Assorted Voices [0:01]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Mostly Uncle Frank [0:10]

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.

Mostly Mary [0:17]

A different drummer and now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, Broadcasting to you now from the comfort of his easy chair. Here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program.

Assorted Voices [0:50]

Yeah, baby, yeah.

Mostly Uncle Frank [0:52]

And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational, and those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Mostly Mary [1:26]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog.

Assorted Voices [1:34]

Lighten up Francis.

Mostly Uncle Frank [1:37]

But now onward, episode 381. Today on Risk Parity Radio, it's time for our weekly portfolio reviews. Of the eight sample portfolios you can find at wwwriskparityradiocom on the portfolios page, I love gold. And yes, it was a good week for gold and the portfolios.

Assorted Voices [2:01]

And that's the way. Uh-huh, uh-huh, I like it. Casey and the Sunshine Band.

Mostly Uncle Frank [2:06]

But before we get to that, there's a couple of things I want to go over here. First, as you may know, I am addicted to podcasts and listen to them all day long, but there were three that came out this week that are of particular interest to the topics we talk about here all the time. The first one was an interview of Bill Bengen on the Afford Anything podcast. Yes that, Bill Bengen, the man, the myth, the legend.

Assorted Voices [2:33]

Inconceivable.

Mostly Uncle Frank [2:34]

So Bill Bengen's been working on updating his original research that goes all the way back to the 1990s and is about to put out a new book, although I've seen and heard of some of this research. But he kind of summarized it all in one place for us, and this is about the safe withdrawal rate and factors that go into it. So I'll link to this in the show notes and you should read the show notes of the show as well, because it was a very well done interview. But here's the sort of key takeaways. First, he says the 30-year safe withdrawal rate, with the inflation adjustments that he originally used, is actually closer to 5% if you have a better diversified portfolio than the simple two-fund or two-asset stock and bond thing that he was analyzing back in the 1990s. Second, he said those diversified assets are going to be largely sub-asset classes of stocks, such as small cap value and bonds, and may also include alternative assets like golden commodities, and those are the kinds of ingredients you need to have a portfolio with a higher safe withdrawal rate.

Assorted Voices [3:47]

That's the fact, Jack. That's the fact, Jack.

Mostly Uncle Frank [3:52]

Third, he says this analysis is valid as you go beyond 30 years and even out to essentially perpetuity 50 to 60 years.

Mostly Uncle Frank [4:01]

If you take that 5% portfolio and you extend the time out, the safe withdrawal rate asymptotically approaches about 4.2% when you get out to perpetuity.

Mostly Uncle Frank [4:12]

Essentially so, as I like to say no, your portfolio does not turn into a pumpkin after 30 years or invalidate any of this research. Third, he looked at other additions or withdrawal strategies in addition to the portfolio construction, and he said that a rising glide path may help with the safe withdrawal rate. He said that attempting to use valuation metrics or PE ratios or those sorts of things to adjust withdrawal rates did not work in his analysis, but that if you have extremely high inflation which he defined as 6% plus over a period of four to five years that would be a reason for reducing your withdrawals. In the end, though, he said, you should adjust your inflation rate to your own reality, and he gave the illustration of people who have a paid off house or a fixed rate mortgage would have a lower inflation rate than the average person. So the upshot is he's confirmed basically everything we've been talking about here since the beginning of this podcast.

Assorted Voices [5:21]

That is the straight stuff. Oh funk master.

Mostly Uncle Frank [5:24]

That you can have a higher safe withdrawal rate with a better diversified portfolio, that those portfolios can last longer than 30 years and that you can improve your results by making appropriate variable adjustments based on things like your personal inflation rate, which, on average, will be lower for a retiree than the average rate of inflation, and we know that from studies from David Blanchett and the Rand Corporation, which we discussed at length in episode 336,. If you're looking for that, what this ultimately means is that all these people running around saying that you have to reduce your safe withdrawal rate to 3% or less, or even 4% or less, are just wrong.

Assorted Voices [6:05]

Wrong.

Mostly Uncle Frank [6:06]

Because they're not playing with a full deck. So I would listen to this and then go back and listen to episode 209 of this podcast, in particular because they go together.

Assorted Voices [6:17]

Yes.

Mostly Uncle Frank [6:18]

Now the next podcast that I heard that you should listen to is an interview of Corey Hofstein on Masters in Business. Now, masters in Business is one of the oldest and most respected podcasts. It's by Barry Ritholtz and interviews just about anybody who is famous in the world of investing, starting almost a decade ago with people like Warren Buffett and Jack Bogle. But now he really focuses on the people who are doing the most interesting things, and Corey Hofstein is one of those people. He is the person who is responsible for the concept of return stacking and, in particular, adding managed futures strategies to portfolios to get better diversification along with a little bit of leverage. So that new Optra portfolio is in the vein of return stacking, but I had never heard his whole story. Like Bill Bingen, who went to MIT, and yours truly, who went to Caltech, he's also one of these geeky computer nerd types and originally wanted to design video games, which I thought was interesting and amusing In the tradition of these great films about fighting back against the odds.

Assorted Voices [7:33]

20th Century Fox presents another milestone in motion picture history Revenge of the nerds Nerds, nerds, nerds, nerds, nerds, nerds.

Mostly Uncle Frank [7:47]

But anyway, I think that that interview really shows you where investing is going in the future, and so I'd really take a listen to that. And finally, on the compound, which is also a product of Barry Ritholtz-related people, which is also a product of Barry Ritholtz-related people, there's a very lengthy interview of Cliff Asness of AQR, who was kind of one of the godfathers of applications of factor investing, or principles of factor investing, to actual investing, and he was an assistant to Eugene Fama, worked for Goldman Sachs and then went off and founded AQR about 20 years ago, and so if you are interested in the development of that field for the past 20 years or so, you should definitely give that a listen too. I will link to all those in the show notes, but now I believe it's time for some emails, and it's going to be one of those days we only have time for one email, but it's a very special email.

Assorted Voices [8:46]

Patrick, just how dumb are you.

Mostly Uncle Frank [8:49]

It varies, and so without further ado.

Assorted Voices [8:52]

Here I go once again with the email.

Mostly Uncle Frank [8:55]

And First off, second off, last off, first, second and last off of an email from Tom.

Assorted Voices [9:06]

Hmm.

Mostly Uncle Frank [9:07]

I sense no danger here. How could they be?

Assorted Voices [9:10]

dangerous, they're covered with free cheese. All I know is Mr Krabs said Patrick, don't do that. Hmm cheesy.

Mostly Mary [9:23]

And Tom writes Hi Dad, I'm in jail I like it here.

Assorted Voices [9:28]

It's nice, I like it.

Mostly Mary [9:31]

Hello Dad, I'm in jail. Just kidding For now. Say hi to Mom from jail. As you may know, it's the most wonderful time of the year. Annual benefits enrollment.

Assorted Voices [9:43]

You can't handle the dogs and cats living together.

Mostly Mary [9:47]

As per usual, the masses of people are frantically trying to figure out what accounts are available to them, what are the benefits and drawbacks of each, how are they taxed, when are they taxed, et cetera.

Assorted Voices [10:03]

No, it's a tax collector. Hi there, SpongeBob.

Mostly Mary [10:08]

I have a couple of questions about the various accounts and how you would go about strategizing different scenarios for different people. You mean like a weenie? Okay, this way the wealth of knowledge can be shared with the masses for entertainment purposes only so they can make informed decisions about how they decide to hoard their treasure this year.

Assorted Voices [10:28]

It's time for the grand unveiling of money.

Mostly Mary [10:32]

Anyway, here goes One the basics. What are the key differences among the following three accounts in terms of tax advantages? When you pay taxes, or, as I like to say, when you render onto Uncle Sam, what is Uncle Sam's?

Mostly Uncle Frank [10:48]

Do not ask him for mercy.

Mostly Mary [10:51]

Standard 401k Roth. 401k Roth IRA. Two for a couple of general scenarios. Which account or combination of accounts would you use? A young engineer, technician, analyst, grossly overpaid for their experience? Probably a little stupid.

Assorted Voices [11:10]

For doing absolutely nothing longer than anyone else. Patrick, this trophy's for you. Yay-ho, yay-ho.

Mostly Mary [11:21]

Very little financial obligation besides rent, food and maybe some student loans. Little to moderate investing experience, ie someone just starting their accumulation phase B, middle of career person, 30s to 40s, possibly some kids Mortgage. Has some retirement savings built up on track to retire by about 60, does not want to live on beans but wants to optimize their tax advantage going forward.

Assorted Voices [11:51]

What have children?

Mostly Mary [11:52]

ever done for me? C. Later career person, late 40s onward. Kids are moved out or near moving out. Has some retirement savings but is maybe a bit off track for retiring at 65.

Assorted Voices [12:05]

Death stalks you at every turn.

Mostly Mary [12:09]

Also does not want to live on beans.

Assorted Voices [12:14]

If you don't start making more sense, we're going to have to put you in a home. You already put me in a home, then we'll put you in the crooked home. It's on 60 minutes, I'll be good.

Mostly Mary [12:24]

Wants to get back on track or minimize time worked past 65.

Assorted Voices [12:29]

Simpson, can't you go five seconds without humiliating yourself?

Mostly Mary [12:35]

Bonus question House savings account From a high level. How do you use this potentially as an investment vehicle? I wombo you, wombo he she me wombo, wombo, womboing.

Assorted Voices [12:50]

I wonder if a fall from this height would be enough to kill me.

Mostly Uncle Frank [12:55]

Well, thank you for writing in, Tom.

Mostly Mary [12:57]

That kills people.

Mostly Uncle Frank [12:59]

I am highly amused. Ha ha, ha, ha, ha ha, I like it. Yeah, throw away the key. I'm in jail. For those of you who haven't got it yet, tom is our son. He is our middle son and works for Procter Gamble as an engineer in North Carolina and as a child and very close relative, he gets to go to the front of the line.

Mostly Mary [13:29]

May I take your?

Mostly Uncle Frank [13:31]

answer. May I take your answer, especially since he indicated in the accompanying text that one of the reasons he wanted to put this on this show was because his friends didn't want to listen to anything unless there were some sound bites involved.

Assorted Voices [13:41]

All we need to do is get your confidence back so you can make me more money.

Mostly Uncle Frank [13:47]

Anyway, one of the reasons I made this podcast in the first place was to preserve information for our adult children, so this is obviously a top priority.

Assorted Voices [13:56]

Time is money boy.

Mostly Uncle Frank [13:58]

So let's dive right into these questions. This is pretty much the worst video ever made. First, I'd kind of like to think about the big picture here, which is why is anybody saving in these retirement accounts at all? What's the purpose of all this stuff? And the purpose of it is not really retirement per se, but to become financially independent. Now, how do we define that? Well, I'm going to give you a very simplified version of this and all of the answers. Going to give you a very simplified version of this and all of the answers are actually going to be a simplified version of answers because we don't have three days to talk about this.

Mostly Uncle Frank [14:38]

But let's pretend for a moment that you're not going to get Social Security or any other kind of pension or something, and you were trying to figure out well, how much money do I need to be financially independent? And the answer to that is 25 times your annual expenses. That is a variation of what is known as the 4% rule and that actually is a conservative number. So if you can accumulate 25 times your annual expenses in investments, you can then manage those investments such that you would not have to have any other sources of income and be able to live? All right. Before we apply those concepts any further, let's address your first question about the basics of what these accounts are. First, you don't actually need retirement accounts to save for retirement. You could save for retirement in just an ordinary brokerage account and make the same kinds of investments in that account. So if that's true, why bother with these other accounts like 401ks and IRAs? The reason you want to bother with these other accounts is you get essentially a bonus by not having to pay taxes or being able to defer taxes on those things, and you also may get matching funds from your employer. So all these are are accounts to hold investments in that have special tax features.

Mostly Uncle Frank [15:59]

One thing that people do get very confused by is thinking that these accounts are actually investments. So a 401k is not an investment. It's an account that holds investments. Similarly, an IRA is not an investment. It is an account that holds investments. An ordinary brokerage account is not an investment. It is an account that holds investments, and you need to be clear about that, because it's not sufficient just to pick the account you're using. You also need to pick the investments.

Mostly Uncle Frank [16:28]

All right, now let's talk about the two basic variations of these retirement accounts, whether they're 401ks or IRAs, and some of them have other designations, like 403bs or 457s. All of those numbers refer to parts of the tax code, by the way. So let's talk about what is called the standard retirement account or traditional retirement account. Those terms are interchangeable. What goes on with one of those is that whatever you put into that account in a given year can be subtracted from your ordinary income. So if you made $60,000 for 2024 and you put $10,000 of it in a traditional retirement account, as far as your taxes are concerned and the IRS is concerned, you only actually made $50,000. So you're only going to get taxed on $50,000. You don't get taxed on the extra $10,000. And then you put that money in that account, put it in some investments and leave it alone for a long period of time.

Assorted Voices [17:33]

Looks like I picked the wrong week to quit amphetamines.

Mostly Uncle Frank [17:36]

There are a bunch of rules for withdrawing from it. The most important one is you can certainly withdraw from it after age 59 and a half without penalty. There are other ways to get money out earlier. I'm not going to go through all those here. The only point I want to make here is that you are taxed on that money when you take it out of the account. You can do anything you want with it if it stays in one of those accounts and it's not going to be taxed as soon as you start actually taking money out of the account. It counts as ordinary income in the year you take it out. So if you take out $10,000 from one of these accounts, you then add that to your tax form as additional income in that year and then you will get taxed on it with the rest of your income in that year.

Mostly Uncle Frank [18:19]

Okay, what are Roth accounts? What is a Roth IRA or a Roth 401k? It's simply a different variation on this account for tax purposes. When you put money into a Roth, you are paying taxes on it that year. So if you made that $60,000 a year and you put $10,000 in a Roth 401k, you would still be taxed on your entire $60,000 income that year, you wouldn't get any credit for putting money in the Roth IRA. What you do get credit for, or the bonus for that, is that it never gets taxed. So you can put the money in there, let it grow for a really long time and then, when you start taking the money out later, you don't get taxed on it ever.

Assorted Voices [19:04]

Yeah, baby, yeah.

Mostly Uncle Frank [19:07]

And so the next question then always is well, which one should I do this year? Before we get to that, let's just talk about the difference between a 401k and an IRA. A 401k is something that is provided through an employer. It has to be provided through an employer. They used to be all just traditional accounts. Now a lot of employers have Roth versions of a 401k or give you the option to use either one of them. There's an annual limit as to how much you can put in a 401k. For 2025, that limit is $23,500. And that is just the money you put in. If there is a matching amount that your employer will provide and a lot of employers do that now that is over and above the $23,500 limit.

Mostly Uncle Frank [19:56]

Now an IRA is the same kind of account for tax purposes, but instead of the employer setting it up, you set that up by yourself. So you can go to Fidelity or Schwab or Vanguard, get online and say I want to open a traditional IRA or a Roth IRA or both of them, and just open the account. It's up to you to put the money in there from your own savings and pick your investments, and those also have annual limits. The limit for 2025 is going to be $7,000 if you are under age 50 or $8,000 if you are over age 50. And it is generally to your advantage to try to fill up these accounts every year, because it's use it or lose it. If you don't use the limit that year, you don't get it back.

Mostly Uncle Frank [20:42]

So, particularly when you're younger, the more money you can get into these accounts, the better off you're going to be in the future. The more money you can get into these accounts, the better off you're going to be in the future. And one of your goals ought to be trying to max out all of these accounts every year, which may be difficult on a low salary, but as your salary increases, you can increase the contributions to this and hopefully be maxing it out as soon as possible. And if you want a rule of thumb on that, here's one that most Americans do not observe but should observe that look at the car you're driving. You should be putting at least that much money or maxing out your retirement account before driving a more expensive car. So by the time you're driving a car that costs you $30,000, you should be maxing out those accounts.

Assorted Voices [21:26]

Surely you can't be serious. I am serious and don't call me Shirley.

Mostly Uncle Frank [21:31]

All right, let's get back to that question which one should you use? The short answer to that is you have to know what your tax rate would be all the way in the future when you're going to take the money out. Because if your tax rate, your marginal tax rate, is the same when you put the money in as it is when you take the money out, it doesn't matter. If your tax rate is the same when you put the money in as it is when you take the money out, it doesn't matter. If your tax rate is going to be higher in the future, or you believe it will be higher in the future, then you want to contribute to Roth Roth first. Generally, if your income is lower, you want to contribute to Roth. If your tax rate is higher right now, then you think it will be in the future, and this generally occurs for people as they get into their careers and start making a whole lot more money. Then you want to use the traditional At least that is the rule of thumb because your tax rate is likely to go down in retirement for a variety of reasons.

Mostly Uncle Frank [22:24]

Now, as you can imagine, there are infinite variations of when it might be better to put into a Roth or a traditional for a given person at a given time, in a given marital situation, with a given number of kids, so on and so forth. But let me give you some very basic advice if you really don't want to think about this too hard. Because, first, the truth is that whether you put it in a traditional or a Roth, it's a good idea, just the fact that you're doing it. So don't get too hung up about which one it is, because you can put more in the other one later. You get to make this decision over and over again every year, so the decision you make in any one year isn't that big a deal.

Assorted Voices [23:02]

You are correct, sir. Yes.

Mostly Uncle Frank [23:06]

But what you want to do is look at your marginal tax rate and I'll give you the table in the show notes. And if you are in the 12% or less marginal tax rate, you should always do Roth. And that is going to be for people who are single with taxable income of about $47,000 in 2025 after all their deductions, so it's really more like $60,000. Or a couple with a taxable income of $97,000, a married couple filing jointly, which, before deductions, is probably more like $120-something thousand dollars. If you are making that much money or less, go with the Roth first.

Mostly Uncle Frank [23:50]

Now, if you are on the other end of the spectrum and are in the 30% or more marginal tax rate bracket and this is basically single people who have taxable income of over $200,000, or a married couple that has taxable income of over $400, dollars that's filing jointly you are definitely in the 30 plus marginal tax rate bracket.

Mostly Uncle Frank [24:15]

You should always go traditional, unless you have some other really good reason for not doing that. Now everybody else is going to be in between. If you were in between those figures,000 and $200,000 for a single person, or between $96,000 and $400,000 for a married couple filing jointly, then your marginal tax rate is going to be in the 20s, in which case I would say you can pick either, but you probably want to pick Roth if you think your tax rates are going to continue to go up in the future and you probably want to pick traditional if you think they're going to go down. But that is enough of a rule of thumb, I think, for 90% of the people to make a decent choice with respect to this, particularly since you can just make a different choice the following year, and that's what I would do.

Assorted Voices [25:02]

No more flying solo.

Mostly Uncle Frank [25:04]

And one strategy people with these middle income rates often use is to do a little bit of both. They do traditional in their employer 401k and then they do Roth in their IRA, and you can do that. There's nothing wrong with doing some of both, particularly if you're unsure what's best at any given time.

Assorted Voices [25:25]

A crystal ball can help you, it can guide you crystal ball can help you.

Mostly Uncle Frank [25:33]

it can guide you. So now let's talk about sort of what order you want to do this in terms of an order of operations. Typically, what you want to start with is looking at whatever matches your employer will give you for contributing to an employer sponsored account, like a 401k, and you always want to get the match. That's essentially free money, and so you need to make sure that you are contributing the way the employer says. You need to contribute to get the maximum match, and sometimes that's just whatever it is you put in that year, and sometimes you need to make sure that you put it in evenly spaced out throughout the year, because they do it every pay period. But it's your employer's plan that governs exactly how that works.

Mostly Uncle Frank [26:11]

Employers are not required to give their employees matches, and so it's all over the board and you need to consult your HR department to see what yours does.

Mostly Uncle Frank [26:20]

But you want to make sure that you get that match first, so that should be your first priority in contributing to retirement accounts.

Mostly Uncle Frank [26:28]

Be your first priority in contributing to retirement accounts.

Mostly Uncle Frank [26:31]

After you get the match, then your first priority, or your next priority, should be to fill that IRA the reason the IRA is slightly better than employer accounts is that in an IRA at a place like Fidelity, schwab or Vanguard you can invest in anything you want in there, and you don't have that luxury in an employer-sponsored plan, because in the employer-sponsored plans typically you are limited to a group of investments, that is, the funds that they provide. So the typical sequence of investment here is make sure you're getting the match in your employer-sponsored plan, then after that fill up your IRA to its $7,000 or $8,000 limit for that year and then go back and fill the rest of your employer plan up. Now, that's not including HSAs we're going to talk about that a little later but between those accounts, that is generally the order of operations you want to use, and ideally you get to the point where you're maxing both of them out. So you're not even making this decision. Your decision is just max them all out, ravving speed Ravving speed.

Mostly Uncle Frank [27:41]

All right, let's touch on briefly on what you should invest in, and I'm not going to spend that much time on this topic. You should invest in and I'm not going to spend that much time on this topic, but if you really want a more detailed version of this, go back and listen to episode 208, which is for a beginning investor in particular, and what you are looking for are your index funds options in these things, particularly if you're near the beginning of your journey and if you don't know anything else, go find the thing that says either total market or something 500, s&p 500 or Fidelity 500, which is the S&P 500. And that's the fund that you want to start with, that, or the total market fund. You can put all your money in that and be okay to start with, because you can change these things later. The next thing I would add would be a small cap value fund.

Assorted Voices [28:32]

Fellas. It was sounding great, but I could have used a little more cowbell.

Mostly Uncle Frank [28:37]

Now, some employers do not have that kind of option, but if you have that kind of option, you should also look for that, and up to 50% of your contributions can be to that kind of fund. Or you can just do that fund in the IRA, because you can invest in all kinds of things in an IRA. Okay, what should you avoid investing in?

Assorted Voices [28:58]

Not going to do it Wouldn't be prudent at this juncture.

Mostly Uncle Frank [29:01]

What you should avoid investing in is the default thing. If you don't pick an investment, they're going to put you in a default thing. It's usually going to be a target date fund, and I did a whole episode on that and why it's not ideal. It's episode 333 if you want to go back and listen to that. But anyway, it's just a suboptimal choice. That's all you really need to know. It is more designed for the employer to cover their butts in terms of providing an appropriate default fund. It's what you would call the bare minimum, and you don't want the bare minimum.

Assorted Voices [29:35]

What do you think of a person who only does the?

Mostly Uncle Frank [29:37]

bare minimum. Go, use index funds and you'll be happier later. Trust me. Bow to your sensei. Bow to your sensei. Trust me, Bow to your sensei. Bow to your sensei. So those episodes were 208 for the beginning investor thing, which talks a lot about this stuff too in a Wizard of Oz format, by the way and 333, which is about target date funds. All right, I think I've given you enough on the basics of those, so let's look at your question two. Now we were talking about three different types of people.

Assorted Voices [30:20]

The good, the bad.

Mostly Uncle Frank [30:28]

The ugly A young engineer, technician, analyst person.

Assorted Voices [30:34]

Young America. Yes, sir.

Mostly Uncle Frank [30:37]

A middle of career person and a later career person.

Assorted Voices [30:40]

I'm never going to make it to the concert now. Maybe I can help. Always hook positive to positive. When the dead car starts, remove the cables immediately. You know you ought to put some baking soda on those battery terminals, that way they won't corrode. Why, I never would have thought of that. I mean, how do you know this stuff? I know because I'm Middle-Aged man. Ah, little-aged man, little H-Man, little H-Man, little H-Man. He has powers and knowledge that are far beyond younger than Little H-Man, caught between 40 and 55. Accruing more interest, yet losing his sex drive, developing skills and a gut middle-aged man.

Mostly Uncle Frank [31:44]

And now let's go back and talk about that overall goal, to get to a point where you have 25 times expenses saved or invested. And that includes all the accounts you could use the 401ks, the IRAs, the HSAs, your taxable brokerage accounts, everything all together.

Assorted Voices [32:03]

It's an entirely different kind of flying. All together, it's an entirely different kind of flying.

Mostly Uncle Frank [32:11]

Now you might reach that any time in your life. Some people reach it in their 30s. They're super savers.

Assorted Voices [32:17]

You're insane Gold Mamba.

Mostly Uncle Frank [32:20]

Some people don't reach it until their 70s or they never reach it.

Assorted Voices [32:23]

I'm cold and there are wolves after me.

Mostly Uncle Frank [32:31]

But let's take an intermediate goal. Let's say that you did want to retire at age 65 with 25 times your expenses saved in investment accounts, and they were in growing investments like one of those S&P 500 funds. Now what does that mean for earlier in time? Well, now we get to use something called the rule of 72, which is a mathematical rule that helps you take an interest rate and convert it into the number of years it would take to double.

Assorted Voices [33:01]

Oh, how convenient.

Mostly Uncle Frank [33:04]

And I am going to simplify this greatly. It has been known for the past 100 years that a total stock market index fund, like an S&P 500 fund, returns about 10% to 11% in nominal terms every year on average. It's compounded annual growth rate is what that's called. But if you take inflation into account, the inflation-adjusted returns, or what's called the real return, is really only about 7% or 8%, and that's also over the past 100 years or so. So using the rule of 72, you would divide that 10 into the 72. And it says, in nominal terms, your investment will double every 7.2 years. But if we use the inflation adjusted returns, it's really doubling about every 10 years, because 7 goes into 72, about 10 times. So we're going to use that as our estimate. So what does that mean? If you wanted to have 25 times your expenses at age 65, and we subtract 10 years from that, at age 55, you would need about half that amount of money. So let's just call it 12. You would need 12 times your expenses saved at age 55. And let's subtract another 10 years, you would need six times your expenses at age 45. Subtract another 10 years, you would need three times your expenses at age 35. Subtract another 10 years, you would need 1.5 times your expenses at age 25. So what this means is this. I'll give you an illustration or two.

Mostly Uncle Frank [34:35]

The other way, if you were making $75,000 in salary and your overall expenses were more like $50,000, just to make it a round number and you expected to have that same level of spending for the rest of your life, just adjusted for inflation, that would mean if you invested 1.5 times that $50,000 or $75,000, and you had that all invested in the S&P 500 or something similar in a retirement account at age 25, and you just left it alone, you would be what is called coast five. You would be already saved enough for retirement at age 65. It's astounding, but that's the way compounding works. The earlier you get that money in there, the more it doubles and the closer you get to being financially independent. So if you can manage to get $100,000 into these accounts before you're age 30 and just let them grow, even if you don't put any more money in them, you're probably going to have enough to retire, especially when you add in Social Security or whatever else you're going to get.

Mostly Uncle Frank [35:43]

But what this also means is that if you fail to invest early on, then you have to save and invest more as you go on, because if you get to 35, then all of a sudden you need to have three times your expenses saved. And if you wait until you get to your 40s, then all of a sudden you need to get to six times your expenses saved, and you get to your 50s, that's to be 12 times your expenses saved. Now, obviously, you can play around with these numbers, but the point is, the more you save early on and the longer you wait, the more you'll have and the easier this is going to be.

Assorted Voices [36:16]

It's so easy to use Geicocom. A caveman could do it. What?

Mostly Uncle Frank [36:22]

But a good goal, I would think, for somebody starting out and making a decent salary should be within 10 years. They're at least coast five based on their current expenses. The truth is, your expenses are going to go up. You're going to be able to save more in the future. It's not like you have to stop saving once you reach one of these figures, and a lot of other things are going to happen fire and brimstone coming down from the skies, rivers and seas boiling 40 years of darkness.

Assorted Voices [36:48]

Earthquakes volcanoesstone coming down from the skies, rivers and seas boiling. Forty years of darkness, earthquakes, volcanoes, the dead rising from the grave.

Mostly Uncle Frank [36:53]

But this gives you an idea of whether you're on track or not. All right, now let's look at these individuals. The young engineer, technical analyst Don't say anything Squidward.

Assorted Voices [37:05]

Remember your karma. What I don't think I will Squidward remember your karma.

Mostly Uncle Frank [37:13]

You need to start with maxing out your Roth. Just max out your Roth versions of these things. When you get into the 22 or 24% tax bracket, then you can think about splitting, doing some Roth and doing some traditional. But, as I mentioned, if you can put the pedal to the metal and max out your savings, the first 10 years are working. You may actually never have to save another dime. That's what I'm talking about.

Assorted Voices [37:40]

I'm out making some sweet moolah with Uncle Rico.

Mostly Uncle Frank [37:44]

But if you don't get started early, then you have to save more later. Could I come home and think that I've been fishing all day or something? All right, a middle-of-career person trying to optimize their tax contributions here. This is going to vary a lot on. For instance, are you still married, Are you dealing with two incomes or one income? Because then you may be dealing with even more potential contributions. Each person gets that limit every year, and then how is your tax situation affected by whatever deductions you get for children, mortgages, etc. Deductions you get for children mortgages, etc.

Assorted Voices [38:27]

Maybe I can help.

Mostly Uncle Frank [38:28]

What? Who are you?

Assorted Voices [38:30]

I'm Middle Age man. I've heard of you who's this? Oh, this is my sidekick Drinking Buddy. What's the difference between you and Dr buddy? I have a life.

Mostly Uncle Frank [38:50]

The calculus ends up though, being fairly similar in terms of the tax implications, once you've figured out what is your marginal tax bracket. If you are still low income, then keep doing Roth or lower income, I should say. If you are intermediate income with the 20s in terms of your marginal tax bracket, then you could do either or split them. And if you are in a higher income bracket, which many people are by the time they get into their 40s- Top drawer, really top drawer.

Mostly Uncle Frank [39:24]

That is the time to really just focus on the traditional, all right. Third, one later career person and the kind of person you described is probably behind in their contributions, but their income is probably very significant or high.

Assorted Voices [39:39]

They have a big shovel I can't wait to start pawing through my garbage like some starving raccoon.

Mostly Uncle Frank [39:46]

These are the people who are catching up to financial independence, and generally, they want to shovel as much into tax-advantaged accounts as they can the traditional accounts because their tax rate is probably at the highest it's ever going to be in that circumstance, and it's certainly going to be lower when they stop working, so I would go full traditional in that case if I'm describing you, of course, if your income does happen to be lower for whatever reason maybe you got laid off or something then you could switch to the Roth again for whatever period that is. Again, this can be changed every year, and by the time you get to retirement, I would expect that just about everybody is going to have some traditional 401k, some Roth 401k, some traditional IRA and some Roth IRA, and, hopefully, some saved in a taxable brokerage account. Because you have all of these different kinds of assets in these different accounts, it actually becomes easier to manage it in the end, because you make adjustments every year. No-transcript. All right, now let's talk about this bonus question.

Mostly Uncle Frank [41:12]

You asked about health savings accounts.

Mostly Uncle Frank [41:13]

Yes, those are potentially very useful investment vehicles. The first thing you need to decide, though, is whether having that setup is right for you and your family, because the way that works is you can only have a health savings account if you also have what's called a high deductible health plan. And the way a high deductible health plan works is your insurance is cheap, but you're going to be likely paying a bunch out of pocket if you have medical expenses in a given year. So it's a trade-off. The idea is you buy this cheap insurance, then you save this money on the side in a health savings account and then you can use that for your medical expenses, and if you have less expenses than the average person, then you're going to be able to keep that money and save it and invest it. So generally, if you are young and healthy, it makes sense to take the lower insurance, the high deductible health plan, and then contribute to a health savings account, because oftentimes your employer will also chip into that. So that is what your brother, ned, is doing starting next year.

Assorted Voices [42:13]

Can't you morons do anything right, ned, we meant well and everyone here tried their best. Well, my family and I can't live in good intentions, marge. Oh, your family is out of control, but we can't blame you because you have good intentions. Hey, back off man. Oh, okay, dude, I wouldn't want you to have a cow man. Here's a catchphrase you better learn for your adult years.

Mostly Uncle Frank [42:42]

Hey, buddy, got a quarter phrase you better learn for your adult years. Hey, buddy got a quarter. However, if you have health conditions and expect to consume a lot of health care, this may not be the right thing for you. And it may not be the right thing for you if you have a bunch of children with other health issues or a spouse with particular health issues, because these are generally best for people that don't expect to be spending a lot of time at the doctor and they're just going to get a checkup that year and that's probably all they're going to have.

Mostly Uncle Frank [43:12]

Now these health savings accounts have become very powerful investment vehicles, particularly if you can get it into one that lets you make investments. They're all a little bit different. Some of them are kind of janky and don't let you invest in very much. A lot of those are provided by employers. But if you can swing it and open one of these accounts, say at just Fidelity, and invest in anything you want, then it becomes like a bonus IRA that you can contribute to and accumulate from, because you are not actually required to take that money out and use it for your health expenses. You can leave it in there and just let it grow as long as you want and you can pay your health expenses out of pocket and then reimburse yourself years later. And so people have begun to really kind of game these things and use them more as a retirement vehicle rather as just a pot of money to use for health expenses, because you can do it either way and there are a bunch of other rules. Essentially, when you get to age 65, they basically turn into a retirement account, but prior to that you can only take money out of them for actual health-related expenses.

Mostly Uncle Frank [44:23]

Now one person who actually is an expert at this and who does it for herself very effectively is Jackie Cummings Kosky, who I just mentioned. She also wrote a book recently called Fire for Dummies, which is a good primer for people getting started, and I'd recommend that book. But I'll also see if I can find one of her interviews where she talks about HSAs, how you can use them and how she has been accumulating a significant amount of money in one of these things. She's also very interesting as being a late starter, that she really didn't start saving for retirement until she was in her late 30s but then put the pedal to the metal and is actually financially independent before age 50. So she has a very interesting story and makes for a good example as to what people can do, because she was not making an exceptionally large income or anything like that either.

Mostly Uncle Frank [45:19]

Now, if you are contributing to an HSA and it's a good one and allows you to make good investments through it, basically you would slot that in as a priority right after getting the match. You would do getting the match in your employer-sponsored plan first, then fill up your HSA, then fill up your IRA, then fill up the rest of your employer account. If you're looking for the order of operations for those kind of contributions and I know this summary is very incomplete, but I think it's the best I can do here at a podcast given the amount of time. Now, if you want good basic information about this stuff, I always use Investopedia. Investopedia is very good at answering questions like what is a 401k? What are capital gains taxes All of these basic concepts of what are these things and how do they work. You can generally find an up-to-date Investopedia article about that topic and I would recommend using that for all these kinds of questions, because you're going to get the same kinds of answers that I just gave you.

Mostly Uncle Frank [46:24]

Be a little bit careful that it is written by the financial services industry. So there's ads and things in there and I wouldn't necessarily use it as a source of advice, but in terms of learning what things are and how they work, it's a very good resource. All right, I know I covered a lot here and I tried to give a high-level summary. The problem with these kinds of questions is you always run into all kinds of variations that are very dependent on the individual circumstances of the individual in question, and that becomes more true as people get older, get married, have children and other things happen to them. So you can really only give very good general advice to single people in their twenties and after that everybody's situation starts diverging. But hopefully it helps you and your friends. You should look at yourself, max. You're a mess. I'm very glad you wrote in and thank you for your email. Don't you have to be stupid?

Assorted Voices [47:21]

somewhere else? Not until four. Don't you have to be stupid. Somewhere else, not until four.

Mostly Uncle Frank [47:28]

Oh, that's gonna hurt. Do it again. I wasn't looking. Now we're going to do something extremely fun, and the extremely fun thing we get to do now Is our weekly portfolio reviews. Of the eight sample portfolios you can find at wwwriskparityradiocom on the portfolios page. And, unlike last week, it was a fun week this week.

Assorted Voices [48:05]

I don't think you're happy enough. Happy, happy, joy, joy. Happy, happy, joy, joy. Happy, happy, joy, joy, joy.

Mostly Uncle Frank [48:09]

I don't think you're happy enough. The S&P 500 was up 1.8% for the week. The NASDAQ was up 1.73% for the week. Small cap value, represented by the fund VIOV, was up 3.31% for the week.

Assorted Voices [48:21]

I gotta have more cowbell. I gotta have more cowbell. Gold was the big winner last week.

Mostly Uncle Frank [48:35]

Gold is up 5.57% for the week. Reits, represented by the fund REET, were up 1.57% for the week. Commodities, represented by the fund PDBC, were up 3.41% for the week. Preferred shares, represented by the fund PFFV, were up 0.21% for the week and managed futures, represented by the fund DBMF, were up 1.11% for the week. Moving to these portfolios, first one's this reference portfolio. It's called the All Seasons. It is only 30% in stocks in a total stock market fund, 55% in intermediate and long-term treasury bonds and the remaining 15% in gold and commodities. It was up 1.49% for the week. It's up 8.77% year-to-date and up 10.43% since inception in July 2020. I'm moving to these kind of bread-and-butter portfolios that someone might actually use in a retirement or decumulation scenario.

Assorted Voices [49:39]

No one can stop me.

Mostly Uncle Frank [49:42]

First one's Golden Butterfly. This one is 40% in stocks, divided into a total stock market fund and a small cap value fund, 40% in treasury bonds divided into long and short, and 20% in gold. It was up 2.32% for the week. It's up 13.95% year to date and up 37.33% since inception in July 2020. 37.33% since inception in July 2020. Next one's, a golden ratio. This one's 42% in stocks in three funds. It is 26% in a long-term treasury bond fund, 16% in gold, 10% in a REIT fund and 6% in cash in a money market fund. It was up 2.24% for the week. It's up 14.34% year-to-date and up 33.83% since inception in July 2020.

Mostly Uncle Frank [50:31]

I think we will be making some modifications to this portfolio at the end of the year. You may recall although you probably don't at the beginning of 2023, I said that we were going to replace the REIT fund in this portfolio with a managed futures fund, but we were going to wait until the REIT fund actually recovered or the entire portfolio had recovered. And, looking back now, those things are generally true, that the REIT performance since the beginning of this portfolio and the performance of a managed future fund are very comparable, and then also this fund has fully recovered sometime in the middle of this past year. So at the end of the year, we'll be modifying this portfolio and we're going to slightly simplify it and make it look more like what I actually hold, and I'm just going to do it at year end to make it more convenient. So the new configuration, starting in 2025, will still be 42% in stocks.

Mostly Uncle Frank [51:34]

It'll just be in the small cap value fund and a large cap growth fund. It'll keep the 26% in long-term treasury bonds. It'll keep the 16% in gold. We'll replace the REIT fund with a managed futures fund, dbmf, and then the 6% in cash will remain the same. So you'll have something to look forward to there. Release the hounds. Now, moving to our next sample portfolio, the one we call the risk parity ultimate, which is really the kitchen sink, where there's just a little bit of everything. We won't go through all 15 of these funds, but it was up 2.14% for the week. It's up 16.51% year to date and up 24.3% since inception in July 2020. And now moving to these experimental portfolios involving leveraged funds.

Assorted Voices [52:25]

It's impossible, tony Stark was able to build this in a cave governmental portfolios involving leveraged funds. It's impossible, tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [52:34]

We perform hideous experiments here, so you don't have to. So don't try this at home.

Assorted Voices [52:40]

Look away, I'm hideous.

Mostly Uncle Frank [52:44]

First one's the accelerated permanent portfolio. This one's 27.5% ina levered bond fund TMF, 25% in a levered stock fund UPRO, 25% in PFF, a preferred shares fund, and 22.5% in gold. It's up 2.96% for the week. It's up 16.09% year to date and up 6.39% since inception in July 2020. Next one's the aggressive 50-50, which is the least diversified and most levered of these portfolios. This one's 33% a levered stock fund, upro, 33% in a levered bond fund TMF, and the remaining third in an intermediate treasury bond fund, VGIT, and a preferred shares fund, pffv. We did rebalance this last week and the specifics of that are recorded on the website, getting it back to its original configuration, but it was up 2.09% for the week. It's up 13.01% year-to-date and down 7.32% since inception in July 2020.

Mostly Uncle Frank [53:50]

Moving to the next one, the levered golden ratio. This one was actually the best performer last week. It's 35% in a composite levered fund called NTSX, 25% in gold, gldm, 15% in a REIT O 10% each and a levered small cap fund tna, and a levered bond fund tmf, and the remaining five percent in a managed futures fund, kmlm, is up four percent for the week. It's up 17.16 year-to-date and up 1.4 since inception in july 2021. And the last one is our newest one that we just started this year. It's called the Optra Portfolio. One portfolio to rule them all.

Mostly Mary [54:33]

In place of a dark lord, you would have a queen.

Assorted Voices [54:37]

Not dark but beautiful and terrible. As the born Tetris is the sea. All shall love me and stare.

Mostly Uncle Frank [54:50]

It is really a return-stacked kind of portfolio, as Corey Hofstein would say. It is 16% in a levered stock fund, upro. It's a levered S&P 500 fund, 24% in a composite worldwide value fund called AVGV, 24% in a Strips Treasury bond fund, govz, and the remaining 36% in a managed futures fund and a gold fund, dbmf and GLDM. It was up 2.67% for the week, it's up 6.88% year-to-date and since inception in July 2024. And that concludes our portfolio reviews. I hope you made it this far.

Assorted Voices [55:36]

Forget about it.

Mostly Uncle Frank [55:38]

Because now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradarcom. That email is frank at riskparityradiocom. That email is frank at riskparityradiocom. Or you can go to the website wwwriskparityradiocom. Put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow or a view. That would be great.

Mostly Mary [56:05]

Okay.

Mostly Uncle Frank [56:06]

Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio Signing off.

Assorted Voices [56:13]

Jail. I'm in jail. I'm gonna stay here. I like it here. Ha, ha, ha, ha, ha. I like it. Yeah, throw away the key. I'm in jail. Hello dad, I'm in jail. Hello dad, hi dad, I'm in jail. Hello Dad, I'm in jail. Hello Dad, hi Dad, I'm in jail. Jail, jail, jail, jail.

Mostly Mary [56:42]

Ah the Risk Parody Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment tax or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.