Welcome back to Portfolio Rescue. We always appreciate your questions, comments, feedback. Email us, askthecompoundshow@gmail.com. Duncan, hit us with that liftoff video. We have to see it. Gotta fade the music first. Okay, let's do it. 5, 4, 3, 2, 1, 0. Liftoff. Liftoff. 30 minutes to after the end. So I get the koala bear.

You know, well, that's what people like about it. You know, I thought that people would be tired of it. There's a lot of requests for the koala bear now. I'm bullish on koalas. We've got a new one at our zoo here. Today's Portfolio Rescue is sponsored by Liftoff. Duncan, I created a Liftoff account for myself and my wife two or three years ago.

And since it's powered by Betterment, what you can do is create your own goals. And I just created a goal for each one of my children. So there's a George, a Kate, and a Libby, all three of my kids. And I created a sub-account for each of them because I want to teach them the value of compound interest.

I want to show them like cost and value over time. So I'm investing just a little bit in there, 50 bucks a month, let's call it, each month for them. And then I'm matching anything that they put in there. So I told my daughter, "Listen, you get 40 bucks for your birthday.

Take half of it. Spend it on yourself. Buy your little toys. But then take 20 bucks, and I'm going to match 20 bucks. That's 100% return." So I'm trying to incentivize them to save. I'm trying to introduce them to the financial markets to show, maybe I should show them now.

I should show them their accounts now to show them they're down. Then I want to establish a little baseline for them. So when they go out into the real world, they're 18 or 21 or however old they are, when they finally are out of my hair, maybe a down payment for their first place, wedding, that kind of thing, first month's deposit, maybe three beers in Brooklyn if they move to New York, that sort of thing.

So if you want to learn more -- It's nice you're not even taking a tax cut or anything, you know? No, I'm giving them more money. I'm like their 100% 401(k) match. Liftoffinvest.com, if you want to learn more, you can talk to an advisor there. You can set up an automated account.

It's pretty sweet. So last week, we kicked off the show with a question from a young viewer who said, "This is my first bear market. Are they all like this?" And we gave some advice to young people, which is actually relatively simple in these times. It's just Nick Majulia, his book, Don't Stop Buying or Just Keep Buying.

That's pretty much it. You don't stop investing because there's a bear market. You actually want to keep investing for sure then. So the advice for young people is pretty simple. Keep saving. Don't get scared out of the market. And then, of course, we had a couple retirees who said, "That's great.

That's easy for young people. Not easy. Simple, but not easy for young people." What do you say to retirees dealing with this? "I don't have the human capital anymore. I'm not saving. I don't have as much time. And I'm dealing with this bear market in stocks and bonds. What do you think?" And so, here's what I tell a retiree.

The good news is, the returns for a diversified investor have been lights out coming into this year. So I just looked at the simple three-fund Vanguard portfolio. So you have U.S. Stock Market Index Fund, International Stock Market Index Fund, Total Bond Market Index Fund. That's a three-fund Vanguard portfolio.

Through year-end 2021, before this year, over ten years, that portfolio of a 60/40 three-fund Vanguard was like 8.5% per year. For 60/40. And that's a time when bonds did pretty terribly. So obviously, if you had more stocks, you did much better. That portfolio was down almost 20% this year.

So that's what people are saying. "This is terrible. I just retired. What now?" Even if you include the 20% down this year, over the last ten years, it's still up 5% per year. That's with two bear markets and bonds giving you basically nothing. So, if you are more heavily in stocks, since 2012 the S&P is up like 12.5% per year.

That's with this bear market. At the lows. Russell 2000 is up almost 10% per year. International stocks haven't done quite as well. So, here's the thing. If you're a retiree, you've been building up financial assets for a while, you did pretty well heading into this thing. So this is just kind of the other side of those wonderful returns that you experienced to this point.

If you own your home, you have a massive amount of equity in it. Right? Maybe housing prices roll over a little bit. You've seen such huge gains there. You're doing fine. It's no fun to see the value of your portfolio, of your house go down a little bit, but the gains you've experienced in the last 10 or 15 years should more than make up for any losses you've seen this year.

Plus, there's some silver lining to the carnage this year. It's no fun, because that other side of your portfolio, the anchor bonds, have not helped much, if you've had any duration on. But yield was back for the first time in a long time. So a year ago, these are the yields for short-term bonds, corporate bonds, and high-yield bonds.

Short-term government bonds yielded about 30 basis points. Corporate bonds were a little over 2%. High-yield bonds, 4.4%. One year ago from today. Today, short-term government bonds yield 4.4%. So in one year, short-term government bonds now yield what high-yield bonds were earning a year ago. High-yield is now 9%. Corporate bonds are approaching 6%.

Muni bonds, you can probably get anywhere in the 5 to 7% range, on a tax equivalent basis. And you have these Treasury Inflation Protected Securities tips that we're going to talk about in a question in a minute here. So, as a retiree, you finally have higher expected returns in the safe part of your portfolio.

So, yes, you've had to deal with some losses to get there. But now, I think you can actually look at this, and for the first time in, I don't know, 12, 15 years, say, "There's a safe part of my portfolio I can actually put some money in that's giving me some yield, where I don't have to take all this volatility." So, as a retiree, yes, you're dealing with losses, but you're actually in a much better position today than you were a year ago, taking away the losses.

So, going forward, you're in a much better position today. Yeah. It's crazy to see the way that the questions change over time. We're seeing a lot more bond questions, a lot more tips questions now. There, for a while, it was like, bonds were so uncool, left for dead, no one wanted anything to do with them.

And they were kind of dead. And bonds didn't do much. And obviously, now they've lost money. But now, finally, you can have some 4-6% yield in relatively safe bonds. Obviously, if interest rates keep going up, that's going to ding you a little bit. But if interest rates keep going up, guess what?

Your future returns are going up as well. So, I think the first one here we have about tips, actually, we've talked about them a little bit in the past. Let's get into the first one here. Yeah. This is a segue. Okay. So, Seamus writes -- I'm a pro, Duncan.

I'm a pro. Seamus writes, "I'm a new investor and still building up my emergency fund and paying off debt. I just discovered Treasury Inflation Protected Securities, or TIPS, and I'm thinking of diverting my monthly emergency fund payments going forward into a TIPS ETF in my Roth IRA account. I'm not currently maxing out my Roth, and I see this as a good low-risk way to max it out, but the yield seems too good to be true.

Am I missing anything? For context, I'm a government employee with a solid pension that would pay out 76% of my final take-home pay every year once I retire at 62, 2% for every year worked. I'm also starting to put money into a 457(b), so any money in the Roth would be a bonus." I don't know what a 457(b) is, I've got to be honest.

No. 457 is like a 401(k) for non-profits, essentially. Oh, I thought that was 403(b). So, there's another one. Okay. Oh, yeah. Okay. I think it's more of a government one. I don't know what this one is. Also, Seamus, great name. Duncan, you went to Scotland, right, for your honeymoon a little bit?

I did. There had to be a lot of Seamuses there, right? Probably. Okay. All right. So, if you missed out a few weeks ago, I think it was the episode we did with Josh. We did a tutorial on tips, and someone asked us at the time, "Why are tips down when inflation is higher?" We did a whole thing on that.

The short answer is, interest rates have risen. But the nice thing about rising rates for bonds, as I kind of mentioned a little bit ago, is eventually those higher yields turn into higher future returns. So, John, let's do a chart on for the five-year tips yield. So, this is from the Federal Reserve.

You can see this is since 2010. And these are the yields on tips. And what this essentially is showing you is a yield on tips with, again, this is Treasury Inflation Protected Securities. The yield you get here, you tack on inflation to it. So, you can see, throughout from 2020 through late 2021, you were getting negative yields in tips.

And so, it was close to -2%, and then you could add inflation on top of that. So, if your yield was -2%, you're basically buying that bond at a discount. And then, if inflation was 3%, your total return would be 1%. Well, now, yields in tips, because interest rates across the board have come up, they've gone from -2% to almost +2% in a hurry, because rates are rising everywhere.

So, what does this mean? It means tips are way more attractive. We haven't had yields this high since pre-Great Financial Crisis. So, why does this matter? Well, back when yields were -2%, even higher inflation would be eaten up by that. So, now you have +2% plus inflation. So, that means your starting point is 4% higher from expected return level in a little less than a year.

That's how much rates have come up. So, let's say the Fed's able to bring inflation under control, and they get it down to 3% or 4%. Interest rates just stabilize. They don't go down, they don't go up. We're talking about a 5% or 6% expected return in tips, taking away the variability of interest rates and inflation and all these things.

That's amazing, when you think about it. Or, let's say they're not as successful. Inflation is 4% or 5%. I think this is a wonderful -- so, the general rule of thumb for tips is, if they get to a 3% to 4% nominal yield, that's like a screaming buying opportunity.

Because if you add inflation onto that, that's about as good as you're going to get. That's very rare. The last time it happened in the last 20 years or so was 2008, and that was a brief period, because people were throwing the baby out with the bathwater. I don't know how that became a financial saying.

Does that happen? I think it must have happened. For people to say it, it must have happened at some point. Back in the day. So, it's very rare. And even 2% is relatively rare. I honestly wouldn't expect these yields to last very long. 2% in tips is pretty darn attractive for me.

Now, there are some caveats, because Seamus is asking, "Should I use this for my emergency fund?" There is some variability here. We talked about this. Tips can lose money. The thing is, with a 2% yield and inflation as the kicker, you have a much bigger margin of safety now if rates continue to rise.

So, yes, inflation protection is nice, but these securities can be volatile. So, I've mentioned this before. It probably makes sense to stick with a short-term tips fund. You can get these at any fund provider, iShares or Vanguard or Charles Schraub or whatever. It's also possible these rates would fall during a recession, which would actually help push prices up, but then it could hurt your yield from there after that.

So, I don't know. We're in a very weird place right now in the markets, but this is the first time in a long time I've actually felt pretty good about bonds. And at least in the short to intermediate term, if I ever get bullish on something, which is rare, I'm probably more bullish on bonds than anything, which maybe is a reason to go against me here.

But there's a lot of places to park your cash now. You have a lot of options. So, tips as an inflation hedge makes sense, even though it can be a little volatile. You're kind of looking like a hedge fund manager today. Maybe you should launch a bond hedge fund?

I told you. The only reason I'm wearing my vest today is because it's a little chilly out, which, let's be honest, a vest, it's a useless article of clothing. I mean, it keeps your chest and your stomach warm, but your arms are just free. Your arms are still cold.

In New York, I feel like it's useful because I see people and I'm like, "Oh, they probably work in finance." The only reason I'm wearing -- I had a little chicken, egg, and cheese sandwich from Chick-fil-A this morning, and I looked down right before we did this and I had a piece of cheese just all over my shirt.

So, that's why the vest is on. We appreciate the vest. All right. Next question. Up next, we have a question from Webb, who writes, "The setup. In 2020, my wife and I bought a home and took out a $550,000 jumbo loan at 3.25%. Part of that loan required us to give additional financial info so we could get a lower rate and our mortgage could be sold individually.

Basic finance tells us that interest rates and bond prices are inverted and as interest rates are mooning, that would theoretically devalue our single home mortgage bond. The 30-year treasury is 3.6% risk-free. Who's going to want our mortgage on the books? The idea, if we were able to come up with the funds, we could go into the market and buy our own mortgage at an increasing discount, if we could, it would essentially end our mortgage, right?

And the value we would gain would be the 3.25% interest, original loan amount, minus current market value of loan. Am I big-braining this too much?" I'm going to say yes, because I don't even understand what this question is, hence me having trouble even reading it. Lewis: All right. The general idea here -- and I've heard a lot of people actually say something like this.

The general idea is, interest rates on government bonds and all these other things are now higher than the mortgage rate, right? That puts you in a great position. John, do the chart on. This is from John Burns, they're a realty research company. The distribution of primary residences with different rates for their mortgage, and you can see 73% of outstanding mortgages are locked in at below 4%.

A third are below 3%, and 40% or so are 3-4%. So, the idea that government bonds are now yielding more than your mortgage puts you in a good position. A lot of people think, "Well, geez, if I just bought a 3.5-4% mortgage, I could essentially pay myself for free, and the income I earn on that bond would essentially pay for my mortgage." Which sounds awesome in theory.

I think they are big-braining this a little bit too much, because, I mean, let's just think about this here. First of all, you probably couldn't get in there and buy your own mortgage, and I don't know why. That'd be kind of weird, because they package these together. But let's say you could.

A 30-year treasury is yielding around 3.5%. You buy that bond, and the income pays for your mortgage. But here's the thing you're not thinking about. You have to pay taxes on that income. So, every year, you're paying taxes, so that kind of eats into your yield a little bit.

You think you could probably make more. The other thing is, you have to actually have that amount of money. So, you have your $550,000. You have half a million dollars sitting in cash. Now we're talking opportunity cost. So, you could invest in those bonds, and the income would pay you.

I mean, you could tell your friends that at dinner. I don't know how many people are going to be really excited about a bond, but, "Hey, I bought this thing that's paying for my mortgage." Isn't the simpler option, if you have the cash, just pay the mortgage off, if you really want your mortgage paid for?

Right? Because then you're taking the payment away, and it's just simpler. It takes the middleman out. It takes a step out. The other thing is, what else could you do with that $550,000? Because you're paying for your three and a quarter percent mortgage. What if, instead, you invested in the stock market and earned seven or eight percent?

We're talking about leaving three to four percent on the table, right? Three percent per year, over 30 years, the life of this loan is, I don't know, on a half a million dollars, it's like three million bucks. Right? You earn an extra three percent in the stock market. That's like three million bucks you're leaving on the table.

So, obviously, you can reinvest the money that you're not paying for your mortgage right now, and maybe you don't care about opportunity cost, but in that case, if you have the cash, just pay the mortgage off. Don't buy the bond to then pay yourself back for the mortgage. I think, as always, less is more in these things.

So, I think the question is, if you have that much money, and not everyone has a half a million dollars just sitting around to buy their own mortgage or buy a bond that pays for it, just pay the loan off or invest that money in something else that can earn a higher return.

Yeah. I feel like if this question was a film director, it'd be Christopher Nolan. This feels a lot like an Inception type thing or something. It's interesting because I think a lot of people, the movements we've seen in interest rates have been so fast and so big that people go, "Wow." I think just count yourself lucky you have that low interest rate and do everything you can to hang on to it.

And so, maybe don't pay it off at all and invest in something else because that low rate is being eaten up by inflation. It's a great asset to have. And I would just -- yeah. Don't overthink it. Yeah. Good advice. Let's do another one. Okay. Up next, we have a question from Adam.

"Can we start a movement to set the Fed funds rate using a blockchain smart contract? Unemployment rate, inflation data, housing data, retail sales, and industrial production ought to be enough to set up an algorithm that at least does halfway reasonable things all the time. The idea that we can cut rates to zero, then leave them there unnecessarily long, then raise them too quickly, and then too high is just crazy." All right.

They have a point. The Fed is not very popular right now. The question is like -- I went on a little rant on the Fed this week on Animal Spirits. The question is, why was the Fed created in the first place? All right. From 1853 to 1933, the United States experienced a recession or depression once every 3.9 years.

The average contraction in GDP during that time was 23%. It was -- I mean, we were essentially an emerging market back then, but that's why the Fed was -- one of the reasons the Fed was established in 1913 was to be the lender of last resorts. Because we kept having all these bank runs.

And it was actually the panic of 1907, which -- I got some visuals. Pretty good book on it here, of the same name. This is when J.P. Morgan had to step in and essentially personally guarantee the banking system and kind of stop it. And then, in 1913, they finally set up the Fed to help -- and essentially, the Fed is the lender of last resort.

Now, I'm guessing an algorithmic Fed on the blockchain is probably not going to fly these days. But a lot of people think a rules-based framework with the Fed would make more sense. Like you said, some sort of rolling average of the unemployment rate or some other economic data. I mean, John, throw the chart on.

Just look at how closely the Fed funds rate follows the two-year Treasury yield over time. Now, you could say, well, the two-year is getting its marching orders from the Fed funds rate. But you can see, actually, the two-year starts rolling over a lot of times before the Fed funds rate, and maybe they're just kind of predicting what the Fed's going to do.

But market interest rates have done a pretty good job predicting what the Fed is going to do with short-term rates. And you can see right now, the short-term rates are, in the two years, much higher than the Fed's rate, assuming that -- that assumes the Fed funds rate is going to keep coming up.

But even if a rules-based framework like this worked 95% of the time, it's probably that other 5% of the time that you want a governing body like this, and that's in a crisis. So, I think, as bad as I think the Fed has done recently trying to snap the economy's neck, I think they did an admirable job of keeping the financial system afloat during the pandemic.

That easily could have been, the credit systems completely blew up and blew apart, the innerworkings and the piping of the financial system could have easily gone under, and we could have had a Great Depression because of the pandemic, when the government was still trying to figure out how to send out checks and give people money.

I think the Fed stepping in there was big. So, I think you have to have them in those kind of times, where, again, they are the lender of last resort, when no one will step in. That happened with the Bank of England this week. It looked like a bunch of their pension funds were going to blow up.

And because interest rates have been rising, and because of the way that these pension funds are set up, do you really want mom and pop to have their pension blow up because there's inflation? No. So, the Bank of England stepped in, and they put a stop to it. That's what you want them for.

Some people say, "Well, moral hazard." Well, guess what? That's what they're there for. They're the lender of last resort. They don't want a disorderly thing to fall apart, just so some hedge fund manager can say he bought bonds for pennies in the dollar, or whatever. So, you could quibble with how the Fed handles the other 95% of the time.

But I think for the 5% of the time that really needed in a crisis, that's probably why they're here. Anyway. So, unless you want to go back to a system where we have a depression or a panic every three years, the Fed is probably better than a blockchain contract.

Because the original blockchain contract was the gold as a global reserve currency. We had to back up dollars with the gold. And that's part of the reason that we got this, because it was such a hard line, and the rules were too hard to fast. Yeah. And it should have been palladium, right?

That would have made more sense. I don't really know my Fed history. Is there a Fed chair that is looked back at as being someone beloved in general? Or do they always end up making people mad? Well, the funny thing is, it's different. Alan Greenspan was beloved at the time, and now he's kind of hated, because everything he does is blue bubbles.

And then Paul Volcker was absolutely hated in the late '70s and early '80s for jacking up interest rates, and now he's loved. So it kind of depends on when you're talking about. If he throws us into a recession, Jerome Powell is definitely going to be hated, I think. People are going to hate him for missing inflation and sending us into a recession.

So he's not going to be the most loved guy there is. Got it. All right. Let's do another one. Next question. Okay. Tyler writes, "I'm 35 and work for the government. I'll be able to retire at the age of 55 in 20 years, and my pension should pay me $80,000 to $100,000 a year.

I'm still able to invest in a 457(b) and max it out, as well as my Roth IRA. Does it make sense to go all Roth for the 457(b), since my pension will be taxed as normal income when in retirement, since my pension money will act as fixed income bonds?" So this is actually our second question with someone who has a pension, which is very rare.

I think from my research I found from my retirement book, in the 1960s, like 60% of workers had pension that covered at least part of their income, and today it's like 17% and falling fast. So we put out the bat signal here because there's a word "Roth" in here.

So let's bring in our favorite tax guy, Bill Sweet. Bill Sweet. William Roth, my dad. All right. So the idea is they know they're going to have some income coming in, and they're trying to figure out asset location here, and maybe asset allocation. How does pension income impact tax planning here?

And does that actually make it more sense for going all Roth? By the way, 457, was I right on that? Is that a nonprofit thing or is that a government thing? Yeah, it's a government. In some states, agencies use them. Different than a 457(f). If you're not in the comment section, there's some hot traffic going on about 457(f)s.

Can we just skip back, though? Can we go back to question three? Is really the solution to today's problems an algorithmic stable fed? Because that's never gone wrong. Look at Google, Tara, and Luna. But let's get back to Tyler. People are always asking me if I know Tyler Durden.

Duncan, are you a Fight Club guy on the Fincher rankings where you were Zodiac, Gone Girl? Yeah. I mean, no, it's good. I'm not crazy about it like a lot of people, but it's a good movie. I pictured you to be a mankhead. But no, great question, and congrats, Tyler.

I think the interesting portfolio question is, would you treat a government pension as a bond? Because more or less, it's a very high amount of fixed income that's coming in monthly. But super duper interesting question, and a really great place to be. If you can max out a 457(f), that means you have the potential to save $20,000 a year, which is fantastic.

So ultimately, 457(f)s work a lot like 401(k)s. The concept there is the same. And the questioner, Tyler, is thinking about, do I take this pre-tax, save the tax money now, or do I eat it as a Roth, take the tax now, and then I get tax-free distributions in retirement?

So just some quick setting the stage. Let's just say Tyler's earning about $120,000, assuming this is all checks out. So he's probably at a 24% tax rate today, let's say 6% for a state. In the future, this is a great place to be, $100,000 pension, right? Plus $30,000, let's say, Social Security, plus, let's say, $15,000 are RMDs.

He's going to have about $145,000, $150,000 of future income. That's just obviously fantastic. And Tyler's made some good decisions to get there where he is in life. So ultimately, my diagnosis, though, is his current tax rate is probably going to be identical to his future tax rate. There's probably some nuance there in the state level we can debate and discuss, but I think it depends on very much.

So ultimately, it's just a question. Do I want to pay tax on $20,000 of income, $6,000 of tax? Do I want to pay that now, or do I want to pay it in retirement? And I think it's more of a moral question, like, do you want to have an account that is $500,000 30 years from now tax-free, or let's say, a $750,000 that you have to pay 100% of tax on?

Without knowing everything, it's very hard to say, but I'm a big Roth guy. William Roth, my dad, my father, that's where I'd go with this. And I think a Roth IRA for somebody with 35, my bias is we're in low-tax nirvana. So that's the direction I'd go with this.

But I think it's a toss-up. Ben, what would you prefer? Well, you always tell me, you made me switch my 401(k) to a Roth, so I'm going to defer to you here. Yeah, do yourself a favor. And your kind of thing that you set up to me was, at my stage in life, I'm in my early 40s now, you said, you're getting to that point where you're going to reach up to higher levels of income.

A Roth makes way more sense. And I guess, I think about it too, if you can save the same amount on a Roth as a regular, it feels like you're saving more. That's it. That's it. Because ultimately, yeah, the after-tax value of that Roth is 30% higher, in my math for Mr.

Tyler, than it is if it's pre-tax, right? So ultimately, he would have access to $6,000 extra of taxes that he wouldn't have paid. But ultimately, people usually don't take that into account, Ben, as you know. I think personal finance-wise, pay yourself first, pay the tax now, and ultimately, you can enjoy that tax-free benefit later.

And will he be paying taxes on his pension in 20 years? Yeah, I mean, yes. Again, if you buy my argument, we're in low-tax nirvana, government spending a trillion dollars a year in excess of income. Ultimately, that'll get recaptured at some point, inflation or not. So ultimately, yeah, I would expect his pension's going to be taxed.

Probably some nuance in the state, but I think it can be worked out. But I think at age 35, I'd still push into Roth now. Yeah, it seems like a good point in life. And as far as the thing about pension income as a bond, it certainly allows you to take more risk because your portfolio doesn't have to fulfill as much of your income.

So that's the way I look at it. It's not necessarily bond. It is income, but it's almost like you have a job that you're not working at. So you have less income that has to come out of your portfolio. So does that-- for some people, that gives them the peace of mind where they can take more risk.

Other people say, why would I have to take more risk if I had this income? So it depends on your risk tolerance, basically. Exactly. And this is the value of a financial planner. It's almost like we're in this business. We answer these questions for our clients every day and give them specific advice.

But this is a great place for Tyler to be. Good luck to you. Yeah. Next question. OK. Up next, we have a question from Mike. Not to brag, but I'm a 64-year-old married retiree with $3.6 million of investments. I retired at age 59. No debt and a $60,000 pension.

We have been doing Roth conversions up to the top of the 24% bracket for the past four years, which usually results in about $180,000 Roth conversion per year. Currently, we have $1.15 million in IRA and $1.657 in a Roth. Plan is to continue conversions for at least the next five to six years.

Goal is to have very little taxable income at 70-plus years of age. Roth conversion taxes calculated out to be about 1.4% of our investments. Can we withdraw around 5.5% to compensate for the Roth tax burden? I haven't attempted the math, but speculate we can safely take out more than 4% since future retirement accounts will essentially be all tax-free Roth.

Duncan, I think we need a not to brag t-shirt that we send to the person who does the best not to brag every week. Yeah, this is a pretty good one. I like this question. It's basically, how do taxes impact withdrawal rates? I've done the research on Bill Bengen's 4% rule.

The guy has been dining on that his whole life. I'm sure he goes to every financial conference he goes to, the guy never pays for a drink. That's great. Right? Yeah. So I've never really seen any work with this in terms of taxes. So Bill, this can be your corner.

You have to do the white paper on this and be the person, but I don't think I've seen any work on this. If you have the majority of your retirement assets that are tax-free coming out as a Roth, and you originally were going to go for the 4% rule because you were worried about paying some taxes too, could you take a higher percentage out because you're not paying those taxes?

Yeah. This is a great problem to have for Mike, first off. But secondly, just thinking about it esoterically, the question I want to answer is, how much Roth is too much? Right? But I think to answer Mike's specific question, yeah. I mean, I wouldn't factor in the Roth conversion because you're not consuming those assets.

Right? If you're converting assets from a traditional IRA to a Roth IRA, that's really just future spending. You're just choosing to prepay your tax. Right? And if ultimately, if the only debit there is the 1 point whatever percent of living expenses that are going to pay the taxes, all you're doing is just accelerating the tax that you would be paying in the future.

When you've got R&Ds, when you've got other stuff going on, maybe your pension is higher there, God willing, it's COLA adjusted, and compounding at 9% a year, that thing could double, right, in the next seven years, God willing. Or maybe not, because I don't want that inflationary environment. But moving back, ultimately, all he's doing is just prepaying tax.

Right? And ultimately, he's just pushing that consumption out into the future. I think this is very valid, and I would think about it. But Ben, the question I want to look at is, if he's got 1 point 6-- again, great for him-- $1.6 million in Roth and $1.1 million in IRA, is that too much?

Is that too much of a balance for somebody at 64? What do you think? Right, so I guess you're saying the idea is, since he's paying the taxes now, his balance could be bigger in retirement if he didn't pay the taxes now, because he'd be saving that money and investing it.

Yeah, but it depends on what game he's playing. Yeah, so I think my general theory-- and this is the problem that I think Roth solved-- is that people tend to optimize for their net worth. What I really think they should be optimizing for is after-tax spending. Right? And so if I'm 64, just actually, how much time do I have left?

20 years? And ultimately, I'm doing these Roth conversions. I think it's wise to do that up to 24%. But what for? Right? What am I doing this for? And ultimately, at some point, you would want to think about, am I doing this because I want to pass on these assets to my children tax-free?

This is a great thing to do. If it's a charitable intent, I would stop Roth conversions now, because you can just give that IRA to charity and make the charitable a beneficiary, a university, a public library, or something like that. And they can get all that money without you paying the tax.

Right? So I think, ultimately, I would sit down and maybe think about, why am I doing this at this point? And I think somebody that's got 2/3 or, let's say, 55% of their assets in Roth, it almost strikes me as that's the limit. That's about as far as I would want to go.

Right. They're almost like a 60/40. That seems like they've got plenty of cover, especially with the pension, too. Yep. Yep. Because ultimately, when you get to 72, you have RMDs start to kick in. You are going to have continued tax issues going forward. And ultimately, if you have that very large Roth bucket, what is the plan?

What are you going to do with that? And I would start having some fun. After you sit down and knock it out your 10-page dissertation on how taxes impact withdrawal rates, we'll have the introduction here on Portfolio Risk. The good stuff. Again, Mike, you need a financial planner, my man.

You need to sit down with somebody competent, maybe a CFP. Yeah. And he's in a great spot. But yeah, that's the time when you-- you're right. What's the point of doing this? Are you doing this just for the sake of doing it because it makes you feel better? Or is there actually a point to it?

Yeah. And he's won the game. So I think when you win the game, you stop playing. Speaking of winning the game, we've got one more here. Yeah. Let us know in the chat who wins, but not to brag of the day. Also, someone in the chat said, I have a supermodel wife who wants a bigger home.

What should I do? Not bad. Portfolio Rescue, where the salmon flock like the Capistrano and all the beer tastes like wine. And it's good stuff. OK. So up next, we have a question from Mark. I'm 43 and I've done pretty well. I have about $3 million in real estate with very little debt, $1.2 million, which was $1.5 in equities, but only about $30,000 in a Roth IRA.

At some point, should I just even taxes and do a backdoor Roth? All right. Mark's doing pretty well here. Pretty well. The majority of his net worth is tied up in real estate. Does that tie into this at all? Does that matter at all? Or do you think if he's got the majority of this money in taxable accounts, he should just suck it up and do it at this point?

Can I do a quick thing? These are great questions for big problems for millionaires, and I don't know what percentage of the Portfolio Rescue audience, but I think we need some questions from the people. I think we need to get populist with this. Here's the way that I think about it, though.

I worked in the institutional world, and I was dealing with-- Is that where you got that vest? Where did that come from? But I was working with portfolios that had 8, 9, 10 figures. And the way I thought about it, after a certain point, is it's just an extra zero.

These people are all dealing with the same problems. Same questions. In a lot of ways. Obviously, there's more comfort here when you have a seven-figure portfolio when you're in your 40s. But it's still the same questions and the same worries. The math is more fun when it's big numbers.

It's true. Yeah. Let's just pretend Mark has $3,000 in real estate. OK. So yeah. A backdoor Roth isn't going to solve your problem, right? You can stick $6,000 into a backdoor Roth IRA. So I think he's asking a different question, actually, than what he said. I think he's saying, should I Roth convert?

And the year that I would Roth convert would maybe be a year-- I don't know-- US equities are down 20%. And maybe our bonds have taken a hit, too. And maybe we're-- oh, I'm describing this exact scenario, right? Where we've had a punishing year, and ultimately, the cost of converting is going to be lower if we expect our future returns to be higher.

So yes. Without knowing Mark's full situation, again, I would urge him to hire a financial planner to help answer this. But yeah. He's probably got a 40-year runway on life, maybe 45 years. Ultimately, this is a great time to think about it, because we've been punishing-- unless he's been in cash this whole year, he's probably down 20%, 30% in his equities.

And ultimately, this is a great year to consider it, because the taxes are going to be low today on any amounts he chooses to convert. Let's go back to question 3. The questioner was thinking, OK, I'm going to fill up my 24% bracket. I think that's the thing to think about, Mark.

If you count in all your income this year, where are you going to be in the tax code? Where does it make sense? And that's the starting point that I'd look at. And you've got about three weeks, three months to figure it out between now and the end of the year.

But I think you've got a golden opportunity in 2022. All right. Roth wins again. Someone asked if this is actually an official Federal Reserve vest. And it's not, because if it was a Fed vest, I would have already lost my shirt, and I'd be wearing just the vest, because the Fed has made everyone lose money this year.

Yeah. It's puffy, but it's not inflated. The inflation is not very high. All right. One more announcement here. This was sent to us yesterday. I've been pounding the table on this all year. U.S. Senator Deb Fischer, introduced yesterday with Senator Mark Warner, raising the annual IBON purchase limit for individuals to $30,000 when inflation is over 3.5%.

Now, I got an email from someone in one of the offices of these senators. And they said, like you've said over and over in many of your now classic rants to Michael and Duncan about IBONs, the Treasury Department's lack of action raising the arbitrary limit. We doubled the limit for individuals to $30,000, returning the purchase limit to where it was originally when IBONs were first introduced in the Clinton administration, which I didn't realize.

Business and trust accounts would not be eligible for the increased cap. We keep the focus on inflation relief for families and individuals. I'm not saying I helped craft bills in the Senate, but I'm not not saying that. I pounded the table, and we got it done. Sean Patrick Maloney, Chuck Schumer, I hope you're listening.

We did it. Carlson 2024. We need confetti. We did it. This hasn't gone through yet, but it sounds like we're going to get $30,000. And I love the rule. Someone asked if we could have an algorithmic Fed. We have an algorithmic IBONs. When inflation is high, you increase. I think that's great.

Ease the pain of the people. Although, backstage we were talking, ironically, this could potentially increase inflation by getting more money out there into the economy, which is interesting. Hey, let's just take a win while we have it. Hey, this actually increases savings, though, Bill. It's less spending. Yeah, that's true.

That's true. I hope this goes through. It sounds great. All right. Thanks again to Bill, as always, helping us on those Roth questions. We get like 45 Roth questions a week. I love it. Keep them coming. Thanks, everyone, for watching live in the chat. We always appreciate it. Leave us a review.

Hit that subscribe button. If you're in YouTube, leave us a comment or a question. We always look at the questions there. If you got a question for us, askthecompoundshow@gmail.com, and we'll see you next time. Also, to our Florida viewers, be safe. It's scary down there. Seriously. Thanks, everyone.