transcript

Speaker 1:
[00:00] Welcome back, this is Ask The Compound, the show where you ask and we answer. Let's say you have a million bucks saved up in your mid-40s, you want to retire at age 55. Okay? How much do you need to retire? What kind of growth assumptions should you put in your portfolio over the next decade? How should you invest your money? How do you reach this goal? We're gonna answer those questions and more on the show today, let's do it. askthecompoundshow.gmail.com is our email here. It feels good to be back at my home base instead of an unfamiliar WeWork in the middle of Washington, DC. I'll say that much.

Speaker 2:
[00:35] I thought that was fun.

Speaker 1:
[00:37] It was fun. Running around in 90 degree weather to find a WeWork is not fun, though. All right, on today's show, we answer questions from, what do we call the people, the compounders, the pounders? What do we say?

Speaker 2:
[00:47] Compound nation.

Speaker 1:
[00:48] Compound nation. How do you convince your adult children to save money for their future? How much life insurance do you actually need? Should you invest in a variable universal life insurance policy? How to retire at 55? And finally, how should you allocate your portfolio when you need to spend it down for your child's college education? Today's show is sponsored by Teucrium. Teucrium, looking to diversify your portfolio beyond stocks and bonds. Commodities are getting more and more attention this year. Teucrium's agricultural ETFs offer a way to access the future prices of essential crops. These funds may help manage inflation risk and add diversification to your portfolio. Ask your financial advisor or explore Teucrium ETFs on your own. Visit teucrium.com, click the link in the show notes for more. We've had Sal from Teucrium on Animal Spirits before on Talk Your Book. Great guy, he knows this stuff inside and out.

Speaker 2:
[01:34] Yeah, he's awesome. Also, happy Earth Day, Ben.

Speaker 1:
[01:38] Yeah, my favorite holiday. Is it a holiday or is it just a day?

Speaker 2:
[01:41] I think it's a holiday. You know, you joke and we were joking before the show, but you're one of the only other people I know that actually picks up trash out walking the dog. I do that as well, so I'd say you're an Earth Day champion.

Speaker 1:
[01:55] When I'm an old man, I'm going to have one of the sticks with the thing on the end to pick up trash. That's going to be me.

Speaker 2:
[02:00] Yeah, I need to get one of those. Right now, I usually just pick it up in a dog bag.

Speaker 1:
[02:06] Speaking of which, Nicole tells me we're doing an idontshop.com 24-hour sale for Earth Day. 22% off? What do we call for that number? 24 hours only. All this stuff. There's some great stuff. The Compound hoodie. I might need to get another one because my kids keep stealing it. Grand Rapids Hedge T-shirt. The new Miami chart on shirt, I think, is great. I love the colors. That's a good summer shirt. idontshop.com. All right. We got a lot of good questions. Let's do it.

Speaker 2:
[02:32] First today, we got a question from Audis. I think. Sorry if I mispronounced that. I'm looking for a way to convince my adult kids that they need to be saving for retirement. They have credit card bills and continually go into debt to buy expensive cars if they don't need, etc. How can we help them and get them to understand the long-term consequences? For example, they will become a burden to their own kids when they get older, and we are also affected and worried for the future, both theirs and ours. Do you have any suggestions or resources that may help?

Speaker 1:
[03:04] There are a lot of things that scare you about what your children could grow up to be. One of the top ones for me is that my kids grow up to be bad at personal finance. So this is the nightmare scenario for me as a finance guy. Listen, most personal finance people would tell you, just show some compound interest tables. If you save this much money by age 25, by age 65, you'll be a millionaire. And guess what? That doesn't help at all. Cliff in the chat says, just disinherit them. We're going to get that, Cliff. I just think that the number of information works for certain people. It doesn't sound like that will impact your kids based on their financial habits. Certain people, that compound interest table, it doesn't help at all right over their heads. They don't care about the future, they care about now.

Speaker 2:
[03:44] This is kind of the opposite end of the spectrum we were talking about last week of like, enjoy life and the monies for having a good life, this is the opposite.

Speaker 1:
[03:52] Some people, we have to like, they save too much, we have to force them to spend. Other people, they're just willy-nilly spending everything and not paying attention to the future at all. For people like that, vague goals don't work. You need to give them like specific emotional reasons to care. So you have to tie it to something concrete, like freedom from a job they hate, which we're going to get to later in a question. The ability to travel, buy a nicer house, whatever. You have to get specific. The other thing is don't pester your kids about small expenses. Stop spending money at Starbucks. Don't spend money on fast food. That budgeting advice just irritates people more, and it's probably not moving the deal anyway. You need to focus on the big picture item. So it's not the $5 purchases, it's those $50,000 cars they're getting, those big expensive cars. You have to talk about them and the big purchases. That's the thing that is hurting their finances. I also think you have to prioritize both saving and spending. So they need to define what a good life looks like to them. Focus on spending on those items and then cut back everywhere else. I call myself selectively cheap. You spend on priority areas, and you cut back and go cheap on all the other stuff that's not a priority. That's budgeting.

Speaker 2:
[04:57] And as fashion forward as you are, you don't even spend a lot on haircuts. You're not like a John Edwards out here or something, you know?

Speaker 1:
[05:05] I got a new haircut place though.

Speaker 2:
[05:06] Oh, you do? Okay. Your claim to fame used to be you go to whatever place down the street that's 20 bucks a haircut.

Speaker 1:
[05:11] My wife wouldn't let me take my son to go to great clubs anymore. So there's a place in Grand Rapids called Ya Man. It's like a Middle Eastern place, and they do the best fades in town. They all wear cowboy hats. They have nice flowing locks. One of the guys vapes while he cuts my hair. I don't know. It works. They know what they're doing. Or hey, down at Ya Man. Check them out if you're in West Michigan. I think your kids probably also need to track their spending for a couple months just to see where the biggest leaks are coming from. Most people never bother looking, because they don't want to look, because it would terrify them. I think once you see where all the waste resides, it's easier to fix. I think it's also just never been easier to automate savings. So if they hate budgeting, just make it like a monthly bill and then let them spend the rest, right? And I also think if you want to make it more specific and personal, talk about your own situation. Talk about how much you're planning on needing to retire. Talk about how much you needed to save every month to get where you are. And talk about how much you saved and then maybe talk about how you're not going to be the backstop for them. It's not disinheriting them, but you have to say, I'm not going to be the one. You might have to take care of me someday if I live longer than you think. So I think you have to be kind of upfront and honest with them. Give them some tough love. Now, as a parent, I know that that's difficult. That's not easy to do. There's also a ton of variables I don't know here, like how much they make and the family situation and stuff. But I think you have to help them create money rules based on their personality. If they're impulse shoppers, Nick's been on this show before, Nick Majulli, he talks about how if he buys a $600 pair of shoes, he saves $600 too. He's got to do a match of his own. I think you could also match their money as well. Like, hey, for the first couple of years, every dollar you put in, I'm putting in 50 cents up to a certain threshold. And I'm going to help you max your savings to get started. I also think you have to help them visualize a future that's worth saving for. Family trips, a house with a big backyard for the kids to play in, the ability to retire early and travel the world, whatever it is. I think you have to, again, pull in the emotional strings, not just the, don't just focus on the numbers. And if you want a few copies of my book for the kids, this is Duncan's favorite. We'll send him everything he needed.

Speaker 2:
[07:13] It's a great book, but I got to say, I'm not certain they're going to be able to get their kids to read that. I'm just not going to sugarcoat it here. I don't know them at all. Maybe this isn't the case, but they sound very spoiled, right? And so, yeah, some of this question is psychological. Like, how do you deal with spoiled kids that don't seem to take initiative and maybe are a little aimless or don't have aspirations? So, yeah, a big part of it might be, to your point, bigger picture trying to help them come up with some kind of goals in life or like what they want to do 10 years from now, not like next week, but help them figure out something. Because otherwise, yeah, it just sounds like they're happy to just sit around and buy new cars on their parents' dime.

Speaker 1:
[07:56] Who would have thought you would have been the bad cop and I'm the good cop here?

Speaker 2:
[08:00] This stuff makes me mad because I see firsthand here how hard people work to save up money, work for whole lives, and then their kids just come along and think that they're owed all of that money. And it just, I don't know, it just never sits well with me.

Speaker 1:
[08:13] That's where the hard love might come in, just to say, hey, listen, you're on your own here. You're gonna have to be your future self, you're on your own. Don't count on us. That might be the thing to start with.

Speaker 2:
[08:21] Especially if they're ungrateful for it, which again, this is a couple sentences, this is all the context I have here. But yeah, if they're not grateful for the life that you've given them and helped them with, then yeah, at what point do you say, okay, well, yeah, go figure things out on your own? Yeah, I don't know. It's hard to say. It's tricky. I don't envy the situation, that's for sure.

Speaker 1:
[08:41] No, there's not an easy solution. That's the problem. Sometimes people have to make mistakes before they get on the right path.

Speaker 3:
[08:48] Yeah.

Speaker 2:
[08:50] Hopefully, they figure it out, though. And yeah, maybe they'll read Ben's book and that'll change everything. That'd be a pretty good advertisement, you gotta say.

Speaker 1:
[08:58] That's right, changing lives here.

Speaker 2:
[08:59] Yeah. Okay, up next, we got a question from Josh. My wife and I are both 38 and I'm the primary earner. I currently have roughly $2.1 million in term life insurance. If I died today, my wife and two kids, eight and four, would need roughly $4 million to replace future income. I was informed about a variable universal life insurance option as a way to increase potential life insurance gaps and have tax-free growth via equity exposure and S&P, along with the future option of barring against the policy. We have roughly $1.4 million in retirement accounts and $400,000 in cash and brokerage accounts. It sounds appealing, but also too good to be true. Thoughts on funding a VUL or just putting more in the brokerage account?

Speaker 1:
[09:45] I don't have a ton of experience with the VUL space, so let's bring on our resident insurance expert.

Speaker 2:
[09:50] Hey, Jonathan.

Speaker 1:
[09:50] Mr. Jonathan Novy, from Hardim, Chicago. Jonathan, explain to us, what is a variable universal life insurance policy?

Speaker 2:
[09:57] You got it.

Speaker 4:
[09:58] A variable universal life insurance policy is a permanent life insurance contract. Sometimes people out in the wild conflate whole life with other permanent kinds of life insurance. Variable universal is a subset of permanent life insurance. It's the kind of insurance where you have a death benefit, like all the life insurance, and the premiums that you pay into the policy are invested in mutual funds. If you're lucky, then they're low-cost index funds, but they usually aren't because insurance companies have to find a way to get paid even more on these. These are ungodly expensive. Typically, you get some crap version of an index fund that costs too much, or some really active thing that there's some double-dealing by the insurance company when they put it inside the product.

Speaker 1:
[10:44] I hear a lot about the tax-free growth thing, and that's a great sales pitch. But that is simply borrowing against your insurance policy, like you would borrow against a portfolio. Isn't that the idea?

Speaker 4:
[10:54] Yeah, for the most part. The tax treatment of cash values and insurance is real. Insurance cash values grow tax-deferred, and when you access them properly, you pay no tax on them. The problem is that they're not, as people will sell them, a Turbo Roth IRA because they're way too expensive. Insurance products largely come with what is known as HEAPD or upfront commissions. That's how insurance people get paid to sell this stuff. And the only reason a person is recommending this to Josh is because there's a big commission that comes with it. It has never hurt us to say, do not combine investing in insurance and the same product because you end up doing both of them badly.

Speaker 1:
[11:41] Right. Yeah, that makes sense. But the thing that's interesting here is that he already says, we have a pretty big term life insurance policy, right? It's more than $2 million. And then they have this, thinking about this VUL, is that just insurance on top of it? Like, how much is too much here? Without knowing the complete situation, but it sounds like they already have a pretty decent policy in place.

Speaker 4:
[12:01] Sure. So when you think about buying insurance, keep this one statement in mind, and I've said it on here before. People buy insurance primarily because there will be a financial impact on their family were they to die. What you have to figure out is that financial impact. So if they've gone through a planning process, and there are calculators that do this, and some are good and some are bad. But if they actually figured out that they need $4 million to support them in the event he were to die, then buy $4 million at term insurance and call it a day. My guess is that they probably don't need that much based on the limited information I have here, and this is limited. But solve what the need is. It's not that hard to do. Figure out what your debt is. Figure out what your future debt is going to be, like paying for college and stuff like that. Figure out the amount of money you need to pay all that off. Now that you don't have to save for college anymore, and now that you don't have to pay off a mortgage or anything like that, how much extra money do you need? How much more free cash flow, if she went back to work, would you need? If she doesn't go to work because maybe she doesn't want to, then how much money would you need to replace the income that's lost? If the answer they came up with is $4 million, then you figure out how to fit that into their plan. If 20 years of term insurance is too expensive, then shorten the time because that will be less expensive. But the most important thing to do with an insurance need is figure out what risk you're trying to manage. The actual dollar amount.

Speaker 1:
[13:31] Yeah, shortest point from A to B essentially, right? Not making it too complicated. Someone in the chat says, they just explained whole life versus term to a buddy, and they said his friend paid $30,000 to get out of it the whole life. So obviously, the liquidity is a big factor too. Like that money is kind of... Oh, yeah, you have the tax-free growth, but it's stuck there, right?

Speaker 2:
[13:47] I know nothing about this. What is... So there's a penalty to pull out?

Speaker 4:
[13:51] It's not a penalty, per se, although it sure feels like one when you don't get your money back. They refer to it as a surrender charge, meaning you can't get your money back in the first many years. That's actually how the commissions get generated because they take that money out of the surrender.

Speaker 2:
[14:07] Sounds like a penalty.

Speaker 4:
[14:09] Yeah, it basically is. They wouldn't call it a penalty charge. They would refer to it as a surrender charge. But because the costs are so heavy in the first years of the contract, your cash surrender value doesn't match up to the premiums that you pay. Your cash surrender value is going to be chasing that premium amount in the first many years of the contract. So you don't get your money out early. These kinds of contracts, and that's going to get us to the next question too, so I'm jumping ahead a little bit. They only work if you have decades and decades to not touch the money.

Speaker 1:
[14:50] So you have to really have to line up the time horizon on these things.

Speaker 4:
[14:52] Right. And even if you do that, so many other things have to line up correctly for this to work that it is almost, and I say almost because I don't love superlatives, but it is almost never worth it.

Speaker 1:
[15:06] Okay, well let's do the next one because you mentioned it, so let's do it. We got multiple questions on this.

Speaker 2:
[15:11] On this note, in the comments, Sean says, whole life is a scam. That's a common thing that we hear. Like, what would be your rebuttal to that? Is that fair?

Speaker 1:
[15:19] Well hang on, the next guy kind of asked that. We'll read the next question first, because he kind of asked that.

Speaker 2:
[15:24] Yeah, I guess that's another thing to clarify. Is VUL whole life? No. Okay.

Speaker 4:
[15:30] They're both, like I said, they're both forms of permanent life insurance. Whole life, the cash values are invested in the general account of the insurance company, largely. Sometimes they're a separate account, whole life, but not really. With variable life, money is invested in mutual funds or investments that are also in separate accounts from the general account of the insurance company. People will dwell on why that matters. It doesn't really matter.

Speaker 2:
[15:53] All right, so up next, we have one that I'm gonna keep confidential of their name, because they already give a lot of identifiable information. My mother-in-law runs her own financial planning company. Ed has been in the industry for 39 years. Her dad wrote books on variable universal life insurance policies and their benefits years ago. Ten years ago, my wife and I signed up for two VULs and planned to use them solely for college savings. They're maxed out now and we can't contribute to them anymore, and we have 11 more years before our first kid goes to college. Everything I see on mine says it was a bad move to invest in them. However, my mother-in-law is adamant that she knows how to take money out of them for us when the kids go to college. To be safe, we also have two 529 plans we contribute to as well. I'm about to turn 37 with three kids and a fourth on the way. All tax-deferred options, Roth 401K, Backdoor Roth, HSA are maxed out. Our ETF account is receiving a healthy monthly contribution as well. Am I crazy for thinking that the VULs might actually be a good use for college with also giving us the additional life insurance protection? We have term policies as well. I can't shake the confusion I have on them and everything I read online is negative towards them. What are my options?

Speaker 1:
[17:15] The good news is that this person in the 30s has all their bases covered. They have insurance and tax-deferred accounts and everything. The funny thing is about the book is that I was given a book early in my career by a family member who basically thought that they struck oil. And they're like, read this thing. Tax-deferred growth and it was kind of explaining the benefits of this stuff. So I think this person is right that there is a lot of negativity towards them. I've never heard about these things being used for college. Maybe you can explain to me what the thought process is. I have.

Speaker 4:
[17:47] So the first thing I want to say is don't fool yourself. Your mother-in-law does not have a financial planning firm. She has an insurance sales firm. And I know she may say she has a financial planning firm. But if she is selling VULs for college planning, she's not a financial planner. She may even be a CFP. The problem using variable life for college planning is that your time horizon is nowhere near long enough.

Speaker 1:
[18:14] You mentioned decades and decades and decades.

Speaker 4:
[18:16] You need decades. And the thing that she has done right in this situation is say that the contracts are maximum funded. Now, there's some kind of detail and nerdy insurance stuff that gets involved in this. All that really means is that when you fund a variable life insurance contract, meaning an investment-based insurance contract, charges are high and fees and cost of insurance is high. So what you want to do is you want to make sure you have the largest amount of premium going towards the investment portion relative to the cost in the contract.

Speaker 1:
[18:47] So what does that look like? What does the maxing it out look like?

Speaker 4:
[18:50] All that means is that there is a maximum amount you can fund in an insurance contract, which is based on the face amount. Because if you could fund this more, it would be a pure tax shelter. So this is what people used to do. Because of the favorable tax treatment of cash values, you can't just pile millions of dollars into a very small insurance policy, because then it would be worth it. So you can't do that. So congratulations, you maximum funded this. The part about withdrawals and knowing how to properly withdraw from them means this. It means that the first thing you do is withdraw to basis. You take your money back, and then you borrow against the remaining cash values. So you can do that for sure. However, there's always a however. You have to make sure that there is enough money remaining in the insurance contract for the policy to remain insurance over the course of the life of the policy. Because if the policy doesn't remain insurance and you have borrowed against it, the policy will lapse because there's not enough money in it to maintain the insurance cost.

Speaker 1:
[20:02] As part of the pool goes, they're not picking up their slack. So would you say that they're probably better off using the 529s and just letting the insurance money run?

Speaker 4:
[20:11] Yes, what I really think they should do with this is, yes, use your 529s to fund college. Don't put any more money in insurance contracts and do not touch these insurance contracts. Let them run for more decades. It says here they have 11 more years till their kids go to college. My guess is they're pretty, it says how old they are. If they're young, do not touch these things. Let them run for decades and decades.

Speaker 1:
[20:39] To get to take care of that tax free growth, right?

Speaker 4:
[20:42] Yes. Be able to take advantage in what is kind of a crap situation, you can turn it into something that's not so bad. It means that your mother-in-law will say to you, why are you not listening to me?

Speaker 1:
[20:53] Yeah, we're talking awkward holiday conversations here.

Speaker 4:
[20:55] Totally.

Speaker 1:
[20:55] A kid's birthday party is gonna be weird.

Speaker 2:
[20:57] Yeah, whip out the laptop and share this episode on Thanksgiving, you know?

Speaker 4:
[21:00] So they're not the worst thing in the world, especially if they're funded properly. But you think about the time commitment you have in something like this, and this is one of my major issues with this. And I used to work in an insurance company, broker dealer. I've seen lots of these in my life, and I even regrettably sold them. You're making a 50-year commitment in something like this. And it's sure different making a 50-year commitment in an insurance contract, which where if you read the language on it, would be totally impenetrable to most people. It's different than if you buy index funds, which are really simple to understand. And the person who sold you this contract, it being his mother-in-law, will not be here in 30 years likely. So you're going to have to deal with someone at an insurance carrier that you've likely never met before, doesn't care about you, and who knows what is going to happen internally to this contract over time? Because carriers can move in and out investment options. Someone may say to you that they don't do that, but they do.

Speaker 1:
[22:05] Yeah, you're right. You're going to need help drawing this thing down for a long time.

Speaker 4:
[22:09] You're never going to know what to do on your own, because these things are largely impenetrable. So not a fan of these things at all. They have a use case in things like executive benefits. We can talk about those one day if someone wants, but that's about as niche as you get.

Speaker 2:
[22:30] And so to respond to Sean in the chat, whole life is not always a scam.

Speaker 4:
[22:36] No, I don't think insurance products are a scam. I think that-

Speaker 2:
[22:40] Because anytime we talk about this on a show, there's a list of comments saying whole life's a scam, whole life's a scam.

Speaker 4:
[22:48] The insurance products are just financial instruments. Some are better than others. The problem with insurance is the incentive structures built into the compensation. People sell them because they get paid a lot to sell them. Until that changes, and the insurance industry is not interested in changing any of this, because the way they get people to sell these products is by paying them to do it. That's not true.

Speaker 1:
[23:15] It's a solution for something, but it's not for everything. That's the problem.

Speaker 4:
[23:19] Correct.

Speaker 2:
[23:20] All right.

Speaker 1:
[23:20] Thank you for schooling us on the VULs, Jonathan.

Speaker 4:
[23:22] My pleasure.

Speaker 1:
[23:23] I think I got it.

Speaker 4:
[23:24] Always good seeing you guys.

Speaker 2:
[23:25] See you.

Speaker 1:
[23:30] This is why we get questions about this stuff, because they're confusing. It's confusing stuff.

Speaker 2:
[23:33] Yeah. Yeah. And I'm always just confused, especially by the idea of something that is beneficial, needing to have huge commissions to get people to sell it. You know what I mean? It just, yeah. So I'm always very wary. I was talking to Jonathan before the show, but yeah. Yeah. He does a good job of explaining. Okay. Up next, we got one from David. I hate my job. Can you help me retire in 10 years? That's a hook.

Speaker 1:
[24:00] Great leading.

Speaker 2:
[24:02] I'm 45 and only have about a million dollars saved. I'm the only income earner out of a family of four with a wife and two grade school children. I make about $300,000 a year. I plan to max out all of my tax advantage contributions every year, totaling about $80,000 plus another $50,000 into a brokerage account. I spend an average of $12,000 each month. That sounds high, but I'm curious to hear your thoughts on that. I spend an average of $12,000 each month including mortgage, car, expenses and vacations. How should I invest so that I can retire at 55? How much do I actually need to retire at 55 while supporting the family? I'm thinking 3.5 million, but even that is worrisome. Also, what growth rate do you assume year over year? I use 4% or 5%, which give drastically different numbers. I do have about $30,000 in cash savings, but plan to build that up to about 3 years of expenses. Did I mention I hate my job?

Speaker 1:
[24:57] All right, this question kind of has it all. Retirement planning, return expectations, saving money, liquidity provisions, job market. Did he mention that? Duncan, what age do people always use for early retirement, every time?

Speaker 2:
[25:12] Well, it's 55 usually or 60, right?

Speaker 1:
[25:15] Yes, no one ever dreams of retiring early at 54 or 57. It's always 55 or 60. But how many questions have we got that mentioned 55 over the years? Rob, looking at that for us. First of all, listen, he says only a million dollars. Nice work becoming a millionaire in your 40s, right? Also have a healthy chunk of your income that you're saving. So it's back to the envelope, 40% or so that they're saving. So you mentioned $12,000 spending a month seems a lot. With a family of four, it seems probably reasonable, especially since you're saving 40%.

Speaker 2:
[25:46] I'm not trying to shame. I guess more to my point is I feel like there's probably some ways he could save a little more.

Speaker 1:
[25:51] He's saving 40% of his income already.

Speaker 2:
[25:53] Right. But I mean, not spending as much, not necessarily.

Speaker 1:
[25:57] Geez, you're being harsh today. Saving 40%. All right. I'm guessing the $3.5 million number he got came from the 4% rule. So take $12,000 in spending, that's $144,000 a year in spending divided by 0.04, gives you about 3.6 million as a target. Okay, so that's where he got it. Give me a chart on here. Daniel, I did a quick back of the envelope, take a million dollars over 10 years at 4% to 10% gains. You can see that it ranges anywhere from $3 million to 4.7. So he mentioned like the, and it, and ever in between, obviously. So it is a wide range depending on what your returns are. Okay. But either way, and this includes that $130,000 in savings, right? So this is inclusive of that. Try it off. Either way, you're well on your way to financial freedom. With how much you're saving, how much you've already saved, the big question is, does that freedom come at 55, or 60, or 65? I think the return expectation thing we've talked about here in the show, it's never easy. No one can predict these things. I like the fact that he's being conservative, 4% to 5% because that builds in a margin of safety. I would rather you go low than high. Because I think if you go too high and then you come short, you're going to, what the heck? I would rather lower those expectations and beat them. I love the idea of building in 3 years of cash expenses. We've talked about this in the show. We talked about the 4-year rule. I think the other consideration here is the taxable versus tax deferred. He said he's putting more money in the tax deferred versus taxable. You won't be able to draw on your retirement accounts until 59 and a half, unless you're taking out Roth IRA contributions. So you might want to think about tilting more of your savings toward the taxable to give you more flexibility. We've had those questions in the past too, right? People who want more flexibility and said, why did I put so much in a tax deferred retirement account? I can't get it out. I want more flexibility. Some other considerations. You spend $12,000 a month today. Duncan thinks it's too much. But if we say...

Speaker 2:
[27:56] I didn't say too much. I just said it sounds like there's room to probably come down. Someone in the chat said they must have the top tier Netflix account.

Speaker 1:
[28:06] Listen, $300,000 income, he's saving 40%. I think he's doing okay. Spend your money. Don't listen to Duncan. So in 10 years at a 3% inflation rate, that's more like 16 grand a year. So now we're talking like 192 a year in spending. So that's a higher hurdle rate, right? 10 years, it's just inflation. What's your plan for health care in early retirement? I'm guessing your job pays for it now. Listen, I do like going through this exercise because it causes you to look at all the different variables required in the retirement planning process. It's a lot. And he's listed them all. I think David has two legitimate options here. Number one, get a job that doesn't make you so miserable. Is that possible? Would you take a minor pay cut to be happier and maybe work a little longer? I think that's a question worth asking.

Speaker 2:
[28:49] Yeah, or even a major pay cut, right? I mean, if it's still something that's sustainable.

Speaker 1:
[28:57] Just thinking of, yes, I have this great income, but 10 more years of soul sucking, just so I can, like, that's a long time. 10 years is a long time.

Speaker 2:
[29:06] Well, and because, I mean, you have to think about your health. Stress causes all kinds of issues. You're going to end up in a bad situation health wise if you stick it out at a job that makes you completely miserable.

Speaker 1:
[29:17] Option two, he needs a higher financial advisor. I've said many times on this program in the past, the biggest question most people want to answer when they come to a financial advisor is, am I going to be okay? I think if he sits down with a financial advisor, here I am, and he has a well-established goal already, that's great. Hashing out a financial plan saying, here's where I am, here's where I want to be, can I do it? And a financial advisor going through that, working with that goal in mind, and then you can update as the expectations turn into actual results. I think the advisor can offer you guidance along the way, and then they can give you like the red light, green light, yellow light at age 55. Like, hey, you're well on your way, things worked out better, we didn't get 4 or 5%, we got 6 or 7%. You're golden, you're good, do it. Or they say, it's going to be tight, you're going to have to cut back your spending. Listen to Duncan, he says you can cut back Netflix. So I think they might look at your plan and tell you that you can pull the trigger or no, like hold off. And I think that is the benefit of a financial advisor, is going, working through those with you and saying, yes, you've got enough money to last you for the next 30 or 40 years, do it. I think having that third party can help. But you're saving 40% of your income. I have faith in you. I think you should seriously consider a new job though.

Speaker 2:
[30:29] Yeah. Yeah. The big takeaway here is, it sounds like they've done great, you know. So David's doing a great job. So, you know, kudos on that. But yeah, you got to get out of a job that is...

Speaker 1:
[30:39] And has he considered a variable life insurance policy?

Speaker 2:
[30:42] That's, someone in the chat said, yeah, he needs life insurance.

Speaker 1:
[30:47] So that, again, well on your way, you're going to be a multimillionaire in 10 years. It's just, is that enough money to retire based on your lifestyle? And that's what you have to consider. Like, do I need to change my lifestyle? Do I need to change my expectations and change my job? All right, one more.

Speaker 2:
[31:04] I think they can do it. I believe in them.

Speaker 1:
[31:06] I have faith. Let's do it. Got it, David.

Speaker 2:
[31:09] Okay. Last but not least, we got a question from Natalie. I'm a UK investor with about $1.5 million in equities and need to withdraw about $100,000 per year for my son's US college.

Speaker 1:
[31:22] It's a spit take right there. Spit take.

Speaker 2:
[31:24] Yeah. He just got accepted into Columbia University. Side note, he's worried that they only produce students to go and work in finance. What's the most efficient and low-risk way to structure these withdrawals? Should I hold one to two years of expenses and cash or tips to manage market and currency risk? I still need growth.

Speaker 1:
[31:44] Natalie, they only teach people how to be value investors at Columbia. Don't let them do it.

Speaker 2:
[31:50] Rob's going to be mad at you.

Speaker 1:
[31:52] $100,000 a year for college sounds insane, but Columbia is obviously a great school. I think if you're going to pay up for school, it has to be an Ivy League school like this. Don't you agree? It almost has to be.

Speaker 2:
[32:03] Yeah. I've already had hot takes today. I won't give you my take on this.

Speaker 1:
[32:06] Okay. Here's the thing though. If you put $400,000 into a brochure account today and invest it into an index fund, that's a terrible comparison because your son still has to do something. But if we did, $400,000 growing at 8% per year from age 22 to 65 gets you $12.5 million. I'm just throwing it out there. Take it or leave it. Had to say it. But you can't put a price on the college experience. Where's Columbia? I don't even know where the campus is in New York. Is it in a nice place? NYU is my favorite neighborhood. Where's that? West Village? Where's Columbia?

Speaker 2:
[32:38] This is like Upper West Side, I think. I don't know. I've never been to the campus.

Speaker 1:
[32:42] Okay. I'm sure it's beautiful.

Speaker 2:
[32:44] Yeah, I'm sure.

Speaker 1:
[32:46] Your son wants to translate that money into future income for himself. Tell him, listen, tell him finance is probably a better, a bigger sure thing right now than software developer. So, right? At the moment, at least. All right, let's get back to the situation. This is a little more than a quarter of your stock portfolio. It's not an insignificant amount of money. It's a decent amount of money. I'm a fan of matching assets with liabilities. You know the liabilities, you know when you're going to have to spend them. The most low-risk way to manage these liabilities is by putting the money into cash and short-term fixed income. So, it might look like this. First year is either in a high-yield savings account or a money market or T-bills, something very short-term. You know you're going to have to spend it. Don't take any risk. Years two and three, short-term bonds, like a one to three-year bond duration or bond fund. And then year four is maybe intermediate-term bond. You're basically creating a bond ladder for yourself. You can do that with individual bonds, you can do that with bond funds. That's the safe, boring advice. That's probably what I would do. But Natalie wants some growth, right? Exclamation point. I get yelled at when I don't put exclamation points on text messages. Why does everything have to be an exclamation point these days? I don't get it.

Speaker 2:
[33:50] Show some enthusiasm.

Speaker 1:
[33:52] That's the thing, I don't show any enthusiasm in my text messages and I get yelled at for it. So if she wants some growth, what if that's a 40-60 portfolio or a 50-50 portfolio? Give yourself a couple more user potential growth, but you also have the ability to take from either side of the portfolio depending on how well it's doing. If stocks do really well, you can sell those if you want. And if stocks do poorly, then you have the bonds with cash. But here's the problem. What if stocks go lower and you're forced to sell lower? Are you okay taking that risk? I actually think if you want some upside and you have the boring piece over here, stocks and bonds, you have the exciting piece, equities over here, I think all of the structured ETFs that we've gotten a lot of questions on over the years might be worth a look, too, because call them what you want. They're the buffers, they're the defined outcomes, they're the structured portfolios, whatever you want to call them. They can define both your upside and your downside. So at least you know in advance how much you're putting at risk. So you could say, listen, I'm okay seeing my money fall 10%, but no more than that. Or I'm okay seeing it fall 15%. And if you do that, a lot of these products will say, all right, if you have the protection down to 10%, your upside is capped at 12%, whatever it is. Or if you want your downside capped at zero, your upside is only seven. You can go into it with a defined outcome. I think actually that's one of the really cool ways to look at this, where you're like, okay, you're giving yourself more wiggle room to the upside, you're capped, but so is your downside. And then you can compare and contrast what your upside or downside would be in those funds. Here's a big question. You know your goal. You want to pay for your child's education. And you can hold this over him for the rest of his life, because this is an insane amount of money. You already have more than enough money. You might want growth. Do you need growth? That's a question only you can answer. And then tell your son, even though he might not want to go into finance, he still needs to pay attention to his finances, as we learned in question one. See how I brought it around there? That was like a John Mulaney joke. I finished way earlier, came back, brought it around.

Speaker 2:
[35:53] You did it. I liked it. Isaiah Machat says pull that money out. Four years is a small-ass time horizon.

Speaker 1:
[36:04] I've said this on the show before, though. If I could bottle up the feeling I had my first week of school, when I was meeting new people in the dorms and going to parties and going to my first classes, I'd be a trillionaire.

Speaker 2:
[36:17] Oh yeah.

Speaker 1:
[36:19] There's something about the college experience, and I know certain people say that's ridiculous.

Speaker 2:
[36:22] And living on campus, there's a huge difference. You know, living on campus versus living off campus, especially as a freshman, I think, getting the full experience, so yeah. No, I agree. I think the arguments are just about like, how different is the education actually at an Ivy League versus a public university or something.

Speaker 1:
[36:40] Well, Dave asked that in the chat. He said, is there any value in connections when we'll get at the Ivy?

Speaker 2:
[36:44] The connections are, yes, that is what you meant.

Speaker 1:
[36:46] You're going there for connections and you're having it on your resume and it'll help you get your first job order. That's why you go to an Ivy League school. In a million years, my high school performance, I never would have gotten into an Ivy League school. That was not going to be me in a million years. So the fact that your son got in, that's a good sign.

Speaker 2:
[37:01] Not to brag, but you're one of the most successful people I know and you didn't go to an Ivy League.

Speaker 1:
[37:06] Didn't need it, did I?

Speaker 2:
[37:07] There's that, and Michael didn't either.

Speaker 1:
[37:10] Yeah, he got kicked out of school.

Speaker 2:
[37:13] Not a joke.

Speaker 1:
[37:14] Yeah. We saved a lot of people's children today, I think.

Speaker 2:
[37:18] I think so.

Speaker 1:
[37:19] Anyone who wants a free book for their kids, let me know. Email us and I'll send you one. Thanks everyone in the live chat for tuning in. As always, people watching on Twitter. Thanks to Jonathan Novy, our insurance expert. Thanks to Duncan for bringing it with his hat game today. Even though he's a little mean to a few people on the question.

Speaker 2:
[37:35] I'm not being mean. I'm not trying to be mean. No, I'm defending the person who wrote that question. I don't like that their kids seem like they're taking advantage of them. I don't like that.

Speaker 1:
[37:44] AskTheCompoundShow at gmail.com. We'll see you next time.

Speaker 2:
[37:47] See you, everyone.

Speaker 5:
[37:50] Thanks for listening to Ask The Compound. All opinions expressed by Ben Carlson, Duncan Hill and any of their guests are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

Speaker 3:
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