(beeping) - Welcome back to Ask the Compound, a show where you, the audience, provides the questions, we try to provide the answers. Duncan tries to provide stock picks that you can then go short in your brokerage account. - Fair. - Fair enough. - Our email here is askthecompoundshow@gmail.com. A lot of wonderful questions again.

Bonds continue to rule the day. We haven't got a question about the stock market in months. It's all bonds and taxes and Roth IRAs. Today's show is sponsored by Kaplan-Schweizer. Sean, our research analyst, just took this-- - Set it right. - I got it. Sean, our research analyst, just took level one for CFA.

He asked, before he took it, "What do I do to pass this test?" I said, "Take as many practice tests as you can "and then get the study guides from Kaplan," because that's what I did. I took the, not to brag, I have my, I'm a chartered financial analyst, Ben Carlson, comma, CFA.

Do I have that on LinkedIn? Maybe. I don't know. I haven't looked at it in a while. But Kaplan makes it easy because the test books for the CFA prep are no joke. They're huge. They don't have a lot of questions in them, at least when I took it.

So I, for the first one, didn't use the books. For the second one and the third one, I used Kaplan because it made it easier for test prep. They bullet point stuff for you. They summarize it. They make it easier. And I think you just have to take as many as you can.

It's a tough test and there's very low pass rates. You have to do anything you can to get better. $300 minimum they recommend for studying for the CFA test, Duncan. It's no joke. - Sounds like a lot. - It is a lot. So go to the link. - I was reading some of their materials.

I was reading about the portfolio perspective. I was looking at some practice questions. - It's tough. Go to our link on YouTube and you can check it out. You can save 10% on their exam test prep stuff right now. All right, let's do a question. - Okay. - Also, we have a lot of people emailing in with the CFA.

We had a portfolio manager email today saying, hey, listen, I know taking the CFA is not necessarily gonna make you a better investor, but it shows your dedication to the craft. And if you wanna be a portfolio manager like me, that's what I'm looking for. So this guy said he's only hiring CFA people.

- Okay, I mean, it makes sense. - Sorry, Duncan, you're out. - One day. - All right. - Maybe we'll do an episode where I just take a CFA practice test and everyone can just laugh at me. - All right, that's fair. - All right. - Bye. - Up first today, we have, not to brag, but I'm 38, make $50,000 a year and have $10,000 in Marcus, $10,000 in a Roth IRA, $10,000 in crypto and $10,000 in a traditional 401k.

I have six months of savings I don't touch. My net worth is about $50,000. My annual expenses are $40,000 and I can typically save $500 a month. I live in LA with my partner and work as a resident services coordinator for an affordable housing organization. What advice do you have for lower income folks who want to be financially stable?

My point of view is that I have such a small amount of money but it doesn't really matter because my amount of time to compound is relatively short and my available monthly investment is low. Should I just spend my money because the reward of compounding takes longer than I have?

I'm not competitive in the labor market. I graduated from Arizona State, LOL. I don't know what that means. I thought Arizona State was fired. - That's fired. - Yeah, taken down the alma mater and getting an MBA is in the cards. - All right, first of all, I believe Arizona State was the number one party school for like 20 years in a row.

So you probably had fun at college. - See, don't say that. If you didn't, I wouldn't have known that, you know. - Looks like a great, you could hike the mountains, nice weather, fine. But here, don't sell yourself. Also, I think he put just kidding after the not to brag.

- Oh yeah, I took that out because I thought it was kind of obvious because they, yeah, they may go on to say lower income. - I think Michael here is selling himself short though. He lives in California, an exceedingly expensive place to live on a lower than median income.

And he still saves $500 a month. He has, he equals his annual salary and net worth. And he has a six month emergency fund, which I think didn't make it out of here, right? So he said he has six months of his savings locked in and didn't touch it.

A lot of times we get these questions and we cut some of the fat off. But so he's not even 40. So I say this is more impressive than it sounds, right? He also says he doesn't have enough time to allow compounding to work. I don't think that's true.

I call BS on this. He's not even 40 yet, right? I think people often underestimate the power of compounding over the short run because you save a little bit of money and you think, oh, I have a little bit of money at the end of the year, right? I still think $500 a month is fine.

You have plenty of time. I went through a bunch of examples here to show how, where he is now and where he can be in the future. So right now, $50,000 saved. He puts away $6,000 a year. Assuming we grow that 50K at 6% per year and then increase the savings rate by 3% a year to account for inflation, which is not as much money as you think.

Going from 6,000 at 3%, it's like 180 bucks in year one. Total, not per month. John, do the chart on this. This is what it'll look like at first. If he pushes back retirement to 70, we're talking about $1.2 million, using again a 6% annual return, which is not bad, which is pretty conservative.

By 65, he'd have $822,000. So this is not bad, right? Just keep on the same track. Obviously, there's a lot of assumptions based into this analysis, baked into it. Like if you stay on the same track and you're doing alignment compounding, the world doesn't work like this in a nice curve, like a spreadsheet, but just, you know, take this word for word.

You're not in that bad of a position if you just have a multi-decade view. However, I think we can do better than this, right? This is my campaign speech here. First, let's look at a little more frugality. He's obviously already cutting back, but let's say you just save an extra 25 bucks a month.

A month, right? You don't go out to eat, you save a little bit more. This is on top of the current assumptions. That's $300 more in savings each year, on top of what you're already saving. Now by age 65, we're talking $1.5 million by age 70, or roughly 1 million by age 65.

You can do a chart off, John. So these small changes can have a big impact over multi-decade time horizons, right? However, one of the ugly secrets of personal finance, frugality can only take you so far, especially when you're on a lower income, right? I think having a higher income and getting a raise or negotiating a higher salary is one of the biggest levers you can pull if you want to improve your personal finance.

And maybe he's happy with this job, but I think now is the perfect time to explore your options, at least, in this tight labor market. Pull up the Fed chart here, John. This is Fed data on wage growth numbers broken up by job switchers and job stayers. Look at that spike for people who switched jobs.

Since the start of 2022, people who've switched jobs are averaging 7% annual wage growth, okay, annualized, versus people who stayed at their job are averaging 5% annual wage growth. This doesn't take into account inflation, but look at that spike for people who switched jobs. If you ever wanted to test the waters to see what your value is in the labor force, now is the time to do it.

And I think a single raise early in your career can have a massive impact on your finances if you save over time. So let's say now you find a new job that pays you $10,000 more per year, and you save like a third of it. Call it $3,500. Every year you save a third of that raise, right?

Every single year. That raise could be worth hundreds of thousands of dollars to you. So let's say you save a third of that raise. We're still doing the, adding that on top of your 6,000, you're already saving per year, and then increase it by 3% for inflation. John, do the next chart on.

Now by 70, we're talking $1.7 million. Again, pretty conservative 6% growth here. By age 65, we're looking at $1.1 million for a one $10,000 raise, right? And it assumes you just have your cost of living increases thereafter. Again, not bad, right? Now, one step further. Let's say if we combine these two strategies.

You increase your saving a little bit, 25 bucks per month each year, add that 25, and you get a $10,000 raise. All right, John, now let's look at it. $2.2 million by the time you are 70. 1.4 million by 65. So those two levers you pull, you get one pretty decent size raise right now.

You also save a little bit more money each year. We're talking about adding a million dollars to your bottom line by age 70, if you push back retirement that long. Obviously, again, life never works out like this. It's easy on a retirement calculator or spreadsheet. Some years you'll be able to save more, some years you'll be able to save less.

Your career trajectory may work out better than you think. I think if you test the waters a little bit, you might be surprised what you can find right now. It could be worse, you never know. Investment returns might come in higher than 6%. It might come in lower. I think that's why financial planning is a process and not an event.

The main takeaway here, though, how do you save on a lower income? It's the same way you save if you have a higher income. You live on less than you earn. You automate your savings. You increase your savings rate a little bit each year. You save more, a little bit more money each year, and you increase your earning potential because that's the biggest lever you can pull.

The good news is for Michael here is that he already knows how to save. He lives in California and he's still able to save 500 bucks a month on a relatively low salary for there. I think there are ways to improve your situation if you're willing to work on your career a little bit.

And I don't think you necessarily need to have an MBA to do so these days 'cause the labor market is so tight. So Ramit at I Will Teach You To Be Rich has these jobs on finding your dream job or starting a side hustle or negotiating a higher salary, which is much cheaper than an MBA, something you can kind of try on the side.

I don't know how happy you are with your job, but now is the time to try something, I think, because it can't hurt to try to look and see if there's something better out there to try to earn a little bit more money by switching jobs. - Yeah, and like you say, just asking, just asking for more sometimes, right?

I mean, sometimes-- - No one wants to have that conversation, but yes, having uncomfortable conversations like that, the worst they can do is say no, right? But I think this is the time in a tight labor market where you can get out there and see how much you're worth.

And again, if he just goes from 50 to 60 or 50 to 65 or 70 and he continues to save the way he's saving with that savings rate, don't YOLO everything now, you're doing fine. Keep it up. - Yeah, and don't discount how much the hiring process sucks, right?

Companies don't wanna lose someone, organizations don't wanna lose someone to then just have to hire someone that they're gonna have to pay whatever you were asking for to begin with. You know what I mean? So yeah, I think that he has some options. - He's not gonna get hired as like a career counselor at Arizona State now that he mocked going there, but-- - Probably not, yeah, yeah.

- But yeah, all is not lost. You're still in a pretty good position here. Just keep up what you're doing and try to improve yourself a little bit. I think you could, I think you'll be fine. - Are they the Sun Devils? Is that the Sun Devils? - Yes.

- Okay. - You got it. My brother went there for a year. - Okay, okay. - Good school, right? - Yeah, I agree though. I think Michael's being a little too hard on himself. I know that not to brag was a joke, but I mean, I don't think they've done a bad job.

- I am much more impressed by someone on a lower income being able to save that much and put away money than someone at a higher income. - Right. - All right, next question. - Okay, up next we have a question from Matthew. I'm 42, I live in Italy and max out my 401k.

Well, the Italian equivalent. I'm single and my savings are one year of expenses in cash and the rest in a world stock ETF. I'm almost done with my mortgage, so I earn 80% of my house. About my salary, I choose to get a monthly payment that just pays my expenses and a lump sum once a year in May.

Wonder what kind of job or work that is. - Yeah, that is interesting. - Every year I invest the lump sum all at once. I ran some data and it looks like I should invest this lump sum every September because it's historically the worst month for the market. Does this make sense?

Trying to buy cheap, right? All right, I wonder what the Italian 401k is called. All right, I've yet to read a good theory on seasonality thing, but it is true. John, do a chart on here. I looked at this, the average returns in the S&P 500 by month, going back to 1926.

Every month is positive on average besides September, which is down close to 90 basis points on average. And what are your thoughts? A couple of weeks ago, Josh did speculate that it's people getting sad because summer's over. I think there might be some credence to that, but I don't know.

It's still pretty warm here in September. I actually think maybe just coming back from the, all the traders coming back from their beach houses at the Hamptons. I did dig into this a little more. 63% of all months have been positive historically, meaning 37% of the time you get a down month, going back almost a hundred years.

In September, it's more like 50/50, almost exactly. Half the months are positive, half the months are negative. There's been 27 double-digit down months historically for the S&P 500 in the U.S. stock market. Seven of those have occurred in September. Now it is worth noting, four of those seven occurred in the '30s.

But even if we take the '30s out of the equation, I think if you start in 1950, September's still down on average. 2008 was a big one as well. The stock market has been down now the past four Septembers in a row. So I don't know if this is like a self-fulfilling prophecy or what.

As far as I'm concerned though, this falls under interesting, not actionable. Because, I don't know, why does this, I think this is just, I think this is honestly just something that happens. I think this is like, people look at this in a hundred years and it didn't follow, and you try to follow some September.

What is it? I don't know. Buy in May and go away. - If you were a betting man, would you bet on September being the cheaper month to buy stocks? - See, I think there's a sell in May and go away, but there's no buy in September because it'll be something to remember.

It doesn't rhyme very well. Here's the thing. You get paid in May. On average, stocks are up in May, June, July, and August. Stocks are up three out of every four years on average. Don't overthink it. It's really gonna matter what month you put your money to work in three to four decades into the future.

I don't know. I guess if you want to get cute with it, fine, wait till September. But what's the point? I mean, if you're investing in a lump sum, I don't think you try to nail it perfectly. I think most of the time you'll be better off if you just put the money to work right away and not try to game the system.

- Yeah, I was thinking all this data makes it seem like, yeah, what they're saying is a no-brainer, right? But then, yeah, you just kind of, I guess, made the point that matters more, which is you're missing out on several months of the market being up to then buy in a month where it's down, yeah.

- We actually got another question. Someone asked, "What's the best day of the week to buy?" Now, I didn't want to go that far into it, but I think you're getting that nitty gritty about it. Just it's too much minutiae and detail. - There is, I mean, there is truth to, what is it, people sell on Fridays because they don't want to hold things over the weekend?

Like traders, right? Isn't there some truth to that? - I don't know. People always say the stock market never bottoms on a Friday. I don't know. I think these things are old wives' tales and they just sound good because traders have been saying them for years. I don't know if they're actually true.

- We should come up with our own, like a good saying that we can just spread out there. - My brother used to tell me, I think you should buy on Thursdays 'cause people in their 401(k) get paid and put the money in on Friday. And I don't know, it's just-- - Ah, look at that.

- I think you're never gonna gain the system that way. If that sort of thing did exist, Jim Simons would arbitrage it out of existence. - Maybe that is what he's doing, though. We don't really know what's happening inside that portfolio, right? Let's do another bond one. - All right, up next we have a question from Alex.

Ben, you've mentioned quite a few times that when buying treasuries, we can more or less expect the return to match the original yield. Is that true for corporate bonds as well? Would something like LQD be a more or less safe way to expect around 5% return over the next five to 10 years?

- Great question because I've never really looked at this before for corporate bonds. Expect returns in the stock market are basically impossible to pin down because you could have all the fundamentals you want of earnings and sales and cash flows and slap a ratio on them or a multiple, but throw those fundamentals out the window if people are willing to pay more or less for stocks.

That's all that really matters, how much are people willing to pay at that time. But expect returns for bonds are based on math. So John, do a chart on the first one. This is five-year treasuries. This is what we're talking about. And the question here from Alex, this shows the red dotted line is the starting yield.

The black line shows a forward five-year return. It tracked pretty closely. I think the correlation is like 0.95 for all you people who aren't math nerds. That's a really strong correlation means these have a very strong relationship together. I've also done this with 10-year bonds in the past. It's a similar story.

I've never actually run the numbers on corporates, but this is how it was explained to me early in my career. Like future bond returns of anything are just the yield minus anything that goes wrong, like a default. So you don't have to worry about defaults for treasuries because the U.S.

government can literally print money anytime they want, but for bonds, you do. But bond defaults are pretty small, actually. High yield bonds, we're talking something like two to 5% historically, I think. So take whatever that bond yield is and shave a little bit off because of that risk of default.

According to Charles Schwab, investment grade bond default rate was 0% in 14 of the years from 2001 to 2022. It's because we have all these zombie companies walking around, right, Duncan? The highest default rate was less than 1% in 2008 during the global financial crisis, so not too bad.

Investment grade corporate bonds don't default all that often. Now that's out of the way, let's do some charts. First one from Bank of America looks at total returns versus yield. This is only over 12 months, so I'm not a really big fan of this, but it's pretty close, not too bad.

They line up okay, but in one-year periods, you're gonna get more volatility because rates can move and inflation can move and economic growth expectations. I also looked at corporate bond, long-term corporates going back to 1926, forward 10-year returns. That's a pretty good line, right? It's not a perfect fit, but it's not bad.

I think the correlation I found is 0.9 between starting yields for longer-term corporate bonds and forward 10-year returns. I looked this morning, investment grade corporates are yielding around 6%, so yeah, that's a pretty good estimate for returns going forward from here for corporate bonds. The only thing I would caution if you're investing in these corporate bonds is during a recession, these bonds tend to get hit way harder and have a higher potential for drawdowns when we do go into recession.

People sell their corporates, they have a flight to safety going to treasuries. I don't know if that'll happen this time, but that's what's happened historically. Not bad though, right? 6%, you can kind of bank on it going forward, I don't know, five, seven years in the future or so.

- Yeah. - 6% is pretty good. - Yeah, I used to mess around with the junk bond ETF, you know, that was more my style. - Triple levered junk bond ETF? - Yeah, there you go. - It's like JNKZ maybe? I don't know if they have that, but. - Only companies that have gone bankrupt.

- Yeah, there you go. All right, so not bad. All right, let's do another one. But yeah, that's, it makes sense intuitively and it makes sense historically as well. - Cool, I like it. Okay, question four. Question from Justin. My wife and I, 22% tax bracket in Pennsylvania, recently had our first child.

- I love it how people always share their tax bracket with us. - I do like that, yeah, yeah, it's kind of like. - It's kind of funny. - It's one of the shows that shares like weight or like measurements or something. - Yeah, and we're tax brackets. - Yeah.

My wife and I recently had our first child. Unfortunately, the birth was complicated, resulting in a brain injury. Due to the nature of this injury, the range of outcomes is wide, anywhere from minimal impacts to requiring special care. We will not know until later in life what the developmental impacts are, even up until school age.

My initial thought before this was to put money in the Pennsylvania 529 plan. Now, due to the uncertainty, I no longer think this is the right course of action. My thought is to put this money into a brokerage account and assign it to a more optimized vehicle when more is known.

We are also considering contributing more to our HSA due to anticipated increasing healthcare costs. Does this make sense? Are there other vehicles to consider for an 18 year time horizon? So, sorry to hear if this is a sad one. - One of the strange things about being a financial advisor is that sometimes you're called upon during like life's tough situations, like death, divorce, medical issues, and it almost feels wrong to think about finances in a situation like this because you're dealing with so many other things on a personal level, but I'm happy that he's at least thinking about this 'cause you don't want it to be a situation where down the road, since there are a wide range of results, that you're surprised down the line.

So, let's bring in an expert from financial advice to help us with this. Financial advisor extraordinaire with us, Kevin Young. - Hey Kevin, how's it going? - Kevin, how's it going? - Great. - So, my initial thought here would have been an HSA. It sounds like that's already been thought of.

Is there anything else to think about here? Like some sort of trust, any other sort of insurance? What else can we assume here that would make sense to cover your rear end on something like this? - Yeah, yeah. So, this is a great question and it's close to my heart.

My seven-year-old Jack has pretty severe special needs. He was born with a very rare genetic condition. And so, I have walked in your shoes, Justin. It's not easy, but you'll get through it. And some of the things you can do to put yourself in a good position, you're already thinking about.

An HSA is a great idea, maxing that out. Because even if the effects are minimal, which we hope is the case, being a parent, you're gonna have medical expenses over and above what your healthcare is gonna look like. Your deductibles aren't gonna, are gonna be higher. Whatever the case, HSA is always a great plan.

- Yeah, with kids, even if there's not some sort of special issue, there's a lot of trips to the doctor. - Yes, absolutely. And the other thing you can start to think about a little bit is a lot of states, Pennsylvania being one of them, has what's called an ABLE account.

And an ABLE account, A-B-L-E, is a part of the 529 section of the tax code. And what it's designed for is, unlike a typical 529 where people put money in and it's used for higher education expenses, an ABLE account is used for medical expenses for people with disabilities. And the great thing about it is it functions very similarly.

You put money in. The state of Pennsylvania is actually one of the best because you can get a tax deduction up to $17,000, which is-- - How many states have the availability for this account? - A lot of states have the availability for the account, but I don't, there might be one or two others that actually offer you a deduction.

Pennsylvania is actually the best one I've seen. Unfortunately, it's only for Pennsylvania residents, otherwise I would have one. - Yeah. - So what's great about it is similar to that regular 529, you get the deduction up front. The money is gonna grow tax deferred. And if, when you take it out, if it is used for a qualified expense, which in this scenario could be anything, assistive technology devices, medical appointments, you know, changes to the home because you need a ramp or you need, you know, special equipment in the house, anything like that can be paid for with this.

- So it works kind of like an HSA a little bit. - It's very similar to an HSA. And the other great thing is if these, you know, if the problems are a little bit more substantial and there's a path down the road to be getting benefits from the state, an ABLE account will not mess with your ability to get those benefits.

So they do not, even though the assets are for your child, the state will not look at those assets at something that would reduce their benefits either now or way down the road. So I'd encourage you to check out, I was on the Pennsylvania site yesterday, checking into this.

It's a really good resource. So I'd highly encourage you to check that out. The other thing here to note, because you don't know what this is gonna look like yet. And that was the way that we were. We still have some questions about how Jack is gonna be ultimately, but it's very different than what we imagined in good ways.

But you can always roll over from a regular 529 plan into a ABLE 529. So if you wanted to make those contributions to the regular 529 today, and then three, four years from now, you realize, okay, maybe college isn't gonna be the answer here. You can roll over up to the gift amount, which is 17,000 this year, you can roll that into the ABLE account.

- Wow, okay, so there's a lot of options here. This is way more than I, I'm not really familiar with this ABLE account. So he has some good options here that sounds like they're pretty flexible as well. - Yeah, yeah, they're really flexible. They're gonna give you a similar breakdown of investment options as well.

And I think Pennsylvania, you can have up to $100,000 in the account before they start to ding you for benefits. The really cool thing about Pennsylvania too is they've got a link where you could, you can send it to somebody if somebody says, "Hey, what should we get the baby for a gift?" There's a link that'll go right to the account.

And so if they wanna contribute money as a gift or anything like that, they can do that as well. So it's great. - That's awesome. That's good to hear. So Justin actually asked another follow up question about his wife. So why don't we come on again. Here's another one.

- Okay, my wife is a teacher and is enrolled in the Teacher's State Pension Plan. The payout is a formula based on average salary, years of service, and a multiplier. This is quite difficult to forecast for many reasons, including how long my wife will want to work, average salary, 25 years in the future, when you can withdraw without penalty, and the solvency of the plan.

My question is how we should be thinking about this pension plan. We have access to several options, 401(k), Roth 401(k), 403(b), Roth 403(b). Should we consider this plan icing on the cake? After 30 years in the plan, my wife would be around 62 or 63. Perhaps it would be good to push more money into a Roth to have more flexibility if she wanted to retire a bit early.

Looking for some general thoughts on this situation. - So one of the joys of financial planning is like a never ending stream of unknowns. And this is the kind of thing too, where you want to be able to bank on a pension being there. We actually get a lot of questions from people saying, listen, I'm in this state and I don't trust the government 'cause they're spending too much money.

And I'm worried my pension's not even gonna be there. So I think they're thinking about it similarly and wondering like, are they gonna change the formula on me? Or are they gonna call back some of this stuff that they're promising me because they can't afford it in the future?

So how do you think about, especially, I mean, it's a little easier if you have someone who's approaching retirement age and they're looking through this because in those situations, they're probably gonna be grandfathered and you don't have to worry about it. How do you approach something like a pension in terms of financial planning?

Because you have the formulas here. And from the math side of things, it should be relatively easy. You could map out the income, you could map out what it's going to be from the pension, but people are still worried about this stuff. So how do you approach these things?

- Yeah, so I think, he used the term icing on the cake. I think that's how you think about it. I would probably save and invest like it didn't exist if it's 30 years from now. Because you just don't wanna put yourself in a position where you're counting on something that doesn't end up happening or happens at 70% of what you had thought it was, et cetera.

I think pensions are a lot like social security. No politician is ever gonna run on reelection on getting rid of or cutting social security. Similar to state pensions, right? - I was thinking the same way. I think a lot of young people in the back of their mind have thought of social, they're planning for social security not being there, but I think it's going to be there even if it's diminished in some way.

Because yeah, you're right. No one's gonna take away that benefit in their right mind. 'Cause a lot of people think that's mine, it's my right. I think a lot of people are thinking of it the same way. And I agree, it could be diminished a little. I don't think it's gonna be, especially for teachers.

I don't think that pension's not going to be there. - Yeah, that's a political landmine, I would think. But again, just assuming even for social security in general, right? Like we're living longer, when it was designed, it wasn't designed to sustain a 30 or 40 year retirement, right? So things might have to change at some point, whether it's social security or a pension, you don't want to rely too much on something, even though it's a promise and it's a guarantee.

It's just not something that you want to fully bank on. And so I think if you have the ability to save in different types of accounts, at the 22%, this is the same Justin, right? - Yes, yes. - Okay, so at the 22%-- - Yeah, we already know the tax bracket, right?

- Yeah, this is really helpful. Everybody needs to put their tax bracket in when they email us questions now. So at 22%, probably lean towards the Roth just because you're not getting as much bang for the buck on the deferral. - Bill's so happy in the chat now. - Yep, Bill Sweet would like the fact that you agreed with him there.

- Yeah, yeah, yeah. So there's a sweet spot and I only know that because I get to work with Bill Sweet and Bill Artzaronian. So you have a lot of other options and I would continue to do that. And then hopefully the pension's there in full and that's great.

- I talked to a family member recently who is reaching retirement age for a teacher, I think it's like 55 or something, and was talking about the pension. And I said, "Do you realize how much that pension is worth "if you put a present value on it somehow?" That's kind of tricky to do because it deals with discount rates and stuff.

But she's like, "If you backed the income out "and turned that into what it would be "if you had a lump sum." It's a big amount of money, bigger than most people would realize if they tried to turn that into an annuity or something. - Yeah, and in the corporate world, you're starting to see, I've certainly seen it with clients of mine that if they worked someplace 10, 15 years ago and they'd been there for 20 or 30 years and they have a pension, they're getting letters saying, "Hey, we'll buy you out of this right now "and here's the amount we'll give you right now." And you go in and you do the math and you figure out, "Well, what would I need to return in the market "to do better than this?" But again, sometimes it's just, "Hey, I know we probably could do a little better "in the market over the longterm, "but I love the idea of that guaranteed check "coming in every month." - Exactly.

- Which has meaning. - And it's an emotional thing, yeah. - Kind of like a basic, maybe nuboil question for you guys, but a pension, you don't get to select what funds are in there or anything, right? You just have a share of the pie. - No, they invest it for you and they have to reach their bogey and yeah.

- This was on your practice test question before you went live. The pension, they bear the risk of the investment. - Oh, that's what that meant. - That's what that means. - Okay, I see. All right, one more question. - Okay, last but not least, we have a question from Eric and sorry, Kevin, we've got the bummer questions for you, but Eric writes, yeah, Eric writes, "My father recently passed away "and my 71-year-old mother will be receiving "approximately $800,000 in life insurance proceeds.

"My mother's level of financial literacy is low. "My dad always handled the finances. "So I will be in charge of overseeing the management "of the life insurance proceeds. "How would you recommend investing these funds? "Their only debt is a mortgage with $200,000 remaining, "seven years left at a 3% rate, "about a million dollars in equity." So sorry to hear Eric.

- We've talked in the past about why people get a financial advisor. This is one of the reasons, especially a lot of like DIY people come to us. They say, listen, I've managed the finances fine myself, but I want my loved ones or my spouse to be taken care of.

I actually have one guy, guy has about $10 million. We've met with him a bunch of times over the years. And he says, listen, I like doing it on my own. I'm gonna continue to do it on my own, but I have a letter that's gonna go to my wife.

Should I pass before she does? And it says, call up the folks at Ritholtz and have them take care of you. But this is the kind of thing that makes sense. So I guess it's probably too simple to tell this guy that his mom needs a financial advisor. My only advice here would be just don't be in a hurry because emotions are probably already high.

Like don't just sit on the money forever, but I think take your time and be thoughtful about this decision as well. And maybe reach out to a professional for some help. - Yeah, we talk about getting rid of a single point of failure in a financial plan. And that's what happens when there's a do-it-yourself investor with spouses or children or people that need to be taken care of after that person's gone.

And it's far more common than not probably. But for this person, that burden now is on your shoulders. So figuring out not only what's best for your mom, but also making sure that you're not taking on too much of a burden for that, that you understand everything that's happened.

God forbid something happened to you, now we're back to square one. - Yeah, someone with low financial literacy. I also think the probability for a scam is high here. So I'd help your mother find someone. Because if we have a million dollars in equity in a home and $800,000 in life insurance, there's probably more money there too.

She's gonna have a huge target on her back from people who are going to try to take advantage of her. So I would help her just make sound financial decisions. I don't think, yeah, you need to take over the management of the money. I would probably try to find someone to help.

But I would at least help her make good decisions in terms of who to hire and go through that process with her. - It seems like you also have to take into account, like Kevin was kind of alluding, just how much the stress of having this on your back is worth.

- It's a lot. - Because yeah, if you make a choice that is perceived as wrong down the line, you're the guy that lost mom's money, like that kind of thing. Seems like there's a lot of pressure there. - Yeah, and these types of things, you wanna find a good fiduciary advisor that can handle this stuff for you.

Because yeah, you never want... I don't know if you have siblings or if there's other family members involved that say that there's an investment that goes wrong and now it's your fault. Well, that could open you up to liability. And these are not fun topics to talk about. But you have to think about this stuff.

And what happens if you're out of the country and mom needs, mom's boiler went, she needs $5,000 immediately and you can't do it. These are like just little things that where it might make sense to get a professional to help you out with this stuff. - Yes, family and money is not something that mixes very well.

- Sounds like a blast. - Yes. - But yeah, sorry for your loss here. - Yep, thanks for helping out today, Kevin. - My pleasure. - Good questions. Tune in tomorrow morning for a brand new episode of "The Compound and Friends" with Josh and Michael. Email us as always, askthecompoundshow@gmail.com.

Maybe leave a comment in YouTube here. We're always looking for questions. Appreciate everyone in the live chat as always. - Share with your friends. - Yeah, thanks everyone. - Yep, thanks everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)