(beeping) - Welcome back to Ask the Compound. We always appreciate your emails. We appreciate everyone who's in the live chat. We appreciate all the YouTube comments. Remember our email here is askthecompoundshow@gmail.com. Today's show is sponsored by Rocket Money. I've actually gotten a few questions about my budgeting in recent months because I said I use a spreadsheet.

And after I said that, Rocket Money reached out. I like Rocket Money because they actually find subscriptions you forgot about. 'Cause I feel like subscriptions are a huge thing these days. Where you have a million of them, I do. I have one for every single streaming service. I have all these subscriptions to financial publications.

There's probably a couple I'm paying extra for. So Rocket Money can actually find if you are doubling up. They can cancel a subscription for you. Or they can actually negotiate a price if they see a price increase. I usually go negotiate on my own behalf for my cable bill.

I would love it to have Rocket Mortgage do it for me. Which is great. So it's a personal finance app that just finds and cancels these unwanted subscriptions. It monitors your spending. Helps you lower your bills. It's all in one place. So you can go to rocketmoney.com/atc to learn more for budgeting.

And people have asked, how do I find a good budgeting tool? This is a good one. I haven't used a lot of these in my day. But I tried Rocket Money and I like it. So rocketmoney.com/atc. - Sounds cool. Yeah, I'm just glad that we got rid of the cable packages.

You know, now I just have 18 payments every month that I have to make. - Exactly, you used to have one payment. Now that's the thing. People don't really know what they're spending. This is a way to do it and they can tell you. 'Cause a lot of those prices have been going up.

So you can say, oh wait, I signed up for that one 'cause I was gonna use it for a month to watch Harry Potter or whatever it is. I should have canceled it. I didn't. It's still there. They'll alert you to that. - Yep. - Do a question. - Good call.

Okay, up first today. We have new question here. With the possibility of interest rates dropping in a year or so, should a long-term investor looking for reasonable yield and capital gains be looking to buy bonds right now? If so, what would you look at? Thanks. - Not a new question in the slightest, I say.

I think most investors don't really pay much attention to the bond market. I think for a long time, they didn't really have to. But I think the past few years, the bond market has been way more interesting than the stock market, right? We had a huge bear market last year in bonds.

Bond yields got to their lowest levels in history in 2020. I wrote a few months ago about how T-bills were like the biggest no-brainer investment that there was. So John, throw up the first chart here. Do a chart on of the yield curve. This is as of April, 2023.

You can see the low end. It was three to six months, we're yielding over 5%. And then if you go out 10, 20, 30 years, we're talking still well below 4%. And so T-bills to me were a no-brainer. Like whereas the Fed had been forcing fixed income investors way out on the risk curve since great financial crisis, now investors are being punished for duration in a rising rate environment.

Plus short-term T-bills had a higher yield to boot. So you were getting lower volatility and a much higher yield. It made a lot of sense. And I still think T-bills look pretty darn attractive. You know, since they're still above 5%, pretty much 12 months and below. So if the Fed raises rates again, T-bill yields will rise.

The thing is, the one risk you do have in T-bills is reinvestment risk. You can't lock in those 5% T-bill yields for more than a year right now, right? I even looked, I went to Marcus where I have my short-term online savings account. I looked at a five-year CD rate there this week.

What do you think? For five years, how long can you lock it in for a CD, Duncan? - For five years? - Yeah, what kind of yield? - I mean, I would hope that it would be close to Treasuries. - That's like 3.8%. - Okay. - So not bad, but you can't get these five, five and a half percent yields and lock them in forever.

And that's the same thing with T-bills. If we have a recession or if inflation keeps falling and the Fed decides to cut rates, eventually those T-bill yields are gonna go down and the reinvestment risk is what gets you there, right? So now look at the updated yield curve, John.

Let's take a look at it now through this week. You can see those T-bill yields are still high and they've gone up a little bit, but the long end of the curve has come up more, right? One, two, three, five, seven, 10, 20, 30 years are all well above 4% now, way better than they were in April.

That's meant for more pain for the bond world because rates have risen, so prices have fallen. But now you can earn, and you still get, again, a premium in the T-bills, but I think intermediate-term bonds are looking way more interesting from a combination of higher yields and falling inflation.

I'm not a bond trader, but let's look at the case for adding some duration here. John, throw up my table here. So this is a table of the duration and average yield maturities for various bond ETFs. So one to three-year treasuries, yielding almost 5%. Duration is almost two years.

Three to seven-year treasuries, little lower average yield maturity, about four years of duration. Seven to 10 years is seven years of duration. Then the ag, which is like a total bond index, is yielding about 5% at 6.2 years for duration. So just as a reminder, duration is just a measure of interest rate sensitivity to bond prices.

So Duncan, if interest rates rise 1% and you have a duration of five years, your bond prices will go down 5%. - Right. - And the inverse is true. If rates fall 1%, your bond prices go up 5%. Now the thing is, when bond yields were 1% and rates went up 1%, you got dinged 5% for that duration, but your 1% yield barely gave you any cushion.

Now, if you have a 5% yield, in a year, you're breaking even. So yes, it would sting if bond rates went up from here 'cause the economy accelerated or the Fed kept raising rates or inflation stays high, but you have a much bigger margin of safety now in these intermediate-term bonds.

And oh, by the way, if your rates rise 1% from here, now we're talking about 6% starting yields. So I think now that yields are higher, the break-even and margin of safety is much bigger, so bonds could have some short-term downside, but 90% to 95% of expected returns five and 10 years out for intermediate-term bonds comes from the starting yield.

Whatever the starting yield is, plus or minus a little bit of wiggle room, that's gonna tell you your future return. So expected returns are way higher 'cause we went through the pain of 2022 in the bond bear market. So I actually think that you're in a much better place now, and if you want to hedge for recession risk or deflation risk or rates falling in the Fed cutting, intermediate-term bonds look pretty good.

Another positive development is tip seal. John, throw this up there. This is Treasury Inflation Protected Securities. This is the 10-year. I was taught early in my career, anything in the 2% to 3% yield range for these, this is nominal yields, is a good development. And what this means is you're getting that yield plus the inflation kicker.

So that's a pretty good deal. You can see in 2020, 2021, and 2022, it was negative nominal yields, meaning you were accepting yields that were less than 0%. All you were hoping for was inflation there. And those bonds got killed 'cause rates rose too. So I guess my thinking here is I don't pretend to have the ability to predict where rates are gonna go, but I don't think you need to bank on capital appreciation for bonds to do well here.

If rates just stayed where they were at 4% or 5%, you're doing way better than you were over the last 15 to 20 years. So I think you have some options. If you're worried about rising rates or inflation, T-bill yields are still nice, and if rates rise more, they will rise too.

If you're worried about deflation or recession or falling rates, intermediate-term bonds look good. You could go way out on the risk curve and do 20 or 30-year bonds, but that's too much volatility for my liking. And then if you're worried about purchasing power, you have TIPS, where you have yield plus the inflation kicker.

So I don't know. I think if you're diversified in a fixed income space, your options haven't been better in, I don't know, 20 years or so in this space. So I think you're pretty good. And you don't have to have yields fall to do well here. You just have to have rates stay where they are, and you're gonna be fine and clip those 5% coupons.

- I used to buy that junk, JNK, I think was the ETF, because it had such a nice, juicy yield. What is that at these days, you think? - So that's 7% or 8%, I guess, something like that. But then you take away any default risk. We're talking mostly treasuries here.

The ag is like 40% or 50% treasuries, so that's not all treasuries. They don't have any junk bonds in there. But based on your tolerance for risk, that doesn't really surprise me that you're into junk bonds. That's more like equity risk, though, when the excrement hits the fan. But yeah, no, I think you're in a much better position for fixed income in terms of having options now than you did before.

- Right. Also, rest in peace, IBONs. Haven't heard anything about those in a long time. - Yeah, that was fun for like nine months. - Yeah. - Remember how many questions we got about that? - I know, that was like weekly. Every week we had IBON questions. - Now nothing.

- Yep. So yeah, that was Roger. Up next, we have a question from David. First off, thank you for all that you do and all the insightful content you put out. I'm 24 years old and have managed to save up roughly $135,000. Half in a high-yield savings account and half in-- - Nailed it, Duncan.

- Roth accounts. Yep. I don't have any equity buildup in a house, nor do I have a 401(k). I'll be taking the Series 65 and CFP later this year and will hopefully land a job with a 401(k) in benefits. Did I ultimately screw myself by not having a 401(k) earlier or am I okay for now?

This is a 24-year-old. - Yeah. - Asking if it's too late. - Yeah, you're doing just fine. Obviously, like the personal finance gurus have got to this person, to David. My first job, I worked in the industry, I was there for three years or so. My salary was buckus.

I didn't make anything. There was no 401(k) plan. I had no dental insurance. I had health insurance, but it was bare bones. And, I mean, I just got out of college, so let's be honest. I didn't go to the doctor, right? Never. Who goes to the doctor when they get out of college?

Unless something's really wrong. Even then. - Still. - So it was a small business. There was five of us. There was one main guy and there was four younger people who were just kind of learning. And I learned a ton on that job, so it was definitely worth it.

It was more about learning than earning for me, right? So I learned a ton of stuff that I still use to this day about asset allocation and investing guidelines and client communications and setting expectations. It was great. But I didn't have a 401(k) for the first three years of my career.

And I had no 401(k)s. I think I mentioned this before. I opened up an IRA, target date fund, obviously, and put $50 a month into it. That's all I could afford. As my career progressed, I started to make more income. I slowly but surely increased that. I got a 401(k) for my second job.

I started putting money into that. I know we have a lot of super savers who write into the show, especially young people in their 20s and 30s, like I'm maxing out my 401(k), my IRA, my HSA, 529 for my unborn child, whatever it is. We have a lot of these super savers who write in.

I applaud those people. You're so far ahead of the game. You're money and you didn't even know it, right? I just turned 42 this month. I don't think I started maxing out my 401(k) till my early to mid 30s, right? Seems late. Like, Ben, how could you? What is wrong with you?

Like I said, I didn't make a lot of money early in my career. So I've been playing catch up for the last eight or nine years, pretty much. And life got in the way so many times. Saving for a house, paying for home renovation. I've mentioned before, my wife and I had infertility issues that cost a lot of money.

All that stuff held back our retirement savings. So I couldn't, you know, I got close, but I never, I couldn't really do it. I think I was maybe 33 or 34 by the time I could finally max out. And guess what? I don't worry about it. It's fine. It happens.

Life gets in the way. This person, David, you're still 24. Yes, saving early and often can help you in terms of like compounding, but you're certainly not screwed. You've managed to save six figures already in these other accounts before you're able to rent a car. That's pretty good. That's still 25, right?

For renting a car? - I think so. I was about to make that joke, actually. It never made sense to me. I don't get it. The 25 thing. People are living longer than ever these days. So young people in their twenties, you have many, many decades ahead of you.

I don't know. Once you get that 401k, you can start funneling money in there. But I mean, if you have an IRA and a brokerage or a high yield savings account, you're fine. I mean, you obviously have developed some pretty good habits by putting that money away already. And the fact that you're worrying about this stuff at age 24 means either way, you're probably going to be fine.

So no, the 401k isn't like the be all end all. - David's probably depressing a lot of our younger audience watching right now. Because yeah, it sounds like he's doing pretty well. - We had Nick Majulian probably over a year ago talking about how you shouldn't max out your 401k.

And just keeping your money in a brokerage account with index funds gets you to pretty much the same place anyway. So I think you'll be fine. Once you get one, you can always put one in there, get your tax deferral or whatever. Bill Sweet would probably tell you to get a Roth 401k if you have the option.

But no, you're fine. Don't worry about it. You'll have plenty of time. - And series 65, that's like, that's something trading related or? - Yeah, so you can sell securities. So he's somehow going to sell securities, working in the finance world. He's going to be fine. - Gotcha. - All right, next question.

- Hey, up next we have a question from Micah. I'm in my late 20s, single, no kids, rent an apartment and hold a stable federal government job, knock on wood. I keep the lower end of the three to six months of emergency fund because of the stability of my job.

And I have access to $60,000 in a taxable brokerage account that God forbid I would ever have to use. Am I crazy for only holding an emergency fund of three months? - All right. All these people in their 20s so worried. I never really looked at anything in my 20s, right?

- Yeah, yeah. - Not a care in the world. I've never really agreed with the whole personal finance trope of you have to have 12 months of savings in your emergency fund before you can move on to saving for this. And like, I don't know, especially when you're young, it's basically impossible to save that much.

I don't know how many people actually have the ability to save that much without just living on bread and water and not doing anything ever. Plus the good news is at Micah's stage in life, you have so few responsibilities. Let's look at your situation. I think emergency fund levels should be circumstantial to the responsibilities you have.

So he holds a stable government job. I know people who work for the federal government. It's basically impossible to get fired. I heard a story one time about someone actually literally bringing a gun in on accident and leaving it in the bathroom counter and they did not get fired.

They worked for the federal government. - Hate when that happens. - Right? No kids, no mortgage, no spouse. Why do you need 12 months in emergency savings? Plus you have three months, it sounds like, and you have this contingency plan of a $60,000 brokerage account to break in case of a true emergency.

Plus if you're a single person, altering your life is so much easier. Like if something really does hit the fan here in your finances, your job, something ever does go wrong, you can cut back mercilessly in your lifestyle as a single person. That's much harder to do when you have responsibilities in your 30s and 40s, when you have a mortgage or a family or someone else to support.

So I'd be more worried about taking trips and enjoying yourself in your 20s, doing stuff that you're not gonna be able to do when you have those responsibilities in your 30s and 40s. So it sounds to me like he's already a good saver. You know, you don't need the fortress balance sheet like Berkshire Hathaway.

When you're in this situation, you're single and you have all this stuff and you already have saved money. As long as you have the backup plan, 12 months is overkill. Three months to me is fine. I would say worry more about enjoying yourselves. And I don't know. All these people in their 20s are so worried.

- Does Dave Ramsey talk about having really-- - A lot of personal finance people think this is a rule of thumb. And again, I think it's circumstantial. - To be clear, I'm not knocking. It definitely makes more sense than not having any emergency savings. But yeah, it sounds like it could get a little-- - And again, it also depends on your other backup, plan B, plan C, plan D, in terms of I have this other money or whatever I can tap.

- I don't think you need to do it just because you have to hit the checkbox because some personal finance guru said you had to do it. - Right. - Doesn't make sense to me. You're fine. - And you're a personal finance guru. So you said that now. So that counters wherever they heard this.

- That's a Trump card. I'm on YouTube, so it has to matter. - It's true. - All right, one more. Next question. - Up next, we have a question from Scott. I'm in my, wait. Yeah, that's the same one I was about to say. The next time you have Jonathan Novy on the show, can you have him go into further detail about long-term care insurance?

My wife and I are in our 50s and each have a family history with medical issues. How do we determine if long-term care makes sense for our financial plan? - All right, we go from 20s to 50s here. - Spoiler alert, who's on the show? - Yeah, well, yeah.

If someone gets called out by name, we'll bring them on the show. Jonathan Novy, one of our advisors in insurance, expert extraordinaire at Rithold's. - Hey guys. - Jonathan, I'm honestly not too familiar with this type of insurance 'cause I haven't had to use it before. So why don't you just start with the basics, like what is it, how does it work, and like when should you think about getting it?

- Okay, so there's a really big backstory with long-term care insurance and how the insurance industry got it really wrong and how they built policies. Suffice to say that no one's caffeinated enough listening now to actually sit through the entire story. So I'll cut to what's happening now. The industry looks nothing like it did many years ago.

And there are almost no, what's known as standalone, long-term care policies available anymore. By standalone, what I mean is you pay a premium and then eventually if you make a claim, great, they'll pay it for you, or the money goes away. A lot like homeowner's insurance or something like that.

So there's only a very, very small number of standalone carriers left. The carriers that used to sell this kind of insurance, whether it be Genworth or John Hancock or Metropolitan Life, they're all out of the business. And all they're doing is choking on these existing books of businesses they are struggling to pay for.

- Is that because, 'cause I've seen the health studies before that show the percentage of spending for healthcare in your later years before you die, that's like the majority of the money gets spent then. Is that why? Was it just too expensive? - So that's one of the three reasons that insurance companies got the pricing wrong.

The cost of care absolutely exploded. It also has to do with the fact that nobody lapses long-term care insurance. I mean, anecdotally, if anyone has a history in their family where someone made a claim on long-term care, it's terrible. People live for a very long time. The care is unbelievably expensive.

So nobody lapses long-term care like they typically do with things like permanent life insurance. - What exactly does it, if you have it, what exactly does it get you? It gets you the ability to pay-- - So it's a very good question. All long-term care insurance contracts have built into them that if an insured cannot satisfy two of the activities of daily living, whether that's feeding yourself or traveling or taking medication or bathing yourself or something like that, if a doctor says you cannot satisfy two activities of daily living, then you can make a claim on a long-term care policy.

And they will pay for, some will pay for in-home care, some will pay for care in facilities. There's all these different bells and whistles on the contracts. Suffice to say that generally speaking, when you can't satisfy two activities of daily living, you can make a claim on a policy.

And there's like 90-day elimination periods or 180-day elimination periods. But we can get rid of all of the kind of small details there. If you can't take care of yourself anymore, then you can make a claim on a policy. - When I'm no longer able to tweet, that's the ring the bell for?

- Yes. Yeah, that actually may count in disability more than long-term care. So at your age, so this is a really good question. So this guy's, you're in your fifties who asked the question here, asking what is a good time for you to look into it? - Well, that's what I was gonna ask is, so like life insurance, if you buy it when you're younger, obviously it's way cheaper.

Does the same thing apply here? If you buy it in your fifties as opposed to your sixties or maybe your seventies, it has to be cheaper, right? Does that make sense or not? - Well, a little bit. So the thing about long-term care is with some of the new contracts available, these what's known as asset-based contracts, people can't buy it before they reach 50 or 55 'cause carriers won't sell it to them because then what they have to do is accommodate a rising benefit, an inflated benefit, and it's more risk for the insurance carrier.

So some of these you can't buy when you're young. Other kinds of contracts you can. Most of what you can buy now is a life insurance chassis with a long-term care rider or capability attached to it. So when you think about what the right time is to buy it, most importantly, it should be grounded in your financial plan.

Most people like Ben, you, like me, I'm in my early fifties, I'm busy paying term insurance premiums. I'm busy paying for disability insurance because the bigger risk right now to my family is that I die or I'm disabled and I'm saving for college. And I'm doing all of that stuff.

And once I have all of those things paid for, if there's any money left over, then I'm probably gonna be investing it in something else. So long-term care comes in when all of a sudden you probably don't need to pay for disability insurance anymore or term insurance isn't necessarily a thing because people buy insurance 'cause there will be a financial impact on their family in the event they were to die or in the event they were to need long-term care.

There's a time when it fits into your individual financial plan. And that's what somebody should pay attention to is when it becomes reasonable for them to think about, one, how they can afford it and two, when it fits into their plan. Now, the older you get, obviously the more expensive it is.

So fifties is actually a reasonable time to look at it. But I wanna point out one other thing in this question. With a family history of cognitive issues, insurance carriers, many of them will underwrite those issues and limit an individual's ability to be insured based on a family history of cognitive issues, whether it be dementia, Alzheimer's, Parkinson's disease, stuff like that.

- So how do you do the cost benefit on this then? 'Cause at a certain point, you'd have to say, well, if they're gonna jack the rates on me because I have a family history, is it better for me to just set aside some money as opposed to buying the insurance?

- It might be. It might not be. With insurance, if you make a claim, you can point out that once you've paid your premiums, how long it will take you to have made your money back or how long it will take you for it to have been worth it.

Now, there's other thing that goes along with long-term care insurance. All carriers provide care coordination services. So what that means is if all of a sudden, let's say one of our parents or something needs care. Most people, when they need some sort of custodial care, they have absolutely no idea who to call or what to do.

It's like, yeah, there's like a nursing home in town or something like that. Or do you go to your doctor and say, all of a sudden, I need someone to come in here and care for my mom or my dad because they can't care for themselves anymore? - That's what happens a lot.

It usually falls on the family, right? The family has to take care of people, right? - Right, but nobody knows what to do. And families need to bring in professionals to do this. So insurance contracts come with care coordination services. I'm not saying that this is the best coordination in the world, but at least it's something.

And at least it's links to services that are available to help you understand it. In addition to that, there are a couple kind of bits of information that you can get free on the internet to understand this. There's two places if you want to learn about long-term care that you would check.

One of them is-- - You're answering my next question. Like what do people start if they want to learn about this? - So go to your state insurance commissioner or state department of insurance. Just use the Google machine and look up long-term care. There's a lot of good information on things like your state partnership program.

That's a thing. It has to do with Medicaid. You want to look at state partnership programs. You want to look at the possible deductibility of premiums. All this stuff will exist on your state website. In addition to that, the NAIC, which is the National Association of Insurance Commissioners, publishes a really informative pamphlet.

There it is. The Shopper's Guide to Long-Term Care Insurance. I would say have a very big coffee before you read it, but there's very good information in that thing. And that's the good place to start. - So I think the reason someone wants to learn this, someone in the comments says that their mom's nursing home was $7,500 a month.

So like this stuff is crazy expensive, obviously. - At 7,500 a month, I'd say you're getting a bargain. It is so expensive. - Do our viewers in Canada not have to worry about this? We have a big audience there. - I'm sure we have viewers in Canada and Europe who say like, you Americans are crazy.

This is like a discussion for another time. But like, why do you have to worry about this even? Obviously that's a whole bigger policy question, but. - So regarding that policy question, the state of Washington was last year or the year before, actually it mandated that citizens own a state sponsored long-term care insurance policy.

It's not a very big one. And they're paying for it through a payroll tax, a 0.58% payroll tax. There are two other states right now that are considering doing that. I think it's New York and California. There are ways to opt out of that insurance contract if you can prove that you want a policy yourself.

But this is a thing now legislatively, and people are recognizing that the cost of care is unbelievably high. - Especially with people living longer. And we have all these 70 million baby boomers and like, that's a... Around my house with like a five mile radius, I swear I've seen six old folks homes go up in the last 10 years or so.

Like they know the wave of people is coming. - You can't believe the cost to do things like reserve beds in there. The costs continue to go up. And as a result, like insurance carriers for existing policies and things like that, they're raising premiums on policies that have been enforced for years.

And anecdotally, my mom and dad own a contract where the cost of it has doubled to maintain the same benefits that they had when they started. - Okay, we'll include a link to that. Some stuff on the YouTube, but good stuff. I honestly didn't know much about this. So let's do another one, Duncan.

- Okay. Last but not least, we have a question from Alan. And Alan says, "I see a lot of annuity companies "offering 5% plus for five years. "Got one for 5.2% right now. "These are selling like hotcakes all over advisor land. "Why do you think annuity companies can go out five years "at these rates while banks are all stuck "offering 12-month CDs?

"Do insurance companies know something "about the future interest rates? "I'd like to hear your thoughts on how they can profitably "offer these competitive rates for so long "and pay me a commission." - Okay, this gets back to our first question, right? I said, you can't lock in T-bill yields right now.

Whereas annuity salesmen say, uh-uh, yes I can. So I guess part of it is the pooling of assets, right? - So there's the pooling of assets. Now that applies to what I believe is a different kind of annuity than he's talking about in this question. So there's lots of annuities out there.

- Also, before we get into this, I'm actually surprised that these things are selling like hotcakes because you can get decent yields and bonds. - Right, that surprised me, reading that. - I guess people just love the certainty of having something locked in. - Yes, people love certainty. So that's something with annuities.

I have no idea if they're selling like hotcakes or not. I guess that depends where you are and what your incentives are to sell them. I guess we can get into that a little more in a minute, but there's a lot of different kinds of annuities out there from this kind that he's talking about, which is just a simple fixed annuity.

We can get into things like variable annuities and QLAX and SPIAs and all of that nonsense later if anybody wants to. But in this specific case, a simple fixed annuity, the reason, and it's a term of time, let's say five years, the reason an insurance company can pay a little bit more than a bank is because an insurance company can invest its general account slightly more aggressively than a bank can with its reserves.

So an insurance company can do more than just own like government bonds and some mortgages. They can own corporate bond portfolios. They can own some, I believe, some small equities. They can not have to worry about the same need for liquidity that banks do. So because of that, if you're going slightly out on the risk ladder and you can match some liabilities, like it used to be, and this points to a question you had earlier in the show, used to be that yields that were further out were higher than yields that were closer in.

- They should be, yeah. - Right, they should be. So if you have a longer time horizon, typically insurance carriers can match the liability to something that's a longer date. And as long as there are decent credits in what they're owning, you can just offer a better yield. Now, there are trade-offs with everything.

At the end of a fixed annuity, you're gonna pay income tax on like all of the yield in there. It just is the way it is. That's the way an annuity is set up. So. - Plus there's a liquidity issue. There's the built-in fees. There's a lot of this.

So like if you wanted that money before the term is up, there's gonna be a penalty. - You're gonna pay a hefty surrender. You're gonna pay a really hefty surrender. - So that's part of it too, 'cause if it's a five-year annuity, you're giving up that liquidity. And that's one of the reasons, too, that they can pay a higher yield because they know they don't have to pay you back in 12 months if you want the money.

Otherwise, you have to pay a fee and your yield goes down, obviously. - So it's essentially, it's a contract. You're signing a contract. And to get out of it, you have to pay to break the contract. - Yeah, it's a contract with an insurance company. And to be fair, granted, you wouldn't be that worried about a reputable insurance carrier paying you back, but there is slightly more risk to an annuity than there is a CD, because a CD is FDIC insured.

- Right, you have the counterparty risk. I think the one thing we've learned today from you, Jonathan, is that insurance products are complicated, right? I think we-- - So they can be. They can be very complicated. There's, again, there's another discussion about annuities to be had here that we can get into if you guys want to.

- Something I'd mentioned to you off the show, Jonathan, is with defined outcome ETFs, which everyone's been talking about so much lately. Yeah, I mean, what role really do these products play? Do annuities play? - Okay, so defined outcome ETFs are different than annuities that give you guaranteed income.

I think defined outcome ETFs are great because people hate uncertainty. And it's the hating of uncertainty that is the reason, generally speaking, that people buy annuities. But annuities give you guarantees. Now, there's gonna be a lot of discussion about whether those guarantees are worth it, but that's not a financial plan discussion.

That's an individual discussion. That's a planning-as-key discussion. - Right, so some people simply can't handle the risk of having a diversified portfolio and seeing it go down in value or seeing it go up and be volatile, and they just want something like this that just gives them money and tell me how much money I'm gonna get.

And obviously, it doesn't have to be all or nothing, but I think that's the idea. Some people just don't want to have that uncertainty. - Right, and there's a lot of research out there, whether it be from Wade Pfau or Michael Kitsis, that say that people with guaranteed income, meaning annuities, they tend to spend more in their retirement than people who don't have guaranteed income.

And they intend to have a much more kind of psychologically comfortable retirement like spending path. - Which is another topic that's come up on this show a lot, is people who have all this money and they can't force themselves to spend it. So an annuity, you're right, it gives you a stream of income.

Even if it's a bad deal and it makes you spend more, for some people, maybe that psychological hurdle is worth it. - Right, and generally, annuities do have a terrible reputation, they're well-deserved. 'Cause the problem with annuities, like I've said before on here, it's not the contracts themselves, it's the people who are incentivized to sell them.

- Right. - They come with big commissions. So anytime you have an incentive structure built in like that, there's gonna be a loser. And it's typically the person who's buying the thing with the high commission. - Right, and maybe that's what the person asking this question should think about, is like, is this a product that's right for some people in some situations?

Yes, but is it right for every person in every situation? Of course not. - You're absolutely right. - That's the way you have to approach it. - Yep. - Yeah, all right, that makes sense. Good stuff, Jonathan. All right, thanks for joining us, as always. We get a lot of insurance questions, so this is helpful stuff.

Remember, you can email us-- - Happy to come on any time. - Askthecompoundshow@gmail.com. I saw we had a couple questions in the live show today, we'll have to pull some of those out. Leave us a question or comment on YouTube. Give us a rating, review. What else, Duncan? Subscribe.

All that good stuff. - Yeah, and just a reminder, we don't have a TCAP this week, so we'll be back next week. - Okay, nothing tomorrow. All right, watch everything again one more time. Askthecompoundshow@gmail.com. We'll see you next time. - Thanks, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)