Welcome back to Portfolio Rescue. One of the cool parts about our job as trusted sources of financial advice is people email us all the time. They give us not to brags about their financial situation, they have questions, they have problems that come up. They email us at AskTheCompoundShow@gmail.com. Duncan, what's going on today?

Well, I just wanted to start out today kind of saying that I'm sorry, I guess maybe I jinxed myself, all the bragging I've done in recent months about my beautiful checking account that paid 4.27% interest. I got an email yesterday, they're shutting down because of all the banking turmoil.

So, yeah, pour one out for Enzo Bank. So you're creating your own bank run here? No, no, no. I mean, they're closing down. They said they're closing down. So yeah, it's just I felt like I needed to let people know because I kind of bragged a little bit about it.

Like, oh, yeah, why would you have T-bills if you have a checking account that pays you 4.27%? Well, I blame Jerome Powell for your banking account shutting down. So where are you gonna move it now? Just a regular old bank? So they're recommending a place, I'm not gonna save a name, but it reminds me of the villain from from Toy Story.

The name, it sounds very not legit, but but they pay 5% interest for the first three months, and then they're offering the 4.27 that Enzo offered. So I'm gonna do it probably. But um, yeah, they don't sound super legit. 14% chance you lose all your money, just putting it out there.

Okay, let's do a question. Okay, up first, say we have a question from Michael. My friend recently sent me an article saying that young people shouldn't save money. The argument is based on the life cycle model. He argues that in order to maximize happiness out of your income every year, and to avoid changes in standard of living throughout life, high income earners should not save at a young age.

And instead, it should be made up in the middle ages. Some context not to brag, I count my blessings for the position I'm in. I'm 24 single and making $252,000 a year. I've been stocking away. Yeah, not, not bad. I've been stocking away all my money in S&P index funds with some money saved on the side for potential real estate investments.

Should I start saving less and enjoy the money in my youth more? I would love to buy a Porsche. But it seems irresponsible given the power of compound interest. Notice I said Porsche. That's the right way to say it, even though I feel awful every time I say it.

Yeah, I refuse. I say Porsche. This is just a question that's tailor made for me. I just I there's like five different layers going on here. We got like retirement savings, behavioral finance, spending money, striking the right balance between like enjoyment now and comfort in the future. Luxury vehicles.

I love this question. Great one, Michael. A lot of people actually sent me the paper he's referencing when it came out. I read it. I don't agree with all the conclusions, but I do kind of appreciate the spicy take the authors take here. Like it's a pretty spicy take.

Retirement research papers are generally boring. I'm a person who enjoys this stuff and I find most of them boring. So here's the main crux of the argument. This is from the conclusion of the of the article, because a lot of times you have to like buy these from some financial journal and they just give you the conclusion of the intro.

And that's usually enough. So we argue that under realistic assumptions, the life cycle model implies that most young people should not save for retirement. That's the general conclusion. High income workers tend to experience wage growth over their careers for these workers, maintaining a steady standard of living as possible, therefore requires spending all income, all young and only starting to save for retirement during middle age.

So I kind of, there are some aspects I kind of agree with here. In theory, in theory, it does make sense that your income should rise over time. Therefore, enjoy your youth, put off saving for another day. That's great. And there probably are a handful of people who are disciplined enough to plan ahead and say, listen, I'm going to make more money in the future.

I'll start saving then, you know, I'm going to enjoy myself from my early twenties to my early thirties. And then when I make more money and I'm further on in my career, then I'll start saving. Here's the problem with this idea. It sounds great in a spreadsheet, you know, in a textbook, as your income grows, you begin to spend more money and you get used to a new lifestyle, right?

You gain responsibilities as you age. Maybe you get used to some of the finer things in life. And I have a hard time believing that after 10 to 15 years of that, people can all of a sudden flip a switch and just go, okay, now I'm going to save because psychologically those new savings are going to feel like a loss, not a gain at that point.

All the behavioral research from Kahneman and all these people says that losses sting twice as bad as gains make us feel good. So even though you'd technically be saving money and putting it aside, taking it out of your income at that point is going to feel like a loss.

So it's going to be hard to do. So I think this idea is probably a pipe dream. Uh, now I understand it's not easy to save as a young person, especially when you want to enjoy yourself. I went through this. My first job out of college did not pay very well at all.

I still wanted to have some fun and didn't have a ton of discretionary income. So I started small and I, it was like $50 a month into a target date retirement fund. Of course, very prudent. Uh, and I made more money. You said, you said your first investment ever was a CD on animals this week, which just killed me.

And number two was a target date fund in my IRA. Sorry, not all of us can be exciting and invest in options in YOLO. I've never made a YOLO trade in my life. So $50 a month didn't give me a ton of capital in my account, even after a couple of years.

But as I made more money, I would save half my raise and spend the other half so I could give myself a little bit of a bump in standard of living. But the idea was to build up saving habits. And I think those early savings habits can compound just as much as the compound interest.

So I think getting into those habits, if you can, that, that, that's very helpful. The thing is for this person, they make a quarter of a million dollars in their twenties. I don't care where you live. That's a lot of money for someone who's 24. So it's not going to be that hard to find spare change.

So here's what I'm going to do for this person. I would say, pick a reasonable savings rate. Now I always say I want double digits. So 10 to 20% is fine for this person. If you want to go splurge for the rest, my answer is unequivocally. Yes, splurge. You don't know what your future earnings powers are going to be, but if you're making that much money at age 24, you're in a pretty good place.

You obviously don't want to go overboard. So I think just make sure you're still saving. Then, you know, for a single person who's young and no responsibilities, you should have plenty of discretionary income, even if you save 30% of your income or something. However, I'm not a fan of spending a ton of money on a car.

So I would, I would, I recommend this person to do is read happy money by Elizabeth Dunn and Michael Norton. Put it up there. Yeah. One of my favorite books, it's all about the science of spending and what actually makes us happy when it comes to expenditure. So the book lays out five ways that research has shown that spending money can actually make you happier and not simply give you that short-term dopamine hit.

So the five things are by experiences, not stuff, right? Make it a treat, which is just don't overindulge, right? It's, it's better when you space things out and don't do them all the time. They say by time, which is basically paying up for convenience. The fourth one is pay now and consume later, which is basically avoiding credit card debt.

And the fifth one is invest in others. So charity, picking up tabs for friends, helping others. I think the big one here for some of their twenties is to buy experiences. So their research shows that experiences provide way more happiness than material goods in part, because experiences are more likely to make us feel connected to others.

And they have these long lasting memories that also compound over time. So I would say before you buy that Porsche, not Porsche Duncan, you know, spend some of that discretionary income on going out more, traveling, go out to eat, do stuff with your friends on nights and weekends, like do stuff, don't buy stuff.

And you know, when we were young, my wife and I made a concerted effort before having kids to travel as much as we could, because we knew once the kids came around, it would be a lot much harder to do. And it's, it's true. It's money well spent. I'm glad we did it.

So I think you get way more bang for your buck by spending on travel and experiences than a car. Wait until you go through a midlife crisis, then buy the Porsche. Don't do it in your 20s. That that new car smell is going to wear off very quickly when you get stuck in a traffic jam, and you realize it's just another car.

So I think the memories you make from going on a bunch of trips in your 20s, traveling, doing stuff with your friends. That's the kind of stuff that lasts a lifetime, the the new car smell fades away quicker than that. Yeah, and if you are I love cars. I mean, if you are gonna buy a car, get get like a Ford GT, or you know, a 1967 GT 40.

If you really want to go out, you know, like get something, you can't just get a Porsche. I'm sorry, you know, like Porsches are cool, but like, I'd rather get something. Well, yes, at 24, making a huge income. Again, if you you say you can save a decent amount of your money, max out your 401k.

And then with the rest of it, sure splurge and have a little bit of fun. This is the you're gonna look back at this time in your life before you have a lot of responsibilities, maybe settle down with a family, get married or whatever, own a home, you know, pay for all this boring stuff.

Yeah, sure. Have a little fun in your 20s. And if you're still, you know, stocking some money away, you're gonna be fine food for thought. What if what if they turn having a fancy sports car into a side hustle and they make money racing it? Maybe they could blow it up and turn it into NFT.

You never know. Right? Okay. Great question, though. If you want to splurge on a car, don't let me hold you back. But I would think twice about about doing that. I don't think you're going to look back at buying a Porsche at 24 and think that was a good idea.

Just what do you think? What do you think they do? That's a pretty, pretty nice salary for a 24 year old. That's got to be software engineer or something, right? I'm guessing that's that'd be my guess. They're working for Google or Amazon or some something like that. Right. All right.

Let's do another one. Okay. Up next, we have a question from Ed. When was the last time in history people rushed to buy government bonds? What are the chances of this leading to the Fed having to lower interest rates and inflation going even higher? All right. So this is this is the fact that the last two weeks we had a little bit of a banking crisis.

Interest rates dropped like a rock in some cases. This question is actually relatively easy to answer because 2022 was the outlier in terms of people not rushing to buy government bonds during a down stock market. I've used this one before, but it's worth revisiting. John, do a chart on.

This is every year where we've had a down year in the S&P 500 since 1928 with a corresponding 10 year treasury returns in those years. Look at 2008. 10 year treasuries were up 20 percent when the stock market got crushed. 2000, 2001, 2002, that was a three year bear market.

Every single one of those years, treasuries did great. People rushed into that flight to safety to buy bonds. 2022, again, is the outlier where you saw bonds actually cause the stock market pain. So most of the time when the excrement hits the fan, people rush into the safety of government bonds.

And that's kind of what happened in the last couple of weeks with the banking crisis. So it's nothing new to see nervous investors leap into the open arms of U.S. government bonds during a crisis. It's just that, yeah, last year was kind of an outlier. So the question here is, will the drop in rates from this bank crisis actually lead to higher inflation?

So the idea here is that for bonds, that the relationship is easy. When bond prices, as rates rise, prices fall. And as rates fall, prices rise. That's the inverse relationship between bonds and prices. But the relationship between rates and inflation is not quite so easy. For instance, interest rates went to zero during the 2008 financial crisis and stayed there for almost a decade.

They remained low until basically inflation really had these last couple of years. From 2009 to 2019, the 10-year yield averaged 2.5%. John, do a chart on here. The 10-year average 2.5%. Inflation over that time was 1.6% per year on average. We had low rates for well over a decade.

That didn't cause inflation. So I think a lot of what we're thinking through here is, well, if rates fall, that must mean inflation has to go up. And that's not necessarily how this works. A lot of it depends on why rates are falling. Now, it seems like right now, sometimes you don't really know.

It could just be that the bond market is confused. But there's two reasons rates are falling now. One is this banking crisis, right? Because people are worried. And the second one is the bond market seems to think that means the Fed is going to have to cut interest rates or stop raising them because of this banking crisis.

The Fed obviously is not. Yesterday, they still raised rates. The bond market says, "I don't believe you." That's the roundberry. "I don't believe you," right? So I think if the banking crisis leads to slower loan growth and thus slower economic growth, it would make sense for rates to fall.

But in that case, if economic growth is going to be slower, guess what? Inflation is going to come down too. So there is no easy relationship. In the textbooks, this is what I learned in economics class, right? If rates fall, inflation should go up. The last 10 or 15 years really disproved that.

So it's really going to matter why are rates falling. That's going to be the big thing. So maybe the past couple of weeks could change people's spending habits and alter the economy. It's a good possibility. I think it's also a confusing time. So I don't think I'd put too much into two weeks worth of bond market moves.

Rates could easily go back up. They could go down further. Who knows? But it's important to remember that rates falling in and of themselves don't automatically cause inflation. There's a lot more that goes into inflation than that. If it was that easy, the Fed would have snuffed inflation out a long time ago.

Because as we've seen, just because the Fed is raising rates doesn't mean inflation falls right away either. It's not that easy. Yeah, it looks like I'm doing a poll in the chat. 55% of people are more worried about inflation than the other option was banking crisis or not worried.

People are still kind of worried about high inflation. Who knows? Consumers could say, "I don't care that this bank in Silicon Valley failed. I'm still going to keep spending money." So we could certainly see that. It's like the bond market versus people in our chat right now. They don't believe it.

The bond market seems to think inflation is over based on where rates are headed. We shall see. We'll find out. Let's do another one. Up next we have a question from Bill. Ben wrote a blog post last week about how so many rich clients at SVB, Silicon Valley Bank, neglected to manage their cash properly.

I have to admit, I've never really given much thought to cash management before the past year or so now that we finally have yields greater than 0%. Here's a cash management and tax question wrapped in one. What is the most tax efficient vehicle to part my cash in? T-bills, money markets, CDs, munis, that's municipal bonds for those new here, online savings accounts, or anything else I'm missing?

This is a question from Bill. We only get our answers on tax questions from another Bill. Let's bring in tax expert extraordinaire Bill Sweet. Gentlemen, coming to you live from Pine Island, New York. I'm on location today. I noticed. Where's Pine Island, New York? Tell us what's going on here, Bill.

It's out in the black dirt region in the sticks, but this is where I come from. New York is not just about skyscrapers and cities. It's a big place. I'm happy to be here and supporting the local business. Did your car break down? Why are you outside? It did.

My turbocharger blew up last week coming back from Chicago. I apologize to the listeners about the wind, but the show must go on, gentlemen. Let's do this. All right. Personal finance crisis for Bill. He had a run on his car. Great name, first off. Ultimately, Ben, I love this question because Bill wraps a lot of things in here.

Ultimately, we don't eat our after-tax returns. You know this, Ben. You know this, Duncan. Ordinary income rates are pretty high, too. As high as 37% plus a 4% net investment income tax, and up to 12% for the People's Republic of California if you happen to live out in the West Coast.

Brother Bill, do the math. It could be as high as a 50% tax rate, meaning that you have to be very careful not to give up half of your interest to taxes. John, can we chart this on right now? I want to talk about the different flavors of interest income that Bill brings up.

Let's start all the way on the left. Let's talk about online savings account. Duncan, what was the company that you were in? You were FDIC Insured Savings, right? Bernie Madoff Securities. Yeah. They were called INSA. Yeah. Ultimately, there are a lot of banks. If they're FDIC Insured, it may be something to consider, but they're offering you a pretty high yield.

Ultimately, you have to pay tax on that. You have to pay federal income tax and state income tax. All the way on the left, on the blue, I'm talking about a 4% pre-tax return that gets cut down to about a 2.53% after-tax return. That's on your typical, standard, ordinary income interest rate.

That's option A. It's great news because it's always liquid, but at least tax efficient. Bill, can I just stop you for a second? Yes, please. Please do. This is the nicest-looking chart we've ever had on Portfolio Rescue. Usually, you have these napkin things. Wow. I know. I thought it was going to be a napkin, but I guess it'd be blowing in the wind too much.

Do you have an intern we don't know about that you're having create things for you now? No. I had a lot of time because I was stuck without a car here all morning. Also, it looks like you're getting some of that black dirt in your eyes from the wind.

Are you going to make it? Yeah. I don't know. The storm is coming, so I think we've got to get moving. John, let's bring that chart. Let's focus on the red now. Let's say that you move out to the tax-efficient scale. You move to a one-month U.S. Treasury. If you buy a 30-day bond that's U.S.

Treasury backed, that's not state income taxable, so you get a bit of a tax-efficient boost there in that you're not going to remit any taxes to the state's tax agencies. That cuts your 4% pre-tax return to about 3%. Then, let's move on to the most tax-efficient vehicle, which is municipal bond interest.

Ultimately, if you're owning a municipal bond in the same state, your pre-tax return is exactly equal to your post-tax return because you're not remitting anything to taxes. Ultimately, take a look at the yields. I think that's really important to focus on, is that the most tax-efficient vehicle, depending on your tax rate, may not give you the best return.

Ultimately, again, you need to do this math. The second thing, Ben, I want to bring up is liquidity. If you lock your money up in a 30-day U.S. Treasury bond, you don't get that money back for 30 days unless it's a marketable security, whereas in an FDIC-insured account, that's pretty liquid.

You can trade at any time. I was thinking about this. The different variables you consider for cash management are liquidity, ease of access, yield, safety, all that stuff. I think taxes probably do rank pretty low in the hierarchy from my perspective. If you want that money to be there, I think you want to make sure you have access to it if you know you're going to be spending it at a certain point.

I would agree 6,000%. One of the things, Ben, that we've observed in our practice is rich people hate paying taxes more than they like making money. That's a real thing, but you do not want to become blinded. Don't let the tax dog wag the tail or whichever direction we're going in here.

I agree with you 100%. Close enough. All right, Duncan, let's do another one. Good advice. Up next, we have a question from Ethan. "I recently heard about Secure Act 2.0 that allows 529 plans to be converted to Roth IRAs. Not to brag, but I expect our daughter's 529 account will be worth about $70,000 when she graduates high school.

Not Michael Batnick-level 529 money, but respectable. We didn't open an account when my son was born in 2020, assuming that we would transfer whatever remained into our son's name from our daughter's account. This new law has me thinking about ways to take advantage of opening Roth accounts without the headache of finding ways for them to have taxable income.

If we have enough to cover two conversions, one for each child, can we do it out of the same 529 account, or do we need to open up a separate 529 for our son?" My favorite comment of the day so far from the people in the chat here, someone said that Bill's on the next season of Last of Us.

I'm out here surviving, guys. All right, Bill, we've gotten a handful of questions on this from people who pay attention to this kind of thing. So obviously, this is on people's top of mind. I didn't really know about this until you brought it up. So my first question is, why don't we just allow parents to open a Roth in their child's name?

Maybe they don't want that tax handoff to richer people, I guess. But what's going on here? Does this make sense to you in terms of the strategy they're taking? Yeah, the first suspicious thing, the last questioner's name was Bill. My oldest brother's name is Ethan, so this is getting real familiar here.

But no, Ben, you're right. I mean, the answer to why you can't just contribute directly to a Roth IRA is you have to have earned income. And that's exactly what Ethan is getting at here, is that he's thinking long-term. So I give him a lot of credit there. He has one 529 account open, and he's saying, "Hey, I really want to take advantage of this provision.

Let's talk about it really quick." The idea is if you have money left over in a 529, Ben, I don't have a lot of clients that spend too little on college. Ultimately, college is a very expensive enterprise. Yeah, it is funny when people worry about that, that it's pretty rare for that to happen.

That is a very good problem to have. But I think if you think long-term about this, ultimately, it could happen. And I think what Ethan's going is, "Do I want to purposely do this, overfund a 529?" That ability to transfer, basically, rollover from a 529 to a child's Roth is super cool.

And Ethan gets to the key point, Ben, you brought it up a second ago. It avoids the earned income limit, right? And so then he could potentially transfer money from a 529 to a Roth for a teenager, right, that may not be working. Somebody in college probably should be focusing on college and not working.

And it's a great avenue to basically do an effective backdoor Roth. The problem is, that Ethan's getting at, is there a couple of contingencies here. Number one, the 529 account needs to be open for 15 years for this to happen, right? So if you're opening a 529 account now, yeah, you're looking at 2037, 2038 being the earliest time that you can conduct this rollover.

The second provision, Ethan mentioned this is original question, contributions that you roll over need to be more than five years old. So ultimately, again, you can't do this instantaneously. You can't just open up a 529 and then roll it directly to a Roth. That's not the way it works.

And so Ethan's thinking long-term. I think this is great to answer your question directly, Ethan, get that 529 open for your son, because that will start that 15 year clock. But I give you a lot of credit because thinking on 15 to 20 year timelines, that results in success in investing.

And so ultimately, I think this is a great option for an investor. We never really know the motivations of politicians, but why do you think they put this in the Secure 2.0 Act in the first place? Who is this helping? It's a great question. I think bluntly, it's helping people like you, me and our clients, right, that are thinking on these timelines.

But it is a very common question to say, hey, I've been successful, or let's say my child gets a Rhodes Scholarship, or let's say they go to a service academy at USMA or the Naval Academy. These are great things. And if I've done everything responsibly, why am I paying a 10% penalty, right?

I'm a saver. I'm an investor. Why am I paying this penalty? How can I effectively move this forward? I think it's a neat provision to have. And the guidelines, furthermore, that they put on this, I think will prevent folks from using this, let's say, to their advantage. Because again, 15 years is a long time to plan for.

So I think generally it's a good thing then. All right. I think we have another question on Roth IRAs, because we have to hit our quota here. That's what I'm here for. We can never have too many. OK, next we have a question from Jordan. Is there any downside to doing a backdoor Roth IRA conversion if you end up under the Roth IRA limit?

This is the first year I think my wife and I might wind up above the MAGI limit. I'm pronouncing it MAGI. I don't know how you say it, but-- Is that like a king, Duncan? What-- It sounds like a gift to the MAGI, right? Yeah, the gift, yeah. But with variable comp and deductions, I'm not positive.

I'd like to contribute now, so that the money is invested in the market. Is there any reason I shouldn't do my 2023 Roth IRA contributions via backdoor Roth IRA conversion now, so I'm OK if we end up over the Roth limit? I don't have any traditional IRA balances, but my wife does.

Does her traditional IRA impact the pro rata rule for me to do a backdoor Roth conversion? I said this off show. These kinds of questions sometimes become word soup to me, and I know that a lot of our younger-- That's a lot. --and people that are new to investing, I know that they don't get this.

Can you also just sum up at the end of this what the main idea is here? What the point of all this is, what they're trying to do? Yeah, before we get into this, Bill, here's my-- if I became tax czar one day, or if you did and you're asking me for some advice, we get these questions all the time about people who are close to the limit.

Why don't we give people a one-year mulligan? One year, you get close, maybe your income goes over because you have variable income. Oh, whoops, you were over the limit, but you contributed to Roth, one-year mulligan. Yeah, I like this idea. Unfortunately, Ben, you and me are not writing the tax code.

They haven't let us do this from Grand Rapids or Pine Island or where Duncan is right now. Duncan, let's talk about what you're talking about. In order to directly contribute to a Roth IRA, your income cannot exceed $214,000 joint, right? So these are relatively wealthy people problems. Let's go back to question one, or let's start making $200,000 at age 23.

That's what this is for. And the idea is, hey, you're making too much money, right? We want to take some of the tax benefits away, and ultimately, let's reallocate those tax benefits to folks at lower incomes. However, due to a quirk in the tax code, you're allowed to circumvent this by a backdoor Roth contribution.

And the idea is there's no income limit to contribute to a traditional IRA, and there's no income limit to convert from traditional to Roth IRA. There is a massive catch, but to answer the listener's question directly, if you think you're going to be in that income limit, and Duncan, I think the problem here that the questioner is going through is they don't know exactly where last year's income is, right?

Maybe they have some expenses that they need to deduct. Maybe they haven't sat down to give their shoebox to their accountant yet. We don't know what the situation is, but ultimately, they're not sure. And if you're not sure, the idea is just do the traditional contribution, and you can backdate that up to April 15th into last year.

That's the concept. It kind of sounded like an anvil was falling from the sky on you. I don't know if you heard that. That was kind of a porky pig, bug's bunny. That was the fungus coming to get me. Hey, Bill, we better put an end to this show because I'm pretty sure I see your car up on cement blocks back there.

They stole all your wheels. That's not me. That's a much nicer ride than I can afford. But ultimately, the idea is backdoor Roth contributions are great, but the big catch that the listener gets at is if you do an IRA conversion, you have assets that are in a tax-deferred IRA, you have to convert as if that's the entire balance.

And so ultimately, the problem is you could be paying income tax on the conversion unless you're careful. But to answer the other question, your wife's IRA is not your IRA. So that does not count for the purposes of a Roth conversion. You're good to go there. How about one more thing, as Ben being the tax czar, why do we make people go through the process of the backdoor Roth IRA?

Is it because they don't want people to do it because they make it hard? Can't we just make it easier for people? Do we have to go through this whole ordeal? Isn't that kind of ridiculous? You're preaching to the choir, Ben. Ultimately, I agree with you. Either have it or take it away or don't.

Why have all these complicated rules? But nothing in the tax code is direct. And ultimately, this is one of many, many very quirks. And I give anybody credit for looking at ways, how can I save on taxes? This is one of them. Right. Well, job security for you. Indeed.

Someone has to pay for your car repairs. Yeah, this ain't cheap. The only thing more expensive than getting your car repaired these days is going out to buy a new car. I can't believe it. We haven't got more, you know, used auto car prices yet. When they fix this policy, will they call it a front door Roth?

I'll take it. Turbocharged Roth. That's what I'm after here today. All right. Thank you to Bill for calling in from his nearest federal location today on the Last of Us set. Yes, he's a yes. Very dedicated. If you have a comment for us, give us one on YouTube. Come watch live.

We thank everyone for showing up in the live comments as usual. Never email us. Askthecompoundshow@gmail.com. Leave us a review, hit the like button, subscribe, all that good stuff. And we will see you next week. Free week deadline for your IRA conversion. Get them in. IRA contributions. Good to know.

See you, everyone.