(beeping) - Welcome back to Ask the Compound, where we finally got some stock market questions this week. Remember, our email here is askthecompoundshow@gmail.com. Duncan, when I was growing up, you basically had two choices when it came to fashion. One, you could be comfortable and look like a slob, or two, you could look nice, but be totally uncomfortable.

I feel like sometime in the last 10 to 15 years, that's changed. Today's show is sponsored by our friends at Bird Dogs. No one cared about making clothes that had both in the past, right? Stretchy, breathable materials that also look nice. I feel like it's a huge leap forward.

Bird Dogs has these new polos. I got one on under here. See, look, Bird Dog. It's comfy. - Nice. - It's the stretch material, just like those shorts. It looks nice, but it's also very comfortable. I think it's one of the biggest innovations this century besides the skip intro button on streaming services.

And it's the same thing across their polos, their shorts, their pants, joggers. I've been wearing the joggers a ton lately. Every weekend, I'm going to flag football games and soccer games, and I have to move around and stand around a lot, and I wanna be comfortable. I wanna look okay, though, so I wear my Bird Dog joggers.

Remember, we still have the Tech Dad hat here. Sorry, Duncan, this is yours. I still owe it to you. - One day. - BirdDogs.com/ATC, or enter the promo code ATC, and you get this free hat. It's great. Stock up now. - Sounds like a good deal to me. - BirdDogs.com.

All right, last week-- - Wait, should we make sure we're alive? I'm just kidding. We're alive. - It's always hit or miss here. Last week, there was a lot of discussion on the person who wrote in and said, "Hey, I make 50K. "I live with my partner in California, in Los Angeles, "and I save $500 a month." And a ton of people responded.

I put this out on Twitter. What do people think? And a lot of people said, "Hey, this is a great question." But there's also the usual contingent of, in this economy, what about inflation and government debt? And what's the point? You'll never save enough. - What if annual inflation's 11%?

- Yeah, and all these things. And my whole point is that just, when thinking about your finances or your career or anything like this, any type of advice, just ignore the defeatist attitude people. I hate those people, right? Those people are never going to be helpful. They're not helpful.

So, I mean, if they're right, what's the point anyway of planning, right? That's their whole idea. So, I don't know. I think you can safely ignore these people that have the defeatist attitude. Like, "Well, you're lucky to have a job. "You should, you know, "how can you do anything in this economy?

"And what about this? "And what about that?" And people who are always looking for the cynical downside of things, those people are not helpful. I say safely ignore them. That's why you come to us. Glasses half full, optimistic. We're not here to be cynics. Let's go. First question. - Okay.

Up first today, we have a tweet that came in. And so, you posted S&P 500 returns 2020 to 2021, up 52%, 2022 to now, down 7%. You don't get one without the other. And then Brent responds, "I began investing in S&P index fund in summer of '21. "Is that unfortunate, good, or bad timing?" - All right.

Good question for a young person. I think intuitively you want to see, when you put money in, you want things to go up, right? You want to make money. It makes you feel good. If you're just starting out though, it should be the opposite. So from 1928 to 2022, S&P 500 achieved annual returns of 9.6%.

We can round up to 10% if we want to be, you know, fudged a little bit. But we all know that the stock market does not simply offer nine to 10% annual returns year in and year out, right? Any given year in the stock market is anything but average.

In fact, if we just look at what happens in an average up year and an average down year, we can kind of figure this out. So in an average up year, back to 1928, there's an average gain of about 21%. You with me, Duncan? So stocks go up, the average gain is like 21%.

The time stocks goes down, the average return is like a loss of 14%. So the stock market is up roughly three out of every four years in that, right? You with me? 75% of the time it's up, and when it's up, it's up. Let's round it down to 20, right?

And when it's down, it's down, we'll say 15. I like nice round numbers. So let's say if you're in an average world, which again, doesn't exist, but for the sake of this example, let's just go with it. So you'd have plus 20, plus 20, plus 20 down 15 in some order, right?

If things follow the average, and that would give you around 10% per year. I'm not saying that 10% is gonna stick with us going forward and I'm also not saying that you're gonna get a 20% up year every time it goes up and a 15% down year when it goes down.

Sake of example, disclosures out of the way, right? But I think these numbers can be instructive when thinking about it through your life cycle investing, especially when you're young and just starting out. So let's say you're gonna save $1,000 a year for the next 40 years, right? And we'll use our same gain and loss numbers as before, right?

When the market's up, it's up 20. When it's down, it's down 15, right? And three out of every four years, it's gonna be up 20. One out of every four years, it's gonna be down 15. Now let's look at two scenarios and think about which would be better. Your gains to be front loaded.

So you have 30 years of gains over 40 years or your losses are front loaded. So you start with 10 years of down 15%, all right? So scenario A, John, throw it up here. So let's say you get 10 years of down 15% in a row and then you get 30 years of up 20% in a row.

Your average return from this scenario is 10% per year, but I'm just moving things around, okay? All right, now let's look at scenario B, John. This is you get 30 years in a row of 20% returns. Again, you're putting in $1,000 a year for both scenarios. Then you have 10 years at the end where you're losing 15% a year.

Again, 10% per year return. The market itself is up 10% per year in either scenario. I just shuffled around the order here, okay? So a person who's saving periodically, which one should you choose, Duncan? A or B? Would you rather have your losses up front or losses at the end and have a ton of gains up front?

- I'm gonna be honest, I was just in the chat and so I missed the last part. - All right, I'm gonna tell you. So you want this, so in scenario A, your returns are dreadful for the first 10 years, right? And then the ensuing 30 years, you have gains every year.

Saving $1,000 a year, your ending balance would be $2.5 million. Pretty good, right? Scenario B, your returns were wonderful for the first 30 years, but dreadful for the final 10. That $1,000 a year would be $200,000. So we talk about a $2.3 million difference. Again, the market has the same average return in each scenario.

But in scenario A, you're saving and investing in the most important compounding years of your life during a nasty crash, right? And in scenario B, you're saving and investing in the most important years of your life during a rip-roaring bull market. Obviously, these examples are not realistic. If the stock market fell 15% per year for 10 years, we're talking like an 80% crash, and that's the Great Depression.

If you gain 20% for 30 years in a row, we're talking about a gain of nearly 2,400%. So obviously, the stock market doesn't look like this. There's more give and take. But the idea here is that you should want those poor returns front-loaded. You want to be investing because you're going to be buying in at lower prices and buying more shares and at higher dividend yields and lower valuations and all these things when you're young.

When you're young, you should not be wanting all-time highs. If you're periodically saving out of your paycheck or saving on a monthly basis, you should want the stock market to fall. You should get on your hands and knees and pray for bear markets and corrections and crashes. These are good things for young people.

- That's what I've said before is I think too many people, including myself in the past, always thought about it from dollar terms. Here's how much money I have in my account instead of looking at shares. If you look at shares, then it feels a lot better, right? 'Cause you are constantly accumulating more and more shares early on.

- And especially if you're going to be a net saver. - Yeah, yeah. - Right? Yes, exactly. So John, throw up the chart here. This is since August, 2021 when this person started investing. The stock market has essentially gone nowhere. We're talking about it's down 2% or so in total.

And it fell for a while, it was up for a while. If you've been diligently saving and investing in the stock market on a regular basis and index fund like this person has, you've had the ability to slowly build up a position. Right? Sometimes prices are higher, sometimes they're lower, but it's essentially gone nowhere, which is a good thing, right?

So I think if you're just starting out, the best thing that could happen to you is a series of down markets or sideways markets, whatever. The thing is you can't promise which way the stock market's gonna go. Sometimes it's luck, sometimes it's timing. The stock market's not gonna do what you need it to do just because you want a certain outcome.

But most people think about it the wrong way. They should be thinking that the stock market should be bad when I'm a saver. That's a good thing. And hopefully it's better later on. So bad returns are not always a bad thing as long as they lead to better returns down the road.

That's the idea here. - Also, going to cash or bonds early on in that scenario would completely negate what we're talking about. So just-- - Exactly, it's the market timing thing, right? And obviously, again, this is probably a different scenario for older investors who have the majority of their wealth already tied up into the stock market.

That's a different scenario. But if you're someone who's young and periodically saving, you want the returns to be poor. You want bad outcomes now so they can be better in the future. - Yeah, makes sense. Buy it on sale. - All right, next question. - Just not individual stocks.

- Well, yeah. - Yeah, okay. Up next. - I mean, oldie goes down 15% every year for 10 years, probably, right? Is that what we're planning on? - That, yeah, that stock is not looking too hot, but I still have some. Okay, up next, we have a question from Brian.

I want you to assume you could decide on the annual return for the S&P 500 for the next 20 years, but you had to select the lowest return you would be content with. What return would you choose and how would you decide? - All right, very philosophical here from Brian.

- I like this. - He may have had a gummy before asking this one, but I like it, right? Because I think philosophical questions like this, although totally unrealistic, just like my first example, it was unrealistic, but I think if it helps you get in the right frame of mind, it can still be useful.

So especially thinking about things like risk and reward. So John, do a chart on first. Let's look at the historical track record of the US stock market over 20 year periods. This is going back to 1926. I did rolling monthly returns. These are annual averages. So the average is a little more than 10% per year for over 20 year periods, which makes sense.

You can see that there's a wide range around the average. The worst 20 year return, I have a gain of 1.9% per year. And the highest one is 18.3% per year. Of course, there's no, as usual, no taxes or costs or that sort of stuff taken out of this, but this is just the market.

So even over longer time periods, there are risks involved with stocks, right? Interesting enough though, 75% of the time, going back to 1926, rolling returns have been eight, over 20 year periods have been 8% or higher. So like our three out of every four years, the stock market is up.

Three out of every four 20 year periods, the stock market is up 8% or more. Now, obviously there's a lot of those periods overlapping. There haven't been that many 20 year periods. If we broke them up, it might look a little different, but initially I'd probably fall right around that 8% number, but there are obviously other considerations here, right?

You have to think about it on a relative basis. So the 20 year treasury right now yields 5.2%. I think it hit yesterday, maybe a little higher, maybe a little lower today. That's a pretty good lock-in for 20 years, not bad. 20 year tips are yielding 2.6% real, meaning you get 2.6% per yield on top of whatever inflation is over the next 20 years.

So these are like your hurdle rates or your bogeys, I think, as far as if you want to think about them in risk-free terms. So that's a much higher hurdle rate than we've had over the past 20 years. It also depends on what stage in life you're in. Like I said, older people are different.

Retirees would probably take some sort of guarantee in the 6% to 7% range, I would imagine. Like if I'm done saving and I'm investing in the portfolio as a thing that's driving most of my income besides Social Security or pension, I'm sure a lot of retirees would say, give me 6.5% or 7% all day long for the next 20 years.

Count it, I don't want to think about it. Young people, you're probably better off rolling the dice and accepting volatility, 'cause again, like the first question, it gives you the opportunity to buy in at lower prices and rebalance on occasion. Duncan, you actually pulled our audience about this question yesterday.

John, just throw up the results here. So what's the lowest-- - Yeah, thanks to everyone who responds. We always get thousands of people responding to me. - Yeah, this is great. On YouTube, we got over 2,300 people voted. The lowest annual S&P 500 return you would be content with over the next 20 years.

It was actually more spaced out than I thought it would be. About a quarter of people said 5% to 6%. Again, if we could look at it by age, I'm guessing that's older people, 'cause you can get 5% in a treasury right now for 20 years. 6% to 7% was around 1/5 of the people.

7% to 8% was a little more than a quarter. And then over 8%, I guess it was around 30%. So a pretty even distribution. And I don't know, it would be interesting to see these broken out by age, but-- - I mean, you can get 4% or 5% in Beanie Babies, I think.

- But again, the treasury is the big thing here. So yeah, I would have fallen in like the 7% to 8% range. But the other problem with this exercise is, the funny thing is, if you did offer some sort of guarantee in the stock market, right? Like you can get 8% per year in the stock market.

Our human nature, we would bid up the, regardless, we would bid up the prices, so eventually prices got so high that returns in the future would be too low, which is kind of how the stock market works, right? If you look at the actual fundamentals, they don't move around nearly, like dividends and cash flows and earnings and revenue, they don't move around nearly as much as the stock market itself.

So even if this did exist, we'd probably mess it up somehow. And obviously life would be much easier from a planning perspective if you could say, hey, I'm getting 8% per year, year in and year out, and I'm just gonna bank on it. It would be way easier to plan for retirement, plan for 529 plans, all this stuff.

Alas, risk and reward are attached at the hip, always and forever in the stock market, unfortunately. So certainly a useful question in light of the move I think we've seen in long-term bonds recently, especially for retirees thinking about like, do I take the guaranteed 5% for seven years or 10 years or whatever, or do I go for the juggler in the stock market and hopefully it's better?

- I haven't seen many questions about munis recently. Is there any reason people wouldn't be looking at munis? - Well, I think we've gotten questions across the spectrum of yield, I think. Munis and corporates and the high yield and all these things. I think people are starting to get interested in all of them.

So we'll see, I bet we have a muni one or two we can look for. Anyway, let's do another one. - Okay, up next. - What was your answer? What would you pick? - I said 7%. - Seven, okay. - It's like what feels like I would want and need to be invested in the stock market.

- Okay, that's fair. - I mean, I'd like, you know, 20, but. - Yes. - Okay, up next we have the following. Hey guys, long time listener, first time emailer. I'm in sales and landed two large accounts that will move me from 300,000 to over $450,000 a year. That bumps my tax rate from 24% to 32% for a good deal of income.

Should I be optimizing for lowering my taxable income, prioritizing things like traditional 401k over Roth and maxing out my 529s? Are there programs similar to the calculators online that you can play out tax scenarios in the future? I think we're talking about like how you can look at your different portfolios, but they're talking about for taxes.

I'd love to try and see the math of traditional versus Roth as your income and tax brackets change throughout your lifetime. That sounds kind of cool. - Yeah, we don't have a tax calculator here, but we do have Mr. Bill Sweet. That's close enough. - Basically a tax calculator.

- He's a tax calculator, Bill. See, tax GPT. Bill, I told you before the show started, I'm impressed with how many people email us in and know their tax bracket, because I don't know how many people in America could actually tell us what their tax bracket is. Maybe 2%, and that might be too forgiving.

I don't really know what mine is until you tell me every year. - Yeah, I'm the only one here in New York City for some reason today. I think I'm gonna go on Fifth Avenue and take an impromptu poll when this show closes. Do you wanna do it live?

You guys wanna come with me? I'm not actually gonna do that. - Let's not do that. - I don't see like a Jimmy Fallon or Jimmy Kimmel show from that ever coming about, because I don't think people care about their tax rates. - Who's the dude that like runs up and like just like, what's that guy's name?

- Oh, it's Billy on the Street. That could be you. - Billy on the Street. Yeah, we could do that. - That's you. - Bill on the Street, tax GPT on the street. Anyway, let's get to Brian's question. Also, this is a not to brag. Good for you, Brian.

He made some sales, got a huge jump in income. - My guy's making a half million dollars a year. I mean, that's gonna solve a lot of problems. But I love the thinking, which is like, cool, I've got this big raise. What am I gonna do tax-wise? So let's go back to the start.

As we've discussed many times in the show, in a 401(k) plan, you have a choice to make on your contributions. And this year you can fund up to 22,500 per year, which is a big number. And that can go either into a traditional bucket and you get a tax deduction upfront for that, but you'd have to pay the full tax later, or Roth.

And if you go Roth, you're gonna pay the tax now, but you get tax-free distributions later. I think at a half million dollars, as Brian indicates, that jump from 24 to 32% is where I would shift from Roth and go traditional there. - That's kind of like your cutoff, right?

- For me, that's it. And we've discussed this in the past, but there's really two reasons, Ben, why the cutoff is there. So reason number one is it's the second biggest jump in the U.S. tax code. You go from 10 to 12, not a big deal, right? Then you go from 12 to 22, that's a big one.

That happens about $118,000 a year. The next biggest jump is 24 to 32, right where Brian's looking at. And that happens at about $390,000 a year. And so Brian's marginal tax rate at 450, 500K, every dollar he puts into traditional 401K is gonna reduce his taxable income at that 32% tax bracket.

And that's why I think that that leap is relatively big. Brian's right there, and that's where I'd make that shift. Very, very important. - Yeah. That makes sense. Any other considerations in terms of trying to figure out a way to do a SEP or a solo 401K? - Yeah, so, well, let me skip forward to the other, or skip back a second, Ben.

The other big consideration is in our work, and this is based on our clientele, which are relatively affluent, relatively wealthy in the scheme of humanity, most of them are distributing assets in retirement at the 20 to 4%, 22% tax bracket, right? And so back to our point, if Brian's at 32 now, and we think he's probably gonna be at 24 when he gets to retirement, that arbitrage is right there looking at you in the face.

And so that, to me, is the second reason. So your question was what? Are there opportunities for other-- - Well, I just wanna make a point here that, see, to all the Roth haters out there, you don't always recommend a Roth, right? - I don't, I don't. And it's almost like that was cued up, right, to rescue me from my-- - I'm just saying, is there anything else, because this is a such, I mean, we're talking like a 50% jump in income here.

Obviously, there's gonna be more taxes paid, but are there any other, should we be looking at any other tax-deferred vehicles to set things aside to try to save some taxes? - Yeah, so I'm assuming that Brian's working for an employer and so 401(k) is off the table, right, because he can't direct his own SEP IRA too.

It's not his own business that he's directing. 401(k) is the easiest opportunity. I think HSA is the other one, Ben, that commonly comes up. It's gonna come up here in question two. Those are the big ones. But no, I mean, unfortunately, you're really limited. I mean, you can look at charitable, but in order to deduct a charitable at a married filing tax, married filing joint, you have to give like 30 grand, right?

So that's a wonderful thing to do. I'm not saying don't, but it's a big lift, right? - Like no one's gonna feel sorry for someone making a half a million dollars a year, but when you're making that much, the traditional $6,000 limit or whatever on a traditional IRA and trying to do a backdoor, it almost doesn't seem, it's such a drop in the bucket at that point.

- It is, it is, but the way to win the tax game is improve at the margins. Like you're not gonna give a big swing. No, you're not gonna cut your taxable income in half. - Okay, I guess that's the point, right? You know, there's only so many levers you can pull.

- It's really winning the game. And fortunately, if you're earning a half million dollars from your job, like, yeah, you're gonna pay a lot of tax. So ultimately the small things do add up, Ben. But the second half of Brian's question was, is there a tax planning software out there where I can look at this?

And like we use, Ben, as you know, in our practice, we use a combination. We use Orion Planning, we use eMoney, and we have a relationship with MoneyGuide. And each of those software platforms have different pros and cons. And unfortunately, none of them are offered to the retail investor.

There are a couple of options that are out there that you could go Google. But unfortunately, for me and Bill, Ben, this becomes such a complex topic. We have not found that there's any real reliable software that can accurately forecast somebody's tax rate over time. What me and Bill Archeronian, CPA, he's the CEO at Ardubam Tax.

What we end up doing is exporting financial plan data in Excel, and we end up building tax projections customized for clients. So unfortunately, I think that's the work of the CPA, and that's why you would pay somebody to kind of help there. There's not a lot that I think Brian can do outside of 401ks and things like that.

- Tax is not very scalable as a business. - And it's not very scalable. And so we just end up with these homemade, small batch, this artisan tax planning that we do for clients. And for us, it's a big part of our value add. It's why we think we can charge.

- My only other advice here would be, I'm okay when you're making that much more money, I'm okay with some lifestyle creep as long as you have savings rate creep. So if you were saving 20% of your income at 300, save 20% at 500 too. So that way you are saving the same percentage of income, and you're also giving yourself a raise to spend a little more.

I'm fine if you're gonna do one, do the other. - Yep, and there are limits to what you can contribute to IRAs, to 401ks, to tax qualified investment accounts. There's no limit to what you contribute to a non-qualified account. We have relationships with some really good firms that do tax loss harvesting, direct indexing through our Shaughnessy Canvas.

There are ways to solve this problem that are not just retirement accounts, and I'd urge somebody making a half million dollars to you to consider that. - Yeah, you're gonna be saving more in a taxable account. - Amen. - And if you need any help with tax loss harvesting, I can always provide.

- We've got the market, Duncan's got the market cornered. - Yeah, I know how to get you there. - A great, great way to save on taxes is to lose money. It's very easy. - Yeah. - All right. Someone says savings rate creep is a new compound shirt. I like it.

- Yep, yep, do not recommend losing money in the market. - You just gotta be careful with that because it could be like on a savings rate and a creep. - Yeah. - You want both of those. - We could do like a Halloween themed one, like some creepy character or something.

- Great radio hit song though, come on. - Also on the Always Sunny podcast, that's what they call viewers of the podcast. - Creeps. - Creeps? - Yeah. - Okay. - Didn't know that. - All right, next one. - Okay, up next we have, I'm 38 years old and a newish dentist.

I make about $400,000 a year and recently started investing in stocks. Maxed out my 2022 and 2023 Backdoor Roth IRA as well as my HSA account. Since I'm already in a higher tax bracket, I've been thinking it would be better if I do a SEP IRA instead of Roth to save more on my reported income and taxes.

Also thinking about starting my solo 401k. I know I'm older and kind of late to the investing game and that's why I'm trying to invest the most and save the most on taxes. I would really appreciate your professional opinion on this. - Okay, so this stuff with someone who becomes a dentist or a doctor is interesting because they spend so much time in school and then even when they start working, like a doctor would be like a residency, you don't get paid as much and then all of a sudden it kicks in and your higher salary kicks in but you feel like you're a little late in the game.

This is also where probably lifestyle creep is. So this person is thinking about it the right way. They make a higher salary. They want to make up for some lost time. They probably have some student loans, I would guess. - Probably typically in the hundreds of thousands of student loan debt, right?

- Yes, obviously a good investment though for the type of salary you're making but also they want to catch up. So I know a lot of dentists are business owners, right? So they probably have this, they can do the solo 401(k) thing. So that's probably a good place to start, right?

If they want to have the tax deferred income. - Absolutely, so Pizad, congratulations. Thank you for getting work done out there in the mountains of America. But I guess Pizad says, "Hey, should I do a SEP IRA instead of a Roth IRA?" Great news, you can do both. - Both, right?

- Yeah, the SEP IRA limits because they're tied to a retirement plan are totally different and separate from your Roth IRA traditional IRA limits. And not only that, but they're 10 times as large. Duncan, John, me, Nicole, Ben, we can each contribute $6,500 to a traditional or Roth IRA.

Pizad's doing the right thing, backdoor Roth. I would keep that up. A SEP IRA has a limit this year of $66,000, right? $66,000 or 20% of your income, whichever is lower. - Hey, these limits make no sense to me and they never have. Why is that so big and IRA is so small and then the 401(k) is, why?

Why are they so different? - I do not know. I do not know, probably we'd have to go back to dig up the ghost of Ronald Reagan and find out what happened to the tax reform code in 1986. But no, I think it's just a case of been summer inflation adjusted and higher numbers and businesses tend to have higher limits, right?

Because of a myriad of reasons. But Pizad also asks, "Hey, should I do a solo 401(k)?" For his amount of income, the contribution limits are gonna be the same, whether it's $66,000, it's gonna be the exact same SEP IRA versus 401(k). So I don't know that you get necessarily a benefit from a solo 401(k) at his amount of income 'cause it's gonna be limited to 20% of his income either way.

So the only thing I caution him on is if you have a dental practice, I'm assuming you're not working totally by yourself. Typically there's dental assistants, there's staff, whatever you're doing for your own profit sharing contribution, you would have to do as well for your employees too. And so it's not just you, unless you're a consultant, you're working for a big, like if you actually are actually on your own.

So I'd be careful there. But Ben, Pizad mentions he's 38, right? And he feels like he missed the boat. I take the opposite side of that. 38 to me feels like a young man in my mid 40s. And if you're 38, you still have 30 years of compounding before you hit 68, right?

Where you probably are gonna retire. And $66,000 saved today, assuming you get a 7% compounded rate of return, is gonna turn to $132,000 in 10 years, $264,000 in 20 years, and $528,000 in 30 years. You are not too late, Pizad. - And he's making mid six figures already, probably gonna make more as his career goes on and more people's teeth get bad.

- Our guy Brian, he's winning the game, making a half million dollars a year in this economy. - Yeah, at that age, you're definitely not too late to get started. - And the SEP component means they own their own business, correct? - Yeah, more than likely. So they're tying it to their practice.

So yeah, I'm presuming he owns a dental practice. But again, Ben Duncan, as you know, we take care of our Ridholds Wealth employees. Your contribution rate is matched like anybody else. You gotta take care of your employees too. And that's not just like a suggestion, that's also actually the law.

So whatever you're contributing for your business to yourself, you need to match your employees too. - Okay, and just to clarify, so there's three different kinds of IRAs, there's Roth, traditional, and a SEP? - Oh, we can throw out some simples. We can throw out rollovers, yeah. There's a suite of IRAs that we could talk about.

- And we have the 401(k), traditional, Roth, and the SEP, the individual 401(k), yeah, there's tons of stuff. - And just to clarify for those that are new and young people that might not know this, for traditional and Roth, the cap is 6,500 combined. - Correct, yep, this year.

This year, until our guy bazaar hits 50 and then it's 7,500. Very great thing to do. And again, good for you, congratulations. - All right, one more question. - All right, last but not least, we have a question from Mark. If one is lucky enough to retire with a decent size net worth, wouldn't it be more prudent to borrow against assets and pay interest versus taxes?

- All right, so securities-based line of credit, I guess we're talking about here. I know this was huge when rates were really low. And I know some of our clients could borrow against their portfolio at 2% maybe, sometimes sub two, around 3% when rates were low. Didn't this make more sense when margin loans were 3%?

Now you're probably paying seven to 9% depending on the financial institution or how much money you have. Like, how do you even think about calculating the break-even on that kind of hurdle rate? - Yeah, it's hard. Yeah, and Ben, you skipped to the chase, right? That was gonna be my take-home point, right?

That we could end the conversation with. But as a concept, yeah. S block or borrowing against a portfolio, it's a tool. It's a tool that you could use. And so there are pros. Ben, let's list the pros. Like borrowing against your assets, that doesn't generate a taxable event, right?

So if you have a large deferred gain on your Apple stock, if you have a property or your house or something else, yeah, tacking on an S block allows you to withdraw those funds and not realize to pay any taxes. - And you're letting the money continue to compound.

- Correct. And so let's just say hypothetically, you get a half million dollar property. You have $100,000 basis. So you have a $400,000 capital gain. If you were to liquidate that property at 15%, let's say some state taxes too, you pay about 80 grand in income tax, right? So pulling out an S block allows you to pull out up to usually 80% of your loan to value.

So $400,000 in your pocket tax-free. So those are the pros. However, the cons. Con number one is most people get to retirement and their goal is then not to add debt, right? So I do like the thinking, right? The invert, let's invert this thinking. Why not? But I guess the cons are that tax on gain can be deferred, but it really can't be avoided.

On a long enough timeline, you can defer, defer, defer. On a long enough timeline, we're all dead, right? So it's not a terrible idea. But Ben, you're exactly right. If I'm borrowing at 8%, let's say, which is roughly the U.S. mortgage rate right now, $400,000 borrowing that amount of money is gonna cost you 30 grand a year.

And so for what you're paying to borrow that money, you're probably paying a third of your tax bill each year. And this is the kicker, Ben. Again, you're just deferring the tax. So if and when you spend out your S block, if and when you go to sell that property, that 80 grand tax bill or more is still due, but now you've borrowed against your proceeds.

And so you're not gonna have the net cashflow potentially to finance that tax. My take would be, look, if you made it that far, it's something to consider, talk it over with your financial planner, talk it over with your tax people, but reducing your net worth on day one, maybe not a great idea, but compared to your other options.

Last quick point for me, Ben, you cannot borrow against your retirement assets. Thou shalt not take a loan against your IRA. It invalidates the entire IRA as if the entire IRA was distributed. - It's only taxable money. - So this is just taxable money. And back to our guy, Bazaad, and back to our guy, Brian, this might be a reason to build up your non-qualified balance.

I like to think about hitting that first. - But trying to game the system here. So you're like putting off taxes forever. It's especially with rates being variable, it's probably not going to work out for you. And 'cause you'd have to pay the money back so quickly, you'd be pulling money out of the account to pay it back almost, unless you had some sort of other source of income.

- Yeah, and it just depends. So like as a timing strategy, absolutely consider it, but as a tax avoidance strategy, it's not going to work unless you pass these assets onto your kids. - Again, when rates were lower, we had people borrowing against their portfolio to put like a down payment on a second home.

And 'cause the rates were, and it made a lot of sense, but then now once rates get jacked back up, they're thinking, well, I need to pay this down immediately, right? - Anybody with a 5-1 arm is sweating bullets for the next two years. So we'll see. I mean, we'll see.

But as a strategy, as a tool and toolkit, absolutely 100% mark. I would consider it, but definitely talk it over and think long-term with this stuff. - I mean, if we had a Michael J. Fox DeLorean in the driveway right now with Doc Brown saying get it up to 88, most of us would probably go back to like 2020, 2021 and borrow as much money as we possibly could at 3%, right?

- Yeah, buy a Tesla. - Well, it's so easy in hindsight, right, to know. That's an argument I've been making internally is everybody thinks interest rates are high. You're like, when are they gonna go down? What if interest rates go up? Like we don't actually know how the future is gonna play out.

So 1.21 gigawatts, I'm with you. Let's go back. - I'll let you know when I buy a TLT and that's when rates will go up more. - All right, that's when we can, all right. - So can we just, before we leave, can we talk about how many collars a man can have on his shirt?

I'm just, can we go into fashion corner? 'Cause that was my big question starting the show. A great, great, great, great clothing, great line, we're big fans. But what is the limit, is it three? - Listen, there's only two shirts on here, Bill. - Is there a limit, I'm not sure.

Hey, I have a quick bonus question if you guys don't mind. - Yeah. - Everyone is talking about student loans lately and for some reason people are asking me questions about student loans because payments are showing back. Would you be okay with someone diverting some of their money that they would have been putting into retirement accounts to help pay down their student loans?

Let's say, for instance, like my student loans are 7.5% interest rate, right? - Okay, I was gonna say it's rate dependent 'cause a lot of people were able to borrow at much lower rates. This is something I've been really against for years. I don't know why the government sets the rates so high on them.

When I graduated, my rates were 2.5% and I think if I made a certain amount of payments over five years, it dropped down to like two. And interest rates were much higher back then. I don't know why the government, anyway, that's my soapbox rant here. But yes, if the rate is, I don't know, higher than 5% or so right now and you wanna divert some, I think I don't see a huge problem with that.

No. - No, 100% Duncan. Yeah, and at 7%, again, it's negative compounding, right? So if it takes you 10 years to pay off that balance, I would. And frankly, the other point, and this is something that we talk a lot with our clients, that like nothing feels better in life, I think, than paying off debt.

If you ask clients on a survey, what was the best financial decision you made? Paying off the house, paying off the loan, that's usually at the top of the list. So even if it's not the right mathematical answer, Duncan, not having to make that student loan payment in a couple of years, that feels better than any tax savings.

- Which is funny coming from us, Bill, 'cause you and I are the ones who said, a few years ago, we're never paying our mortgages off. - That's mortgage. (laughing) - Does that mean we're not human? We don't have human emotions, I guess, is what you're trying to say.

- Yeah, yeah, and it's one thing to live life on a spreadsheet. I think that can give you the answer. But again, it makes a lot of sense to right sides of your life for what you wanna achieve, right, and what you wanna do. So yeah, I would prioritize paying off debt at 7%.

- Yeah, at that rate, I think so too. - Amen. - That's good advice. - Okay, good question. Thanks to Bill and Duncan, as always. - This is a fun one. - Thank you to John behind the scenes, and Nicole in the chat. Thanks, everyone, for logging on to the live chat.

As always, we appreciate your comments. Leave us a comment on YouTube, send us a question, askthecompoundshow@gmail.com, and we'll see you next week. - See you, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)