(beeping) - Welcome back to Ask the Compound. Our email here is askthecompoundshow@gmail.com. Great questions as always. We got our first audio question this week, which we're very excited about. - Exciting. - Today's show is sponsored by Future Proof. Futureproof.advisorscircle.com. Got a couple things were mentioned here. The Hyatt is already sold out.

The rest of the hotel rooms are selling out fast. So hurry up and get there and book your hotel because you're not gonna have a spot. I think there's like four hotels there. I liked the Paseo last time. That was my favorite. - That was cool. I liked that, yeah.

- There's plenty of good ones. Qualifying advisors, $200 off at futureproof.advisorscircle.com/downtown. We're going to have a live Animal Spirits there. We're gonna have a live Compound and Friends there. We're gonna have a live Ask the Compound there. It's gonna be great. Gonna be tons of good speakers. Good food, good drinks, good weather, good scenery.

It's gonna be, and plus for me living in Michigan, it's like an extension of summer 'cause it happens in, what, the middle of September? - Right. - And so it's another way to like keep that summer going a little bit. - Also, yeah. - Great time. - Hit the Rocky, hit the Rocky video.

Maybe, maybe this will jog some memories from our long time Animal Spirits viewers. But last year we had Mike and Ben do the Rocky, the classic Rocky scene. So yeah, we're already thinking about what we're gonna do this year. So keep your eyes peeled. - Rocking Apollo on the beach.

Yeah, that was, I still can't believe you guys talked me into doing that. - My favorite part is this one. - Yeah, we really did it. All right, let's do our first question. - Okay, up first today we have a question from, oh, I don't have their name here.

Okay, my target date fund does a lot worse than SPY. Should I just move to an index fund for my 403B? - Great question, and I think one a lot of investors grapple with. So the S&P 500 is doing better than my portfolio. Why don't I just put all my money in there?

Why don't we look at an example of why a target date fund is underperforming the S&P 500? So John, do a chart on it. - Did this hurt your feelings a little bit, though, that they're kinda taking a shot at target date funds? - No, I don't think it's a shot because I think a lot of people don't understand benchmarking, which is what I wanna talk about.

So John, do this chart on. I just, I don't know what target date fund this person is in, so I just picked a Vanguard 2055 fund to see what's under the hood. So this is roughly 90% in stocks, split between 60% U.S. stocks, 40% international stocks, which is about the global weighting of the market cap, 10% in U.S.

bonds and international bonds. So now, John, go to the next chart here. This just shows the gains this year. The S&P's up like 14%. This target date fund's up 11% or so. So why is this the case? Well, it's pretty simple. Bonds are only up around 3% this year, U.S.

and international. Stock market's up 14 to 15%. International stocks are up like 10 to 12%. So listen, if your target portfolio is a 100% asset allocation to the largest stocks in the United States and you're underperforming the SPY, then something is wrong. There's a problem there, right? You're underperforming.

But if your target allocation is something different and you're using the S&P 500 as a benchmark, then you're comparing apples to oranges here. It's not the same thing, right? That's one specific market. It's one specific style of investing. Now, it could be the case that you need to take more risk, right?

Most target date funds cap out at 90% equity exposure. I looked, if you went up to 2070, I think is the furthest Vanguard one, it's still 90% stocks. So I think that's as high as they go. So if you want to be 100% invested in stocks, then a target date fund is not for you.

I'm a big proponent of them. You mentioned it, Duncan. They're low cost. They're probably diversified. They're rebalanced automatically. They're simple. It's like a single fund of funds. And then they're professionally managed. So the asset allocation will change and get more conservative as you age. If that's a problem for you, maybe you need a portfolio that's 100% invested in stocks.

All of my retirement funds are invested fully in the stock market, 100%, right? I take those RPMs all the way to the top. I'm not in the leveraged versions like you on some funds, Duncan. But if you have the intestinal fortitude to have 100% of your money in stocks, that's fine.

And that's the one to compare to, that's fine. But even within stocks, I diversify by international and I have different strategies and I have different types of stocks. So I still diversify that way. So if you want to have everything in the biggest stocks in the US, then that's a decent benchmark.

I think, I just think for most people, that's not the benchmark that they have. And I think a lot of times my worry is this person is talking about performance chasing, right? The perfect portfolio is pretty clear in hindsight. It's never clear ahead of time, right? So diversification means your portfolio is never gonna be invested in the best performing asset class or strategy or style, but that's a feature, not a bug.

So the question really boils down to how you're benchmarking in the first place. I'm not a fan of benchmarking portfolio performance to a benchmark simply because it's doing well or because financial media talks about it or someone else has invested that way. Because sometimes a diversified portfolio will be the S&P 500.

Anything you diversified last year, you did much better. Right, if you had some value stocks in your portfolio or high quality stocks or something else, international stocks, you did better than the S&P last year. So nothing works always and forever. I think you just have to figure out if that's the right benchmark for you.

I look at it like this. The only benchmark you should really care about is whether or not you're on track to achieve your financial goals. That's it. Any performance numbers or risk measured should be compared to that goalpost alone. If you're trying to beat the market and you're a stock picker, sure, benchmarks matter.

But I think it matters what your risk profile and time horizon are. And if you set an asset allocation, that's your target. And I actually think it's kind of funny. I actually think a target date fund is a good benchmark to have. If you have an 80/20 allocation to stocks and bonds and you measure that against an 80/20 target date fund, I think that that's actually a pretty good benchmark.

That's a better benchmark than the S&P 500. I also think, I also just think the idea of constantly measuring yourself against those kind of indexes means you're always gonna be chasing something else. 'Cause it could be the NASDAQ 100 one year, it could be international stocks one year, it could be bonds one year, you never know.

I also, I just, the whole thing about beating the market is always kind of funny to me. Jason Zweig wrote a piece for the Wall Street Journal a number of years ago about beating the market. And I love this part. He said, I'm gonna read it here. "I once interviewed dozens of residents in Boca Raton, "one of Florida's richest retirement communities.

"Amid the elegant stucco homes, the manicured lawns, "the swaying palm trees, and the sun and the sea breezes, "I asked these folks, mostly in their 70s, "if they'd beat the market "over the course of their investing lives. "Some said yes, some said no. "Then one man said, 'Who cares?

"'All I know is my investments earn enough "'for me to end up in Boca.'" I think that's the idea. You don't judge your performance against the stock market or whatever you think it is. You judge it against whatever asset allocation fits for you and your personality and your disposition.

And that asset allocation should always be tied to your risk profile and time horizon. That's the thing. I think first you figure out if that's the right asset allocation for you. And then you figure out what the right benchmark is to judge yourself against. - Yeah, it kind of becomes a keeping up with the Joneses thing, right?

It's exhausting to constantly be judging yourself like that. - So your benchmark is TQQQ, right? - Yeah, I mean, hey, I actually, new experience. I started selling covered calls a while back because I was looking for something to help offset my horrible losses. - Not that good. - And I just got some pulled away from me at a very unfavorable price that I wasn't expecting.

So I just found another way to get chopped off. - But you earned some premium in the meantime, I hope. - I did, I did. - Okay. - Not worth it though, but yeah. - Right, that's the kind of strategy that always seems better in a bear market, right?

And that's the whole problem here with any of this stuff is anytime there's a bear market, you're gonna be kicking yourself saying, "I wish I would have gone into this with way less risk." And when there's a bull market, you're gonna be kicking yourself and going, "I wish I would have gone to this with way more risk." Unfortunately, I think for most people, you figure out the asset allocation that you can hold during both of those environments and everything in between, and that's the one you have to be, find your, make yourself comfortable with.

Otherwise, you're always gonna be chasing something. - Right, and the way I make myself comfortable with something like that scenario, just described as, like Josh says, it's like your tuition to the market, right? You know, like I didn't go to school for finance and investing. So, you know, sometimes you pay a little tuition.

- You went to film school so you could record Michael and I running on a beach in slow motion. - Right, exactly. - All right, next question. - Okay, up next, we have a question from Pascal, or Pascal, I'm not sure. "Thanks to you, I am now really interested "in personal finance.

"I have money to invest in a low-cost index fund, "but I have serious doubts that the market can generate "around 8% returns over the next few decades. "We can't replicate the industrial revolution "of the last century, and the climate crisis "will have a massive impact on the world economy.

"World population growth slowing is a mega trend, "and future generations cannot sustain "the pace of growth we witnessed in the last century. "In general, the earth is a finite system, "so indefinite growth is impossible. "Isn't this a mathematical reality?" - So this was the TLDR, this one, Pascal is actually from Germany, I guess, and he gave like eight more paragraphs, so I actually read 'em all, and kind of went bullet point by bullet point going through this.

I understand the thinking here, even if I don't agree with it. Like, is there a ceiling of the amount we can grow? I guess eventually, like the United States was once an emerging market, so the fact that we've grown so much in the last, whatever, 150, 200 years, can we grow that much going forward?

No, just like China has had 10% growth for the last 30 to 40 years or whatever, they can't do that forever. So I think the low-hanging fruit has probably been picked in terms of growth and innovation, sure. But I still think we have some work to do. John, give me a chart on here.

This is from Our World in Data. Shows the share of the population living in poverty. 25% of the world still lives on less than $3.65 a day. 47% of the world lives on less than $6.85 a day. 84% of the world lives on less than $30 per day, which is the poverty line reflective of like high-income countries.

So there's still plenty of work to do and plenty of emerging markets that I think are gonna come up and have their day and can provide some growth, even if it doesn't come from the US. But I don't know. Do I think people are gonna wake up in the decades ahead and not want to improve their standing in life?

No. Do I think innovation is gonna plateau and stop happening from here? No, I think it's probably only gonna get better. Do I think people are gonna stop spending money in the future? I think, if anything, we've shown that that's probably never gonna happen for the United States. And do I also think corporations are gonna try to stop creating profits?

No. What drives stock market returns over the long run? Profits and dividends. So could returns be lower in the future? You could certainly make that case. But does that necessarily mean that everything's gonna grind to a halt and things are gonna stop? I think if that's the bet you're making, that growth is gonna stop completely because we've already rung everything, all the water out of it that we can.

I think the least of your worries in that situation is your stock market portfolio. 'Cause it's not gonna matter what you do with your money at all. If the economy just completely stops and the gears grind to a halt, then your investments aren't gonna matter anyway because we're probably gonna have hyperinflation or something and things will go really wrong.

Now, on the climate change front, like a lot of people are worried about that, but I mean, can you imagine the amount of government and private spending that might be necessary to combat climate change in the future? Electric vehicles and charging stations and wind and solar and batteries. I actually think that's kind of bullish for the stock market because we're gonna have to-- - I agree.

This is one of the areas I'm most interested in. I'm constantly reading about battery storage and electrifying the grid and moving away from fossil fuels and that kind of thing. Yeah, I see it as something that could actually turn a negative into a positive from an economic standpoint. - Yeah, I think it could be more government spending and I think that could actually be helpful.

I think, like what's the higher probability bet here? Like is there a non-zero chance that stock market returns are awful going forward? Of course, that's always a possibility, but do you really want to bet your future on that, your kid's future? Like I think stock market returns being pretty decent or terrible, the baseline for me is stock returns are gonna be pretty decent.

I wouldn't have terrible as my baseline because it's kind of like if you make that bet, what good is it gonna do anyway? You're screwed either way. So you might as well bet that stock market returns are gonna be okay going forward. Maybe they won't be as great as they were, but betting that they're okay, I think is, otherwise, what's the point?

Just spend everything you own now. - Yeah, thinking about like don't look up style scenario, what's the alternative if you're like, yeah, humans won't be able to inhabit the earth in 50 years? Well then, I mean, what are you gonna do anyway then? So to me, I like to be optimistic about it and think that we're gonna harness technology, we're gonna innovate, we're gonna find ways.

Everyone's gonna care more and more, right? As things start to become more and more obvious about the climate and the future. And I don't think it'll be as politicized in the future, that kind of thing. So yeah, I'm hopeful. - And do we kick the can down the road and wait to the last minute to solve these kinds of things?

Probably. - We love procrastination. - Yeah, but then we're just gonna spend a ton of money and get a really crazy bull market in a year, and then we're gonna have a crash and another bull market, and so goes life. - Yep, or we'll move to Mars. - There you go.

All right, another question. Okay, up next, we have a question from Justin. Hello, I'm a regular watcher of the show and other content. I really enjoy all, I really enjoy you all, and find you entertaining and educational. Thanks, Justin. That being said, uh-oh. I'm confused why you continually push Roth IRAs.

Why do you and Bill want everyone to pay taxes up front and to avoid them later? Or yeah, to avoid them later. The idea of low earning years early and higher later is nonsense. Isn't the goal to live off the proceeds of your investments and leave the principal alone?

Is your 75% principal going to outpace my 100%? When you die, you'll have paid taxes and pass on substantially less. When I die, my family will pay no taxes. Wealthy people go out of their way to avoid taxes. Why are you recommending people pay them up front? Shots fired.

- Justin went hard in the paint here on the Roths. All right, let's get Bill Sweet in here to defend his honor because Justin went hard in the paint on the Roth. - Ooh, wow. - That's rough, Bill. - Yeah, I had to take the jacket off 'cause it's heating up a little bit in here.

Justin, my man. - Now, Bill, as much as you love the Roth as a tax-deferred vehicle, you have stated in the past on many occasions that it's not right for every circumstance. So before we, Justin laid out a lot. He laid his case out here pretty, I mean, this is like Stephen A.

Smith style here. Before we get into anything you disagree with here, anything that he said here that you actually agree with that makes sense. - Yeah, well, first off, Justin, if you come at the king, you best not miss. But I do agree, Ben, with Justin. He's got a bunch of great points.

And Ben, we covered this on the last Ask the Compound two weeks ago, as you recall, where I did moderate my stance a little bit on the Roth IRAs due to some listener feedback like this. But Justin, guns blazing, I give you a lot of credit. He's got a lot of great points.

I do think I've overstated the benefits of Roth IRAs. They're not applicable in all circumstances to all taxpayers. If you're in a high-income situation now and you expect to be a low-income situation in retirement, Roth ain't for you. That's what traditional IRAs and 401ks are for. And when choosing between Roth and traditional, I advocate that there's no reason to do both, to do one or the other.

Like that is a fallacy. And so, John, can we just pull up the first chart real quick? This is a chart I shared two shows ago, two Ask the Compounds. If you're in the 12% bracket or less, Roth makes all the sense in the world. If you're at 32% or above, generally depending on path dependence, I would say thou shalt not Roth.

And that's it. I think that's it, not applicable for everybody. John, can we take the chart away? - The simple one would be, your younger, low-earning years, Roth makes a ton of sense. Older, higher-earning years, Roth doesn't make as much sense. Is that fair? - Yeah, more or less.

And I think the 12% tax bracket is more or less it, that right around there, it tends to be a slam dunk, unless you expect to be indigent in retirement without Social Security, without RMDs. So, Ben, if you will indulge me, can I get to some points, some retorts for a moment here?

- The floor is yours because, yeah, I figured. So, Justin, a couple of things. First off, in your presumptions that you're not gonna, your heirs aren't gonna pay any tax, that's not right. Like, if your heirs inherit your traditional 401(k) IRA, they have to distribute the balance within 10 years, and that's 100% taxable to them.

And so, if you don't care about your heirs paying tax, I mean, I just, I wouldn't do that, but there's no step-up in basis that occurs with a traditional asset. So, that's a big one. Another point that I wanna just debate a little bit, behavioral finance shows, this is a Harvard University paper, does front-loading taxation increase savings from 2015?

It shows that when given the option, people save the same amount in a Roth 401(k) as they do in a traditional 401(k). - I was thinking that. So, he was saying your 75% principal versus my 100%. Most people who do that don't then save the difference. - That's it, that's exactly it.

And so, if you're choosing between Roth or traditional, and you have the discipline to go out and save the balance that you would have otherwise invested, then yes, I think it's close, and in many cases, the traditional 401(k) wins out. But, where we live in the real world, with real people that don't do this, don't know there's life on a spreadsheet, they tend to save the same amount, and so, when you look back in hindsight, when you get to retirement and distribution age, if you have a traditional and Roth IRA, your Roth IRA is worth about 20 or 30% more because it's all post-tax, right?

- I did this recently. When I switched to a Roth 401(k) a few years ago, I saved the exact same amount. - Exactly. - I didn't change what I saved. - And so, exactly your point, Ben, if you're cramming more dollars into the Roth that are post-tax, it ends up being worth more in retirement, assuming that you don't save the difference, and that's the key point.

Next is, I'm not optimizing personally for my net worth. That is a heresy in financial planning, where people play this video game where they wanna see their net worth go up every year. I don't give a flying hoot. I am optimizing in my retirement for how much money can I spend, and therefore, I am very comfortable, early in my life, in early years, filling up those low tax brackets, stuffing the Roth into there, because when I get to retirement, I'm gonna get to take all those distributions tax-free and live happy, and buy my cars, and go on vacations, and have a good time.

So that is very important. In my experience in financial planning work, 15, 16 years of experience, retirees taking distributions still feel the pain of taxable distributions. It is still painful for them, especially lump-sum distributions, which, assuming you have Social Security, assuming you have, let's say, a modest pension, assuming you have some investment income, you're probably not gonna be in the 12% bracket.

- Oh, so you think people have a way easier time spending Roth dollars? - Yes, and that has been my experience, and we're gonna get to that question, Ben, another listening question here in a moment, but if you're pushing into a higher tax bracket, then you may blow up the math, and furthermore, it doesn't account for things like Medicare surcharges, which begin to kick in at about $140,000, $160,000 of net income, and so that's a big deal.

So I'm not optimizing for net worth, I'm playing a different game, and that's okay, right? So for people that wanna see their net worth go up every year, Roth errors are not for you. You will definitely be better served with a traditional pre-tax dollar. And then, again, I just recommend filling up less tax brackets.

Last point, John, can we go to chart number two? So I'm gonna reveal some of my bias, but without any bias or anything like this, I wanna show you guys a chart of, this is federal government expenditures on the top line, and receipts on the blue line. And those numbers have not been in balance since roughly the late '90s.

And that's okay, because, Ben, you've said this before, and I agree, the government is not a household, it doesn't have to balance the books, but when I look at these numbers, they are disconnected, and one of the primary reasons is, John, this next chart that I wanna show the listeners, this is a history of federal tax brackets, effective tax rates, not the highest marginal rate.

My opinion and my bias is, we're living in a low-tax nirvana right now, and we just don't realize it. I have no expectation that tax rates are gonna jump up in the next couple of years, but I don't have to, because absent action by Congress, every taxpayer's gonna be paying about 3% more in 2026 because of the expiration of the Tax Cuts and Jobs Act.

And so that's a bias of mine, that's an assumption that's built in, but I do think that we're living in this low-tax environment right now, and we just don't realize it. - That's why I noted that I was gonna ask you, Bill, 'cause a lot of people I feel like always assume that we know that tax rates are gonna be XYZ in the future, 20, 30, 40, 50 years, but I mean, there's nothing really stopping massive increases in taxes down the road, right?

- I think that's correct, and that's a scare tactic, but if you look across the world and look at other OECD, the major countries, the U.S. is in the bottom third of taxes. I think there's a conservative argument that that's part of what makes our economy dynamic, right? People are out there reinvesting that capital elsewhere, but the government spending is just so outpaced revenues, and there's not a political will to increase taxes.

I do not think spending is gonna go down, so I think just by hook or crook, this is gonna have to work itself up one way or the other, and I think higher taxes are in our future. - Sean in the chat wants to know if you actually drew that last graph on Etch-a-Sketch.

- I didn't, but it might've been a big improvement. That's actually, I wanna shout out a guy, Mike Bostic. I read that article a couple years ago. It's a really, really good article on observable.com. - But yeah, to the point of not knowing what the future holds, that's the whole point of tax diversification and why I preach the benefits of diversification in everything that you do.

I think income diversification is helpful. Investment diversification, tax diversification, all this stuff, I think you rarely ever wanna be concentrated in one thing because you're betting on the future's gonna turn out this way, so I'm gonna concentrate anything I do in one bucket. - Yep, and we had a great listener question last week, Ben, that we addressed two weeks ago on Asset Compound.

Please go back and take a look, but it was should I ever have 100% Roth, and my answer's no. You should not always leverage, unless you're 25 years old and you plan to shift to traditional later. I'm probably about a year or two out, and I'm gonna shift gears, but probably, Ben, the last point on this for me, I've been 100% Roth since I got into this game, and I'm 43 years old, and I'm probably mid-career right now, so I can't say more about what I'm doing with my own assets and what I help clients recommend with than that.

- Right. - So great question, Justin, thanks for the question. I appreciate it. - No, we don't mind a little pushback here, right? - Bring it on. - Bring it on. - Bring it on. - Yeah, that's fun. - Absolutely. - Yeah, there's nothing like Bill spitting facts with a tank shell over his shoulder there.

- Exactly, that is an M82 high-explosive anti-tank round. It's not real, just to be very clear. Don't come and arrest me. But I bring the heat. I bring the heat, too. - I like it. Okay, up next, we have our first ever audio question submitted, and it's a really good one, and it's from Joshua, and he really took time.

He got it perfect. It's a very good recording. - Let's do it. - So I'm gonna hit play on this thing. Let's listen. - I have a question about HSAs. I know Ben isn't fully sold out on the health savings account, but we're fairly keen on the triple tax advantage.

We opened our account in 2006 and have fully funded it every year since. We paid for one set of braces, but paid all other medical bills out of pocket. With the long-term in mind, we invested in 90% equities, low-cost index funds, but alas, no target date funds were available.

It's been a good 17 years for stocks, and not to brag, it's $250,000 now. The question is this. How much is too much in an HSA? We're millennial empty nesters. Barely 40, one child in college. House is paid for, college is all sorted, retirement is on track. My wife has a long-term chronic health condition, so healthcare is super important to us, but if we keep funding the HSA at the annual maximum, it'll just grow.

We know it can be used as a pre-tax account after 65, and we've heard the inheritance situation is pretty rotten, but we just struggle to turn away from the triple tax advantage. Do we keep on funding it, or find something else to do with these funds? Thank you. - Bravo, Joshua, great question.

Very eloquent reading skills, way better than I could do. The recording quality was perfect. Yeah, he did sound very, maybe he can-- - Eloquent. - He can do my next audio book for me, I think. - Yeah, this is good. - Let's see, so first of all, I'm not anti-HSA.

I honestly just don't have the bandwidth for another account because I have 401ks and IRAs and SEP IRAs and corporate accounts and 529s. It's not the HSA's fault. So having said that, I know very many smart people who swear by the triple tax benefit. Blair Duquene has been on this show before.

She's talked about the benefits of the HSA. - Joey Fishman, our guy in Portland. - Yeah, love the HSA. Bill, what say you? First, how much is too much? 'Cause they have a big amount in there. Is that ever a problem if it's overfunded? Is there problems down the road from that?

- Yeah, wow, Josh, I don't know that I've ever seen an HSA of that magnitude. I have seen six figures, but not 250K. So that is some fantastic investing. And one of the things I don't like about HSAs sometimes are higher fees. So I'm presuming that you've just got a great, great deal and a lot of discipline between you and your wife and your family.

For me, Ben, the only thing better than a Roth IRA, in my opinion, is that HSA because of the triple tax exemption that Josh mentioned. It's such a powerful savings vehicle, and it's very rare to see any amounts of this magnitude. So how much is too much in the context of somebody's net worth?

Really hard to answer, but Josh, I think, hit on something towards the end of his question that to me was so important, that if you've got some chronic health issues going on, like, that's what those assets are going to be used for. And ultimately, as we age, and we do this in financial planning a lot, people really tend to underestimate their medical spending, right?

And a lot of times when we do these mining card simulations going forward, what tends to happen is people age, their medical needs increase, and that ends up being a quality of life thing, typically, or a quantity of life. But ultimately, my guess is those assets are just doing exactly what they need to do.

I would have no qualms dumping in another $6,000 a year into a balance of 250K with the plan of being the distribution of the future. And Ben, I want to mention before we close that the coolest thing about HSA is that the year of distribution does not have to match the year of the expenses incurred.

And so if you incur a $10,000 medical bill, unfortunately, or brace, as you mentioned, in a single year, you can hold on to that reimbursement from the HSA for five years, for 10 years, allowing that compound effect to occur. So that to me, it's like, I don't know that an HSA balance could be too large for me to be concerned about it due to all the factors that Josh laid out.

- Right, this fact that they already know at 40 his wife has a chronic health. - Yes, very sure to hear that, yeah. - Yeah, this is a huge fallback plan for them. This is like a big time margin of safety. I also want to talk about how they're 40 and kid is already in college.

- Yeah, wow, what's that all about? - Started young, that's, I had a friend from who, him and his wife got pregnant like the summer after our high school senior year. - Okay. - And their kids are out of the house already. It's like a total backwards, and they're reliving their youth.

So hopefully that the Joshua, or this is a, who's this one? Is this another Josh? - That's Josh. Yeah, that's Josh. Our guy Josh, yeah, definitely. - Can live it up a little bit too. And obviously they've saved enough money, so they're in pretty good position. - Yeah, exactly.

But I think you're gonna have a lot of flexibility as time goes forward. And again, my guess is you are gonna use that. But if I'm you, Josh, I'm saving every single medical receipt. You go to CVS, you pay that $3 copay, that's going to a drawer somewhere or put it in a PDF for a future tax return.

Because you're right, ultimately-- - You're gonna need a lot of drawers if you're saving CVS receipts 'cause they're so big. 'Cause they're this long. But yeah, but I'd be stacking those things as high as you can go, because ultimately you are gonna wanna access that cash at some point and use it to fund other goals.

And the best way to do that is to get that money tax-free. - Here's a question from the comments. Can you use HSAs for nursing care if you need it? - Get me to it. I was gonna say something. - To the best of my knowledge, yes, I'm not an expert, but I'll dig into that.

And Ben, if you maybe wanna follow up an update next week, we can do so. But yeah, to the best of my knowledge, yeah, it's pretty broad on what HSAs can be used for. - Cool, all right. Great, great audio. Everyone doesn't have to do that, but that was a good first one.

He broke us a good one. - I wanna rap next time, if you can drop a beat. - Oh, true, yeah, yeah. Just not licensed music. - Next question about Roth IRAs. Someone else likes Roth IRAs too. - Let's do it. - Okay, up next we have a question from Sam.

I have a question about how to view my Roth IRA now that I'm older than 59 1/2. I don't need the money for anything this time, so should I view it as something that should only be used as a last resort, or should I now be okay with using some of the money to pay for things like a vacation or a car, or even if I could pay for those things with other money?

If the answer is that I should never touch the money unless I absolutely have to, it seems like I may never actually get to spend any of it. - Okay, we kinda started down this path earlier about is a Roth, and I never thought about that, Bill, but you're right.

We've had countless conversations with clients and with our advisors about the fact that people have an easy time building wealth and saving because they compound slowly and it builds up, but then when they have to turn around the other way, like turn the battleship and spend it, it's very psychologically challenging for people because I don't know how I'm gonna live, I don't know what my healthcare expenses are gonna be, and people have a hard time spending their money.

So I like the idea of the psychology behind spending Roth dollars. Now Sam here, it sounds like, is going the other way, saying what if I never spend these? So what do you think? How should they view that in terms of spending? - Yeah, I've got two answers for Sam.

First off, Sam, very strong name. It's the name of my firstborn son, just doesn't get much better. We're gonna talk about Sam Sweet in a couple minutes, but moving forward with Sam, I've got two answers for you. Number one is if I have a bucket of Roth, in addition to my traditional IRA, in addition to my Social Security, in addition to my pension, et cetera, for me, that lends itself to these types of lump sum distributions because what happens is if you right-size your life based on, again, your Social Security, recurring income, let's say your RMDs when you hit age 73, if you right-size your life around those, you're paying your bills, you're paying your gas bill, blah, blah, blah, every once in a while, you're gonna wanna buy a new car.

Every once in a while, you're gonna want a fancy dinner. Every once in a while, you're gonna get on a plane and fly to Paris, wherever you wanna go, Bogota, whatever's up to you. For me, those distributions really, really lend themselves to all the Roth IRAs because they don't disrupt your tax picture.

John, can we pull up chart number one if you still have that thing handy? - That's true, so you can look at the Roth as a bonus spending. I wanna take all the whole family, the grandkids and my kids on a huge trip to Italy this year. We're gonna take it from the Roth because it's bonus money.

- And kids, we're gonna do it tax-free. The taxman doesn't get a piece of that. So just looking at the charts, you can see where these step-ups are. So if you're right-sizing your life, let's say hypothetically, somewhere at the high end of the 24% bracket, you've got a lot of income, pension, whatever else, you don't wanna jump up in that 32% bracket by taking $100,000 distribution to buy a new truck or a Tesla or whatever it is you want.

So that perfectly lends itself to a Roth because furthermore, it doesn't mess up with your IRMA, your Medicare expenses on a monthly basis. So that's answer number one. Answer number two for me is if, if, if, you've got all your needs funded and if you don't need that asset at all, it is a fantastic estate planning, pass it on to the next generation asset, right?

So I would not, I would not have that at bullet point number one, but assuming that all of your lifestyle needs are cared for and you're taking your kids out to nice dinners, you're enjoying the retirement that you so richly deserve after working and saving for years and decades and doing it all right.

On the back end, the Roths are great because on your passing, the kids have another 10 years to distribute that asset. They leave it to another account. It comes from them completely tax-free. Going back to question number one for Justin, it was a great question. Your heirs are going to pay tax on your traditional IRA balance.

- Does that work like an RMD where you have to take 1/10 every year? - You do not is the way it works for most taxpayers on the Secure Act. There's a technicality there, Ben. If you're, if you inherit an asset where the person had already been receiving an RMD, you do have to continue those, but not at 1/10.

It's based on your life expectancy. But so really there's just a final RMD at year 10. If I inherit an IRA today, 2023, I need to distribute all the balance by December 31st of 2033 or I've broken the law. - So your children are going to learn to love Roth someday, right?

They're going to be getting a lot of Roth dollars coming to them. - Well, I mean, you would think so. If I have an untimely passing, then yes. But my goal, Ben, is to spend every freaking dollar that I'm saving here. My kids are on their own. I'm going to help them pay for college.

I'm going to get them on a good feed. I might help them out with a vehicle or something like that. But after that, they're out of the house and they're on their own. And they've got to do it the American way, exactly. Yeah, I just, I do push back a lot on clients and taxpayers generally.

This goal of passing money onto the kids, it's insane to me. Go out and earn your own money. Do it the right way. I think that's the way to raise children in 2023. - It's Shaq that said, that told his kids, you know, that's not your money. It's my money, right?

Famously. - Yeah, and if you have a lot of traditional air balance, at least 24% of that's the IRS's money. So again, back to Justin, great question. But yeah, tax-free. I want to, if I pass on assets, I'm going to do it through Roth. - Perfect, okay. - It's beautiful.

- A lot of Roth stuff as usual. I think we've landed in a good spot with a Roth here. - Yeah, it was a good, and again, Justin, totally support the feedback. I've been way overzealous. Can I give my man Sam Sweet a shout out? - Yeah. - Let's do it.

- So speaking of, you know, a gentleman named Sam John, can you pull up that photo? Sam Sweet's kindergarten graduation was today. He graduated with about 18 of his buddies. I'm just very, very proud of him. A quick story, in his preschool graduation a year ago, he melted down to a puddle of goo and began crying.

But what he told me, I said, Sam, what do you want to do? What do you want to do this weekend? I said, Dad, I want to go camping. And if you see a bear, I want you to punch him in the heart and then kick him in the privates.

And then he ran away to play with his friends. And I have never been so proud. And I just wanted to share that for posterity. 10, 20 years from now, I'm gonna show this to him. - The great thing is, my kids are done with kindergarten this year too.

We didn't have a graduation. I didn't get to go that route. But our kids are gonna graduate high school the same year. My twins are both moving on to first grade as well. - Oh, congratulations, Ben. Our teacher tried to pull that crap and we were like, no. We're coming in on this day and we're gonna gather and we're gonna celebrate.

And the kids got candy and it was awesome. - Okay. - Congratulations. - Participation trophies still. - Congratulations, proud dad. - All right, way to go. - Awesome. - All right. We always appreciate your comments and emails. Remember, askthecompoundshow@gmail.com. Keep them coming. Every week we get a full inbox.

We really appreciate it. Voice memo works too, if you want. And if you're listening in podcast form, please leave us a review. YouTube, subscribe, like, all that good stuff. - Even if you're not listening, if you're in the chat right now, go and still leave us a review on Apple or Spotify or whatever.

- We would really appreciate it. - And thanks, as always, to the people who show up in the live chat. We always appreciate it. - Thanks, Sean. - See you next time. - Et cetera. - Thanks, everyone. - I got you, Justin. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) you you