(beeping) - This is Ask the Compound. Our email here is askthecompoundshow@gmail.com. We get questions every week from people on YouTube, email, Twitter, wherever. Always good ones. We got a bunch of good ones today. I even said to our expert guest host who kept coming on that we got some good ones.

Today's show is sponsored by Future Proof. We're getting there. I was just telling someone, I always get really sad when the summer's over because I hate cold weather, which doesn't make sense since I live in Michigan. But Future Proof, being in the middle of September, gives me something to look forward to to extend the summer a little bit.

So they tell me August 15th is the last day that you can register for the conference and still get a discounted ticket. Duncan may or may not be running a meetup for compound people, right? - It's true. We're trying to keep it nice and pretty intimate, though, so don't tell everyone on a live stream or anything.

- Yeah, I kept out of the bag. Futureproof.advisorscircle.com. It's gonna be a blast. Can't wait. - Yeah, I can't wait. - Let's do a question. - Okay, so before we get started, we have a lot of overlap between all of our shows. I just wanted to address something you said yesterday that I felt like brought a little bit of shame to everyone at the compound and the firm, which was you were giving people a hard time about grinding coffee beans and getting whole bean coffee.

- Listen, someone was grinding coffee beans while we were recording the show, and I just said maybe, maybe people who grind their own coffee beans are like, needs to take it easy a little bit. - No, I mean, I get that. People should not be grinding during a show, that's fair.

But you were kind of calling into question and if you could actually taste the difference. So I just wanted to read a quick excerpt from this book called-- - Craft Coffee. - Craft Coffee, which is a bit of like a coffee Bible. It says, "Many of the delicate compounds "that make coffee taste great "are locked in the bean's structure, "but breaking that protection apart via grinding "exposes them to air, moisture, and light, "the ever-present banes of a coffee bean's existence.

"All of those compounds will start to noticeably diminish, "at least to the train palate, "about 30 minutes after grinding. "And like the proverbial man who went out for cigarettes, "once flavor is gone, it's not coming back." - Yeah, but doesn't Folgers grind them for you too? - Well, yeah, but I mean, it starts to lose flavor quickly.

So if you grind them every morning, right before you make it, you're getting more-- - Okay, that sounded like the difference between me getting a drink and a mixologist pouring a drink for me. All I said was it's pretentious and you just made my point for me. - Fair enough, fair enough, okay.

- Well, I guess I got a lot of hate on that one. As a non-coffee drinker, I'm fine throwing bombs into that department 'cause I don't drink coffee. - So while you're making your bed, we're grinding our coffee beans, you know what I mean? - Yes, you're a coffee mixologist.

- My God, okay. - Let's do a question. - Up first today, we have a question from Salem. "I'm looking to purchase a new home in the coming months "as I'm in need of additional space. "I'm trying to decide whether to rent "or sell my existing home, "which has a 3% interest rate and $200,000 in equity "since I purchased it in 2016.

"My real estate agent and many pundits "seem to default to renting it out as a no-brainer approach "because of the 3% interest rate. "However, if I took the $200,000 profit from the sale "and invested in the S&P 500, over 30 years, "it would surpass the monthly rental profit, $600, "and eventual sale of the home.

"This includes investing the $600 profit "into the S&P each month over the same period. "Finding quality tenants, "keeping the place rented at all times, "and covering maintenance as the home ages "seems riskier than investing in something like VTI. "I'm a long-term investor and volatility doesn't rattle me, "so outside of diversification, "doesn't selling the home yield the greatest return?" - I really like this question because most financial questions are equal parts spreadsheet and behavioral psychology, but this one is kind of like a heavyweight fight between spreadsheet and spreadsheet.

So John, let's do the tail of the tape, Tyson and Holyfield style. Rental properties versus index funds. You can find pros and cons for each of these, right? There's a lot less volatility in owning real estate because you don't have a daily update of the price and people aren't trading it on a second-by-second basis.

You can increase the rental over time. I think we've seen, especially in this latest cycle, real estate is a great hedge against short-term and long-term inflation. You can build equity when you have a rental property. Obviously, Saleem pointed out some of the problems with it, the maintenance, the property taxes, the management of the property.

There's idiosyncratic risk because it's a single holding. So I think they're looking at it the right way here. And he's already run the numbers to kind of see here. I understand why, and I'm sure I left a few things off. Johnny can do chart off here. Let me first say there's no right or wrong answers here.

There are people who have built wealth investing in real estate. There's people who've lost money investing in real estate. There's people who've built wealth in the stock market. People who've lost money in the stock market. Like that, get that out of the way right now. You could run all the numbers you want, but I think personal preference is what wins here.

I understand why the real estate agent and some of the pundits are pushing you to turn your place into a rental. I think a lot of people did that in the 2021 time. It's like, if I'm gonna get a 3% mortgage at a new place, why would I not just keep the old 3% one and rent it out?

And it's one of the reasons that I think housing prices went up a little bit, 'cause people weren't putting as much housing as their supply on the market. That 3% mortgage is one of the best financial assets you can carry in your personal balance sheet right now. I've been pounding the table on that for a while, but.

So let's do a quick example. Let's say you bought your house for 300,000 in 2016 and are now selling it for 500. That's the 200,000 discount or difference for your equity. If you put 20% down at the time with a 3% mortgage, we're talking a $1,000 monthly payment, right?

Now let's say you wanted to buy your house at going rates. That $500,000 house at 7% is more like a $2,700 a month payment, just a huge, plus your down payment would be $40,000 higher if we did 20% down for that. But holding that 3% mortgage and turning into a rental property while appealing the fact that you get to grow equity, if that's not your thing, it's not your thing.

Like, I don't think you wanna be peer pressured into doing something just because of that 3% mortgage. And if it's gonna cause you sleepless nights and give you a headache, I don't see what's the point. Like, the point about finding tenants is one for me. Like, if a tenant leaves and you have to find a new one and you have a few months where you're not earning that income, that can eat into your profit in a big way, right?

He mentioned that this, I think his house was built in 2000 and he realized, like, I'm gonna have to do some upgrades on this relatively quickly. One new roof or a new air conditioner or a new heater or something, and there goes your profit for a few months, maybe a year.

So I think some people are more equipped than others to deal with the realities of being a landlord. And I think you have to figure out what your tolerance for inconvenience is. And so there is a good case to be made for taking your money, your equity off the table, investing it in the stock market.

But there could be scenarios where the rental income and the equity you build in the house puts you in a better place financially over the years. You really don't know. So this is the type of decision, as usual, I would make completely outside of this spreadsheet. If you don't want to be a landlord, owning a rental property is not for you no matter how good the economics of it are, even if it works out.

Like, what's the point of giving yourself a headache? So I don't think all financial decisions have to be made based on levels of interest rates or ROI. I think you have to focus on the potential headaches involved here. And if you don't want to, I personally would not have the heart to own a rental property.

I just, I wouldn't be able to have other people be in my house or in my place that I own or apartment or whatever it is, and potentially trash it and not know who the tenants are. I wouldn't be able to psychologically sleep at night with that. So, I mean, I know- - Yeah, it's like you can't care too much about it, right?

But I mean, but then you want to make sure it's a nice place, but- - Yeah, and other people are just fine with that. And they hire a property manager and they vet the tenants and it works out fine and they make money. But for me, I wouldn't do it just 'cause someone says you can't get rid of that 3% mortgage.

'Cause then what if you hold onto it and in two years, rates go down? You know, it's just do whatever works for you. And it sounds like you don't want to be a landlord, so don't be a landlord. - Yeah. - I'm fine with that. - Yeah, I don't think I'd want to be a landlord.

- No, it's a lot of work. - You know what I would rather invest in? I would rather buy a parking lot. You know, what do you have to do to a parking lot? - That's true, paint the lines. - Yeah. - All right, next question. - Good business idea.

Okay, up next, we have a question from James. "I love the idea of set it and forget it target date funds. "You guys recently talked about a Wall Street Journal "article that showed boomers are hooked on equities. "I agree with Ben that more and more older people "are going to up their equity holdings.

"Can you guys explain why target date funds, "especially long horizon ones, "have a bond allocation at all? "Vanguard's 2065 target date fund holds 54% US stocks, "36% international stocks, 6.7% US bonds, "and 2.8% international bonds. "Why would anybody with a 42-year time horizon "want an allocation to bonds?" - As a target date aficionado, I'm well-suited to answer this question.

I've looked into this before. Basically, every target date fund you have, maybe there's a provider somewhere, but most of them have at least like a eight to 10% allocation to bonds, no matter how far out you look, right? This person's saying 2065, 2070, any of those will have a little bit of bonds.

And I mean, the great thing about target date funds is that it's broadly diversified. You automatically get to rebalance it. It's run by a portfolio manager, a team of managers. It's low cost. It's like simplicity at its finest. That's what I love about it. There are some drawbacks to these funds, of course.

Like you don't get to pick the asset allocation of the funds that are involved. There's no customization beyond picking a fund that's more or less growth oriented, depending on what year you pick, right? 2060 or 2065 or 2050. So the bond piece is a fair question. "Why would anyone with a multi-decade time horizon "want to own bonds?" First off, bonds are not forever.

We've had a handful of questions this year on the show alone about keeping 100% of your retirement portfolio in stocks. And there are people who have the ability to stomach that. I've mentioned my retirement portfolio is all equity. I do keep cash in an online savings account, even some T-bills, money markets, but no bonds for me at the moment in retirement.

That will likely change as I get closer to retirement, but all stock portfolios aren't for everyone. So even if bonds don't have the same expected returns as stocks over the long run, I think investing in bonds could be a hedge against bad investment decisions. For people who just can't stomach the ups and downs of the stock market.

So they can dampen the volatility, they can dampen the volatility of your portfolio, but also your emotions. I think bond yields are much higher now than they have been, but even if bond yields go back down, I think they can still help people, certain investors from making the wrong move at the wrong time.

And it didn't happen last year, but high quality bonds will do the trick in the majority of market crashes, right? The bond market essentially causes the stock market crash last year. So if keeping 10% or 20% in bonds allows you to stay invested in the other 90 or 80% of stocks, I think that's a worthy allocation.

I think that's the thinking, that they want broad diversification. And if you want to just supplement the target date fund, own the target date fund, and then buy an index fund of the rest of it, or just take the funds in that target date fund, get rid of the bond funds and just buy the stock funds and set an automatic rebalance, and you're fine.

I understand you want to take the simplicity of the target date fund, but there's enough fund providers out there that will do an automatic rebalance for you, where you can create your own if you want. - Yeah, I think that's key for young people that are new to all of this to understand, is that, yeah, the idea traditionally is stocks are going down, bonds are going up, so then you can rebalance.

And so you're using that bond money to buy more stocks at a lower price. - Yeah, that's the big part of it is the dry powder. Like if you want to buy stocks and you don't have new savings coming in during a bear market, those bonds can act as not only a stabilizer, but also dry powder for rebalancing into the pain.

That's part of it too. Even if they have lower expected returns. I get it. If you want to be 100% in stocks, you're probably just gonna have to build that yourself though. - Right. - Which isn't that hard either. You could, again, you could buy a target date fund and just buy more stocks.

So it takes it from 10% to 5%, depending on how you utilize it. - Yeah. I'm waiting for the leveraged target date funds to come online. - Okay, the T target date funds. All right. - Okay. Up next, we have a question from Chad. I'm actually surprised no academic has done that yet.

Because a lot of the academic studies say, if you're a young person, you should leverage your stock portfolio. 'Cause you have the ability to wait out bear markets and save more if you blow yourself up. I'm surprised no one's tried that yet. - Well that's, I mean, Sean called me out and let you guys know, but I was asking him a while back about like, what's stopping you from having a portfolio that's basically like triple, you know, triple Q's and then like hedged with some short triple Q's and like doing it kind of like a hedge fund.

I was trying to piece it together. I was talking with Sean about this. (laughing) - I'm not even gonna talk. That sounds way too complicated. Just take the leverage off and keep it at a hundred instead of trying to leverage and then hedge the leverage. - Yeah. - Keep it simple.

Occam's razor here, Duncan. - It's true. I'm reading that hedge fund book of, you know, more money than God right now. So it's on my mind. - All right. - Okay. Up next, we have a question from Chad. How do you decide between a traditional 401k and a Roth 401k when you have no idea whether you'll end up in the 22, 24, 32, 35 or 37% tax bracket?

I'm 43, married, filing jointly with two kids, two young kids with a not to brag base salary of $175,000 in the 22% MFJ. So married, filing jointly bracket. In 2022 bonuses jumped my salary all the way into the 35% bracket. How do you factor in things like the larger take-home paycheck with traditional versus Roth or the fact that when kids get older, I won't have those tax credits reducing my taxable income or the fact that RMDs for whichever one of us survives longer might be taxed as single rather than MFJ?

- Well, there's a lot going on. I'm tapping out on this one. There's way too much tax stuff going on. Let's bring in our tech expert here. - Get in here, Bill. - Bill Sweet. - Hey, Bill. Oh, nice. - He's ground some coffee beans. - Isn't that Chemex?

- It was, yes, when I got started. But are we going to take coffee advice from a guy that, A, doesn't drink coffee and recommended Folgers? Speaking about more money than God. I mean, come on, live a little, Ben. - How else are you going to retire, Bill, if you don't drink Folgers?

- And avocado toast. But no, great, great question from Chaz, my guy Chaz. - Let's start off this, though. - Yeah, what's up? - Has Chad not already won the game if he's getting this in the weeds? - I mean, I was going to say it's double not to brag on Chaz's original question.

You know, his base hour, he gets him at 22%, but the 35% bracket starts at $490,000 of gross income. - Oh, so he's getting a pretty good bonus. - Yeah, wow, that's quite a year for Chaz. And looking back, I mean, the way I would frame it, though, we've talked a lot about Roth versus traditional.

The answer is both, right? So the way to answer Chaz's multiple questions here is to look back from age 63. What do you want to have in retirement? And Ben, if we knew what the best performing asset class would be over the next 20 years, we would obviously invest there, but we don't.

So what do we do instead? - Right, diversify. - We diversify. And so diversification works for tax planning, too. What I would recommend to Chaz is, in a year in the 35% bracket, that to me would go full tilt for traditional, right? 'Cause there's only one more step you can go into 37%, but maybe in years that are not so great, you know, 24%.

Because if we fast forward, Chaz, if you're looking at age 63 backwards, let's say you have Social Security pumping out $3,000 a month, you can then distribute another $80,000 or so at today's current tax brackets and tax rates, ignoring inflation for a moment, at the 12% tax rate, right?

So I think you do have to do a little arbitrage and think ahead, and do that financial planning exercise looking backwards. But ultimately, I don't think the answer is either/or. I think it's how much and when. And if you're 43 and you're earning a half million dollars a year, I think you're full tilt traditional at that point, because your tax rate is probably gonna not be much higher.

37% is as high as it goes, but in years that you can skirt under that 22% range, or let's say 10 years ago, if you're young, if you're starting out, that's when Roth makes more sense. - My thought was, with a question this complex, it does seem relatively complex because there's so many paths you can take, it's very path-dependent.

Like, what's the simplest solution? I think the simplest solution, as you said, is do a little bit of each and don't try to get too cute with it. Because if you try to say, this year I'm gonna do this, but then at the end of the year, I figured I can't do it anymore and then I'm gonna do this, so I feel like, just make it easy on yourself.

- Sorry, Cliff is cracking me up in the chat. He said, "I would quit the job to save on taxes." (laughing) - That's it, and that's, Duncan, I say that to clients a lot. There's a very easy way to save on taxes. - Then you don't have to pay for a CPA either.

So yeah, that's all your solution. - No, that's it. But just a couple of other things that Chad brings up. I mean, the tax credits for having kids are gonna be there regardless. Like, that all happens after your taxable income gets calculated. - Hey, wait, when does that go away?

- Ooh, that goes, yeah. - So when are my three tax credits going away? - The year your kids turn 16, actually. - 16? - Yep, 16. - Oh, man. - Yeah, so that happens pretty quickly, depending on where you are. - I should boot 'em out of the house then.

- Yeah, you could. I mean, that's my rule for my kids. Once you're 18, you're out of the house. (laughing) You're not my problem anymore, good luck. - At 16, they need a job. - Yeah, more or less. - You have to book credit. - But yeah, but I think the basic rule of thumb here is 12% or around there, or if you have a long time horizon, Roth IRAs make a lot of sense, especially if you expect your future tax rate to be higher than your current tax rate.

The other factor is mid-career, when you're starting to pump up, if you're hitting that 32, that 35, that 37% bracket, that's when I go traditional. That, I think, is a good rule of thumb. - Fair, see, it's not always Roth for Bill. - Nope, it's not. - The one guy, a couple months ago, said you were too far into the Roth.

- A lot of the listeners, yeah, have called me out, and I think that's it, but when I look at people's portfolio spend, I don't see enough Roth IRA assets, so that's what's led me to be the acolyte that I am. - That makes sense. - And about coffee beans, too, grind your own coffee.

How hard is this? It's not that hard. - Can we get a silent coffee grinder, please? - That's great, that's great. - Like, you know how Duncan put the soundproof stuff on the walls in the podcast booth there? Just do some soundproofing, that's all I'm asking. - There are some that are a lot quieter, yeah.

- Yeah, it's true, and we have dustless brake pads for cars. Why can't we get a quiet coffee grinder? - I think I'm just a little bitter because my wife had a roommate in college, and she would get up every day at 5.30 a.m. to go to her internship, and she'd grind her coffee beans and wake us up, and it just-- - Wow.

- Since then, it's just-- - So, it would have been more respectful for her to grind them the night before. You lose a little bit of flavor, but, you know. - Right. - Come on, like, you could have done that. - That's what I'm saying, disrespectful. All right, let's do another question.

- Oh, also, before we move on from that question, we just had Adam, Adam, a long-time listener of all the pods, just stop by the office, and he was telling me the top tax rate in Canada, he's from Toronto, is, I think he said 55%. - Yeah, yeah. - So, he was asking for us to do some Canadian-specific tax questions at some point.

- Yeah, it's something nobody believes in me, but yeah, U.S. taxes are actually very, very favorable compared to OECD countries, in the lower third, but it doesn't feel that way, so I try not to convince people of what they already know. - Yeah. All right, up next, we have a question from David.

I will take my first RMD in 2024, and I'm considering a backdoor Roth. I will not need the majority of the RMD in 2024, or subsequent years. I was not able to contribute to a Roth IRA during my working years due to income limitations. My thinking is that it may make sense to do a backdoor Roth on the RMD after having paid the income taxes on the RMD.

My time horizon is approximately 20 years. I understand that there is a five-year rule for withdrawing money from a Roth. Does the five-year rule clock apply only starting with my first Roth deposit in 2024, or to subsequent contributions in 2025 and beyond? My taxable brokerage account is direct index for tax alpha, so it would seem that tax-free growth in a Roth would provide better long-term returns.

I gotta be honest, I don't understand a lot of this question. - Okay, so the idea is-- - I need to break this down. - It sounds to me like they're taking their required minimum distributions, but they're not going to need to spend them right away, so they want to reinvest them and maybe get some tax deferral benefits by putting them in a backdoor Roth.

- Right, right, yep. Duncan, I don't think it's your fault. There's a lot going on. First off, RMD started at age 73, so I give our questioner a lot of credit for thinking in a long time horizon. 20 years, that's great, and God willing, we all make it that far.

But yeah, a lot going on here. But number one is you cannot take an RMD if you're receiving one-- - And for new people, an RMD is a required minimum distribution. - Required minimum distribution, right. Exactly, Duncan, and as those build up, as your assets build up, at some point, the government says, look, you gotta spend the money.

Yeah, you can't just have this build up forever, and as I said before, that starts at age 73 here in the year 2023. But you cannot take an RMD and just move it from one traditional into a Roth. It doesn't happen quite that way. You do need to have earned income in order to contribute to any IRA.

So that's the first kind of nuanced point here is that you can't just take assets from traditional, roll them into Roth. - Social security doesn't count, huh? - Social security neither, but that's it. But to move on, again, 20 years is a pretty favorable time horizon, and what the listener is comparing a backdoor Roth contribution to is a direct indexed account, right, something that's taxable.

And Ben, if I could give you the choice, would you want your investment earnings tax-free or would you want them taxed as capital gains? Which would you choose? - Tax-free. - You want them tax-free. - So what, you're saying move it right from the, so take the RMD and then put it into the direct index account?

- No, I'm saying do this backdoor Roth solution. You do need to have earned income. And so if you're comparing it to an investment that's going to be taxed, the backdoor Roth is gonna make sense because you've already paid tax on that income. You've already taken that required distribution.

So assuming you have the other earned income, you can put $7,500 into a Roth IRA up to any age as long as you have the income to support it. So that's an important question to focus on. - Okay. - Next. There are two five-year rules when it comes to Roth IRAs that we can go into.

- I didn't get the five-year rule thing, what's that? - Yeah, okay, so there are two. The five-year rule number one, you cannot take a qualified Roth distribution from any Roth IRA until you've had any Roth IRA for five years. And so it is literally, you just have to have a Roth IRA in place for five years.

Any distributions that happen in year two, year three, year four are not qualified. And so that's one of the reasons I apostolized it. Like, look guys, just fund a Roth IRA now in your 20s, because then that five-year clock is done and over with. So that's five-year clock number one.

If we're starting at age 73 and we've never made a Roth IRA contribution-- - Wait, what's the reason for the five-year clock? I don't get that. - I think the idea is that they don't want people just putting money into Roth, into IRAs, and then taking them out the next year.

I don't really fully understand it, Ben, to be honest, but I think the intent was that, look, these are long-term retirement accounts. These are not meant to be, like, someplace to park cash for a year or two. Now, it doesn't make a lot of sense to me, because once you do that once, then the one first five-year rule no longer applies.

But the second five-year rule is relating to rollovers. And if you take assets out of a Roth IRA after you've done a Roth IRA conversion, then that could be subject to penalties and interest, too, if you take it out in the five years after a conversion. However, the Roth IRA ordering rules are super funky and complex.

I don't wanna get into them. But it's very unlikely that if you have a balance in a Roth IRA, that's gonna be a problem for you. But one thing that we know about this listener is they're 73, and no penalties apply for any type of distribution, unless it's that first five-year clock.

So backdoor Roths are fine if you're over the retirement age of 59 1/2, which this listener is. So it's really complex. I don't think we need to go into the nuance of it, but ultimately, I think it's probably a good idea as long as you have earned income to support the Roth IRA contribution.

- So once again, job security for Bill Sweet and other CPAs around the country. - And it gets more and more complex. The SECURE Act, as you know, Ben, just changed the rules on inherited IRAs, and boy, we could do a whole asset compound on that. But we won't.

- Oh, good. See, I was afraid it was getting too boring. - Okay, so if anyone has questions on inherited IRAs, ask for the next one. - Bring 'em on. Bring 'em on. - All right. One more question. This is a good one. - Okay. - Good one for Bill, too.

- Yeah. - It is. Last but not least, we have a question from Chris. How do you factor a pension into your retirement savings rate? I'm a 36-year-old Army officer and will be eligible to retire from the service at the age of 42 with a pension that equates to about 42% of my annual income, adjusted annually for inflation.

I'll continue to work in another industry until at least 55 to replace the lost income. My wife and I are first-time homebuyers and closing on a house this week. We'll be stretching a bit on payments for the first three years until my promotion in 2026, and I plan to pause retirement contributions to build our savings account back up.

Not to brag, but we currently have about $450,000 in our 401(k) and IRA. Am I foolish for thinking that a 5% to 7% retirement savings rate is sufficient for folks with a good head start on retirement savings and a government-backed pension on the horizon? - A lot going on in this one, too.

Bill, correct me if I'm wrong. - This is a good place for you to mention, Ben, too, like you said on Animal Spirits, how many people ever had pensions. It's not as many as people think. - Yes, yes, yeah, I was gonna, yeah, that's interesting. I'm writing a piece about that right now, actually.

It wasn't as prevalent as people think. 40-some percent was as high as it got in the '70s, and that's the peak. Bill, correct me if I'm wrong here, but your origin story of getting into the world of finance was you were in a leadership position in the Army, and all the young people in your platoon were finally making decent money for the first time in their lives, and they were coming to you for advice.

Is that right, pretty much? - Yeah, kind of, kind of. So what happens is, when you reach a certain level of staff officer, they start assigning additional duties, and when you get volunteered, you do not volunteer, you get volunteered to take a position. Mine happened to be tax assistance officer, and so it was my job to help soldiers that were coming from Missouri or Idaho or whatever, and they had a tax question.

It was my job to get them resources to solve that, and yes, that's part of how I got into this crazy business. - So the pension adjusted for inflation sounds like a pretty darn good deal, 'cause most pensions for a private employee do not get adjusted for inflation. Social Security is one of the only ones I know that actually gets adjusted for inflation.

So we try to never say never or always here, but I would assume most government pensions are pretty safe. So I think planning on that is, Chris is probably gonna be pretty good. So the idea is, listen, we've already built up a pretty good nest egg, mid 30s and already have almost half a million dollars saved.

Can we do a lower than Ben sets as target for savings rate because I have this pension? Like if you did a present value, it'd be worth, a pension is worth a lot more money than people assume. So he's probably in a pretty good position because they blew through their savings for this house and they might not need to.

Does that make sense to you? And I think it kind of does, right? - Yeah, it definitely does. So Defense Finance Accounting Service runs the military pension system, and ultimately it is indexed for inflation. The same cost of living adjustment that rolls out for Social Security every year would apply to a military pension too.

And so as the listener points out, hey, this is gonna cover 40% of my spending when I get to retirement, which is great. State income tax free, right? So if you move to New York, California, they can't touch your pension. It's always federally taxable. But yeah, I'd say it's a great deal.

And Ben, what is really the difference? A government pension, a government bond, like these are all things that are guaranteed by the full faith and credit of the United States of America. I'd say, yeah, go for it. And so Ben, sometimes in my formulation, it really unfortunately all depends, but sometimes I will treat this like a bond, right?

And that's my fixed income because I know that's gonna support my lifestyle. I know that's gonna hit my paycheck, my bank account every month. I think it's an excellent way to plan. And yes, if you'd like to, I think so. Is it more or less you've funded part of your retirement, not through your savings, but through the work that you've been doing to defend our nation.

So I think that's a really neat thing to think about. That's another good point is that they could also probably take more risk in their 401k and IRA in stocks because that pension is going to act like a bond, even though it doesn't have some of the same characteristics as a bond fund would.

- I think so too. And ultimately, when you sit down to sort of do the planning that can continue on with your surviving spouse, I think it's 50% of the default. So there's a couple of elections that you do need to make. You can think about life insurance to cover the balance otherwise.

But I would totally agree. And I think that does more or less de-risk some of your retirement spending because you have that ace in the hole with the federal government. - And that's the way to think about retirement too, planning from a withdrawal perspective is, if I have income that's going to be covering a certain percentage of what I'm going to be spending, I don't need to take as much from my portfolio each year.

So maybe the nest egg doesn't have to be quite as big. So yeah, they could spend more now in the house or whatever it is that they're doing and not save as much. And they'll probably be just fine. - Precisely. And it connects directly, Ben, with the conversation we had a couple of minutes ago about traditional versus Roth.

Fast forward a couple of years, fast forward 20, 30 years, what would you like your portfolio to look like then? I want to take this amount of distributions here. I want to have this bucket of, let's say, Roth assets in case I want to buy a house, take my kids to Paris, something like that, have fun, one-time spend, but backwards plan and decide, what do I need to do at this point to fund it?

But ultimately, really, what they're saying is, I'm going to divert some of my retirement savings into this real estate project, right? And I think that's great. I mean, that's a use asset, and then it'll be there when you do retire and you can head on. - Yeah, thinking through this stuff at age 36, I think they're in a pretty good position.

- I would agree. And thank you very much for serving our country, keeping it safe out there so we can sleep safe in our beds at night. Thank you. - Yeah, thank you. And yeah, good job. - Good job. - Yeah, nicely. Yeah, good job. - Great question. - That's great.

And we didn't even get to not to brag there, even though they deserved one. - Yeah. - All right, we want to thank Bill for getting back five minutes before the show from vacation to help us out. - Neither rain nor sleet nor the Pocono Mountains will keep me from my appointed rounds.

- Yes, next week. I know I angered a lot of people who drink coffee. Next week, I'm going to talk about how I hate IPAs, and I also don't like "Star Wars." - Sponsored by Folgers. - Wants to email me. - Ben, his elitist tower there in Michigan looking down on us humble New Yorkers.

- You're going to be here in person. We're going to hold you down and make you drink coffee live on the show. - That's right. I will be live in New York City next week, sitting next to Duncan. Email us if you want. We're going to have a bunch of different people on the show next week because we have a lot of people coming to New York.

Askthecompancho@gmail.com or leave us a comment on YouTube. We appreciate everyone who comes in for the live chat, as always. Thanks to Duncan and Bill, and we'll see you guys next week. - See you, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) you you