(beeping) - Welcome back to Ask the Compound. Our email here is askthecompoundshow@gmail.com. Today's show is sponsored by Bird Dogs, yet again. Duncan, one of the great things about Bird Dogs is it goes with just about anything. Today I'm wearing a nice new polo shirt, right? Got the nice collar, and it goes well with a Bird Dog.

I can wear a button-down Hawaiian shirt, or just a t-shirt, maybe a tank top in the summer. If it's hot, it's been like 90 degrees here lately. Very, very versatile. So birddogs.com/ATC. Remember, use the code ATC. Get yourself a free Tumblr. These things are the most comfortable shorts in the summer.

All right, the last few weeks, we've gotten a ton of questions from people about the debt ceiling debate, and should I sell, and should I worry about the volatility? And obviously that stuff has taken care of itself, and it's fine now. Kind of like I said it would, but let's say I was wrong, right, would you still be right for panicking if I was wrong and they didn't come to a deal, and there was volatility?

Probably not, that's my whole point here, is that taking these macro news headline events and trying to trade them, or time them, or get in front of them is basically never a good idea. You should make financial moves in your portfolio because of fundamentals, or your circumstances are changing, or you need to spend, or a good reason, a legitimate reason, not because you're trying to guess which way things are gonna go based on the headline.

And that's the whole thing, it's like the process over outcomes, and not freaking out and panicking just because you're trying to just get ahead of things. Hopefully you didn't panic and sell your triple-levered, whatever. - No, no, no. I didn't sell. Yeah, I'll write something down 80%, you know what I mean.

- (laughs) There you go. Panic later. All right, let's get into a question. - Okay, up first today, we have a question from Webb. When we read articles about how much you should have saved by age X, should it not be how much income you'll be earning with savings Y?

Here's my scenario. Mid-30s, worked at a public university for 11 years, and left to take a job in the private sector. I have a pension at the university with a guaranteed fixed income, and just started a new 401(k). Total retirement savings doesn't help me know if I'm on pace.

Assuming a presumed 5% withdrawal rate and 8% 401(k) growth rate, wouldn't a calculated retirement payout that can include things like pensions and social security be better than make sure you have $1 million by age 50, et cetera? - See, look at how intelligent our audience is. This is a great question.

I like where your head's at. It makes a lot of sense. Remember those ING commercials five or six years ago, and people would be carrying around their number with them on the street? And like, I need to get this number. I need 500,000, I need a million, I need five million, whatever it is.

I think the number itself is meaningless without some context. So Kahneman said in one of his books, might've been the Michael Lewis book that he wrote about Kahneman and Tversky, he said like, how do you understand memory? You don't study memory, you study forgetting, right? It's like the Charlie Munker, invert, always invert thing.

I like the idea of backing into how much you need to save based on how much you spend and what your other income sources are. Because like, there are so many different questions that you have to go through to think in terms of like, what am I gonna spend on healthcare?

And what are the market returns going to be when I retire? And what if there's a bear market when I retire? And what if my spending changes? And all these other things. So let's get in. I think the spending thing is a good one because the retirement calculators think about life in a linear fashion, right?

You're gonna spend this much every year at this percentage, but people don't live in a straight line. People's lives change. So John, put this chart on for me. This is from the BLS. They break out all sorts of data on income and spending levels by age. And they look at this average expenditures per year.

These are annual expenditures. And you can see the way the chart goes in your 20s and 30s, you sort of ramp up because obviously you don't make a lot of money. And then in your 50s, 40s and 50s, you're spending peaks. And these are average numbers. And then as you age, 50s, 60s, 70s, 80s, the numbers actually go down again, which this actually makes a lot of sense to me, right?

And I think a lot of people don't think about this, but is it much easier to travel the world or go on a cruise or something when you're 65 than when you're 85, right? So that's why you don't spend as much. So the way that you think about spending goes down.

That Die With Zero guy, Bill Perkins, did you read that one yet, Duncan? - I haven't, that's on my list, but yeah, I got a lot on my list first. - He actually says like your net worth should also peak in your 50s. I think he says like 50 or 55 is when your net worth should be peaking.

You should be spending it down faster because you want to do it when you're physically and mentally able to do it, right? So I do agree with this idea that coming up with a number is the wrong way to go through it, especially for someone- - It's kind of like responsible YOLOing.

- Yeah, yeah, exactly, yeah. And it's about smoothing things out and using it when you have it. I think this is especially true for someone in their 20s, 30s or 40s. Like trying to go through the retirement planning process is very difficult. Like, I don't know what tax rates are gonna be.

I don't know what market returns are going to be. I don't know what interest rates are gonna be. Inflation, you don't know where you're gonna live, what your cost of living is gonna be. All these things, there's so many different variables that can get in the way. And that's why I think that financial planning is a process and not an event.

Usually moving the goalposts is a derogatory phrase. Like it's a bad thing you're moving the goalposts. But I think in this instance, moving the goalposts is actually good because it should be kind of a moving average and a moving range of results that you're kind of looking for as opposed to I'm gonna hit this exact number.

And I think, yeah, you want to back into it. And as you get closer and those expectations become reality, then you can make course corrections along the way in terms of your saving, your spending, or market expectations and all these things. I think that's the idea. That's why it is a very hard process to go through 'cause no one knows what their life is gonna look like in two years, let alone 20 years.

- Yeah, it's true. - I like the way he's thinking about it here. - With the goalposts thing, just a quick aside, what kind of goalposts are we talking about? You know, are we talking about a basketball goal or are we talking about like soccer goal? I guess any could work.

- That's true. You can't really move goalposts. I guess football is in my thinking, but- - Yeah, maybe that's it. Maybe that's it. - All right, let's do another one. - Okay, up next, we have a question from Love to Audit. I'm guessing this one came from social media.

I'm 35 and trying to get some direction on lifestyle. - Maybe his dad was just a tax consultant. - Yeah, maybe. I'm 35 and trying to get some direction on lifestyle versus aggressive saving. This is a common theme we're seeing these days, so good people are thinking about this.

The money I have saved doesn't feel tangible in terms of lifestyle. I make $120,000 to $150,000 a year, rent and have a roommate, drive a '90s car, cook my own food, and live in a very high cost of living coastal city. Obligatory not to brag, I have $3,000 in my HSA, $8,000 cash, $16,000 in company RSUs, $52,000 in a Roth IRA, $169,000 in my Roth 401(k), and $265,000 in a traditional 401(k), and $615,000 in a brokerage account.

They started off, you see they worked their way up there, you know, smaller, smaller figures working out. - Yeah, pyramid here. - Yeah, a down payment on a home here is in the $100,000 to $250,000 range, depending on location/commute, but buying here would eviscerate my monthly savings rate. I'm considering a move to a cheaper state despite my family being here.

All of my friends are settling down, starting families, having kids, and here I am with roommates. Admittedly, money seems to be getting in the way of my goals. Do I really need to choose between these extremes, saving versus comfortable lifestyle? - All right, this is a very existential question.

This is like a not to brag, but also I'm kind of stuck here, right? This person seems to be living like probably the fire lifestyle, so I just, back of the envelope this, by my calculation, this person at 35 is a millionaire. They have like a $1.1 million, and the crazy thing is, this person is literally a finance compounding example.

So I use this in one of my books. So, John, throw up my little table here. My sister's name is Sarah, my brother's name is John, so I helped them out here and I used them. So Sarah starts saving at age 25. She stops at 35. She saves $500 a month.

Total saved is $66,000. If she earns 7% a year at 65, she's gonna have $720,000. John doesn't start at saving until he's 40. By age 60, and he saves the whole time until he's 65. He saved for 25 years, Sarah saved for 10. John saved almost three times as much money, but ends up with $412,000, right?

Assuming those same, and the reason here is 'cause Sarah did the compounding thing. This love to audit person is this example. They saved so much by age 35, they could just let it go and they'd be fine. So if you, I looked at it. If you, if we look at their $1 million, right?

Let's say, let's assume they take 100 grand out for their down payment for their house and they have a million dollars left over. They don't contribute another dime the rest of their life, right? If their investments grow at 6% per year for the next 30 years, they'll have something like $5.7 million at retirement at 65, right?

Or let's say they just, all they do is max out their 401k, it's 20 grand a year. They'd have like seven and a half million dollars in 30 years. So you're already so far ahead of the game because you saved and scrimmed early, but now you're having this existential crisis of, oh geez, I'm in my 30s.

I live with a roommate. I drive a 1990s car. If I had to guess, this person drives in a Accord. Has to be. - Okay, I'm so glad you mentioned it. I was gonna guess a Volvo station wagon. - Okay, that sounds, those are both fire-ish cars, but. So this person obviously has a wonderful savings.

They've already done the hard part. They saved a boatload of money in their 30s. So they have the delayed gratification part down, living with a roommate, driving an old car, all this stuff. It's time to enjoy yourself a little bit, you know? Go live on your own. Buy that house in the city or move somewhere else and buy there.

But I think you're doing just fine. At your income and savings level, you don't need to choose between the two. You already have a seven-figure net worth. So you don't have to buy a home if you don't want to, but you certainly are in a good position to. And here's the thing.

I'm giving you permission to lower your savings rate because that's the great thing about having such a high savings rate. And I don't know what it is, but this person obviously probably, we're probably in the 50 to 60% range, I'm guessing, based on how much money they have saved.

That's the great thing about having a high savings rate is it's a margin of safety to pull the lever when you need to spend a little more. So if, yeah, you're gonna take 150,000 out for a down payment and the mortgage is gonna be way more 'cause you're not sharing with a roommate anymore.

But that's why you have a high savings rate to begin with, because it allows you to pull that one down. And the other thing is, you can grow into that mortgage over time, right? This person is obviously a financially successful person. I'm guessing their income is gonna continue to grow over time, right?

So maybe for a few years, it's gonna be painful and your savings rate's gonna go from 50 to 25 or 20 or maybe 10 or 15. But so what? You can grow into it and as your income increases, then you can start saving more piece by piece. So I think this person is in a wonderful position financially.

They need to worry more about their life, frankly, I think, and figure out how to have a little more fun and stop having their savings rate dictate their entire life because, as they said, at a certain point, those benchmarks and goalposts along the way that, oh, I see this money in my account or my brokerage account, it doesn't really do anything for you.

At a certain point, it loses its luster. It doesn't make you happy. The whole point of saving in the first place is you're gonna spend it someday. So now is the time to spend it and make yourself a little happier. - Right. Also, I just had an idea. We should start having you write permission slips.

You know, like you used to get in school for different things. You could write permission slips for people to adjust their savings rate. - Yes. Again, some people are gonna hear this and go, geez, I'm gonna play the world's smallest violin for this person. They save too much money and they can't enjoy themselves.

But it is a real problem for some people. And I think you get into that mindset of saving, saving, saving, and you have your head down and you look up and you go, wait, what did I miss out on? And I think in your mid-30s, you still have plenty of time.

- Yeah. Life's what happens while you're busy making other plans. - What is the Andy Dufresne? Get busy living or get busy dying? - Yeah, that's a good one too. - All right, next question. - Okay, up next, we have a question from Scott. I just listened to last week's show and heard Benny Markets.

Benny Markets is a favorite, people love him. - Fan favorite for sure. Everyone likes his enthusiasm. - Also, I told him, I thought that was an all-time phrase, calling you smarter, Ben. That really cracked me up. - I've heard that before. - Anyway, I just listened to last week's show and heard Benny Markets say he keeps his short-term cash in bill, which is an ETF, which looks like it pays 4.55% right now.

I realize it's small potatoes and maybe that answers the question, but is there any reason to choose that over a money market fund like SWVXX that pays 4.9% at present? Neither have locked in rates, though maybe bill is slower to move downward. Love the show. Wish I had something to not brag about.

- This one's from Scott. Hey, Scott, do not sell yourself short. You have cash available to invest in T-bills and a money market fund. That is something to brag about. You can brag about that. I'll give it to you. That's my permission to slip to Scott. So here's the thing.

Before we get into the comparison here, I wanna just give a little bit of a tutorial on the yields on some of these funds. So BIL is simply a T-bill ETF, right? And so, John, throw up the yield here. So I think what this person is looking at is the wrong yield.

So if you go to the fund for this 30-day SEC yield, and I think this might be a little old from the emailer. So they said 4.55. It's now 4.67. The 30-day SEC yield is just the income over the past 30 days paid out. So it cares more about these actual, and it annualizes it, the actual cash flows and the go-forward yield.

It's backward looking. And I prefer to look at the average yield of maturity. So John put up the next one. This is the average yield of maturity. You can see it's 5.2%, almost. So why is the difference? Because the yield of maturity is simply the market-weighted average of the holdings in the current portfolio if they were held to maturity.

And I think this, so this takes into account current yields and what they would look like going forward. So I think this is especially important when yields are changing a lot, as they have the past few years, especially for short-term stuff like this. So the yield to maturity is way more important than the SEC yield, which kind of shows what happened.

The yield to maturity is sort of what's going to happen. And obviously, the rates can change, and that yield to maturity can change if rates rise or fall. But that's just so you know. So the yield on this T-bill ETF is actually better than you think. But let's say those yields are right, and you're looking for an extra 45 or 50 basis points.

If I'm still getting permission here, I'm giving you permission to do that one time, maybe. Like one time, okay, you're doing a bump in yield. But if you're gonna do that all the time, it seems like kind of a waste of time to me to constantly be chasing the best yield, how much bang for your buck you're really gonna get in that kind of move.

In terms of the timing of the rates, that's a good question. Will money market rates fall quicker, or will T-bill yields fall quicker? We don't know for sure, but here's my general rule of thumbs when it comes to banks. Not all banks, but most banks. Banks are slower to raise yields and quicker to cut them, just like they're quicker to raise borrowing rates and slower to cut them.

Right, does that make sense? Took a long time, so John, throw a chart on of money market rates versus T-bill yields over the last two years or so. So T-bills are in orange here. You can see they started moving up in January. It took money markets until May to start moving up.

And so basically, T-bill yields are leading money market yields here. And this is, the average money market yield is lower right now than T-bill yields. Average T-bill yields are closing in on 5.5%, and average money market yields are like 4.8. Obviously, that depends on your institution and where you're looking, and that can be different.

So treasuries go out first, and money markets follow on a lag. I think going down, we could actually see the opposite. I think money market yields will probably fall faster because the banks aren't gonna keep paying you more for the yield, so they'll either fall in concert or a little bit faster.

So there you go. T-bill yields are probably better than you think in terms of these ETFs. I wouldn't be constantly chasing yield here. If you've done it once or twice, that's fine. I wouldn't be doing it all the time because it's probably not worth the hassle. And especially if you're jumping in and out of an ETF, you're paying taxes and it's just not worth your time.

But the most important thing is going from, like we talked about last week, 10 basis points or whatever to four or five. Once you get to four or five, just stick with what you got. - Do you want to put it on the record here? Do you want to call when they're gonna cut?

Is that in mind or anything? - Geez. - Just kidding. - I'd have to know when the recession's gonna start because if the Fed creates a recession, then they're gonna cut pretty quick. That's the thing. - I thought the recession started last year. - Well, let's see. It's always three months from now.

All right, another question. - Okay, up next we have a question from Brandon. My wife and I just had our first child six months ago. Congrats. - Yeah, congrats on the addition. - Wondering what investment vehicle or options you recommend beyond a 529 that we could use to save for our child's future.

A wedding, house, et cetera. UGMA, Roth, IRA, traditional investment account. Those are their questions. - All right, we get a ton of questions. This is another pat on the back to our audience who is obviously thinking ahead. I like the idea 'cause you're not only thinking in terms of compound interest and planning ahead for your child's future, but it's your own future too, right?

Because you want to get them off your payroll some day. Starting to save for them now is probably a good thing, especially for weddings and that sort of thing. So I like the idea here. This is definitely more of a financial planning question than an investment question, I think.

So let's bring a financial planner in here to help out with this one. - Hey, Ross. - Ross Cohen. Ross is an advisor with us at Ritholtz Wealth. He is in our Chicago office, which is easily one of the best cities in the country in the summer. Correct, Ross?

- It has to be. - Of course, nothing better than Chicago in the summer. - All right, so young people, young person here, you work with a handful of younger clients and want to know how to plan for the child's future. I like, again, I like where their head's at here, but what do you think are some of the considerations in terms of the kind of accounts we're looking at here?

- Yeah, as you guys mentioned, congrats to Brandon on the newborn. I'd love to see a timestamp on this question when it came in. Ben, it feels to me like this was something that was like late at night while he's probably not sleeping much and thinking about his kid's future and potential wedding and first home purchase.

So I'd love to see a timestamp on it. - Probably not in the first three months because that's kind of a blur when that happens. But yeah, good on him for thinking ahead here. - Yeah, and as you mentioned before, our listeners are in the 99th percentile thinking about this type of thing.

They've gone above and beyond. They're already doing the 529 plan and they're thinking, okay, what's next? Beyond college, what's the next step? What's the next best place that I should be saving? And I created a chart for this. I've always wanted to say this, so chart on. Oh, you beat me to it, Duncan.

- That's John, that's John. - Oh, sorry about that, John. So there's a couple of different vehicles. As Brandon's already doing, he's got the 529 covered. He's already contributing to the 529. I'm gonna skip over the Coverdell. It's an older type of investment vehicle meant for private education. So the two other areas are the UTMA/UGMA and just a general brokerage account.

The reason why I love 529 plans so much is that there's amazing benefits to saving into a 529. For most states, you actually get a state tax deduction when you contribute to a 529 plan. Going down the line, there's no income limits and you have lifetime control over the assets, meaning that when the kid turns 18 or 21, they don't get this chunk of change where they can then go buy a convertible or some whatever they want, right?

The 529 plan, as the parent, you maintain ownership over the assets. - I never thought about that. That makes sense. I've never heard it mentioned that way. That makes a lot of sense, actually. - Yeah, the last area that it's really important to is financial aid. So if there is a potential to receive financial aid, UTMA and UGMA accounts are deducted at a higher rate than 529 plans and parents' assets.

So the low-hanging fruit, as you're already doing, is 529 plan. Saving early and often in the 529 plan is gonna be your best bet. If you are looking to earmark money for a future down payment for your kid 25, 30 years down the road or another purchase, that's where I would suggest going with just a brokerage account in your name or a joint account with you and your spouse and having it earmarked for that purpose.

That way, when it comes up, whether it's a wedding or a purchase, you can then gift them the money and you have a little bit more control over the asset. - The other downside to UTMA or UGMA is it's just the worst sounding acronym in finance. Like, they just don't sound appealing, right?

Ugh, right? - I'm not a big fan of UTMAs, just 'cause once they turn 18 or 21, that money is theirs. That is out of your control. Even if you want it earmarked for a down payment, it's out of your hands. - Here's my other consideration for Brandon here.

You need a DeLorean that can go 88 and go back in time to when you're like 17 and start saving for daycare, because no one tells you that putting your kids through daycare is basically like putting them through college, but you don't get 18 years to save. I'm still a little bitter about the daycare costs.

- What if you space your children so that the oldest one is old enough to take care of your second, you know? That seems like alpha. - There you go. - That's some intense family planning there. - All right. Ross, I like the visuals. All right, let's do another one.

- Okay, up next we have a question from Brett. I'm a single 33-year-old freelancer living in Charlotte, North Carolina. Shout out, North Carolina. Being self-employed, I don't have access to a traditional 401(k) plan. Also, not to brag, but my income level has disqualified me from Roth IRA contributions. I'm an aggressive saver/investor, but the only accounts available to me are an IRA with a $6,500 annual limit and a taxable brokerage account.

This has resulted in an ever-increasing imbalance of the three-bucket strategy, 200K brokerage, 50K IRA, 50K Roth IRA. Am I setting myself up for trouble down the road? Would a solo 401(k) or SEP 401(k) be a better option? - Okay, this is a question that's becoming more and more relevant to a lot of people.

John, throw up the chart on here of business applications. So this is business applications since the pandemic. You can see the huge spike. I think it was like 5 million or something new business applications since the start of the pandemic. So if you have a side hustle, you're starting your own business, I think it makes a lot of sense to think through this because there is no universal 401(k) plan.

I wish there was, like the thrift savings plan, the TSP. Duncan, nice shirt. I like it, you got it, huh? - Yeah, yeah. - Duncan's sporting the new Tropical Brothers shirt. All right, it looks good. Someone must have just reminded you. So short of having a universal retirement account, because a lot of people just simply don't have access to a 401(k), what are the options here, Ross?

- Yeah, I love the question. And they're thinking about diversification in two sense, right, there's the asset diversification, meaning investing not just in the S&P 500 globally, diversified portfolios. Talk about that all the time. But then there's tax diversification, right, where you don't want all of your money, whether it's in a brokerage account or an IRA or a Roth IRA.

That way down the road, you have different levers that you can pull, whether it's in five years, 10 years, or 20 or 30 years in retirement. So there's a few different options. And to answer his question too, he's not setting himself up to failure just by investing in a brokerage account.

But if you do wanna invest in a tax advantaged vehicle, solo 401(k) and a SEP IRA are both terrific options for someone in his situation that's a entrepreneur. Depending on his situation, there's a couple of different pros and cons. - Just so we know, I'll do a visual here, John.

I have a, I actually have a SEP IRA. This is the one that I use because I have money that is on the side outside of my employer income. And some people say that I'm an idiot, I should have a solo 401(k). So Ross, what do we got here for the differences?

- Yeah, the main difference is the flexibility within the two. So if you are gonna maintain being just you or you and your spouse in the business, the solo 401(k) is gonna be a better option. The reason why it's a better option is there's more flexibility within the solo 401(k).

The max contribution for both is $66,000 per year. Solo 401(k), once you're above age 50, you also have that catch-up provision where you can contribute a little bit more. Here's where the differences come into play. So with a solo 401(k), there's a combination of both employer contributions and employee contributions.

What that leads to is more flexibility with how much you can contribute. As you can see there on the SEP IRA side, that max contribution, it's subject to your compensation. Your max contribution is subject to your compensation, 25% versus in the solo 401(k), you can contribute as an employee up to $22,500 per year.

- So does it matter that this guy is a solo business owner? Does that come into play at all? - Yep, absolutely. So since he is solo, the solo 401(k) would be a better option. It allows for more flexibility. - Funny how that works. He's a solo business owner of a solo 401(k).

It's almost like it was-- - Go figure, yeah, go figure. The government doesn't wanna steer anyone in one direction, right? But there you go, a solo 401(k) right in the name. - Okay, so that makes sense. And the other thing is, so I personally have a 401(k) through work and I also have the SEP.

So you have to take into account those personal 401(k) contributions as well so you don't go over, right? So that kind of eats into your max contribution. - Yeah, it's viewed as a whole. Yep, it's a whole. - So you have to look at them both. If you, not to brag, I have multiple retirement accounts, multiple.

- Yeah, you can't do 66,000 in two different type of accounts. - Right, yeah, it comes together. So I guess that-- - It's not about everything. - So you mentioned that there's an employee, an employer contribution for the solo. If you're a solo practitioner, you're both, right? So you can, that means you can put more money in, potentially.

- You are both, yeah. It just allows a little bit more flexibility. So let's say you make, it doesn't sound like this is the case, but if you make like $70,000 per year when you're starting out in the business, you can contribute from the employee side that 22.5. It's not subject to your income limits at 25%.

- Gotcha, okay. Duncan, I just say that your transition to middle age is gonna be wonderful, with that shirt and the beard and the hat. You're already there, basically. - Yeah, no, I like to think that, yeah, I'm pretty much there. - It looks wonderful. Okay, thank you to Ross for coming in.

Ross put up a good fight, even though someone broke into his office and stole his microphone last night, which it must have been, is there a gang of like out of work podcast people that are going around taking people's microphones? - I bet that's it. - It was a strange morning trying to figure out what was going on here with just the microphone missing and nothing else.

It's a little bit confused. Thought someone played a prank on me, but yeah, it turns out it was real. I also do wanna say that I think love to audit. I think they have a Subaru. That's my guess. - Ah, okay, Subaru, I can see that. - I can see that.

- Outback. - Like a legacy or an Outback? No, I'm just kidding. - Probably an Outback, yeah, like a '90s Outback. - All right, remember. - I forgot to throw in the doc, but I wanted to say Tony wrote in and said it's he and his wife Melissa's one year wedding anniversary and watching the compound helped them save up for their wedding.

So yeah, congrats. - Oh, wow. Wanted to say congrats. - Kudos. Lot of congrats all the way around. All right, remember, you can email us at thecompoundshow@gmail.com. Check out idontshop.com for all of your compound shopping needs, leave us a review, like. We're up to 120,000 subscribers on the Compound channel now, which is very exciting.

- Yeah, almost 121, yeah. - Yeah. See you next time. - See you, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) you