00:22:57.660 | Yeah, we just don't know, and so that's why diversification

00:23:00.660 | actually probably is the right angle here.

00:23:02.660 | Okay, that makes sense.

00:23:03.660 | All right, we've got one more question, Duncan.

00:23:06.660 | Okay.

00:23:07.660 | Last but not least, we have a question from Travis.

00:23:09.660 | "My wife and I are 39.

00:23:11.660 | "We're diligent savers in a variety of tax-deferred retirement accounts.

00:23:15.660 | "My concern is that most of our nest egg will be in tax-protected accounts

00:23:19.660 | "that are not meant to be used until 59 1/2.

00:23:22.660 | "If we want to retire between 50 and 55,

00:23:24.660 | "should we contribute less to 401(k) and Roth now

00:23:27.660 | "and more to our taxable brokerage account?"

00:23:30.660 | Good question. I think a lot of--

00:23:31.660 | Yeah, this is a good one.

00:23:32.660 | I shortened this question a little bit.

00:23:34.660 | Travis gave us some numbers.

00:23:35.660 | They're doing very well.

00:23:36.660 | We're at their stage in life, almost 40 years old.

00:23:38.660 | Good on you, Travis.

00:23:39.660 | They've got a lot of money saved.

00:23:41.660 | So I think this is something you have to think about

00:23:43.660 | in terms of diversification for retiring early.

00:23:46.660 | What are your thoughts here?

00:23:47.660 | Because I know you've talked in the past maybe about,

00:23:49.660 | "Well, if you used a Roth, then you could take the contributions out,"

00:23:51.660 | but you have to think through what are the spending levels going to be

00:23:54.660 | at that time in 15 or 16 years.

00:23:55.660 | Totally. Brings up Bill's point before.

00:23:57.660 | But diversification, big principle.

00:23:59.660 | You do not want all your assets in a traditional.

00:24:01.660 | You do not want them all in Roth.

00:24:02.660 | And if you're planning on retirement, think about retiring in your 50s.

00:24:04.660 | You probably don't want everything in a retirement account.

00:24:07.660 | I would think about an order of operations, right, Bill,

00:24:09.660 | is that ultimately there's a couple of different buckets you could go to

00:24:12.660 | if you retire at 52, 53.

00:24:14.660 | First, you're looking at a 9-year time horizon,

00:24:16.660 | so you're not looking at a large time frame.

00:24:18.660 | Second, skip all the way to the end, what's the worst-case scenario?

00:24:21.660 | You need to take a distribution from a traditional IRA.

00:24:23.660 | What are you looking at if that's the case?

00:24:24.660 | In that first year?

00:24:25.660 | In any year before 55.

00:24:27.660 | Oh, there's a 10% penalty--

00:24:28.660 | 10% penalty.

00:24:29.660 | --to distribute from an IRA early, before 55.

00:24:32.660 | Are there any rules of thumb for asset location, too?

00:24:35.660 | If they're in their taxable account,

00:24:36.660 | should they keep certain types of investments

00:24:38.660 | that they'll be using for spending purposes?

00:24:40.660 | Typically, if we're trying to bridge the gap between an early retirement

00:24:44.660 | and an IRA distribution age without penalties,

00:24:48.660 | I think there's a case to be made to build up the taxable bucket,

00:24:51.660 | the brokerage bucket.

00:24:52.660 | And that bucket can bridge the gap between 50 and 59.5,

00:24:55.660 | where they're not paying penalties.

00:24:57.660 | And then at 59.5 and into the 60s, you have the IRA or the 401(k) money

00:25:01.660 | to draw on without the penalty.

00:25:02.660 | Yep.

00:25:03.660 | And so ideally, if you're retiring,

00:25:04.660 | that means you don't have any earned income at that phase.

00:25:06.660 | You're not eligible for Social Security until 62.

00:25:09.660 | Filling up capital gains brackets at that point, to me,

00:25:11.660 | would make a lot of sense,

00:25:12.660 | because if you're under the 12% or lower tax rate,

00:25:15.660 | your capital gains bracket is actually zero.

00:25:17.660 | Right.

00:25:18.660 | And so that, Ben, to answer your question,

00:25:19.660 | I would love to have some long-term capital gains built up at that point

00:25:22.660 | to start to realize it was tax-free.

00:25:24.660 | There are other choices, though, Bill,

00:25:26.660 | and we could just cover a couple of them.

00:25:28.660 | Number one is Rule 55.

00:25:29.660 | Do you want to go down to that real quick?

00:25:30.660 | That's pretty easy.

00:25:31.660 | Yeah.

00:25:32.660 | Rule of 55 says if you leave an employer at the age of 55,

00:25:35.660 | before 59.5, before you can roll it into an IRA

00:25:38.660 | and take penalty-free distributions,

00:25:40.660 | you can leave the assets in the 401(k)

00:25:42.660 | and take distributions from the 401(k) without penalty

00:25:45.660 | if you're over the age of 55.

00:25:47.660 | It has to stay in the employer plan.

00:25:48.660 | It has to be in the employer plan.

00:25:49.660 | If it leaves the employer plan, you're out of luck.

00:25:50.660 | You can't roll it over.

00:25:51.660 | Correct.

00:25:52.660 | 403(b) is also eligible.

00:25:53.660 | 403(b) is eligible.

00:25:54.660 | And if you're a public safety employee,

00:25:57.660 | a police officer, a fireman,

00:25:59.660 | you can do this at 50 instead of 55.

00:26:01.660 | And if you happen to have a business,

00:26:03.660 | you could potentially roll assets

00:26:04.660 | into a self-employed 401(k), right?

00:26:06.660 | A little more technical,

00:26:07.660 | but ultimately that could qualify, too.

00:26:08.660 | The key point, Bill said it.

00:26:09.660 | You have to be 55 or older when you leave service,

00:26:12.660 | so you can't retire at 52 and then wait for three years.

00:26:14.660 | So many numbers.

00:26:15.660 | This is why we have tax professionals,

00:26:17.660 | because there's 50, 55, 59.5,

00:26:19.660 | which still never made sense to me.

00:26:20.660 | I've got another one for you, 72(t).

00:26:22.660 | If you do hit 55, you can file a 72(t)

00:26:25.660 | and ultimately take some penalty distributions

00:26:27.660 | on roughly, you annuitize.

00:26:29.660 | We're switching from 401(k) to IRA.

00:26:31.660 | Right, correct.

00:26:32.660 | This is an IRA strategy.

00:26:33.660 | Or to start, you just take the penalty, right,

00:26:36.660 | if you happen to have this issue.

00:26:37.660 | And if you don't have a lot of income,

00:26:39.660 | maybe that's not a big deal.

00:26:40.660 | But I think planning ahead, you're 39.

00:26:42.660 | Travis, he's got 10 years to figure this out, 20 years.

00:26:45.660 | I feel like if we're doing an average of,

00:26:47.660 | when people say they want to retire early,

00:26:48.660 | 55 is always the number, is it not?

00:26:50.660 | It's a rule of 55 in the tax code, right?

00:26:52.660 | Doesn't it seem like it, though?

00:26:53.660 | When people say, "I want to retire early,"

00:26:54.660 | I mean, people are saying this in their 30s and 40s,

00:26:55.660 | and their life could always be completely different,

00:26:57.660 | which is, I think, to your guys' points

00:26:59.660 | about diversification.

00:27:00.660 | But that seems like a number of people

00:27:01.660 | just pull out of the air and go, "55 sounds good."

00:27:03.660 | I think it all depends, right?

00:27:04.660 | In this career, in financial advice,

00:27:06.660 | people never retire.

00:27:07.660 | I mean, it's very rare to see that.

00:27:09.660 | I'm on Team Never Retire.

00:27:10.660 | I like being a useful, productive member of society.

00:27:12.660 | But that said, I think it's more about choosing

00:27:14.660 | what you do, how you do it,

00:27:16.660 | and if you have a lot of assets, you can have options.

00:27:18.660 | I think mid-30s is where a lot of people

00:27:20.660 | get kind of burned out and are like,

00:27:21.660 | "I think I can do this for another maybe 20 years."

00:27:23.660 | A lot of the early retirement questions

00:27:24.660 | come from people in, like, 35 to 40, right?

00:27:26.660 | Travis, 39. Look at that.

00:27:27.660 | And 20 years feels like a long time.

00:27:29.660 | So it's like, "Okay, I can do this 20 more years."

00:27:31.660 | Yeah, kids are in college.

00:27:32.660 | If you're in mid-30s, you have young kids,

00:27:34.660 | you're like, "Oh, I'll get them through college,

00:27:35.660 | and I'll call it quits."

00:27:36.660 | That's true.

00:27:37.660 | Sounds good to me.

00:27:38.660 | Then you realize how much college costs,

00:27:39.660 | and you work for 10 more years.

00:27:40.660 | There goes the retirement.

00:27:42.660 | All right, I want to thank the Bills

00:27:44.660 | for their tax expertise, as always.

00:27:46.660 | Thank you to Michael for coming on and helping.

00:27:48.660 | Thank you to Bird Dogs for the great polos.

00:27:50.660 | Thank you to Duncan and John and Nicole,

00:27:52.660 | everyone here helping out.

00:27:53.660 | Email us, askthecompoundshow@gmail.com.

00:27:56.660 | Leave us a comment or question on the YouTube comments.

00:27:59.660 | Subscribe, like, all that good stuff,

00:28:00.660 | and we will see you next time.

00:28:02.660 | See you, everyone.

00:28:03.660 | [music]

Am I Saving Too Much?

Chapters