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Published On

July 16, 2019

Does the media impact financial markets and the economy? Oliver Renick, host of Morning Trade Live and Market on Close on TD Ameritrade Network, has ideas on how we can best make use of what the media tells us about the financial world. Plus, where should bonds be allocated to lessen the tax burden? Should you contribute to a Roth 401(k) or traditional 401(k)? And a call from a listener with a strong opinion on the FIRE movement (financial independence/retire early).

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Show Notes

(00:51) Oliver Renick: TD Ameritrade Network and How Traders and Investors Use Financial Media (video)
(14:12) Oliver Renick on Trustworthy News Sources and the Politicization of Data
(24:26) Where Should Bonds Be Allocated to Lessen the Tax Burden? (video)
(30:06) Should I Contribute to My Roth 401(k) Instead of My 401(k)?
(37:48) Naysaying FIRE: Who Wants to Live Like Grant Sabatier?

Transcription

How much of what we see and hear about the economy and financial markets is fake news, and how can we best make use of what the media tells us? I’m producer Andi Last, and that’s what we’ll discuss today on Your Money, Your Wealth® with our guest, Oliver Renick from TD Ameritrade Network. Plus, the hosts of YMYW, Joe Anderson, CFP® and Big Al Clopine, CPA have some suggestions on contributing to your Roth 401(k) instead of your traditional 401(k), where to stick those bonds, and we discuss a call from a listener who thinks that a certain proponent of the financial independence/retire early or FIRE movement is a lucky, hippy moron. But first, since we’ve asked a heavy-hitting guest to join us today to talk about the markets and media, we’re bringing in our own heavy hitter, Pure Financial Advisors’ Director of Research, Brian Perry, CFP®, CFA. Brian, thank you for joining us today.

:51 – Oliver Renick: TD Ameritrade Network and How Traders and Investors Use Financial Media (video)

Brian: Very welcome, although heavy hitter made it sound like I’ve been eating too many burgers lately, I don’t know how to take that.

Andi: (laughs) Now Brian is a regular guest on TD Ameritrade Network’s Market On Close with Oliver Renick, so today we decided to turn the tables and bring Oliver Renick to YMYW. He is, in addition to hosting Market On Close, he is also the host of Morning Trade live on TD Ameritrade Network, and before that he was at Bloomberg and the Bond Buyer – Oliver, welcome to the show.

Oliver: Thank you guys, appreciate it. Glad to be here in a little role reversal. I welcome it.

Andi: So for the uninitiated, can you tell us about TD Ameritrade Network and about the shows that you host?

Oliver: Absolutely. Thanks again for having me on, guys. And it’s good to see Brian and now I know the pain of having to go through a Skype setup that we make everybody do on a daily basis. (laughs) The TD Ameritrade Network is a pretty simple concept. Basically, we launched this about two years ago now to offer a direct-to-consumer over the top financial network that is just purely financial news. I kind of bring the analogy to the sports world is an easy place to consider what our value-add is. If you only like hockey and you turn on ESPN and that’s your sports go-to, you have to wait for baseball, you gotta wait for football, et cetera et cetera. The hockey network is all hockey all the time, you know what you’re getting. That’s basically what we are and what we aim to do for investors, traders, generally active people who either manage money for individuals or trade and invest on their own. So the network itself is 8 hours a day in terms of live content. There is an educational bent to some of our programming for those that are beginning traders or beginning investors. The shows that I host Morning Trade Live and Market On Close are a little bit more news-oriented. But within everything we do there is always a push for utility – it’s utility over entertainment is the best way to describe it. And you know what you’re going to get – no matter what time of day you turn on TD Ameritrade Network, you’re getting market analysis, and I tell people that, “Hey, if you’re not interested in market analysis then it might bore ya because as much as we love it, as much as fun I have doing it, that’s what it is. It is about trying to find answers for why things are happening and help people understand how markets and investing works, basically.

Brian: So you mentioned traders and investors using the network and to me, sometimes that those are two different subsets of people. I mean traders, much shorter time frame and then investors, a little bit longer. How do you see those two groups, and maybe we’ll start with traders. How do traders use whether it’s TDA or any financial information?

Oliver: I think that the group of traders even within itself is kind of a spectrum. You have people who literally look at intraday activity and then you have people who might describe themselves as traders but just buy and long stocks over intermediate timeframes of months to maybe years. There are people that are active in the more complex instruments, there are options traders. For investors – for me that is kind of the importance of the distinction is that investors can be money managers, they can be RIAs. To me, that’s a big part of our audience that I try and access. For some of our more short term and options oriented traders a show like Fast Market in the middle of the day is more geared to those that are looking at making say like an earnings trade around a particular company. They have a view on how Canada Goose is going to do this quarter and they want to put an option spread, and that is definitely, to your point, a very different type of investor. I think there’s a good bit of overlap in terms of if you want to be a “successful trader” – and I think that within itself is a hard thing to define – but you have to still have an understanding I think of some of the macro forces that all intertwine. So I think even for short term people, there’s a fair amount of overlap between what the longer-term investor also looks at. So my goal is to, on the one hand, we kinda separate these things – “look, here’s an option strategy, a spread ahead of this earnings that they might do on Fast Market, but that company also fits into a broader macro scheme of let’s say retail spending and direct-to-consumer, to stay with the Canada Goose example. So I’m always trying to connect kind of the web between short and long term.

Brian: So how do you see people misusing or mistaking trading and investing? I mean, one thing we see a lot is somebody thinks they’re an investor and then they watch something on TV and they see a news headline and they panic and get out of what was supposed to be a short-term headline. So how do – the average consumer, how can they differentiate between something that should only affect a trader versus something that should affect an investor?

Oliver: I think it’s a good question and it’s hard to know really what news should or should not affect. Part of me is, when I look at a news item, kind of the first thing I do is try and distinguish what you’re describing – which is, do we present this as something that is potentially game-changing for a company or a theme or a trend? Or is it a headline, basically, that shouldn’t have lasting impact? I think the easiest example of how to approach that from a news perspective is probably by looking at tweets and trade and this type of stuff where we have a volatility-induced, White House, geopolitics, all that type of stuff. For us, we don’t even venture into the political analysis. It’s so far away. But, if there is something from the political realm that is a catalyst for a company that’s now going to have to deal with obviously a tariff input that goes directly onto their bottom line, then that becomes relevant. But something like where we wake up to Steve Mnuchin saying 90% of the trade deal is done. It’s important to try and add context I think, that people don’t all of a sudden change their view of the status quo because this is something that we’ve heard multiple times and I think approaching that news with that perspective was very useful, because as we saw during the trading day, it didn’t offer that much of a lift because we’ve heard this type of language so many times. But it is a very difficult thing to do. And what I try to do is remain somewhat agnostic, which is not really telling the viewer whether or not something is going to change fundamentally based on a headline, but really trying to analyze it and let them make that decision by really examining both sides of this. “Hey is this a big deal or is it not a big deal? Here’s the case for big deal. Here’s the case for not.”

Andi: Now, you create media, you consume media, what effect does having this constant input have on how you personally invest?

Oliver: Yeah. I just kind of started getting going since I came here. It was kind of impossible not to. I always just kind of let my 401(k) and standard additions from the paycheck go into the longer term and I never really thought about it too much. Since I’ve come here, I’ve got a little bit more interested and kind of dabble within my own investment. But I think the biggest thing that changed in the way I view the investment philosophy is I have a little bit more belief in the concept of sort of active management, in terms of the opportunity to derive alpha in financial markets. When I was at Bloomberg I took a very top-down way of viewing things. Bloomberg is very much economic and cycle-driven analysis, where when I wrote about the stock market, it was more about, how much visibility do we have in earnings over some forward period and what does that mean for the market? How does it reflect based on the economy? Here we have that, but then we also have, “well, let’s look at these companies and let’s also see what they’re telling us on a micro basis.” And it’s amazing the way these two kind of schools of thought have merged in my own interpretation of markets in a way that is very additive. And I think it has really enhanced the way I think about markets. Corporate earnings has been a big part of that and watching companies because when you’re looking from the top down, it’s a very useful way – it’s kind of a Ray Dalio type of cycles way of viewing things. But, when you also are looking at so many companies that we do on a daily basis, you start to see bread crumbs being left. And when I look at others who view things from a strictly kind of macro sense, they do miss things. You have to be careful not to extrapolate those micro details into something bigger, but they definitely offer I think a great deal of information that, if you are kind of removed from them, you might miss. And then I think also, just the return of volatility to markets has really shown that doing research and having sort of a system can really be beneficial. That may be a turning point it may not. We’re going to find out basically, but for many, I think there are the seeds of being sown to a period in which just strictly getting top-level exposure to markets may not cut it anymore.

Brian: Why has it been so hard to generate alpha? Is it because of the top-down nature of the analysis that’s driven markets lately? Because it does make sense on some level intuitively that if you study a company in great detail, try to figure out where it’s going and know a little bit more about it than anybody else, you should be able to predict where it’s going to go – and yet the statistics continue to bear out that very few people can do that again and again. Why is it the case?

Oliver: It’s something that I’ve been grappling with for a while and I and I think it’s a very difficult thing to answer. I think that I’ll start from kind of the general kind of decade during this recovery analysis which is, I think that up until now, it has been such a macro-driven story with central bank coordination. I think that it’s been very difficult for active managers and performance has been so poor during this period because of, essentially, forces that are new and are, I think by most analyses, I think it’s fair to say, have generally been very risk-on. And I think that that we’re going to see how long that effect has. An unprecedented period of zero interest rates around the world. And suddenly you have a lot more risk-taking – that’s the idea, right? In many ways, I think it has worked to kind of compress that cycle. The business cycle, the economic cycle, in a way that it has been more advantageous to just say, “Look, people are going to take risk and they’re going to buy things and there’s going to be growth. So why try and pick which is going to grow more than the other?” That being said, I think that there is a potential for that kind of regime to shift a little bit. I’ll give the example of the airlines, which I think is a good place to start because over the past year, what you have is more competition because as the pie of the economy kind of shrinks a little bit as we have slowness potentially arriving, what you have is a lot of M&A. What you have is a lot of margin pressure for certain industries that are showing up first – the Staples group is another great example. If you look at us chart of the Staples Companies, you’ve got big winners and you’ve got big losers. You have companies that are able to pass on price because they have a good brand, and there is now a cyclical pressure from input prices that is causing delineation between company performance. Airlines are pretty similar. United Air came out last year and Oscar Munoz, CEO said, “look, we know that things are going competitive. There’s a strong consumer we want to take advantage of, and so we’re going to add on more mileage and we’re going to add on more capacity.” That drove a big red flag along the airlines group and everybody dropped. But in retrospect, United Air kind of biting the bullet on what they saw from their industry going forward was actually a great move for them, and the company has done very well next to most of its peers. And I suspect that, unless we get through this kind of rough patch with transition and central bank policy, that you’re probably going to see more of that. So to kind of – not to be too long-winded, but to come back to your point is, if you believe sort of in the concept of alpha – I like to play poker, and in poker it certainly exists, because humans eventually make mistakes. If you think you can make fewer mistakes than your opponent in poker, this concept of alpha definitely exists, which is why as Matt Damon tells you in Rounders, the same guys sit at the table every year. To a certain extent that logic should also apply to markets. It’s just much harder because of all the different pieces moving. So as long as people are doing it, my view is, I’m going to give them the best analysis that I possibly can to make sure that they’re starting on an even playing field with everybody else as much as possible.

Now, you know I’m gonna say this at the end of the podcast, but just a quick reminder here, this show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision. Check out the transcript and the video of our interview with Oliver Renick in the podcast show notes at YourMoneyYourWealth.com. And speaking of market volatility, that’s the subject of this week’s episode of Your Money, Your Wealth® TV. Watch it online and get yourself a copy of our white paper, Pursuing a Better Investment Experience. Links in the show notes at YourMoneyYourWealth.com.

14:12 – Oliver Renick on Trustworthy News Sources and the Politicization of Data

Brian: You know, one of the keys in poker or in investing is keeping emotion out of it. If you get tied up or too afraid to make the big bet when you should in poker you’re probably not going to be successful, and when it comes to investing, I really think emotions are an investor’s worst enemy. We’re not hardwired as human beings to be successful investors, so a lot of it comes down to putting steps into place to put some sort of discipline to avoid making emotional mistakes. And while financial media is fantastic for the information it provides, I think sometimes having constant access to information–

Andi: Prompts the emotion.

Brian: Exactly It prompts emotions. And TD Ameritrade Network is way better than some of the outlets but some outlets will just be screaming headlines over everything, right? How can an investor separate or put steps into place in order to consume information that can make them a better investor but at the same time not be overly emotional based on the information they’re taking in?

Oliver: Yeah, I think it’s a really good point. I think step number one is to be as quantitative as possible. And that doesn’t mean you have to be an MIT math grad, it means to be data-oriented. And that, I think, was kind of the first step towards building the way we do our news shows on the network. At Bloomberg, I just basically spent all day in Excel and going through data and really just trying to approach markets from a very agnostic and kind of objective perspective on, “I don’t care if they go up, I don’t care if they go down. What’s the best way to think about this data?” Essentially it is very analogous to kind of what sell-side banks do. But whether or not they have motive to be bullish or bearish on any given company or the market as a whole is something I think is legitimately up for debate. So what I try to do and what we try to do on the network is start with that main building block of objectivity. So the first step of that is the removal of anything that doesn’t really have to do with markets, which is why we don’t go into the social news, we don’t go into the politics stuff. With the exception as being a catalyst because it sort of takes on the form of data. So I think the first step to doing that is to look at data to let that be your sort of guiding path – and then also, just trying to learn and consume as much as you can. There’s a growing, I think, support for the average investor that has leveled the playing field in a really positive way over the past decade of course with indexes and ETFs. With the research being done, the coverage that’s improved, and other places – Ritholtz I think does a really good job, their team, of educating people on on how the statistics and the data support the idea of removing emotion and sort of trusting, not necessarily the system, but kind of trusting history to some extent on why certain tactics are better than others. And that if you really believe that you have some degree of information that can deliver you some alpha, then fine. It’s a free world do what you want. But I think that having access to data has been huge to leveling that playing field. The democratization of data in finance is I think a big thing. You don’t have to have a $25,000 Bloomberg terminal anymore to get very good data on markets, and you don’t have to be an inside guy anymore to understand sort of what has worked over time. And I think that’s really the biggest thing – educating yourself and having information at your fingertips in terms of data.

Andi: What sources do you trust?

Oliver: I trust – well, I trust what I know basically. We use Bloomberg a lot for data. We use a lot of different data sources – the ThinkOrSwim platform that the clients use and we go to that. Moreso what I kind of trust is, I kind of trust the market to some extent to hash things out. You have to be careful I think as a commentator to talk about the market being wrong. I think what you try and do is start with this kind of web of how the economy and markets connect. That’s kind of what I’m always thinking about is, “how do all these different things connect?” Because they all do. Everything does. And weaving in between them and finding where some of those connections are breaking down or where they don’t meet their usual logic is what becomes newsworthy to me. So it’s kind of a cop out answer, but a lot of that is honestly watching the market, watching where things change. I don’t do as much reading as people would think. I do a lot of engaging in markets and the producers and our team of people that we build up to learn about markets, they’re really good and they do a lot of that, and they’ll present a bunch of ideas. “Here are the things, here’s all the news headlines for all the main websites and news sources. Which ones do we want to cover?” And we try and figure out the ones that are most unique from what you might expect. That’s what kind of drives our news coverage.

Brian: So that kind of leads into the whole concept of fake news. I’m not sure that I believe that outside of the National Enquirer most news is truly fake, but most news outlets have some sort of position or spin on something. How can the average person who doesn’t – maybe they’ve got a 9 to 5 job, they don’t have the ability to consume financial data all day long. How can they know what to look at or what sources should they be considering that are less biased than others or that maybe are going to be less sensationalized than others?

Oliver: Not to sound like too Gordon Gekko, but I think that places where there is money at stake, and capital at stake, are probably the most trustworthy. And to make that clear, like for example, I go to Seeking Alpha a lot for news headlines on companies. I don’t read the articles from Joe Schmo about what they want to buy or sell, but it’s a great place to start off the morning with just every mover in the market. A site like that is very simple in terms of what they want. All they’re doing is just giving information about what happened on earnings, why the stock went up, why the stock went down. You have to be very careful with stuff I think where there is a potential for kind of corruption of the message that comes across. So direct company sources and news outlets that just compile that information and aggregators – I get a lot of the kind of news flow from that. So when I start off in the morning that’s where I go. That doesn’t mean I’m not going to read Bloomberg, I’m not going to read the Wall Street Journal or anything like that, I do, but I’m always kind of taking it with a grain of salt because it’s just hard to know sometimes.

I think the tax move last year was a good example of this because at Bloomberg one of the subjects that I covered a lot were buybacks and the nature of share repurchases in markets. And to me it was always just a quantitative thing: “Here’s how much they buy back, here’s what they bought back in history, here’s what they say they’re going to buy, here’s the effect that has on earnings.” And I never even really thought about it as like a political thing. And then all of a sudden, it’s like every news outlet wants to write about buybacks from a political perspective. And I was like, “Are you kidding me, guys? None of you even cared about—“ and I’m not talking about the financial news sources. It was everywhere. And it still is becoming this political tool. So a lot of this kind of came out of the tax cut and it wasn’t that hard to just kind of look at the numbers, look at the data, say, “OK, there was a massive rise in buybacks, but it’s a trend that’s been going on for 10 years. Is this year’s annual change in the buyback rate something alarming or going to destroy the American economy? I don’t know but it’s just an extension of a trend, basically.” The CapEx is kind of another example where a lot of people were eager to paint certain economic activities because they viewed it as being positive or negative a political party. But in reality, there was a big jump in CapEx and then it stopped. So it’s not hard to look at this data and say, yes, it might have had this effect. It might not have been lasting. But I think that there is just an adherence to the data that is sometimes easily corrupted. But you just have to get the original source basically. And if you don’t have the original source of the data, then try and find the places that just kind of aggregate and compile that because once there is a tone, an editorial introduced, it gets risky.

Andi: What would be one piece of investment advice that you would offer to listeners…

Oliver: Watch TD Ameritrade Network.

Andi: …from your years of experience – no, besides that, come on now!

Oliver: The years of experience is probably not to dive straight into it. And I think the most simple one to anybody is, if everybody is talking about something, the more you need to question it. I’ve always kind of had a contrarian streak, but I think that the explosion of crypto and all that the past couple of years is a good example of how people often kind of use opportunity to their advantage. And for your average person, they have a tendency to get sucked into things that they think is going to make them rich quick. So I think that – as I think about this question during my answer – it’s probably to be patient. I think that’s the biggest one. Whether you think you want to be a trader, you think I want to be an investor, or you just want to put your general 401(k) and income to work, I think patience is probably a really big part of it. And that patience is built from learning – which starts at places like what we’re doing. But other places as well. And I think that’s the most important part is to be informed.

Andi: The website is TDAmeritradeNetwork.com. That is Oliver Renick. He’s the host of Morning Trade Live and Market On Close on TD Ameritrade Network. Oliver thank you so much for joining us today.

Oliver: Thanks a lot, guys. A lot of fun. Appreciate it.

Andi: Brian thank you very much for joining me as well.

Brian: My pleasure. Oliver was fantastic. This was great.

Coming up next week on YMYW, economist Dr. Chris Thornberg from Beacon Economics returns to the show at long last with his thoughts on the California real estate market and how he thinks the economy is doing right now, in the midst of all the recession talk of late. Visit YourMoneyYourWealth.com to subscribe, share the podcast, spread the YMYW love, and send in your money questions and comments. Whatever is on your mind, Joe and Big Al will provide their ever-so-wise insight, and I might even post a video of their response in the podcast show notes at YourMoneyYourWealth.com like I did for this first one:

24:26 – Where Should Bonds Be Allocated to Lessen the Tax Burden? (video)

Joe: Nick writes in from Moreno Valley, California… No idea.

Al: Riverside. Riverside County.

Joe: Riverside. Okay.

Andi: Look who’s been doing the show prep, Joe.

Al: Oh I already knew that. (laughs)

Joe: So Riverside… that’s what northeast of us?

Andi: It’s between here and Orange County.

Al: That’s correct. Well, it’s kind of on the way to Las Vegas if you drive there. Now you haven’t been in ten years because they banned you from the city on your 35th birthday. (laughs)

Joe: (laughs) Yes exactly.

Al: Well you put our founder in the hospital. (laughs)

Andi: Wow that sounds like a story that needs telling.

Al: Maybe we’ll talk about that later.

Joe: Yeah. Okay. (laughs) “Joe and Al, I love listening to your show. I’ve learned a lot over the years. I’ve got a question. I have taxable Roth IRA and 401(k). Where should I have the total bond market and international bonds be allocated to lessen my tax burden? Please advise.” Well, Nick, we do not give advice on this program. So that is out of the question. (laughs) But we can give you some ideas. Because Nick’s going to send us another email saying, “hey, I did what you told me 10 years ago and international bonds didn’t grow very much. So I want to sue you.” So we give zero advice on this program. But if I were putting bonds in an account and I had taxable or Roth or tax-deferred, it would go in the tax-deferred account.

Al: Tax-deferred, which is the IRA or 401(k). And the reason – it’s not that complicated. Bonds have a lower expected rate of return. They’re safe. They don’t go down very much but they don’t go up a lot. But they’re safety in your portfolio. If you put those in the Roth IRA, well that’s the account where you’re going to pay no tax. You actually want your high growth assets in the Roth. And if you put them in the taxable account where you can have capital gains, well you want your growth in that account too. So in the 401(k) and the IRA, which is the tax-deferred accounts, that’s where you want the safer investments.

Joe: So it all depends too on how much money that Nick has, how old Nick is, when he needs distributions, how much that he needs to pull from each account…

Al: Good point, because sometimes we’ll say put certain asset classes and someone has like two dollars in non-qualified and five dollars in a Roth and everything in…

Joe: Like $2 million in…

Al: …Well, then you have to put everything in the IRA.

Joe: Right. Because you know what, I’ve seen before, Al, because people listen to this show for like 30 seconds and then they implement something.

Al: Yes. We have seen that and heard about that all the time.

Joe: You know? And so it’s like, “OK we’ll keep your safer assets in the retirement account. So bonds, you want to keep bonds or real estate, things that are not necessarily tax-efficient, in your retirement account.” So you’re right. So they have a million dollars in a retirement account. They have $10,000 in a Roth and then they got maybe $20,000 outside. So then what do they do? They put $20,000 in their outside accounts or brokerage account in some stock mutual funds, in the Roth, stock mutual funds, and the whole million dollars in the retirement account is in bonds.

Al: And he’s going “this portfolio didn’t work out.”

Joe: “This portfolio sucks! What are you guys doing here??”

Al: No, the first step is to figure out what kind of portfolio you need and then you figure out where to put those pieces.

Joe: Yeah. So if you need 60% stocks 40% bonds, 80% stocks 20% bonds, you kind of figure that out first.

Al: Yeah. The other factor here Joe is if you are in distribution mode, so you’re already retired and you’re pulling money out of your accounts – you’re going to want to have some safe money in the Roth and some safe money in your savings account, non-retirement account because you’re pulling money out. So you just have to be aware of that too.

Joe: Yeah you’re absolutely right. Things change so much with the advice that they need to get, or that we give… or I guess not advice, because we don’t give advice on this show.

Andi: Suggestions.

Joe: Yes because as you age, things change in life as things happen. Things change all the time.

Al: Yeah as your situation changes you have to kind of look at changing things around. Also to be aware of when you have an emergency cash fund: that should be outside your retirement accounts and that should be in a money market or maybe a short term CD.

Joe: So what do you think about – we get this argument, question, or thought: “I have a line of credit for my cash reserve.”

Al: Yes, I used to have that mindset too.

Joe: Well because you’re a big real estate guy. (laughs)

Al: Yeah, I don’t need cash. But here’s what I did happen to me because that’s what I did.

Joe: Right, you had no cash and you said, “I’ll just live off a line of credit and I’ll have everything invested.”

Al: Yeah exactly. In real estate or whatever. And so then the Great Recession hit and the mortgage crisis, and then all of a sudden they said, “you can no longer draw from your line of credit. We’re freezing it.” “Really? I paid every month. What are you talking about??”

Joe: “You must have me confused with another Clopine.” (laughs)

Al: (laughs) “Yeah, now my cousin, that’s a different story.”

Joe: (laughs) “So send him this letter because I have very good credit, ma’am.”

30:06 – Should I Contribute to My Roth 401(k) Instead of My 401(k)?

Joe: All right. We’ve got “James from Washington state here. Hey, love your podcast. The two of you both crack me up.” Oh, thank you, James.

Al: That was nice.

Joe: All right Jimmy. I wonder if he likes being called Jimmy. (laughs)

Andi: Considering he put James as his name, probably not. Joey.

Joe: Well that’s fine. Call me Joey.

Al: That’s endearing.

Andi: It’s better than Jill…

Joe: Yeah. “I’ve been contributing to my employer 401(k) for 20 years and have saved up over one million dollars.”

Al: First of all congratulations James.

Joe: If you got a million dollars we call you James. If he had ten grand we’d call you Jimmy. (laughs)

Al: (laughs) You’re right about that. It’s back to James.

Joe: Yeah, “I’ve been saving for 40 years and I have $42,000 saved.” All right Jimmy! Let’s see whatcha got goin’ on. (laughs) All right. “I just researched and found out that indeed they do have a Roth 401(k) option with this plan.” Cool. “My question is do you think it would be best to stop contributing to the pre-tax 401(k) and switch over for the remaining 10-15 years of my career to Roth 401(k) option from zero? I think I will continue to be in the same tax bracket as I am now when I retire. But I like all the advantages you were pointing out with the Roth options. Interested to hear your thoughts.” James, appreciate the email. Well, I’m sure Al will give you the mathematical answer.

Al: (laughs) I’m going to give the same answer as you. The answer is yes. Yes yes yes yes yes yes yes.

Joe: Yeah for sure. I mean you got a million bucks James, and how old… James is… 20 years, so he’s gonna work another 10 to 15 years, so I’m guessing what is he, 50, 55?

Al: Yeah 50, 45-50.

Joe: Right. So let’s say if he works another 15 years, that million dollars in his 401(k) plan is what, two and a half million bucks given a conservative 6% growth rate if he adds zero dollars to it.

Al: I agree with that.

Joe: So now James is 60, 65 years old, his 401(k), if he stopped contributing to it entirely. Just the compounding of interest, 10 years at 6% roughly will double.,7%. So now he’s got 2 million. He’s working another 15. So two and a half ish million.

Al: Yeah in that ballpark. Sure.

Joe: So then he’s going to have Social Security, and if he’s at 50, he’s got over a million bucks saved. You know I’m guessing he’s probably in a decent income tax bracket.

Al: Probably. But he’s saying he’s going to be the same bracket now versus retirement.

Joe: Yeah I guess what I was going with is that he would have a decent Social Security benefit. So he’ll have Social Security benefits, he’ll have a nice 401(k) plan. But it sounds now, with his savings pattern, everything is going to be taxed at ordinary income. And so Al do me a favor – let’s say if he puts in $25,000 into an investment at 6% for the next 15 years. What’s the future value of that?

Al: (calculating) Let’s start with zero principle… $600,000.

Joe: All right. So now let’s say, James, you save the $25,000 into the Roth option of your 401(k) plan over the next 10, 15 years, you get 6% on the money, now you’ve got $600,000. So now you got about 3 million bucks, but at least a quarter of that is tax-free. Then you have real control over your tax brackets long-term. And if you’re going to be in the same tax bracket as you are now in the future, I think the Roth option is by far the better one to go.

Al: Yeah. And so now you can look at your investment portfolio and certain asset classes are going to have higher expected returns and certain ones lower. What I mean by that is stocks have higher expected returns than bonds. But you need to have bonds in your retirement portfolio for safety. So you put the higher expected return accounts in the Roth IRA where you get rewarded for that growth because you pay no tax on that growth. Now all of a sudden you have the same portfolio but you get to keep more of it because your higher returning assets are in the tax-free pool.

Joe: Yeah I would change how you’re saving too, James. Now you’re putting – I’m guessing you’re maxing out the 401(k) plan. It’s $25,000. And I would go into – because a lot of times people will save intotheir 401(k) plans, “Hey I want 20% in large cap, 20% in mid-cap, international bonds, whatever.” They kind of break that stuff up on their contributions. I would do something maybe a little bit different in this case because he already has a fairly large sum in the retirement account. My contributions on a biweekly, or how often he’s paid, would go into an asset class that’s fairly volatile. You know, emerging markets, for instance. Smaller companies. Absolutely no bonds. So you want an asset class that jumps around here because you’re buying into those stocks every two weeks. So it’s called dollar cost averaging. So you want to be safe with the million dollars that you’ve already accumulated. But over the next 10-15 years as you’re saving, you can take on a lot more risk with those dollars because you’re just putting them in every couple of weeks.

Al: Yeah plus, as I just said, you want that growth in the Roth. So I totally agree.

Joe: So yeah. And one other argument that we get Al is, “Well if I’m in the same tax bracket today that I’m going to be in the future then wouldn’t I want to take the tax benefit today? Because who knows what the future’s going to bring.” What’s your argument against that?

Al: (laughs) Well we could go through an example. But when you do the mathematics, assuming you have the same investments and you have the same tax rates, it comes out the same. It’s just does. I mean we can go through an example but take my word for it, it comes out the same. But where it becomes better is when you can allocate asset classes with higher expected returns in the Roth and end up keeping more of what you made. I mean here’s a simple example…

Joe: But I think there’s more than that though. With the Roth once he retires, he moves it into a, let’s say a Roth IRA. There is no required minimum distributions. He’s going to have control over the dollars that he pulls out of those accounts. So he could say, “I’m going to pull out X amount of dollars out of my 401(k) plan that’s pre-tax and then I want to supplement my income, I’m going to take that from the Roth so I don’t push myself up into a higher tax bracket.” You have so much more control.

Al: Right. Particularly when you have years where you want to get more capital and you have a Roth to pull it out of. Also Joe, a lot of people don’t think about this, and I hate to bring it up, but if he’s married, one spouse will probably survive the other one, and the survivor will now be in a single tax bracket and they will actually be in a higher tax bracket. So you’ve got to consider that too.

Joe: Right. So you just did the straight in a bubble math it works out exactly the same – but then life is not in a bubble. Unless you’re the bubble boy.

Note to self, add ridiculous bubble boy derail and others to the end of today’s episode… Sorry. If you’re like James and trying to decide between contributing to your traditional 401(k) or your Roth 401(k), check the podcast show notes at YourMoneyYourwealth.com for some additional resources and previous discussions to help you figure out what’s best for you:

VIDEO: Roth 401(k) vs Traditional 401(k): Which is Better for Taxes and Inflation?
VIDEO: Roth 401(k) Income Restrictions and Contributions vs. Conversions
VIDEO: Should I Save to a Roth IRA, 401(k) or Pay Down Debt?

Of course, you can always scroll down YourMoneyYourWealth.com and click “Ask Joe and Al on Air” for more personalized suggestions. You can send in your questions or your comments as an email or as a voice mail and chances are we’ll play it and talk about it on the podcast.

37:48 – Naysaying FIRE: Who Wants to Live Like Grant Sabatier?

Joe: Alan, we did get a recording here.

Al: We got a voice recording didn’t we?

Joe: Yes, someone left us a message. And they were listening to some podcasts of ours.

Al: Yeah, I guess an old podcast.

Joe: Yeah. So I mean, you can send us anything you want folks.

Al: Yeah, and we’ll play it. As demonstrated…

Joe: Do we have this gentleman’s name?

Andi: He did not leave us his name.

Joe: He did not leave his name, so Anonymous. Let’s just see what he has to say.

Caller: “Hi I’m listening to podcast number 207. The interview with this guy Grant Sabateer or whatever the heck it is – the guy sounds like a frickin’ hippie who just got lucky and he’s making some money! Who wants to live their life like he is? I mean, he’s a moron. Thank you.”

Joe: (laughs) All right.

Al: Well that’s an opinion.

Joe: OK so he’s referring to Grant Sabateer…

Andi: (laughs) Sabatier.

Joe: (laughs) I knew it, you were getting ready because you knew I was going there.

Al: He’s part of the FIRE movement. Financial independence, retire early.

Joe: Yeah, wrote a book, Financial Freedom. CNBC just tweeted something, like “if you make $70,000 a year you could retire in ten years. This 34-year-old millionaire explains how.”

Andi: And it’s about Sabatier.

Joe: It is. So yeah this guy, what he did is he saved 99.5% of his income.

Al: (laughs) Extreme saver. I think he’s the guy that had a certain savings amount and every month he increased it by 1%.

Joe: That’s what I liked about it because it’s like, Okay you start somewhere. Because most people save 2% of their salary. Then okay maybe next month you go to three. But he’s like going way out of control.

Al: If I recall I think he got to about 85%.

Joe: Something stupid.

Al: Andi, he was what, he was living in apartments that his girlfriend didn’t even want to come to.

Andi: Yeah exactly. And he was side hustling like crazy. Personally, that doesn’t sound like luck to me that sounds like a lot of really hard work.

Joe: He got a couple good gigs.

Andi: Yes he did. He did tell us that he ended up making some websites for a lot of money, but then he was also flipping camper vans and house sitting for people and babysitting cats and just doing whatever he could to make money and stick it into his retirement savings.

Joe: You couldn’t pay me enough to babysit a cat. (laughs)

Al: That’s right. He did do that. So here’s my comment. So the FIRE movement, it’s all about living intentionally, spending less, trying to save as much as you possibly can, so that you don’t necessarily have to retire, but so that you could retire. So that you know that you could retire. I think the concept is great. And so Grant is the kind of guy that took this extreme. A lot of people take it way less extreme. Some people don’t want to do it at all. They want to live kind of the standard American life and hopefully retire at age 65. The whole point about this is it’s just a different way to think about retirement and savings. I’m all for it. And I think virtually everybody can learn something from Grant, whether they want to implement 1% of what he says or all of it, I think there are lessons to be learned.

Joe: Yeah and I agree with that. But I would like to fast forward 20 years and see all these FIRE people and see where the hell they are at. You know what I mean? Because a lot of them I think are doing things that could get themselves into financial issues, problems. Like our boy that was leveraging up all that real estate. And then passive income, “because I want to retire at 45, and the 401(k) is stupid, because it’s all taxable, you can’t touch it till 59 and a half and all this.” I mean, they’re talking about things that they have no clue! You’re a software engineer that has very little financial knowledge and then you can save a little money, you read a couple of books, you do a little side hustle and this and that, where- you and I’ve interviewed a couple of these people, it’s like, “OK, you’re going to retire at 40 years old and well, how do you take distributions? Well, you take 4%.” It is like, “Are you kidding me?” This is the advice that you’re giving? And you’re a journalism major! No offense, I love journalists, but I just think you have to be careful and responsible. By all means, save as much as you possibly can. Do I think Grant’s a moron? Absolutely not, love the guy. Respect him. But you’ve got to take things with a grain of salt too. All right, that’s it for us. For Big Al Clopine, I’m Joe Anderson, thanks for listening. Your Money, Your Wealth®.

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If you missed them, I’ve posted our previous conversations with Grant Sabatier in the podcast show notes at YourMoneyYourWealth.com so you can listen and make up your own mind as to whether he is a lucky hippy moron:

February 5, 2019, YMYW episode #207: This Myth is the #1 Barrier to Financial Freedom
October 2, 2017, YMYW episode #134: Millennial Money Founder Side-Hustled to a Million in 5 Years

Special thanks to Oliver Renick from TD Ameritrade Network for joining us today. Check him out on Morning Trade Live, and check out Brian Perry’s previous appearances on Market On Close at TDAmeritradeNetwork.com. For the video, the audio and the transcript of our interview, links to share and subscribe to the podcast, and a ton of free financial resources, visit the podcast show notes at YourMoneyYourWealth.com.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.