Bond Market Analysis: The podcast discusses the current state of the bond market, highlighting that the 2020s have been the worst decade for bonds, with long-term treasuries experiencing a significant drawdown.
Investment Strategy for Bonds: The hosts suggest that despite the poor performance, higher yields could present a buying opportunity, especially as bonds provide a recession hedge and yields are higher than in recent years.
Financial Advice for Service Members: The podcast emphasizes the importance of financial discipline for young service members, advocating for automation in savings and investment through tools like the TSP and Roth accounts.
Roth vs. Traditional 401k: A listener's query about switching from Roth to traditional 401k contributions is addressed, with advice suggesting a shift might be beneficial when nearing higher tax brackets, especially considering future marital status and potential tax implications.
Mortgage Decision-Making: The discussion covers the choice between a fixed-rate mortgage and an adjustable-rate mortgage (ARM), with considerations about future interest rate movements and the unique benefits of the U.S. 30-year mortgage.
Health Savings Account (HSA) Withdrawals: The podcast advises that large HSA distributions should not be a concern if proper documentation is maintained, as the law supports such withdrawals for qualified medical expenses.
Portfolio Diversification: The hosts discuss the benefits of a diversified portfolio across Roth, pre-tax, and taxable accounts, suggesting that maintaining a balance can provide flexibility and tax advantages in retirement planning.
Transcript
Welcome back. This is Ask the Compound, the show where you ask and we answer. I am Ben Carlson. Everyone always says to buy when there's blood in the streets. Be greed and others are fearful. That's typically for the stock market, though. Does this also apply to bonds? 10-year Treasury is still 10% below. They're 2020 highs. The whole decade underwater. Long-term treasuries 40% draw down still. Yields are higher, prices are lower. This is the worst decade ever for fixed income. You heard it here first. Is it time to buy bonds? We will explore this topic and more on today's show. Stick around. [Music] All right, our email here is ask the compoundgmail.com. If you wanted a hat just like Duncan, go to idonshop.com. Those are the hottest new hats in the streets. >> Compliments of future proof. Lots of people like them. Yeah. >> Yeah. Patagonia stole that look from us. Can't believe it. Uh on today's show, we have questions from our compound audience about how bonds work. Investment advice for service members, when to make the switch from Roth assets to traditional or taxable brokerage account contributions, uh 30-year fixed rate mortgages versus ARMS. Which one makes more sense right now? Does the IRS care about the size of your HSA expenses? And finally, where should you focus your contributions when thinking about early retirement? Today's show is sponsored by our friends at Public. Public has everything you need as an investor all in one place. stocks, bonds, options, crypto. Plus, if you keep your cash on public, you can earn 4.1% APY. No minimums or fees, and AI is woven into the entire entire experience with portfolio insights, quarterly earnings, call transcripts, and more for limited time offer. Free money, 1% match on all IRA deposits, IRA transfers, and 401k rollovers. Again, free money, just like a match. Fund your account in 5 minutes or less. Find out more at public.com/ATC. That's publicub.com/ATC. paid for by public investing. Full disclosure is in the podcast description. All right. I like our updates. We've been getting more of them lately. Remember the 20some SEC couple from a couple weeks ago who was building a budding real estate empire, >> right? >> They wrote in and they said, "Yes, you guys were close. We were from the University of Tennessee." Okay. Close. Still live there. Uh they said, "It's interesting. I would agree their comments. If we were entering a recession, people would still need a place to live, but affording rent might be the real challenge. for some context that you didn't ask for. Both of my parents lost their jobs in 2008. It hit us hard financially and emotionally and the impact still lingers. I think that's why we have a bit of hyper fear around recessions. This is a real thing. The experiences you had sometimes when you're younger, sometimes when you're older can really impact your risk appetite. This said, so they said, "Writing this email and hearing your response helped us reflect. We've decided to move forward with our first development project and for the first time we're taking on outside capital. So they brought some friends in who are architects and they're going to go ahead and do their design company. If it fails, do not blame me, but I say go for it. Good for you. >> Yeah, it got a it got a stamp of approval from Ben, so do without what you >> No Grand Rapids Edge. They're in their 20s. Take some risk. If it fails, >> pick yourself back up again. >> It is so true though. when I feel like when you graduate, you know, especially when you graduate from college or I guess you could say high school as well, but but for me, especially college, I graduated right into the, you know, teeth of the great financial crisis. And it was, you know, it forever changed my my thoughts on the economy and and like this is why I'm always coming to you and being like, why do so many people think this is a bad economy? I remember when like no one could get a job at Home Depot or any of the places that people typically get like summer jobs in college. Like no one there were no jobs, you know? Uh, so yeah, I think it has >> Yeah, and young people these days have come into a ripporing bull market in the 2020s with speculation and and that it totally changes your perception of risk and you want Yeah, you wonder if it'll take a financial crisis to make that change again. Who knows? All right, let's do a question. >> All right, up first we got one from Rebecca. I've been a longtime listener and while I have many questions in the realm of finance, the one thing I keep coming back to is bonds. When you say the 2020s are the worst decade ever for bonds, and then I see a Business Insider article saying the 6040 is in its worst stretch in 150 years, I just can't understand what's going on. I'm a simple investor, mostly investing in my work 403b and 457 with target date funds. I don't know what a 457 is. Uh, but I also invest in a 401k, >> but I also invest in funds like BNDX and AG. Uh, what I'm trying to understand is if bonds are in a bare market, am I buying them on sale like equities in a bare market? It feels like every time I check my bond holdings are in the red. Does this mean I'm getting them at a lower price with the hope that they'll eventually go back up or is buying bond funds more of a static situation where what you buy that day is what you get. >> Now, I will say Rebecca sent this question in a couple months ago and then she pinged us again this week because I am a man of my word and I said if we have female questions come up. So, she said, "Hey, I was going to let it go, but when you said women's questions move to the top of the list, I was wondering if you still had a chance to answer my question on bonds." So, when we get to the top of the list, and she also says her net worth is 3.2 million at age 50, not to brag. Good for you. So, she's thinking about bonds as a way to transition into potential retirement. So, um I have said and I've written about that the fact that this is the worst decade ever for bonds. Daniel, show my blog post here. I wrote this a few months ago. Uh, let's go to the charts. I looked at five-year treasuries, 10 year treasuries, and long-term treasuries. So, we're talking 20 plus years. Every decade going back to the 1930s, and nominally, this so far is the worst decade so far. Let's do the next one, though. It really, really makes a difference on a real basis. Inflation adjusted. Look at these returns halfway through the decade. The 70s had nasty, nasty inflation, but you had much higher rates. So the you the returns are actually better in the 70s than they are this decade so far. Decade's not over obviously. It's pretty brutal, right? All right. Chart off. So I said so far this is the worst decade ever. I'm not sure about that whole 150 year thing about the 60/40 portfolio that she wrote about business insider. Uh bonds have had a brutal decade, but the stock market has more than made up for it. So let's do a chart on here. I created a quick 60/40 portfolio using the Vanguard total stock market index fund. the Vanguard Total Bond Market Index Fund. And over the past 5 years, it's up more than 9% per year. So despite the fact that 10-year treasuries have a negative return over the last 5 years, they're down about 10% in total with income. That's terrible. This is the beauty of diversification. Stocks have more than picked up the slacks slack for bonds, right? So that's a good thing. That's why you have a a balanced portfolio. One thing does bad, the other thing does good. Doesn't always work like that, but pretty nice. Chart off. Um, I'd say there's really two things you need to know about bonds, Rebecca. One, rates and prices have an inverse relationship. If rates go up, prices go down. If rates go down, prices go up. Okay? I think if you didn't know that as an investor, you know it in the 2020s now. Especially when rates rise, prices go down. I think a lot of bond investors were very caught off guard by the fact that if rates go up really, really fast from a very low level, there's no margin of safety. you could get killed. Like I said, long-term treasuries are in a 40% draw down still, which is nuts. They've been under a whole decade. >> Yeah. The last few years seem to have uh caused a lot of young people to think like why and kind of myself included. Not that I'm that young anymore, but uh like why take risk in bonds if I I'd rather take risk in equities? I hear that kind of sentiment a lot from >> Well, that's that's always been my mentality. But I think the thing was for a lot of people for 30 or 40 years when you had rates long-term yields were at 15% in the early 80s and they fell. You had the this wonderful period of the you got it on the other end, right? Where you had these unbelievable returns because rates were falling from a high level, but once you got down to the floor, there was nowhere else to go. And that was the problem. So, you're right. I've always had the mentality of if I'm going to take some risk, I want to get paid for it. And in bonds, especially long-term bonds, at lower yields, you don't get paid for it at all. So, what's the point of taking that risk? So, here's what else you need to know about bonds. The starting yield is far and away the biggest predictor of long run expected returns. Let's do a chart on. This is 5year treasuries versus 5year forward returns. So, I kind of moved it back a little bit. And you can see not a perfect match. The correlation is 0 93 for all you math wizes out there. Um, but it's a pretty darn good approximation of what your returns are going to be. They can diverge at times if rates move really quickly like they have recently. So you can see that the the starting yield the returns have actually been lower than the starting yield and at the end of the 20 end of the 2010s the returns were higher because yields fell so fast. So um so the great thing is is that guess what yields are much higher. Chart off please. So you had to go through the pain of taking those those yields going from essentially zero to 5%. But now that we've gone through that the higher yields are here. So um now the the the caveat here is that for this this is treasuries my chart about the starting yield um for other bonds like high yield or corporate bonds you need to take the starting yield and subtract any defaults if there's losses on the bonds which are typically very low but still a thing right okay higher yields higher risks that sort of thing um so I think the worry about seeing your bonds constantly fall in price like you're getting short you're trading short-term pain for long-term gain right the the starting yield has gone up but the thing is going from 0% to 5% is going to be way more painful than going from let's say yields keep going up 5% to 6%. Because you have that bakedin yield now that kind of can protect you a little bit. So the case against bonds is the fact that well inflation could reacelerate right government spending shows no signs of slowing down and if rates rise bonds are going to continue to get dinged especially treasuries and the like. The case for bonds is that yields are way higher than they've been over the last 15 or 20 years. Um bonds provide a great recession hedge. If we go into a recession, uh, bonds typically see a flight to safety and yields fall and bonds do well. Um, and if the Fed is going to cut rates, probably this week, right? Um, it doesn't guarantee that bond yields will fall, but it it certainly helps the the case. Now, let's say like we don't even go into recession. The economy keeps growing, not too hot, not too cold, Goldilock situation. Bond yields in the four to 6% range are still pretty darn good, right? Now the thing to think about and I think this is what people have realized there are dozens and dozens of different bond strategies you can employ different credit quality different duration different maturity different yield different collateral treasuries and munis and corporates and high yield and mortgage back securities and asset back securities and clo and tips plus you have c like fixed income cash equivalents T bills money markets CDs high yield savings accounts so I think what thing a lot of investors have realized is that you have to be way more thoughtful about how you set up your fixed income allocation based on how it will perform with rising or falling yields, rising or falling inflation, rising and falling e economic growth. Um, and the thing is it all depends on what you want to get out of your fixed income. Do you want income? Do you want volatility protection from the stock market? Do you want um liquidity for spending purposes? Maybe some combination of the three. That's the thing. And I just think you have to be way more um conscious of how you're setting up that allocation based on what the environment is. Because I think a lot of people learned a hard lesson this decade that if you take a little duration and yields rise from a very low level, you're going to get smoked. >> Yeah. And if you take nothing else away from this, if you're new to investing, just please understand you can lose money in bonds. I think a lot of people think they hear safe bonds are the safe thing and they they don't understand that you can actually lose. >> And it's possible that that 2020 to 2023 period where rates went to zero essentially and back up to five. That could be a once in a lifetime thing. We we may never see something like that again. But it that's the that's the that can happen though, right? You can get a quick move in yields like that. Um and it can hurt you and you could see a quick move down too. Like that could happen as well. So yeah, you're right. It's uh and the other thing is with inflation, the I think I always say the biggest rate risk for most investors over the long run for bonds is inflation because you're getting your money back in nominal terms, right? Your money isn't indexed to inflation. Um, so yeah, I just think you have to be a little more thoughtful about it. So, Rebecca, talk to an adviser. Come talk to us and we'll tell you how to manage fixed income. >> There you go. >> Let's do another one. >> Okay. Up next, we got a question from Dylan. What advice would you give to a service member in his first enlistment who is interested in investing? I'm a veteran uh fortunate enough to work closely with young Marines who are mostly in their first enlistment. Most of these guys don't know the first thing about investing, but show interest in learning. Over the years, I've been asked about it and I try to give sound advice, but I don't want anything I say to be misinterpreted. People on their first enlistment are in a unique scenario because of the fact that they're so young, don't have to worry about college debt, and are making more money than other 18 to 22 year olds. I feel like we have the perfect person to talk about. >> We have the absolute. We love questions from our service members. We have the perfect person to answer this question. Mr. Bill, >> gentlemen, how's it going? Hold on. >> All right. Q tips, Bill. home. >> Uh, so Bill, we've talked about your origin story before. >> Yeah. >> About how you got into finance because you were helping people that were in your crew that that that didn't know what to do with it. And this is a great point here, like these 18 to 22 year olds that have no student loan debt. They're making more money than they probably ever have in their lives. Um, but I'm curious, I don't know if we ever talked about this, what did you actually show people when you were helping them with their finances? Like what did you start with? Because it feels like at that point it's almost a clean slate for a lot of people. >> Yeah. No, totally true. And not only do Marines on their first duty tour or you know, sailors, soldiers, airmen, not not only do they not have to worry about college debt, but they don't have to worry about health insurance, they don't have to pay tax on their housing. Uh, and they typically will get a GI bill to help cover college tuition. So, like, it's a pretty good deal. And this is not meant to be a military recruitment segment here. U, but Dylan, I've been in your shoes. And I think the most important thing to emphasize is to get started on healthy financial habits. Uh, Ben, your blog is an excellent resource for this type of thing. And ultimately, Marines are programmed at Paris Island to be disciplined. And so, it's just a matter of applying that discipline to their personal finances. >> I'm curious, did you see that discipline? Did or did people just blow all their money when they first got it? >> No, because you're dealing with a bunch of 18, 19, and 20 year olds with money for the very first time. Yeah. I mean, were you financially, fiscally responsible at age 20? I certainly was not. I will admit. >> Well, let's be honest, I was, but most 20-year-olds are. >> Yeah. I I was filming a documentary uh years ago uh at Camp Ljun or they told me it was Camp Lejourne, but I don't know if they're just messing with me, but uh and and they told me that you see like all these diamond stores and fancy car places pop up around the base, right? Because there's a bunch of young young people with lots of >> I was I was talking to somebody. I I went on a trip recently and one of the things I talked to them about was like take a look at like what props up outside of the military bases. It's instant check cashing, uh Walmarts, and then yeah, a lot of a lot of grime. Uh but ultimately really really >> mostly personal finance stuff though for you. >> Yeah. Yeah. So for me it's about automation and for a lot of what the military's done over the last you know defense finance accounting service is that they've deployed the TSP I think very effectively. Ben you and I are famously big big big fans of the TSP. It's available for every Marine uh every soldier sailor. Uh make sure it's a Roth. So I I would just always push people to do that. I don't think you're giving them bad advice or overstepping your your skis at any point Dylan to get them to think about the future. Um, and pay yourself first because savings ultimately is freedom. And what do Marines love? They love freedom. Like, right, they love waving that flag. That's why they signed up. And so, it's just a matter of getting them to do things that I think are are are in their best interest in their nature. And just those small nudges do compound over time. Automate, automate, automate. I think that's the way to go. And when you have your housing covered by the United States government, that is a great time to take that excess income and and put it away for for the future. I agree that the biggest thing I would teach them is just automate your savings right away after you get paid going into your Roth IRA or your TSP, whatever it is, and then spend whatever's left over, right? You start the saving, it's automatic every year. Increase it just a little bit. Yep. >> And then that's the biggest habit that you can get is just that that saving. I think that's the biggest one to me. >> Yep. I used to serve >> whatever's left. Blow it a little if you want. I don't care. >> Yeah. I used to serve soldiers in the army. Sounds like that's what's only doing for the Marine Corps. Now we serve very wealthy clients. One of the things, Ben, that that doesn't separate anybody is that people will spend the money that goes into their account, right? If the dollars hit the checking account, it will go out the door, right, in very short order. And that's male, female, military, non-military. I think it's just a force of nature. So, automating that savings is probably key. And and Dylan, that the basics are the things to stick to and and I'm sure that you're doing great work uh for those for those new Marines. >> Yeah. Give us a call. Me and Bill will come talk to them for sure. >> Let's do it. That'd be fun, right? >> Yeah. >> All right. I I I brought you into that one. All right. >> Yeah. >> Shout out everyone watching from uh Camp Pune. >> Yeah, there you go. >> Let's do it. >> Where is that, by the way? >> It's on It's in Jacksonville, North Carolina. >> Okay. >> Yeah, pretty pretty far. Office in Charlotte is what, Duncan? Like three hours, four hours. North Carolina's a pretty big state. >> Something. Yeah, something like that. It wasn't far from Wilmington, which is why I was up there. Yeah. >> Would love to swing down. Absolutely. >> Okay, up next, we got one from Matthew. I'm a relatively new listener to the show, but I've already shared it with all my friends. Uh, thank you. And they've been breathing a collective sigh of relief after hearing your stay the course advice. I have a question about traditional versus Roth 401ks. I'm 32 and work in real estate finance. My income is mostly uh commission based and I've earned between 300 and $450,000 annually since 2021. Since graduating college, >> Drag, huh? >> Yeah. >> Yeah. Nice. Since graduating college in 2016, I've been contributing exclusively to a Roth 401k, which is now about $230,000. I've also been maxing out my Roth IRA for the past few years. Outside of that, I have $315,000 in a taxable brokerage account, 115,000 invested in real estate, 12,000 in HSA, 20,000 in cash, and uh profits interest currently valued at $700,000. I need you guys to clarify what that means. Uh, at what point does it make sense to switch from Roth contributions to traditional? I don't own a home or have kids yet, though marriage is coming in 2026. Uh, so I don't need extra cash for my paycheck to cover bills, but I would like paying less taxes today. Is that a smart move? Since middle school, I've heard warnings about the debt bomb and rising tax rates, but that doesn't seem to be happening anytime soon. I can't help but feel like I'm missing out on potential gains by paying Uncle Sam now instead of putting that money to work in the market. See, Matthew's on the same train as me. Bill says taxes are supposed to rise all the time and they never do, >> right? >> Yeah, >> I'm with you, Matthew. Um, okay. So, he's I made this comment after we heard from the SEC couple a couple weeks ago. Um, it boggles my mind how many people in their late 20s and early 30s are doing so well financially. This just didn't exist in the 2010s. >> Uh, and which makes it difficult as a young person these days, I think, to see this. But well, well done, Bill. Right up your alley. Uh, is Matthew ready to graduate from the Roth? I think he's on the cusp. One of the things we didn't get from Matthew, Ben, was the state, right? Which state Matthew's on. I'm presuming we're talking somebody in California, maybe New York, just based on Yeah. the comment of his tone. Duncan, I don't know if you have any insight there. >> But that's it. And Daniel, if we can chart on uh for Q3 here, ultimately where Matthew is for a single taxpayer, uh he is right there in that red box right on the right. And for those listening at home, that's somewhere above the 35% threshold, but well below the 37% threshold. However, Matthew is very, very close uh to the highest marginal tax rate. And at that tax rate, Ben, I think that's around the time that I think I would consider shifting gears into a traditional. Matthew mentioned that he's 32. So, he's been doing this for a while. He has built up a pretty solid uh egg there in 401ks. Pretty wide range of income, right? 300 to 450 is that's like a 50% swing or 25% swing on income. But still, regardless, he's going to be there. But the other big part that Matthew mentioned, which I think is important, is he's getting married in 2026. And so, unfortunately, he's going to have to sit down and take a look at what his future wife's income is as well. But Matthew is right around the time when I would recommend shifting gears to a traditional. So, there you go. >> Um, the profit interest thing, he says he works in real estate finance. I'm guessing it's some sort of equity ownership type of deal. That'd be my guess. Yeah, very very common for real estate partnerships. And what they do is they basically grant you some sort of stock or equity, but it's it's not worth anything the day that you get it. And but it allows you to basically to get a claim on the profits of future distribution. So very typically for real estate, that's net income. It's a really neat way to to basically compensate people. It's an equity based compensation scheme. >> All right. So he's cash flow close then. All right. >> Yep. Yep. Yep. >> And guess what? He's probably going to be fine either way. >> Yeah. And I'm not I'm not Roth all the Roth all the time, but yeah, I think I think Matthew's right on the cusp. And particularly if he's in California, New York, and is considering retiring to a lower tax state, I I think now is probably is the time, Ben. >> All right. Chris in the chat says, "Ben blocked me on Twitter." And I don't know why. Um Chris, I have a quick trigger finger. I'm sorry. If you want to email me and and give me your handle, I'll unblock you, but um >> I I get I get these like a couple times a year, someone being like, "Hey, can you talk to Ben about he blocked me? I don't know why." I'm just like he he probably thought you were a bot because 90% of people on Twitter now are bots. That's true. Or or you said something and Ben, you know, was just like, yeah, >> I block hard and fast sometimes. This is the sarcasm maybe goes over my head, but uh if you didn't do anything bad, email me and I'll >> Yeah, I can't imagine Mark Andre of Andre Horitz is watching the show, but just in case you are, yeah, he blocked me about a month ago and I'm I'm hurt. Like I am personally stung by this because we've had a lot of great interactions throughout the years. I like retweeted something that's something somebody says something very nice about him and I I I'm being yeah somehow the the the the thunderbolt of Mark Andre is is hit me hit me hard. >> I don't know. You had it coming. Next question. >> I guess so. >> Okay. Up next we got a question from David. I'm currently in the process of purchasing a home and I'm evaluating two mortgage options for my primary bank. Uh I'm well qualified in terms of income and assets and I'd appreciate your insights on which option you think might be better. My bank has offered me the following. A 30-year fixed rate mortgage at 6.375% or a 5-year ARM adjust adjustable rate mortgage at 5.875%. The ARM would be locked at this rate for 60 months and then adjust based on the 10-year Treasury. I'm leaning towards the ARM because it would reduce my monthly payment on a $500,000 mortgage by $161. My goal is to refinance the loan in the next few years if interest rates decrease. I believe the risk of rates increasing significantly within the next 5 years is low. I'm wondering if I'm overthinking this and if it would be safer to opt for the fixed rate mortgage with the intention of refinancing later if rates drop. >> All right. I mean, it sure seems like mortgage rates have nowhere to go but down. Uh throw my chart up on here. This is mortgage rates for the past 10 years or so. It's interesting. So, the the stock market bottomed I think in October 2022 from the bare market and that's when mortgage rates first hit 6% for the first time. I mean, they've been above that level ever since. So, if you would have asked me back then, can mortgage rates stay above 6% and even get closer to seven or 8%. For a while, I would have said, no way, you're nuts, unless the housing market gets crushed. And that didn't happen. So, guessing the direction of mortgage rates is is kind of a fool's errand, I guess, just like guessing just about anything else in finance. Um, but if I had to use my gut, I would say, yeah, they're probably going to go down. I feel like the the government is going to do what they can to make them go down. Um, so I I guess it depends. I guess it doesn't really matter. So I guess the arm probably makes more sense assuming you're willing to take that risk that they don't drop and you can't refinance. I guess that's that's your only risk here, right? Um, but then that gives you a five-year window. I I'd feel pretty confident about that, but I would nothing's ever certain. Do you do you have a sense of what you would do here? >> I have a really strong opinion on this. uh the 30-year put option that is a 30-year mortgage is unique in finance. You you don't see this outside of the United States and it's because the United States government through Sally May through Freddy Mack basically subsidizes taxpayers on this option and that Ben has just been my conclusion for really since I've owned a home. I I would always take the the longer option. Everybody thinks that rates are going down. I understand that the Fed is probably going to cut rates with like a 99% certainty, but the reality is we don't know. The stock market's at alltime high. inflation does appear to be ticking up. What if rates increase, right? And we don't we don't know. And Ben, I've just very rarely seen this ARM thing where like you have to then go out and refinance or there's adjustable rate. Like very rarely does that tend to work out. And I I could be wrong. I've been wrong in the past. I'm happy to be wrong in the future. I would take the 30-year put option. That That's my advice. >> It I I agree. It it just makes things way simpler and you know it. And if the costs of refinancing are not going to be different from one product to the other, and I don't see why they would, that would make more sense to me. And just in terms of planning, I've always I think the third I agree with you. The 30-year fixed rate mortgage is one of the best thing that's ever happened to American consumers. And a slight history lesson, it came about because of the depression. So many people defaulted their mortgage. They had to extend them. They had to extend it because so many people they they couldn't just see the whole housing market blow up like that. So they had to give people longer loans to keep in their houses. 1930s, the first time it was too big to fail. >> Yeah, it is funny how many good things came out of the Great Depression. Good things came out of a bad thing, right? The SEC, a lot of consumer protection, um, a lot of the unemployment insurance, all this stuff and 30 mortgages was going on. Um, Michael from Katana that is in Sicily, Italy. He's always in our live chat. Um, beautiful place. I would love to visit sometime. Looks great. >> Never been. >> Hey, well, sounds like you might have a place to stay. >> In Sicily, they do not have 30-year mortgages. >> I I kind of see the the other side of this, too, though. If if he's saying he thinks he's going to refinance in the next five years, then you know why wouldn't you take the lower repayment from here to then >> because what are you refinancing with the arm? >> Yeah. What are you refinancing into? Yeah, you could be refinancing to an 8% loan. Yeah. I don't know, Ben. I I think I wouldn't say that the economy is a random walk. Like >> what would happen to the economy if they really went to 8% in the next five? >> I mean, it would be inflation. Inflation would probably be the key driver, right? So, yeah, you need to have >> Yeah, that' be the because they did almost hit 8% a couple years ago. >> Yeah. Yeah. Which is great. We're seeing that. I mean, we're seeing it in coffee prices. I don't know if you guys are coffee drinkers. I know Ben isn't, but yeah, they're >> Yeah, we we could see. And it's it's hard to make sense of it. So, like, I've taken the tack of >> You know how rich I am by not drinking coffee? I save $4 every day. >> The avocado toast of Ben Carlson. Yeah. >> On on this uh mortgage note, I was in Vancouver over the weekend and uh I I talked with multiple people, mainly Uber drivers, but uh who were talking about the economy there and mainly complaining about housing and they were talking about >> Duncan. If you think housing is bad in New York, look at Vancouver or Toronto or pretty much any any other big city around the world and it's way worse. So, that's a great thing to look forward to. Real estate is really expensive in America. It could always get worse and it probably will. That's true. Always be worse. >> It's the worst day of your life so far. >> Yeah. >> Vince's quote of a day. It could always get worse. Uh, okay. Up next, we got a question from Joshua. We've PDFed our receipts and EOBS. Don't know what that is. since 2010. By end of year, we'll have about $90,000 in unreimbured expenses. It's too much time to trim. There will still be $250,000 left behind for the next 50 years of health expenses. Were they in like Nvidia in this agency or something? >> Oh boy. >> Okay. Uh let's see. Too uh too soon to say if that's not to brag. Here's the thing, and maybe it's unanswerable. Is there a genuine risk that a large HSA distribution will trigger extra attention from the IRS? I know the audit score function is a big secret, but what has the RWM tax team seen in real life? Not seeking genuine advice. Thank you for the disclaimer. Uh just how to think about how to manage audit risk. The big decision is whether to distribute over three to four years to keep it lower and smooth or to rip off the band-aid. >> Cliff in the chat says EOB explanation of benefits. Correct. Make sense? >> Um >> got it. So, I remember when I was a bank teller for a couple summers, for two summers, I thought like, "Yeah, I'll be a bank teller. That'll help me in my finance career." Uh, one of the worst jobs I've ever had. This is like precomputer, so I had to like write the slips out by hand and then balance the slips at the end of the day. It's like, "Oh, you're off 200 bucks." You have to go back through and I'm sorry. I'm picturing you in a bank robbery. >> Yeah. Did you have to like >> Oh, trust me. Every single day I thought about how I would get money out of this place. Um, >> no. I mean, think about you're dealing with these huge stacks of money. Uh, I thought about um, so anyway, there were these IRS forms that you needed to fill out if you deposited like 5,000 or 10,000. I can't remember what the break was. I think it was 10,000 in cash into your account. You had to fill these forms out. So that's what I guess they're thinking of. So the question is, does the IRS actually care about the size of these expenses or not really? >> I think so, Ben. But if you've got the receipts, if you have 90 pages of PDFs on your explanation benefits, if you're disciplined enough to bring the goods, I just you're you're within the law. You're playing within the law. Exactly. Exactly. And that's it. If if Red Holtz Wealth Management or or Duncan or or Ben or anybody that I work with goes through an IRS examination, you better believe like I'm going to be pounding the table with my PDFs and printouts. Like, you have to have the receipts. And if you have the receipts, you're good to go. What happens mechanically, Ben, is you get IRS form 54.98 HSA and it shows the amount of the gross distribution. And again, you just have to say, "Yeah, I've got qualified medical expenses of $90,000 and here's my itemized list of how this happens." And that would only come up if you do get examined. So I I I would not hold back. The the law is the law and if the law is on your side, you should do you should do do what's right as taxpayer. >> Yeah. And it sounds like they did the thing where they have held on to these receipts and they let the account grow. Yep. >> Right. And then they're going to cash in later. Uh >> yeah. From this ever Sorry, I was just gonna say why would this ever cause like suspicion? Is there a lot of fraud in the HSA space where people try to claim? >> I think just I think just large amounts of money with a tax break. I think they're just trigger something. Yeah, >> it's unusual. Yeah. But but ultimately, Duncan, to answer your question, yeah, it is unusual. You don't usually see people compound large amounts of assets into an HSA and you don't usually see large distributions unless there's some medical event right in that current year. So, it is abnormal. It doesn't happen all the time, but again, the law is the law and if the law is on your side, I see no reason not to do this all at once. If you have the goods, you have the receipts, knock it out. Go for it. >> There's never any fraud in healthcare. That never happens. But, um, Michael says, "I'm not invited to Italy because I don't drink coffee." That's too bad. I guess I have to say, >> uh, yeah, espresso big. >> Yeah, you'd have to do at least a couple espressos. >> They call your coffee Americano there. Yeah, >> we got one more. >> Okay. Uh, up next, we got one from Ryan. I recently had a health scare that has prompted me to re-evaluate my savings approach. I'm feeling incredibly fortunate to still be here. uh and and well and it's given me a fresh perspective on financial planning. Recently, I reached a significant milestone in my savings, not to brag, and depending on the assumptions used, I may now be considered coasty. I'll also be hitting the big 50 next year. Earlier this year, Bill Sweet mentioned on a pod a target allocation of 1/3 Roth, one/3 pre-tax, and 1/3 after tax brokerage, uh referencing some of Nickma's blog posts. I found this diversified approach really compelling. Over the past 5 years, I've focused heavily on Roth contributions. Currently, my portfolio is roughly 23% Roth, 75% pre-tax, and 2% after tax brokerage. Given this breakdown, I'm considering pausing my Roth 401k contributions to build up the aftert tax brokerage bucket instead. I'd still receive the employer match through the Safe Harbor contribution, which should provide a margin of safety. Nod to Ben when making this comment. Uh, do do you have any thoughts on redirecting my savings from the 401k to an aftert tax brokerage account at this stage? Anything I should consider before changing my savings approach? >> This is one of the the reasons I think we're going to see a lot more people retiring sooner than expected in the years ahead for baby boomers. Health scare something going on in your life. Healthcare with you, healthcare with a a loved one, healthare, something happening and just going, you know what, I could wait and I could have a lot more money, but I don't care. I want to just do it now and rip the bandit off. So, I can I can see this kind of thing happening. So remember coast fi Duncan is he's like you've got enough saved you just let it grow and compound not save anymore. >> I was about to ask you. >> I totally totally did not. >> You've reached a point where you can just coast the rest of >> Yeah. So you you've saved enough early so you let compounding interest take the take the steering wheel and then you don't have to save anymore because the growth is going to um and I think there's a lot of people in that situation now that have more money than they ever thought they would. >> Obviously a bad fiveyear stretch in the markets would would change that mindset really quick. >> Yeah. But um so I I guess the point here is that they have very little amount in their taxable brokerage account. They're thinking about retiring early. I think it makes all the sense in the world to divert more money to that for more flexibility, right? >> Yeah. Instead of coasting, I call that escape velocity, right? If you reach that that you're beyond the earth's gravity, right? If you just keep compounding, God willing, we all get there, Ben. Um but no, I'd take the other side. uh on an order of operations there there's no reason in my view to dump money into a taxable brokerage account presuming you're going to invest it in roughly the same thing over a Roth account because the Roth account a you're going to get your dividends and interest and compounding taxfree you can rebalance within that account anytime right you can move assets around buy sell stuff and you don't pay tax so that's awesome and then you can always take a distribution with Roth 401ks uh once you roll that into an IRA you can get take a distribution get your basis back taxree >> so it's all the contributions you can take out without a penalty >> and irrespective of age. Irre >> Yes, irrespective of age, you can get your basis back. Now, it's not the case for the 401k account. Unfortunately, Roth 41ks have different distribution rules than IAS. But a rollover to an IRA, once that's free and clear, your basis transfers over. You can just pull that money out. And then guess what it becomes then? If you pull your basis out of the Roth, now you have your non-qualified asset that you can do what you want to do with. So, I would just if you have the opportunity to fund a Roth, I would generally always do it. There's no reason to do it unless you expect to spend that money in the next year or so because again, you can get your bases back. So, it's not a one-way street in the way that other accounts are. >> I should have known you'd have gone wrong there. Of of course you would. >> Well, I didn't in the first one, right? Uh so, I don't so I don't blame you, but I I threw a curveball. >> Counterplay. If you think you're going to pick a bunch of bad stocks, you can tax loss harvest in a in a taxable account. >> Exactly. With perfect perfect knowledge. >> The does the guy with like the 4% rule? There's all these rules in finance, so we need to trademark one of yours. So, you have somehow the billuite equal weight taxable portfolio. I'm I'm trying to think of a good name for you, but the equal weight between Roth, traditional, and taxable, right? >> Yeah, >> it's got to be something. >> When when the equal weight fits, you must have quit. I don't know. Uh, somebody in the comments, jump in and help us out. But can we go back, Daniel, can we go back to question two because I actually forgot to do something. I have a question for you guys, a gentleman. Please, let's do a poll. What is the best service uniform? Can we start uh with the United States Army 1775? This is the very first pinks and greens came back, gentlemen. Uh, now your army officers and NCOs's and enlisted soldiers look like they did in Band of Brothers. I think this is a great shift about 5 years ago and I missed it. Throwbacks. >> Oh yeah. Yeah, they're great. You'll see them in the airport and you know in formation. Next we have the United States Marine Corps actually the second service. This is the United States Marine Corps dress uniform. Uh, and you see the the the light colors. When I was a cavalry officer, I wore a light blue and a dark blue jacket because what the military officers used to do when they were riding on horseback, they put their jackets in their backpack, right, to fight the war and then they put on their jacket and, you know, the sun would have melted their pants into pieces. So that's the reason that you have this. >> I would have coffee spilled on those white pants in like 30 seconds. >> Not if you were United States Marine, Duncan. Very disciplined savings rate. Talk to Dylan about it. Next, uh we have the United States Navy. Uh these are sailors and they're in their dress. uh the military, the the uh I don't have an officer here in this photo. Um but obviously it's iconic. If you've been in New York City for Fleet Week, you see these these guys and gals walking around. Great servicemen. Please, you know, shake their hand, buy him a beer. Next, uh we have the United States Air Force. Used to be the Army Airore. And in 1946, gentlemen, I cried uh because that was the year they pulled my beloved Air Force away from the Army. Uh next, I just have two more. The United States uh Space Force uh which is, yes, is a real thing. And finally, uh, not to not to brag, the United States Coast Guard, which actually predates some of the other services, but they're part of the Homeland Security Department, so we don't count them in the Department of Defense. Okay, gentlemen, what do you choose? What's there is the right answer. >> Well, the sailor uniform is the best for getting in bar fights, right? If you see one of those, you can't. And I I'm sorry, I'm a little I I have a bias here. I have to say the Marine uniform just because Tom Cruz rocked it so well in Few Good Men. >> So, I have to go if it's Tom Cruz wearing it, then I'm going to go Marines. But you're right. The the I know. I think I know which one you're going to say. I'm I'm going I'm going Navy because I was a big Popey man fan. >> Wow. All right. You got to eat your spinach. Well Well, Ben, I can handle the truth. And even though I was not blessed to wear United States Marine uniform, I would agree that those are the best uniforms of my >> very clean, right? Something about the white pants and the navy blue. It >> Yeah. And then you get the saber, you know, or the rifle and it just it just works. So yeah, if you're pure sex appeal, you bet your ass I'm going to be recommending that Sam Sweet joins that United States Marine Corps because those people are psychos and they'll have good people like Dylan to help them save and invest for the future. So God bless the United States Marines. >> Yes, thanks everyone for their service. We do get tons of questions from service members. So it it is cool to see them thinking through this idea of like, I know I have money, I need to be responsible with it. What should I do? So there I love seeing questions like that all the time. There are a lot of non-financial benefits for military service and you can pivot into a career in finance. We'd love to have you over here at Red Hole 12. >> And uh in the chat, I I can only fit four options, so I didn't include Space Force or Coastg Guard, but so far Army is is winning in the chat. >> All right. It's it's classic, right? All right. Email us ask the compound show atgmail.com. Thanks to everyone in the live chat as always. It was very rocking today. Uh leave us a comment in there or a question. Leave us a comment or question on YouTube. Leave us a review, subscribe, all that good stuff. See you next time. See you everyone. [Music] [Music]
Is It Time to Buy Bonds?
Summary
Transcript
Welcome back. This is Ask the Compound, the show where you ask and we answer. I am Ben Carlson. Everyone always says to buy when there's blood in the streets. Be greed and others are fearful. That's typically for the stock market, though. Does this also apply to bonds? 10-year Treasury is still 10% below. They're 2020 highs. The whole decade underwater. Long-term treasuries 40% draw down still. Yields are higher, prices are lower. This is the worst decade ever for fixed income. You heard it here first. Is it time to buy bonds? We will explore this topic and more on today's show. Stick around. [Music] All right, our email here is ask the compoundgmail.com. If you wanted a hat just like Duncan, go to idonshop.com. Those are the hottest new hats in the streets. >> Compliments of future proof. Lots of people like them. Yeah. >> Yeah. Patagonia stole that look from us. Can't believe it. Uh on today's show, we have questions from our compound audience about how bonds work. Investment advice for service members, when to make the switch from Roth assets to traditional or taxable brokerage account contributions, uh 30-year fixed rate mortgages versus ARMS. Which one makes more sense right now? Does the IRS care about the size of your HSA expenses? And finally, where should you focus your contributions when thinking about early retirement? Today's show is sponsored by our friends at Public. Public has everything you need as an investor all in one place. stocks, bonds, options, crypto. Plus, if you keep your cash on public, you can earn 4.1% APY. No minimums or fees, and AI is woven into the entire entire experience with portfolio insights, quarterly earnings, call transcripts, and more for limited time offer. Free money, 1% match on all IRA deposits, IRA transfers, and 401k rollovers. Again, free money, just like a match. Fund your account in 5 minutes or less. Find out more at public.com/ATC. That's publicub.com/ATC. paid for by public investing. Full disclosure is in the podcast description. All right. I like our updates. We've been getting more of them lately. Remember the 20some SEC couple from a couple weeks ago who was building a budding real estate empire, >> right? >> They wrote in and they said, "Yes, you guys were close. We were from the University of Tennessee." Okay. Close. Still live there. Uh they said, "It's interesting. I would agree their comments. If we were entering a recession, people would still need a place to live, but affording rent might be the real challenge. for some context that you didn't ask for. Both of my parents lost their jobs in 2008. It hit us hard financially and emotionally and the impact still lingers. I think that's why we have a bit of hyper fear around recessions. This is a real thing. The experiences you had sometimes when you're younger, sometimes when you're older can really impact your risk appetite. This said, so they said, "Writing this email and hearing your response helped us reflect. We've decided to move forward with our first development project and for the first time we're taking on outside capital. So they brought some friends in who are architects and they're going to go ahead and do their design company. If it fails, do not blame me, but I say go for it. Good for you. >> Yeah, it got a it got a stamp of approval from Ben, so do without what you >> No Grand Rapids Edge. They're in their 20s. Take some risk. If it fails, >> pick yourself back up again. >> It is so true though. when I feel like when you graduate, you know, especially when you graduate from college or I guess you could say high school as well, but but for me, especially college, I graduated right into the, you know, teeth of the great financial crisis. And it was, you know, it forever changed my my thoughts on the economy and and like this is why I'm always coming to you and being like, why do so many people think this is a bad economy? I remember when like no one could get a job at Home Depot or any of the places that people typically get like summer jobs in college. Like no one there were no jobs, you know? Uh, so yeah, I think it has >> Yeah, and young people these days have come into a ripporing bull market in the 2020s with speculation and and that it totally changes your perception of risk and you want Yeah, you wonder if it'll take a financial crisis to make that change again. Who knows? All right, let's do a question. >> All right, up first we got one from Rebecca. I've been a longtime listener and while I have many questions in the realm of finance, the one thing I keep coming back to is bonds. When you say the 2020s are the worst decade ever for bonds, and then I see a Business Insider article saying the 6040 is in its worst stretch in 150 years, I just can't understand what's going on. I'm a simple investor, mostly investing in my work 403b and 457 with target date funds. I don't know what a 457 is. Uh, but I also invest in a 401k, >> but I also invest in funds like BNDX and AG. Uh, what I'm trying to understand is if bonds are in a bare market, am I buying them on sale like equities in a bare market? It feels like every time I check my bond holdings are in the red. Does this mean I'm getting them at a lower price with the hope that they'll eventually go back up or is buying bond funds more of a static situation where what you buy that day is what you get. >> Now, I will say Rebecca sent this question in a couple months ago and then she pinged us again this week because I am a man of my word and I said if we have female questions come up. So, she said, "Hey, I was going to let it go, but when you said women's questions move to the top of the list, I was wondering if you still had a chance to answer my question on bonds." So, when we get to the top of the list, and she also says her net worth is 3.2 million at age 50, not to brag. Good for you. So, she's thinking about bonds as a way to transition into potential retirement. So, um I have said and I've written about that the fact that this is the worst decade ever for bonds. Daniel, show my blog post here. I wrote this a few months ago. Uh, let's go to the charts. I looked at five-year treasuries, 10 year treasuries, and long-term treasuries. So, we're talking 20 plus years. Every decade going back to the 1930s, and nominally, this so far is the worst decade so far. Let's do the next one, though. It really, really makes a difference on a real basis. Inflation adjusted. Look at these returns halfway through the decade. The 70s had nasty, nasty inflation, but you had much higher rates. So the you the returns are actually better in the 70s than they are this decade so far. Decade's not over obviously. It's pretty brutal, right? All right. Chart off. So I said so far this is the worst decade ever. I'm not sure about that whole 150 year thing about the 60/40 portfolio that she wrote about business insider. Uh bonds have had a brutal decade, but the stock market has more than made up for it. So let's do a chart on here. I created a quick 60/40 portfolio using the Vanguard total stock market index fund. the Vanguard Total Bond Market Index Fund. And over the past 5 years, it's up more than 9% per year. So despite the fact that 10-year treasuries have a negative return over the last 5 years, they're down about 10% in total with income. That's terrible. This is the beauty of diversification. Stocks have more than picked up the slacks slack for bonds, right? So that's a good thing. That's why you have a a balanced portfolio. One thing does bad, the other thing does good. Doesn't always work like that, but pretty nice. Chart off. Um, I'd say there's really two things you need to know about bonds, Rebecca. One, rates and prices have an inverse relationship. If rates go up, prices go down. If rates go down, prices go up. Okay? I think if you didn't know that as an investor, you know it in the 2020s now. Especially when rates rise, prices go down. I think a lot of bond investors were very caught off guard by the fact that if rates go up really, really fast from a very low level, there's no margin of safety. you could get killed. Like I said, long-term treasuries are in a 40% draw down still, which is nuts. They've been under a whole decade. >> Yeah. The last few years seem to have uh caused a lot of young people to think like why and kind of myself included. Not that I'm that young anymore, but uh like why take risk in bonds if I I'd rather take risk in equities? I hear that kind of sentiment a lot from >> Well, that's that's always been my mentality. But I think the thing was for a lot of people for 30 or 40 years when you had rates long-term yields were at 15% in the early 80s and they fell. You had the this wonderful period of the you got it on the other end, right? Where you had these unbelievable returns because rates were falling from a high level, but once you got down to the floor, there was nowhere else to go. And that was the problem. So, you're right. I've always had the mentality of if I'm going to take some risk, I want to get paid for it. And in bonds, especially long-term bonds, at lower yields, you don't get paid for it at all. So, what's the point of taking that risk? So, here's what else you need to know about bonds. The starting yield is far and away the biggest predictor of long run expected returns. Let's do a chart on. This is 5year treasuries versus 5year forward returns. So, I kind of moved it back a little bit. And you can see not a perfect match. The correlation is 0 93 for all you math wizes out there. Um, but it's a pretty darn good approximation of what your returns are going to be. They can diverge at times if rates move really quickly like they have recently. So you can see that the the starting yield the returns have actually been lower than the starting yield and at the end of the 20 end of the 2010s the returns were higher because yields fell so fast. So um so the great thing is is that guess what yields are much higher. Chart off please. So you had to go through the pain of taking those those yields going from essentially zero to 5%. But now that we've gone through that the higher yields are here. So um now the the the caveat here is that for this this is treasuries my chart about the starting yield um for other bonds like high yield or corporate bonds you need to take the starting yield and subtract any defaults if there's losses on the bonds which are typically very low but still a thing right okay higher yields higher risks that sort of thing um so I think the worry about seeing your bonds constantly fall in price like you're getting short you're trading short-term pain for long-term gain right the the starting yield has gone up but the thing is going from 0% to 5% is going to be way more painful than going from let's say yields keep going up 5% to 6%. Because you have that bakedin yield now that kind of can protect you a little bit. So the case against bonds is the fact that well inflation could reacelerate right government spending shows no signs of slowing down and if rates rise bonds are going to continue to get dinged especially treasuries and the like. The case for bonds is that yields are way higher than they've been over the last 15 or 20 years. Um bonds provide a great recession hedge. If we go into a recession, uh, bonds typically see a flight to safety and yields fall and bonds do well. Um, and if the Fed is going to cut rates, probably this week, right? Um, it doesn't guarantee that bond yields will fall, but it it certainly helps the the case. Now, let's say like we don't even go into recession. The economy keeps growing, not too hot, not too cold, Goldilock situation. Bond yields in the four to 6% range are still pretty darn good, right? Now the thing to think about and I think this is what people have realized there are dozens and dozens of different bond strategies you can employ different credit quality different duration different maturity different yield different collateral treasuries and munis and corporates and high yield and mortgage back securities and asset back securities and clo and tips plus you have c like fixed income cash equivalents T bills money markets CDs high yield savings accounts so I think what thing a lot of investors have realized is that you have to be way more thoughtful about how you set up your fixed income allocation based on how it will perform with rising or falling yields, rising or falling inflation, rising and falling e economic growth. Um, and the thing is it all depends on what you want to get out of your fixed income. Do you want income? Do you want volatility protection from the stock market? Do you want um liquidity for spending purposes? Maybe some combination of the three. That's the thing. And I just think you have to be way more um conscious of how you're setting up that allocation based on what the environment is. Because I think a lot of people learned a hard lesson this decade that if you take a little duration and yields rise from a very low level, you're going to get smoked. >> Yeah. And if you take nothing else away from this, if you're new to investing, just please understand you can lose money in bonds. I think a lot of people think they hear safe bonds are the safe thing and they they don't understand that you can actually lose. >> And it's possible that that 2020 to 2023 period where rates went to zero essentially and back up to five. That could be a once in a lifetime thing. We we may never see something like that again. But it that's the that's the that can happen though, right? You can get a quick move in yields like that. Um and it can hurt you and you could see a quick move down too. Like that could happen as well. So yeah, you're right. It's uh and the other thing is with inflation, the I think I always say the biggest rate risk for most investors over the long run for bonds is inflation because you're getting your money back in nominal terms, right? Your money isn't indexed to inflation. Um, so yeah, I just think you have to be a little more thoughtful about it. So, Rebecca, talk to an adviser. Come talk to us and we'll tell you how to manage fixed income. >> There you go. >> Let's do another one. >> Okay. Up next, we got a question from Dylan. What advice would you give to a service member in his first enlistment who is interested in investing? I'm a veteran uh fortunate enough to work closely with young Marines who are mostly in their first enlistment. Most of these guys don't know the first thing about investing, but show interest in learning. Over the years, I've been asked about it and I try to give sound advice, but I don't want anything I say to be misinterpreted. People on their first enlistment are in a unique scenario because of the fact that they're so young, don't have to worry about college debt, and are making more money than other 18 to 22 year olds. I feel like we have the perfect person to talk about. >> We have the absolute. We love questions from our service members. We have the perfect person to answer this question. Mr. Bill, >> gentlemen, how's it going? Hold on. >> All right. Q tips, Bill. home. >> Uh, so Bill, we've talked about your origin story before. >> Yeah. >> About how you got into finance because you were helping people that were in your crew that that that didn't know what to do with it. And this is a great point here, like these 18 to 22 year olds that have no student loan debt. They're making more money than they probably ever have in their lives. Um, but I'm curious, I don't know if we ever talked about this, what did you actually show people when you were helping them with their finances? Like what did you start with? Because it feels like at that point it's almost a clean slate for a lot of people. >> Yeah. No, totally true. And not only do Marines on their first duty tour or you know, sailors, soldiers, airmen, not not only do they not have to worry about college debt, but they don't have to worry about health insurance, they don't have to pay tax on their housing. Uh, and they typically will get a GI bill to help cover college tuition. So, like, it's a pretty good deal. And this is not meant to be a military recruitment segment here. U, but Dylan, I've been in your shoes. And I think the most important thing to emphasize is to get started on healthy financial habits. Uh, Ben, your blog is an excellent resource for this type of thing. And ultimately, Marines are programmed at Paris Island to be disciplined. And so, it's just a matter of applying that discipline to their personal finances. >> I'm curious, did you see that discipline? Did or did people just blow all their money when they first got it? >> No, because you're dealing with a bunch of 18, 19, and 20 year olds with money for the very first time. Yeah. I mean, were you financially, fiscally responsible at age 20? I certainly was not. I will admit. >> Well, let's be honest, I was, but most 20-year-olds are. >> Yeah. I I was filming a documentary uh years ago uh at Camp Ljun or they told me it was Camp Lejourne, but I don't know if they're just messing with me, but uh and and they told me that you see like all these diamond stores and fancy car places pop up around the base, right? Because there's a bunch of young young people with lots of >> I was I was talking to somebody. I I went on a trip recently and one of the things I talked to them about was like take a look at like what props up outside of the military bases. It's instant check cashing, uh Walmarts, and then yeah, a lot of a lot of grime. Uh but ultimately really really >> mostly personal finance stuff though for you. >> Yeah. Yeah. So for me it's about automation and for a lot of what the military's done over the last you know defense finance accounting service is that they've deployed the TSP I think very effectively. Ben you and I are famously big big big fans of the TSP. It's available for every Marine uh every soldier sailor. Uh make sure it's a Roth. So I I would just always push people to do that. I don't think you're giving them bad advice or overstepping your your skis at any point Dylan to get them to think about the future. Um, and pay yourself first because savings ultimately is freedom. And what do Marines love? They love freedom. Like, right, they love waving that flag. That's why they signed up. And so, it's just a matter of getting them to do things that I think are are are in their best interest in their nature. And just those small nudges do compound over time. Automate, automate, automate. I think that's the way to go. And when you have your housing covered by the United States government, that is a great time to take that excess income and and put it away for for the future. I agree that the biggest thing I would teach them is just automate your savings right away after you get paid going into your Roth IRA or your TSP, whatever it is, and then spend whatever's left over, right? You start the saving, it's automatic every year. Increase it just a little bit. Yep. >> And then that's the biggest habit that you can get is just that that saving. I think that's the biggest one to me. >> Yep. I used to serve >> whatever's left. Blow it a little if you want. I don't care. >> Yeah. I used to serve soldiers in the army. Sounds like that's what's only doing for the Marine Corps. Now we serve very wealthy clients. One of the things, Ben, that that doesn't separate anybody is that people will spend the money that goes into their account, right? If the dollars hit the checking account, it will go out the door, right, in very short order. And that's male, female, military, non-military. I think it's just a force of nature. So, automating that savings is probably key. And and Dylan, that the basics are the things to stick to and and I'm sure that you're doing great work uh for those for those new Marines. >> Yeah. Give us a call. Me and Bill will come talk to them for sure. >> Let's do it. That'd be fun, right? >> Yeah. >> All right. I I I brought you into that one. All right. >> Yeah. >> Shout out everyone watching from uh Camp Pune. >> Yeah, there you go. >> Let's do it. >> Where is that, by the way? >> It's on It's in Jacksonville, North Carolina. >> Okay. >> Yeah, pretty pretty far. Office in Charlotte is what, Duncan? Like three hours, four hours. North Carolina's a pretty big state. >> Something. Yeah, something like that. It wasn't far from Wilmington, which is why I was up there. Yeah. >> Would love to swing down. Absolutely. >> Okay, up next, we got one from Matthew. I'm a relatively new listener to the show, but I've already shared it with all my friends. Uh, thank you. And they've been breathing a collective sigh of relief after hearing your stay the course advice. I have a question about traditional versus Roth 401ks. I'm 32 and work in real estate finance. My income is mostly uh commission based and I've earned between 300 and $450,000 annually since 2021. Since graduating college, >> Drag, huh? >> Yeah. >> Yeah. Nice. Since graduating college in 2016, I've been contributing exclusively to a Roth 401k, which is now about $230,000. I've also been maxing out my Roth IRA for the past few years. Outside of that, I have $315,000 in a taxable brokerage account, 115,000 invested in real estate, 12,000 in HSA, 20,000 in cash, and uh profits interest currently valued at $700,000. I need you guys to clarify what that means. Uh, at what point does it make sense to switch from Roth contributions to traditional? I don't own a home or have kids yet, though marriage is coming in 2026. Uh, so I don't need extra cash for my paycheck to cover bills, but I would like paying less taxes today. Is that a smart move? Since middle school, I've heard warnings about the debt bomb and rising tax rates, but that doesn't seem to be happening anytime soon. I can't help but feel like I'm missing out on potential gains by paying Uncle Sam now instead of putting that money to work in the market. See, Matthew's on the same train as me. Bill says taxes are supposed to rise all the time and they never do, >> right? >> Yeah, >> I'm with you, Matthew. Um, okay. So, he's I made this comment after we heard from the SEC couple a couple weeks ago. Um, it boggles my mind how many people in their late 20s and early 30s are doing so well financially. This just didn't exist in the 2010s. >> Uh, and which makes it difficult as a young person these days, I think, to see this. But well, well done, Bill. Right up your alley. Uh, is Matthew ready to graduate from the Roth? I think he's on the cusp. One of the things we didn't get from Matthew, Ben, was the state, right? Which state Matthew's on. I'm presuming we're talking somebody in California, maybe New York, just based on Yeah. the comment of his tone. Duncan, I don't know if you have any insight there. >> But that's it. And Daniel, if we can chart on uh for Q3 here, ultimately where Matthew is for a single taxpayer, uh he is right there in that red box right on the right. And for those listening at home, that's somewhere above the 35% threshold, but well below the 37% threshold. However, Matthew is very, very close uh to the highest marginal tax rate. And at that tax rate, Ben, I think that's around the time that I think I would consider shifting gears into a traditional. Matthew mentioned that he's 32. So, he's been doing this for a while. He has built up a pretty solid uh egg there in 401ks. Pretty wide range of income, right? 300 to 450 is that's like a 50% swing or 25% swing on income. But still, regardless, he's going to be there. But the other big part that Matthew mentioned, which I think is important, is he's getting married in 2026. And so, unfortunately, he's going to have to sit down and take a look at what his future wife's income is as well. But Matthew is right around the time when I would recommend shifting gears to a traditional. So, there you go. >> Um, the profit interest thing, he says he works in real estate finance. I'm guessing it's some sort of equity ownership type of deal. That'd be my guess. Yeah, very very common for real estate partnerships. And what they do is they basically grant you some sort of stock or equity, but it's it's not worth anything the day that you get it. And but it allows you to basically to get a claim on the profits of future distribution. So very typically for real estate, that's net income. It's a really neat way to to basically compensate people. It's an equity based compensation scheme. >> All right. So he's cash flow close then. All right. >> Yep. Yep. Yep. >> And guess what? He's probably going to be fine either way. >> Yeah. And I'm not I'm not Roth all the Roth all the time, but yeah, I think I think Matthew's right on the cusp. And particularly if he's in California, New York, and is considering retiring to a lower tax state, I I think now is probably is the time, Ben. >> All right. Chris in the chat says, "Ben blocked me on Twitter." And I don't know why. Um Chris, I have a quick trigger finger. I'm sorry. If you want to email me and and give me your handle, I'll unblock you, but um >> I I get I get these like a couple times a year, someone being like, "Hey, can you talk to Ben about he blocked me? I don't know why." I'm just like he he probably thought you were a bot because 90% of people on Twitter now are bots. That's true. Or or you said something and Ben, you know, was just like, yeah, >> I block hard and fast sometimes. This is the sarcasm maybe goes over my head, but uh if you didn't do anything bad, email me and I'll >> Yeah, I can't imagine Mark Andre of Andre Horitz is watching the show, but just in case you are, yeah, he blocked me about a month ago and I'm I'm hurt. Like I am personally stung by this because we've had a lot of great interactions throughout the years. I like retweeted something that's something somebody says something very nice about him and I I I'm being yeah somehow the the the the thunderbolt of Mark Andre is is hit me hit me hard. >> I don't know. You had it coming. Next question. >> I guess so. >> Okay. Up next we got a question from David. I'm currently in the process of purchasing a home and I'm evaluating two mortgage options for my primary bank. Uh I'm well qualified in terms of income and assets and I'd appreciate your insights on which option you think might be better. My bank has offered me the following. A 30-year fixed rate mortgage at 6.375% or a 5-year ARM adjust adjustable rate mortgage at 5.875%. The ARM would be locked at this rate for 60 months and then adjust based on the 10-year Treasury. I'm leaning towards the ARM because it would reduce my monthly payment on a $500,000 mortgage by $161. My goal is to refinance the loan in the next few years if interest rates decrease. I believe the risk of rates increasing significantly within the next 5 years is low. I'm wondering if I'm overthinking this and if it would be safer to opt for the fixed rate mortgage with the intention of refinancing later if rates drop. >> All right. I mean, it sure seems like mortgage rates have nowhere to go but down. Uh throw my chart up on here. This is mortgage rates for the past 10 years or so. It's interesting. So, the the stock market bottomed I think in October 2022 from the bare market and that's when mortgage rates first hit 6% for the first time. I mean, they've been above that level ever since. So, if you would have asked me back then, can mortgage rates stay above 6% and even get closer to seven or 8%. For a while, I would have said, no way, you're nuts, unless the housing market gets crushed. And that didn't happen. So, guessing the direction of mortgage rates is is kind of a fool's errand, I guess, just like guessing just about anything else in finance. Um, but if I had to use my gut, I would say, yeah, they're probably going to go down. I feel like the the government is going to do what they can to make them go down. Um, so I I guess it depends. I guess it doesn't really matter. So I guess the arm probably makes more sense assuming you're willing to take that risk that they don't drop and you can't refinance. I guess that's that's your only risk here, right? Um, but then that gives you a five-year window. I I'd feel pretty confident about that, but I would nothing's ever certain. Do you do you have a sense of what you would do here? >> I have a really strong opinion on this. uh the 30-year put option that is a 30-year mortgage is unique in finance. You you don't see this outside of the United States and it's because the United States government through Sally May through Freddy Mack basically subsidizes taxpayers on this option and that Ben has just been my conclusion for really since I've owned a home. I I would always take the the longer option. Everybody thinks that rates are going down. I understand that the Fed is probably going to cut rates with like a 99% certainty, but the reality is we don't know. The stock market's at alltime high. inflation does appear to be ticking up. What if rates increase, right? And we don't we don't know. And Ben, I've just very rarely seen this ARM thing where like you have to then go out and refinance or there's adjustable rate. Like very rarely does that tend to work out. And I I could be wrong. I've been wrong in the past. I'm happy to be wrong in the future. I would take the 30-year put option. That That's my advice. >> It I I agree. It it just makes things way simpler and you know it. And if the costs of refinancing are not going to be different from one product to the other, and I don't see why they would, that would make more sense to me. And just in terms of planning, I've always I think the third I agree with you. The 30-year fixed rate mortgage is one of the best thing that's ever happened to American consumers. And a slight history lesson, it came about because of the depression. So many people defaulted their mortgage. They had to extend them. They had to extend it because so many people they they couldn't just see the whole housing market blow up like that. So they had to give people longer loans to keep in their houses. 1930s, the first time it was too big to fail. >> Yeah, it is funny how many good things came out of the Great Depression. Good things came out of a bad thing, right? The SEC, a lot of consumer protection, um, a lot of the unemployment insurance, all this stuff and 30 mortgages was going on. Um, Michael from Katana that is in Sicily, Italy. He's always in our live chat. Um, beautiful place. I would love to visit sometime. Looks great. >> Never been. >> Hey, well, sounds like you might have a place to stay. >> In Sicily, they do not have 30-year mortgages. >> I I kind of see the the other side of this, too, though. If if he's saying he thinks he's going to refinance in the next five years, then you know why wouldn't you take the lower repayment from here to then >> because what are you refinancing with the arm? >> Yeah. What are you refinancing into? Yeah, you could be refinancing to an 8% loan. Yeah. I don't know, Ben. I I think I wouldn't say that the economy is a random walk. Like >> what would happen to the economy if they really went to 8% in the next five? >> I mean, it would be inflation. Inflation would probably be the key driver, right? So, yeah, you need to have >> Yeah, that' be the because they did almost hit 8% a couple years ago. >> Yeah. Yeah. Which is great. We're seeing that. I mean, we're seeing it in coffee prices. I don't know if you guys are coffee drinkers. I know Ben isn't, but yeah, they're >> Yeah, we we could see. And it's it's hard to make sense of it. So, like, I've taken the tack of >> You know how rich I am by not drinking coffee? I save $4 every day. >> The avocado toast of Ben Carlson. Yeah. >> On on this uh mortgage note, I was in Vancouver over the weekend and uh I I talked with multiple people, mainly Uber drivers, but uh who were talking about the economy there and mainly complaining about housing and they were talking about >> Duncan. If you think housing is bad in New York, look at Vancouver or Toronto or pretty much any any other big city around the world and it's way worse. So, that's a great thing to look forward to. Real estate is really expensive in America. It could always get worse and it probably will. That's true. Always be worse. >> It's the worst day of your life so far. >> Yeah. >> Vince's quote of a day. It could always get worse. Uh, okay. Up next, we got a question from Joshua. We've PDFed our receipts and EOBS. Don't know what that is. since 2010. By end of year, we'll have about $90,000 in unreimbured expenses. It's too much time to trim. There will still be $250,000 left behind for the next 50 years of health expenses. Were they in like Nvidia in this agency or something? >> Oh boy. >> Okay. Uh let's see. Too uh too soon to say if that's not to brag. Here's the thing, and maybe it's unanswerable. Is there a genuine risk that a large HSA distribution will trigger extra attention from the IRS? I know the audit score function is a big secret, but what has the RWM tax team seen in real life? Not seeking genuine advice. Thank you for the disclaimer. Uh just how to think about how to manage audit risk. The big decision is whether to distribute over three to four years to keep it lower and smooth or to rip off the band-aid. >> Cliff in the chat says EOB explanation of benefits. Correct. Make sense? >> Um >> got it. So, I remember when I was a bank teller for a couple summers, for two summers, I thought like, "Yeah, I'll be a bank teller. That'll help me in my finance career." Uh, one of the worst jobs I've ever had. This is like precomputer, so I had to like write the slips out by hand and then balance the slips at the end of the day. It's like, "Oh, you're off 200 bucks." You have to go back through and I'm sorry. I'm picturing you in a bank robbery. >> Yeah. Did you have to like >> Oh, trust me. Every single day I thought about how I would get money out of this place. Um, >> no. I mean, think about you're dealing with these huge stacks of money. Uh, I thought about um, so anyway, there were these IRS forms that you needed to fill out if you deposited like 5,000 or 10,000. I can't remember what the break was. I think it was 10,000 in cash into your account. You had to fill these forms out. So that's what I guess they're thinking of. So the question is, does the IRS actually care about the size of these expenses or not really? >> I think so, Ben. But if you've got the receipts, if you have 90 pages of PDFs on your explanation benefits, if you're disciplined enough to bring the goods, I just you're you're within the law. You're playing within the law. Exactly. Exactly. And that's it. If if Red Holtz Wealth Management or or Duncan or or Ben or anybody that I work with goes through an IRS examination, you better believe like I'm going to be pounding the table with my PDFs and printouts. Like, you have to have the receipts. And if you have the receipts, you're good to go. What happens mechanically, Ben, is you get IRS form 54.98 HSA and it shows the amount of the gross distribution. And again, you just have to say, "Yeah, I've got qualified medical expenses of $90,000 and here's my itemized list of how this happens." And that would only come up if you do get examined. So I I I would not hold back. The the law is the law and if the law is on your side, you should do you should do do what's right as taxpayer. >> Yeah. And it sounds like they did the thing where they have held on to these receipts and they let the account grow. Yep. >> Right. And then they're going to cash in later. Uh >> yeah. From this ever Sorry, I was just gonna say why would this ever cause like suspicion? Is there a lot of fraud in the HSA space where people try to claim? >> I think just I think just large amounts of money with a tax break. I think they're just trigger something. Yeah, >> it's unusual. Yeah. But but ultimately, Duncan, to answer your question, yeah, it is unusual. You don't usually see people compound large amounts of assets into an HSA and you don't usually see large distributions unless there's some medical event right in that current year. So, it is abnormal. It doesn't happen all the time, but again, the law is the law and if the law is on your side, I see no reason not to do this all at once. If you have the goods, you have the receipts, knock it out. Go for it. >> There's never any fraud in healthcare. That never happens. But, um, Michael says, "I'm not invited to Italy because I don't drink coffee." That's too bad. I guess I have to say, >> uh, yeah, espresso big. >> Yeah, you'd have to do at least a couple espressos. >> They call your coffee Americano there. Yeah, >> we got one more. >> Okay. Uh, up next, we got one from Ryan. I recently had a health scare that has prompted me to re-evaluate my savings approach. I'm feeling incredibly fortunate to still be here. uh and and well and it's given me a fresh perspective on financial planning. Recently, I reached a significant milestone in my savings, not to brag, and depending on the assumptions used, I may now be considered coasty. I'll also be hitting the big 50 next year. Earlier this year, Bill Sweet mentioned on a pod a target allocation of 1/3 Roth, one/3 pre-tax, and 1/3 after tax brokerage, uh referencing some of Nickma's blog posts. I found this diversified approach really compelling. Over the past 5 years, I've focused heavily on Roth contributions. Currently, my portfolio is roughly 23% Roth, 75% pre-tax, and 2% after tax brokerage. Given this breakdown, I'm considering pausing my Roth 401k contributions to build up the aftert tax brokerage bucket instead. I'd still receive the employer match through the Safe Harbor contribution, which should provide a margin of safety. Nod to Ben when making this comment. Uh, do do you have any thoughts on redirecting my savings from the 401k to an aftert tax brokerage account at this stage? Anything I should consider before changing my savings approach? >> This is one of the the reasons I think we're going to see a lot more people retiring sooner than expected in the years ahead for baby boomers. Health scare something going on in your life. Healthcare with you, healthcare with a a loved one, healthare, something happening and just going, you know what, I could wait and I could have a lot more money, but I don't care. I want to just do it now and rip the bandit off. So, I can I can see this kind of thing happening. So remember coast fi Duncan is he's like you've got enough saved you just let it grow and compound not save anymore. >> I was about to ask you. >> I totally totally did not. >> You've reached a point where you can just coast the rest of >> Yeah. So you you've saved enough early so you let compounding interest take the take the steering wheel and then you don't have to save anymore because the growth is going to um and I think there's a lot of people in that situation now that have more money than they ever thought they would. >> Obviously a bad fiveyear stretch in the markets would would change that mindset really quick. >> Yeah. But um so I I guess the point here is that they have very little amount in their taxable brokerage account. They're thinking about retiring early. I think it makes all the sense in the world to divert more money to that for more flexibility, right? >> Yeah. Instead of coasting, I call that escape velocity, right? If you reach that that you're beyond the earth's gravity, right? If you just keep compounding, God willing, we all get there, Ben. Um but no, I'd take the other side. uh on an order of operations there there's no reason in my view to dump money into a taxable brokerage account presuming you're going to invest it in roughly the same thing over a Roth account because the Roth account a you're going to get your dividends and interest and compounding taxfree you can rebalance within that account anytime right you can move assets around buy sell stuff and you don't pay tax so that's awesome and then you can always take a distribution with Roth 401ks uh once you roll that into an IRA you can get take a distribution get your basis back taxree >> so it's all the contributions you can take out without a penalty >> and irrespective of age. Irre >> Yes, irrespective of age, you can get your basis back. Now, it's not the case for the 401k account. Unfortunately, Roth 41ks have different distribution rules than IAS. But a rollover to an IRA, once that's free and clear, your basis transfers over. You can just pull that money out. And then guess what it becomes then? If you pull your basis out of the Roth, now you have your non-qualified asset that you can do what you want to do with. So, I would just if you have the opportunity to fund a Roth, I would generally always do it. There's no reason to do it unless you expect to spend that money in the next year or so because again, you can get your bases back. So, it's not a one-way street in the way that other accounts are. >> I should have known you'd have gone wrong there. Of of course you would. >> Well, I didn't in the first one, right? Uh so, I don't so I don't blame you, but I I threw a curveball. >> Counterplay. If you think you're going to pick a bunch of bad stocks, you can tax loss harvest in a in a taxable account. >> Exactly. With perfect perfect knowledge. >> The does the guy with like the 4% rule? There's all these rules in finance, so we need to trademark one of yours. So, you have somehow the billuite equal weight taxable portfolio. I'm I'm trying to think of a good name for you, but the equal weight between Roth, traditional, and taxable, right? >> Yeah, >> it's got to be something. >> When when the equal weight fits, you must have quit. I don't know. Uh, somebody in the comments, jump in and help us out. But can we go back, Daniel, can we go back to question two because I actually forgot to do something. I have a question for you guys, a gentleman. Please, let's do a poll. What is the best service uniform? Can we start uh with the United States Army 1775? This is the very first pinks and greens came back, gentlemen. Uh, now your army officers and NCOs's and enlisted soldiers look like they did in Band of Brothers. I think this is a great shift about 5 years ago and I missed it. Throwbacks. >> Oh yeah. Yeah, they're great. You'll see them in the airport and you know in formation. Next we have the United States Marine Corps actually the second service. This is the United States Marine Corps dress uniform. Uh, and you see the the the light colors. When I was a cavalry officer, I wore a light blue and a dark blue jacket because what the military officers used to do when they were riding on horseback, they put their jackets in their backpack, right, to fight the war and then they put on their jacket and, you know, the sun would have melted their pants into pieces. So that's the reason that you have this. >> I would have coffee spilled on those white pants in like 30 seconds. >> Not if you were United States Marine, Duncan. Very disciplined savings rate. Talk to Dylan about it. Next, uh we have the United States Navy. Uh these are sailors and they're in their dress. uh the military, the the uh I don't have an officer here in this photo. Um but obviously it's iconic. If you've been in New York City for Fleet Week, you see these these guys and gals walking around. Great servicemen. Please, you know, shake their hand, buy him a beer. Next, uh we have the United States Air Force. Used to be the Army Airore. And in 1946, gentlemen, I cried uh because that was the year they pulled my beloved Air Force away from the Army. Uh next, I just have two more. The United States uh Space Force uh which is, yes, is a real thing. And finally, uh, not to not to brag, the United States Coast Guard, which actually predates some of the other services, but they're part of the Homeland Security Department, so we don't count them in the Department of Defense. Okay, gentlemen, what do you choose? What's there is the right answer. >> Well, the sailor uniform is the best for getting in bar fights, right? If you see one of those, you can't. And I I'm sorry, I'm a little I I have a bias here. I have to say the Marine uniform just because Tom Cruz rocked it so well in Few Good Men. >> So, I have to go if it's Tom Cruz wearing it, then I'm going to go Marines. But you're right. The the I know. I think I know which one you're going to say. I'm I'm going I'm going Navy because I was a big Popey man fan. >> Wow. All right. You got to eat your spinach. Well Well, Ben, I can handle the truth. And even though I was not blessed to wear United States Marine uniform, I would agree that those are the best uniforms of my >> very clean, right? Something about the white pants and the navy blue. It >> Yeah. And then you get the saber, you know, or the rifle and it just it just works. So yeah, if you're pure sex appeal, you bet your ass I'm going to be recommending that Sam Sweet joins that United States Marine Corps because those people are psychos and they'll have good people like Dylan to help them save and invest for the future. So God bless the United States Marines. >> Yes, thanks everyone for their service. We do get tons of questions from service members. So it it is cool to see them thinking through this idea of like, I know I have money, I need to be responsible with it. What should I do? So there I love seeing questions like that all the time. There are a lot of non-financial benefits for military service and you can pivot into a career in finance. We'd love to have you over here at Red Hole 12. >> And uh in the chat, I I can only fit four options, so I didn't include Space Force or Coastg Guard, but so far Army is is winning in the chat. >> All right. It's it's classic, right? All right. Email us ask the compound show atgmail.com. Thanks to everyone in the live chat as always. It was very rocking today. Uh leave us a comment in there or a question. Leave us a comment or question on YouTube. Leave us a review, subscribe, all that good stuff. See you next time. See you everyone. [Music] [Music]