Is $1 Million Still Considered Rich?

Summary

Ask The Compound - Is $1 Million Still Considered Rich?

Episode Date: July 1, 2026
Hosts: Ben Carlson, Duncan Hill
Guest Contributor: Bill Sweet

Episode Overview

In this episode, the hosts field listeners’ questions around wealth in the United States—specifically, whether $1 million is still “rich” today. They dive into changing wealth benchmarks, pitfalls of liquid versus illiquid assets, and the relativity of wealth across regions and ages. Other topics covered include smart savings allocation for new parents, small business debt management, rental real estate in asset allocation, and whether to liquidate investments for a home purchase. The conversation features practical frameworks, personal anecdotes, pop culture references, and candid takes on current financial realities.

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Key Discussion Points

1. Does $1 Million Still Make You Rich?

Timestamps: [02:55] - [10:26]

• Stats & Wealth Definitions:

  • The Capgemini 2026 World Wealth Report estimates 25.3 million people globally with at least $1 million in investable assets.
  • For the U.S., 8.7 million people have $1 million+ in liquid net worth (no home equity/business value) ([03:34]).
  • Including home equity, about one in five U.S. households are “millionaires” but much of that is illiquid ([04:29]).

• Liquidity vs. Wealth:

  • Many millionaires are “house rich,” meaning much of their net worth is tied up in illiquid assets like home equity.
  • Retirement assets are often inaccessible until a certain age but still count toward net worth.

• Is $1 Million Rich?

  • “On a global basis, yes. If you have a million dollars, you’re rich. It puts you in the 88th percentile of Americans.” (Ben, [06:06])
  • Regional cost-of-living, age, and lifestyle heavily influence whether $1 million feels rich.

• Pop Culture References:

  • Classic ‘90s films and shows framed $1 million as a fortune ("Indecent Proposal", "Blank Check", Dr. Evil from "Austin Powers", "Who Wants to Be a Millionaire," "Office Space") ([07:33]).
  • The iconic personal finance book, "The Millionaire Next Door," published in 1996, equates to $2.1 million in today's money ([09:30]).
  • “A million dollars in 1996... how much would you have to have today... for the same level of wealth, accounting for inflation? $2.1 million.” (Ben & Duncan, [09:35])

• Perspective:

  • While being in the "two comma club" still means something, inflation and growing wealth inequality have changed the social meaning of millionaire status.
  • “There are a lot more rich people now, and I think having a million dollars might not feel very rich anymore... But if you have a million dollars, you’re still—you’re up there still.” (Ben, [09:59])

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2. Savings Vehicles for New Parents

Timestamps: [10:47] - [18:59]

• Scenario:

  • Maria and her husband, expecting their first child, must prioritize savings with a drop to single income.
  • They ask how to rank savings options: 401(k), Mega Backdoor Roth, HSA, 529, 530A (Trump account), IRA ([10:47]).

• Tax-Advantaged Account Hierarchy:

  • Bill’s hierarchy:
    1. HSA ("HSA is the only account... you can get dollars in, take a tax deduction, and get them out tax free." Bill, [15:09])
    2. 401(k)—get the match
    3. Roth IRA
    4. 401(k) up to max
    5. Brokerage
    6. 529 (for education, state deduction where available)
    7. Mega Backdoor Roth
    8. 530A (Trump account) ([14:21] - [16:44])

• Tips & Pitfalls:

  • HSA custodians can be a “pain in the butt” with cash hold requirements and fees ([16:44]).
  • Flexibility: Roth IRAs and HSAs prized for their withdrawal versatility.
  • You can roll over HSAs to other custodians if your employer’s provider is bad ([17:06]).

• Notable Insight:

  • “Guess what? Maria and her husband have maxed out all these tax deferrals. Like, they're rich.” (Ben, [18:45])

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3. Small Business Loan vs. Lifestyle Spending

Timestamps: [19:02] - [23:57]

• Scenario:

  • Spencer, a small business owner, has a $225k SBA loan at 8.24%. With increased income, should he aggressively pay it down or enjoy the higher income (home renovation, vacation)?

• Framework:

  • Business expansion loans at these rates are “not available to a gentleman on the street”—a valuable option ([21:12]).
  • After-tax interest (with deductions) reduces effective rate closer to mid-5%s ([21:47]).
  • “If you are going to consider just making some installment payments... the compound benefit... would be to do it sooner rather than later.” (Bill, [23:16])
  • Year-end is a good time for holistic review and making prepayments or investments ([23:57]).

• Memorable Moment:

  • “Or he could sit down in Turks and Caicos and evaluate it.” (Duncan, [24:01])

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4. Rental Properties in Asset Allocation

Timestamps: [24:43] - [30:29]

• Scenario:

  • Listener Paul asks how to factor a $300k rental property into a 70/30 stock/bond portfolio. Is it like a stock, bond, or separate asset?

• Key Points:

  • Real estate has features of both stocks (equity, appreciation, risk) and bonds (income stream), but is a distinct and illiquid asset ([25:12]).
  • “It’s kind of like fixed income because you have regular payments coming in, but it’s kind of like equities, because you’re building equity. ...But the risks are probably more equity like, than bond like.” (Ben, [25:12])
  • Rental real estate entails unique/“idiosyncratic” risks—local market effects, tenant risk, liquidity constraints ([27:24]).

• Insights:

  • Long-term, median home price appreciation is often attributable to inflation more than “real” gains ([27:20]).

• Notable Quote:

  • “Can I give you my take as a long renter? If you’re doing long-term rentals...that’s more like a bond. If you’re Airbnb-ing...that’s more like a stock.” (Duncan, [29:33])

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5. Should You Sell Stocks to Buy a Home?

Timestamps: [30:31] - [33:58]

• Scenario:

  • Should Ted sell stocks to buy a house or condo, believing his stock positions will outperform the property?

• Key Points:

  • The “personal finance vs. investment” distinction is crucial—buying a primary residence is first a lifestyle decision, not just a spreadsheet calculation ([31:48]).
  • “I don’t think you make that comparison like, oh my gosh, can you believe the opportunity cost here? ...If you are a spreadsheet person like that, then maybe it's probably not right for you.” (Ben, [32:35])
  • For investment, don’t liquidate stocks to buy real estate unless a very unique deal is available; generally, it’s not a clear financial win ([33:14]).

• Notable Quote:

  • “Nothing is more American on our 250th birthday than owning your own property.” (Bill, [33:40])

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Memorable Quotes & Timestamps

• “A million dollars is not what it used to be, right? ...A million dollars in 1996, how much would you have to have today, Duncan, to be a millionaire? For the same level of wealth, accounting for inflation?” (Ben, [09:11])
• “On a global basis, yes. If you have a million dollars, you’re rich. It puts you in the 88th percentile of Americans.” (Ben, [06:06])
• “There’s a lot more rich people now, and I think having a million dollars might not feel very rich anymore...But if you have a million dollars, you’re still—you’re up there still.” (Ben, [09:59])
• “The HSA is the only account that you can put dollars in, take a tax deduction and...you can get them out tax free. That is unique in the tax code.” (Bill, [15:09])
• “Owning real estate is a pretty good inflation hedge to kind of offset that fixed income risk.” (Ben, [28:33])
• “Nothing is more American on our 250th birthday than owning your own property.” (Bill, [33:40])

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Notable Lighthearted Moments

• Duncan’s pop culture discovery: “You just made me think of the 3 comma club from Silicon Valley.” (Duncan, [10:03])
• “Mega Backdoor Roth, which I’ve got to be honest, it sounds like a really bad adult film, but...” (Ben, [12:24])
• Banter on historical analogies, e.g., “No taxation without HSA representation.” (Bill, [17:49])
• Fourth of July holiday rankings and plans to fire misbehaving children out of cannons at Fort Ticonderoga ([36:52]).

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Conclusion & Takeaways

• "$1 million" as a wealth benchmark is less definitive than in the past, but it still confers financial privilege—especially from a global perspective.
• Context matters: where you live, your age, and the composition of your wealth (liquid vs. illiquid) all affect perceptions and reality of “being rich.”
• Select savings vehicles with attention to both tax advantages and flexibility, especially during major life transitions.
• Small business debts require nuanced, case-by-case strategies. Consider taxes, amortization, and lifestyle preferences.
• Real estate—especially directly owned rental property—is best understood as a unique asset class, not strictly a “stock” or “bond.”
• Buying a primary home is as much or more a personal/lifestyle decision as it is an investment one.

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Further Listening

For ongoing money and life Q&A, email questions to askthecompoundshowmail.com and join the live chat for future episodes.

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Transcript

[A]

Welcome to Ask the Compound, the show where you ask and we answer. I am Ben Carlson. Let's say you have a traditional portfolio, stocks and bonds. Call it 70, 30, 75, 25, whatever. But you also own a rental property. Is that rental property more like stocks? Is it more like bonds? Can you take more risk in your portfolio because you have rental income coming in or less because it's in a liquid asset? We'll answer these questions about investing in real estate and much more on the show today. Let's do it. All right. Welcome to ask the compound. Askthecompoundshowmail.com that is the email today's show. We'll be discussing the following questions straight from our compound audience. Does $1 million make you rich still? How should your savings vehicles change when you have kids? When should a small business pay off an SBA loan? How does real estate fit into your asset allocation? Should you sell stocks to buy a house or condo? Duncan will be also taking live from the chat from everyone. I'm sure Dave is here. Cliff is here. Dunkin mom's in the house. Is Pam here?

[B]

I don't see her, actually. I don't think so.

[A]

If you're in the live chat on YouTube, if you're watching live on Twitter, send us your questions or send us thoughts on how we're answering the questions. We'll discuss them live on the show early. Happy July 4th to everyone.

[B]

I'm rocking the July 4th best.

[A]

I am, too. I have a natural light shirt from Tropical Bros On. You can only wear it on the fourth of July weekend, I think. All right, Dave, where is Ben today? Ben's at the lake. I'm going on the boat right after this. Okay, this is it for me, Ben. I'm out. It's 90 degrees. It's time to be on the water.

[B]

Some tritune time.

[A]

Definitely Lake House Bend.

[B]

All right.

[A]

Today's show is sponsored by Public. If you're actively involved in your portfolio, you'll probably catch yourself repeating the same actions. Buying the diploma, manually sweeping idle cash, putting on a hedge on public. You can create AI agents that handle all of these tasks on your behalf. Just describe what you want to do in plain English. Like if the Vix hits 25, buy a put option on the S&P 500. You approve the workflow and your agent handles the rest. Monitoring the market, watching for your conditions, and executing your strategies exactly as defined. Public is the world's first agentic brokerage and investing platform, driven by your intent, not just your clicks. You can also get full read and write access to your account via the public API. Go to public.comatc to get started. That's public.comatc paid for by Public Investing. Full disclosure is in the podcast description. All right, again, a big welcome to everyone in the live chat. We've got a great show today. Tons of good questions. We're never going to run out of questions because we got so many that came in for the book. Sorry for everyone who didn't get a copy. Still appreciate the questions.

[B]

Everyone wants a book, but now you can just go buy one. Support Ben.

[A]

You know, $15, that's like the cost of a beer in New York. Everyone can handle that.

[B]

Not even. Not even really a joke.

[A]

Yeah, that's like beer at happy hour in New York. All right, let's do a question.

[B]

Okay. Up first, and I have no idea if I'm saying this right, because I only read it, but I came across cap Gemini's 2026 World Wealth Report and was surprised to see that there are 25.3 million people globally with at least $1 million in investable assets. I remembered reading one of your blog posts called House Rich Millionaires from late last year where you stated that one in five Americans were millionaires. Capgemini is essentially saying that there are 8.73 million people in the U.S. with $1 million in investable assets. Does $1 million in investable assets still make you rich in the U.S. how much do you think you need to be rich?

[A]

All right, this is a new one to me. This Capgemini. Whatever it is, I've never seen it before. CNBC had this article on it, and whoever sent this question in, they put the article here. Here's some numbers from the report. The population of Global Millionaires surged 7.9% to 25.3 million in 2025. Ultra net worth. That's 30 million or more. This group makes up 1% of the millionaire population, but 35% of millionaire wealth. So there's inequality even among rich people. Right. 730,000 new millionaires in 2025 in the U.S. and that brings the total to 8.7 million, according to the report. Now, this, they make this point in the question, but. So we're saying this is liquid net worth. This is like what you can tap. This is not home equity or businesses. You know, values of that.

[B]

Okay, that's what I was going to ask you. Okay.

[A]

Yeah. So there are other ways.

[B]

If you take a hi walk, does that become investable?

[A]

Well, this is net worth. So it's net of your debt.

[B]

Okay, I got you.

[A]

Right, so now the one. So I did have this house. Rich millionaires. I looked it up. I wrote this at the end of 2025, and I used some data from Bloomberg to talk about this. So they say that there are now more than 24 million millionaire households in the United States, which is around one in five households. And one third of those people have become a millionaire in the past eight years. But this is including home equity. So Daniel, put. This is a chart that they had. Do a chart on here. They talk about how these people aren't very liquid because a house makes up most of it. So people who have 1 to 2 million dollars, that's 12 million households. A third of or 40% of that is in housing. Like, so these people have got rich. Again, this is net of the debt. So this is pretty good because they've had so much equity. But Bloomberg's point was most of these millionaires are not liquid, which is fine. Chart off. That's okay. And they're also saying a lot of this is in retirement assets that you can't touch. Guess what? You're still rich. That's a financial asset for you. It doesn't mean you're not rich. Well, I mean, it is interesting.

[B]

Do you think that it counts as being rich if you have a massive 401k but like, you're. Let's say that you. You, you know, had a. Or an ira? Let's say you invested in some crazy stocks that have gone up 100x but, like, you can't really tap it, and your job is just pretty average. I mean, are you rich?

[A]

Yes, Duncan, being a millionaire is not spending a million dollars. It's having a million dollars right now. $1 million. And look at net worth. I get the. I get the argument. I live in San Francisco. It's super expensive here.

[B]

I'm just saying it doesn't help you make a car payment or anything. Right. Like if it's in your ira, but

[A]

maybe it's less money you have to save so you can now spend more on that car payment. Right. So 1 million in liquid net worth, meaning no home equity, puts you basically in the top 1.5% globally. Okay, so on a global basis, yes. If you have a million dollars, you're rich. It puts you in the 88th percentile of Americans. The top to be in the top 10% is more like 1.9 million liquid. Again, no home equity. So obviously the $1 million doesn't make you rich. It Depends. Do you live in Manhattan, do you live in San Francisco, or do you live in Topeka or Des Moines? Right. I think your age probably matters a lot. Do you have a million dollars in your 30s or a million dollars in your 60s? A million dollars is worth way more to someone in their 30s than someone in their 60s. Because the time value of money, the burn rate obviously is a big thing. Like, what kind of lifestyle are we counting for? The subjective part is, of course. What does a rich life look like to you? It is true that a million dollars is not what it used to be, right? I love to do a tour of the 90s. For some reason, I feel like the first half of the 90s were no one sells out. That was just the music, the grunge style. Pearl Jam and Nirvana. It's like, no, if you sell out, your. You cannot do that. By the end of the 90s, everyone was selling out. And for some reason, a million dollars became a big thing. Being a millionaire was. Obviously it's been a thing for a while, but it became huge in the 90s. So let's look at some of my pop culture references. For a millionaire in the 90s. Indecent proposal. Remember this one? I rewatched it recently.

[B]

I have never seen this one, actually. Is it worth it?

[A]

So Robert Redford. Robert Redford offers Woody Harrelson and Demi Moore $1 million. Demi Moore is married to Woody Harrelson. He says, I'll give you a million dollars to let me sleep with your wife. Okay, a million dollars. Next one blank check. I watched this one with my kids recently.

[B]

That's a classic.

[A]

Kid gets a blank check.

[B]

That one's good.

[A]

This movie would have some problems today because the kid's like 10 years old and the FBI agent who's a fully grown woman, like, has a crush on him. And it's kind of be problematic, but he writes a check for a million dollars. Because a guy runs over his bike and he buys like a castle and all this stuff. He buys water slides and for a million dollars, okay, Whenever that movie came out, Dr. Evil, he said he was gonna ask for a million dollars. Remember? That was the meme. $1,000,000. Otherwise he's gonna blow up the world. And they laughed at him. Who Wants to be a Millionaire? Remember this one? I watched it live when John Carpenter won the first million dollars. And he called his dad, he said, I want to phone a friend. And he called his dad and he said, dad, I just won a million dollars. That was pretty cool. So a million dollar for Some reason in the 90s became a big thing.

[B]

You know how the phone a friend always answered? I only recently read somewhere that they were there in the studio. The friend had to be there in the studio. That's how they knew that they would be able to answer.

[A]

Ah, that makes, that makes a lot of sense. Yeah, I just remember that. Yeah, that show was huge. REGIS member My favorite one is office space. What would you do if you had a million dollars? Right. Lawrence says, I do two chicks at the same time. And then Peter says, what I would do is nothing. And then Lawrence says, well, take a look at my cousin. He's broke, doesn't do shit. You don't need a million dollars to do nothing.

[B]

Yeah.

[A]

So a million dollars was a huge thing. And then of course, if you're a financial advisor, you have this book, A Millionaire next door. Right. So I wrote about this a little bit in my book. This came out in 1996. A million dollars in 1996. How much would you have to have today, Duncan, to be a millionaire? For the same level of wealth, accounting for inflation?

[B]

2.1 million.

[A]

Yeah. So a million dollars in. Yeah, hopefully. You read that in my book, right?

[B]

Yeah, I read that in your book.

[A]

Yeah. So listen, I still think being in the 2 comma club means something. You have a lot of money. If you're a millionaire, it makes you one of the richest people in the world. But there are a lot more rich people now, and I think having a million dollars might not feel very rich anymore because there are people with a lot more money than that. So I understand why some people say they don't feel rich even though it's in their 401 and their home equity and stuff. But if you have a million dollars.

[C]

Yeah.

[A]

You're still, you're up there still.

[B]

You just made me think of the 3 comma club from Silicon Valley.

[A]

Well, yeah, that's where the joke came from. Come on, Duncan, keep up.

[B]

I like it.

[A]

The 2 comma club, right? Yeah. All right, so yeah. Is a million dollars, does it make you as wealthy as it would have in the past? No, of course not, because inflation eats away at that value. But that's still not bad. All right, next.

[B]

Well, yeah, this, the last thing on this I'll say is there's a lot of memes going around of when I was a kid, a million dollar house was a mansion. And you know, today a million dollar house in a lot of America is just a pretty average.

[A]

Yeah. For some reason that. Yeah. I even in. Yeah. I feel that for sure.

[C]

Yep.

[A]

All right, next question.

[B]

Okay, up next, we got one from Maria. My husband and I are expecting our first child this September and will be shifting to a single income for the next one to three years. We've always maxed out every tax advantaged account available to us, but now we'll need to prioritize. What would your financial order of operations be between a traditional 401, additional 401 contributions through mega backdoor Roth conversions, an HSA, a 529, a 530A and an IRA, which we'll become eligible to contribute to again with only one income between us. Part two.

[A]

All right.

[B]

We're fortunate to have healthy savings, including 12 months of expenses, plus a 20% down payment for a near term home purchase. We're particularly interested in 530A versus 529 versus mega backdoor Roth. We're leaning towards the Mega Backdoor Roth because contributions can be pulled whenever. And there's some estate planning benefits as well. Are we off base here?

[A]

All right, first of all, I'm Maria and your husband. Congratulations on child number one coming in. I'm impressed with how thoroughly they've thought about this. So I think you're probably going to the other stuff together. Let's bring on Mr. Bakdor Roth himself. The Mega Backdoor Roth.

[C]

Maybe I should retitle HSA guy, you know, for 250. I don't know. That's where I wanted to start with this one.

[B]

But Ben, why pick one, you know?

[C]

Yeah, exactly. Love them all like your children.

[A]

Okay, so, I mean, they. They list it. So the 530A, that's the Trump account now, right?

[C]

That's correct. Yep, yep. 5:30 Cap A.

[B]

You got it. That's when I was.

[A]

Duncan's got to add that to his cheat sheet.

[C]

Yeah, exactly.

[A]

So first of all, before we get into the hierarchy, Bill, tell us the benefits of this Mega Backdoor Roth, which I've got to be honest, it sounds like a really bad adult film, but. Mega Backdoor Roth, what is it? Why do people do it?

[C]

Yes, it is not as sexy as it might sound. But, Ben, ultimately what you're doing is you're filling up the 415charlie contribution limit on a retirement plan. You can fund a 401k a retirement plan at work up to $72,000 this year. The thing is only 23. The first 24. 5 comes in elective contributions, and that's your typical Roth. And then you can bolt on in some retirement plans with Fidelity and other vendors after tax Convert that to Roth contribution to get all the way to that 72,000 DOL limit. It's a really, really special thing and unfortunately not everybody has access to it. But it's a very cool way to turbocharge retirement savings.

[A]

Okay, but the thing is, obviously by doing the backdoor, you're putting it in traditional, then you're converting it and paying the taxes.

[C]

Yeah. And more or less. Yes. Is that you don't get an upfront tax deduction. And then the catch with that is that contributions have to go in after tax and then somebody has to convert that to Roth at some point.

[A]

Point along the way.

[C]

Different companies handle that differently.

[A]

All right, so obviously again, Maria and her husband really have stuff down. They've been maxing stuff out. They say, hey, three years or so with kids, it's gonna be harder. I don't know if someone's not working or they're just gonna have more money going to the kid. Oh, single income, of course. Yeah. One of them not working. So here's my hierarchy. Tell me what you think. I would always say 401k, get the match, of course. Right. Then maybe move to your Roth. And I think she said, yeah, they're going to become Roth eligible by going down to that single income. Right. So I'd say Roth next, then head back to the 401k until you max it out. Then we're talking brokerage, then 529, then HSA, then Trump. Where do we disagree?

[C]

Yeah, no, I think you're right about there, Ben. And I like Ben also how you split the contribution.

[A]

Right.

[C]

You did it based on the match. I would say that's the difference between a 4.2G and a 415C contribution. So, Dan, can we chart on? Because I put a chart together, Ben, I rank these in a power ranking going into our 250th birthday here as a country on tax advantaged accounts. And Ben, I would put the HSA at the bottom. HSA first, HSA top. I know I need to rebrand to do neck tattoo for a health savings account, but yeah. Ben, the HSA is the only account that you can put dollars in, take a tax deduction and. And you can get them out tax free. That is unique in the tax code. It doesn't happen with anything else. So if you happen to have an access to a high health savings plan account via a high deductible health care plan, we're acronym city today. An HSA to me, Ben would be number one.

[A]

And I guess also you may Be having some more medical bills with a child.

[C]

Yes, that's certainly a case. You will have medical bills in your life.

[B]

I guarantee you not to derail this. But with hsa, I'm always confused. You have to keep a certain amount of cash in there, but you can invest the rest. What's the deal with that? I don't understand.

[C]

Rules dictate these things. I know, Duncan. Our Ritholtz wealth HSA plan. I guess we're revealing ourselves as HSA fellow travelers here on the show. Yes. I have to hold $2,000 of cash, and I totally agree. It drives me crazy because I don't spend on. I don't plan on spending that. Like, I actually want that to compound in a tax free manner throughout the years. But yeah, Duncan, that's. That's an individual plan.

[B]

That's to cover medical expenses.

[C]

Yeah.

[B]

In theory, if you're, like, invested.

[C]

Yeah, exactly. So you don't have to, like, pull your money out for your health savings account. But can we chart on? So once your HSA is funded, can we go back? I would then bend. Exactly. I'd hit the 402 limit on the 401 plan, and then I would flow dollars into a Roth ira. I love the flexibility there. This is where the flexibility becomes really important. Right, Ben? You don't get a tax deduction upfront funding a Roth ira, but you get this flexibility in distributions and then ultimately tax free growth after that. I would fund a 529 to take advantage of the state tax benefit. I'm in New York. I get a $10,000 deduction I can take for 520 contributions, which is really special. Louisiana, I think, has the coolest state tax benefits. They offer a 2% credit plus a deduction, which is really cool. Then I would fund the 415c Roth Mega Roth backdoor, and then I would look at a 530, cap a account on the Trump side and chart off. That's more or less the order of operations. Ben, I think you and I are totally aligned. The 530A is the least attractive of the bunch.

[A]

Okay. In the comments, someone did say that the custodians usually suck or are cumbersome for HSAs. Is that a problem where you could be like, your options are limited? And that's always been my thing with hsa. Isn't it kind of a pain in the butt?

[C]

It's a pain in the butt.

[B]

My wife was charging some pretty big fees that I saw coming out every month. So, yeah, it's not perfect.

[C]

Yeah. I totally agree. However, you don't have to stay with the same HSA for the next 30 years. Right. Basically, that's the vehicle you need to use through your employer to get dollars into those plans. And then once you're done with the plan or you can roll it over, our HSA again, I'm company man, allows us to trans funds to Schwab where you can have a whole suite of ETFs that you can go and invest in that are low cost and index based. So I would say generally that's something to look out for. It's a pitfall, but not always leveraged ETFs. I don't know if you can do it, but why not? Hey, it's 250 years of freedom, Duncan. You be. You let that freak flag fly.

[A]

That's what George Washington asked for. I mean, representation. And then he would have been into

[C]

no taxation without HSA representation.

[B]

He would have been into it. In the chat, Osprey says. I think they're responding to what I was asking you, Ben. The idea that you can't access 401k or IRA penalty free before age 59 and a half is one of the greatest personal finance myths. What do they mean?

[A]

Well, Bill, they might be talking about the rule of 55 or paying the penalties or taking the Roth contributions, I guess. Is that part of it?

[C]

Yeah. Typically, Duncan, the plan will not allow you to take funds out for any reason. However, hardship distributions is a new penalty exception. New this year. It's a limited amount, $1,000. But yeah, first time home buyer. There's a slew of ways you can go to basically access funds, even on a pre tax basis. Yeah. You have to pay the tax.

[B]

You can borrow from your 401 for a house.

[C]

That's right. And a loan too. Yeah. There's a lot of neat things. And again, that's why the 401, the Roth IRA, these things are awesome. And the goal should be to just get dollars in there. Right. And put them to work.

[A]

Guess what? Maria and her husband have maxed out all these tax deferrals. Like they're rich.

[B]

Right.

[A]

Or they're going to get rich.

[C]

I would say so too. Yeah. In terms of compounding. Right. Because the tax advantage is difficult to quantify, but I would argue very, very underrated.

[A]

All right, what's another question? Kind of a new one here. Small business stuff.

[B]

Yeah. Up next, we got one from Spencer. I own my own business and I keep retained earnings in my business at about two months of my overhead. Expenses. I took out an SBA loan to expand my operations in 2024. The loan was originally for $225,000 on a 10 year term with an 824 rate. The monthly payment is manageable, but that 8.24% interest rate is killing me. The amortization table for the loan shows interest costs totaling $106,000. If all I paid was the minimum payment for the life of the term, this is the highest our income has ever been. I already maxed out my Roth K and my backdoor Roth contribution. Have a Star of Every Year part two. I'm really torn between aggressively paying down this loan on the one hand and on the other hand, letting the regular payments take care of it while enjoying this, not to brag income. After working hard for 17 years to get here, for example, my wife would love to renovate our bedroom and bath. We've also talked about a vacation to Turks and Caicos.

[C]

Turks and cows. I think it's cows, sure.

[A]

Turks and Caicos. What are you talking about?

[B]

Bill, in the next year, having heard you discuss the merits of not paying down a 2.5% mortgage early, extensively on the show, what are your thoughts on how to address paying down a whim with a higher rate like this? Do I just order myself a Miami Vice and enjoy where I am right now?

[A]

All right, so this is, I guess, the hard part about owning a small business because your business decisions can bleed into your personal finance decisions. And it's a really tough balancing act because it probably feels like it's one in the same. 8.2% is obviously a pretty high hurdle rate. I think this is one of the reasons that you make plans in advance. What was your plan when you took the loan out? Were you planning on paying it off over the life of the loan? Will it help your business if you pay it off, not just your personal life? How badly are you in need of a vacation to Turks and Caicos? Bill, how do you think about it? Because you've been a small business owner too. Like, how do you think about these business decisions bleeding into real life? And it's like, gosh, I could take all the money and reinvest it in the business and not spend anything on myself. Like, I. It's. It's a tough balancing act.

[B]

Yeah.

[C]

My first reaction, Ben, is first principles. I don't look at this as a burden. Like, where else can you go and borrow $225,000 collateralizing it, like with your business, Right. That's not available to a Gentleman on the street, more or less. I would agree with your observation. The mix of business and personal, that can get complicated. But this isn't even an option, right. If you have a W2 style job. So I think it's pretty good. The other factor I'd point out, Ben, is business interests like this. Presumably Spencer took out the loan, 200 grand took it out in order to expand operations, generating more revenue on the back end. So yeah, there probably is a cost and it's not.

[A]

Yeah, what's the payoff going to be? What's the ROI?

[C]

Exactly. So yeah, he's paying $16,000 ish a year in interest and okay, that's not great, but ultimately what are you for that? Right. And presumably he's getting some additional gross revenue. Ben, there's a tax advantage to doing things to the business that should be obvious in that if you're able to deduct the interest that you're paying on a taxable basis, let's say at 30%, his after tax borrowing rate is closer to 5.6, 5.7%.

[A]

Right.

[C]

And that actually brings it below, Ben, like what you can borrow from quote unquote, the street.

[A]

Right.

[C]

A 30 year mortgage is in the sixes right now if you think about it.

[A]

So all the inflation's running at 4. So that's actually not as bad as it sounds maybe.

[C]

Yes, exactly. Because ultimately the principal balance is fixed. You're totally right. And as you pay that loan down amortization table, you do end up paying less and less and less. So therefore, put it all together, I think it's not a bad rate. It's ultimately, I think pretty fair. I think it's relatively stable for a market purpose. And Spencer, it really is a business decision if a 6 or 7% rate of return is not on the drag on the tax drag, if that's really eating and chewing you up, Ben, I don't know that necessarily you can guarantee or really feel super confident you're going to get a 6, 7, 8% rate of return for the next eight years right from the market. It really depends. Things feel kind of frothy, a little bit high in valuation purposes to me. But that said, there's no reason to think all or none with this type of thing.

[A]

But you're right, borrowing six figures for a probably risky small business at that rate probably makes sense and hopefully Spencer's CPA knows that he can deduct that interest.

[C]

Exactly. But Spencer, if you are going to consider just making some installment payments, just paying off the loan A little bit early. I do think it would lend itself to doing that more on the earlier side, Ben. Right. Because again, amortization, you're paying the most amount of interest. Interest as a percentage of your monthly payment or annual payment right now. And you're eight years left in the loan. Right. So if you are going to do it, the compound benefit in compound debt would be to do it sooner rather than later. So my recommendation to Spencer, sit down at the end of the year, you know, look at. Look things over, take a look at the books. Take a look at your retirement plan. Up, down, left, right. And you can decide, hey, if I have an extra 5, 10, $20,000 sitting around in the business account, then you can decide to allocate that to debt or to investments. That's what I would recommend.

[B]

Or he could sit down in Turks and Caicos and evaluate it.

[C]

I really think it's. I really think it's smoother than that. I think so. That's what Barry Ritholtz told me. He said he goes to Turks and Cows every day.

[A]

Have you heard Barry Ritholtz try to pronounce Michael Mobison's name? Come on, you're taking his advice.

[C]

Unlike the three of us, he's been there, so I took his word for it.

[B]

Yeah, I've definitely. I've never been there. Okay. Are they in the World Cup?

[A]

No, it's a small Caribbean island. Speaking of which, my kids are upstairs watching England lose right now. We're actually rooting for the British because we want them to play the Americans the next game, right?

[C]

Yeah, exactly.

[B]

That's what I want to see.

[C]

And the French won an American soil yesterday for the first time in 250 years. Congratulations to the French.

[B]

True.

[A]

That's pretty good. All right.

[B]

Okay, up next, we got one from Paul. How do you think of personally managed rental properties and asset allocation? Say I've settled on a 70, 30 stock to bond ratio with a million dollars in total. How do I factor in a $300,000 rental property? Is this more like a stock or a bond or is it treated totally separate? Would you change your portfolio allocation to account for the rental? And do they mean the. The cost of the place is 300,000? They're not saying you're getting that rental income, right?

[A]

No, I think the. The cost is probably 300k. And it's tough because real estate has a little bit of features of both. Like, it's kind of like fixed income because you have regular payments coming in, but it's kind of like equities, because you're building equity. And the risks are probably more equity like, than bond like. Right. Because it's illiquid. There are ancillary costs involved. You're dealing with people who could be awful tenants. You could have an economic downturn, you could have natural disasters. So I do think real estate has both of those characteristics. I would say unique risks, unique asset class. Right. Really, it's its own thing. It's not either. So if you have that million dollar stock bond, 7030 portfolio and then an extra 300 grand in the rental property, it's probably like 50% change in stocks, 20% change in bonds and 20% change in real estate. Real estate is the asset class. It's another asset class. Now the question is, does it mean you can take more or less risk? I don't think it means either of those things. I don't think it allows you to own fewer bonds because you're getting income in because it's not liquid. Right. For rebalancing purposes and that kind of thing. And I don't think it necessarily mean you're taking too much risk because you do have the income coming in. So I think it's its own separate thing.

[C]

Yeah, I'd agree. And Ben, I think on my way of thinking, I think you're right. But to me it tilts more towards the equity side of my brain, certainly, because I would agree with everything you just said. And cash flows. Clean rental and commercial real estate do tend to be higher. However, you do get these relatively severe drawdown effects that happen from time to time. But in the benefit you get inflation adjustments. So can we chart on? I took a look at some data, and this is from the Federal Reserve. I took a look at the median sales price of US Houses sold. Now, this is not exactly like the market. Right. The problem with real estate, I would argue, is it's all local. And ultimately, if you buy a Property in Brooklyn, New York in 1974 and you sell it 30 years later, you're going to get much higher than the market rate of return. But vice versa, if you're in the middle of rust belt, right, and you bought a property there in southern Detroit, and the market falls apart. Right?

[A]

Right.

[C]

So you can't know these things in advance.

[A]

I call that idiosyncratic risk. Correct?

[C]

Yes, yes. And again, the locality of it. And I don't think these things necessarily can be predicted in advance. So. But if you take a look at the median price of houses sold, so these are actual sales, these are not Values. This is not an appraisal. This is what would the prices actually sell for. And then I adjusted it for chained CPI and you can see that that March of 2007 peak right of 389,000 for the median house declined to 305,000 over the next two years and then did take that long march higher. I do like looking at data like this because Ben, I think people just have this perception that real estate always goes up. But one of my observations is a lot of that is just it's inflation, right? And how many assets do you hold for 10 and 20 years? And I guess the shocking thing when I was looking at some of this data is that the median price of houses sold in the US peaked something like three years ago. I had no idea on a real basis that inflation has chewed up most of the returns from houses sold in the US over the last three or four years. I do think that we all think, hey, house prices are going up. Not realizing that that might not necessarily be true on an inflation adjusted basis, but more so locally. So it really unfortunately just depends.

[B]

I think they're taking off every time I look.

[A]

Well, right. Only where Duncan's trying to buy. Now taking the other side of that could be that bonds do not protect you against inflation. In fact, inflation is the biggest risk for bonds. So you could say actually owning real estate is a pretty good inflation hedge to kind of offset that fixed income risk. So it's totally agree, totally agree. Again, unique risk, unique rewards. Right. That's why it's totally different than both of us.

[C]

And that's why founding Father Alexander Hamilton in 79 created the tip. Right? Because an inflation adjusted bond, I mean you can seek these things in the market. But yes, I would agree that the inflation protection and more so the big thing that you get from real estate where you get a place to live and that it's very difficult to quantify the value of that, particularly if you're paying rent or you need to live somewhere. Right.

[A]

But with this a rental property and bill, you can speak from, from experience here, you've, you owned rental properties before. It's. There's the headache risk that you don't get in a lot of other asset classes.

[C]

It's work. It's basically running a small business, you know, not every day, but certainly you do need to put the time into it or pay somebody to do the work for you.

[B]

Can I, can I give you my take as a long renter?

[C]

Please.

[B]

I think that if you're doing long term rentals like Having people sign yearly leases, that's more like a bond. And if you're just Airbnb the place week to week and you're getting more money, but you don't know if it's going to be rented out a month from now or not, that's more like a stock.

[C]

I like that. What's interesting too, in the tax code, those short term rentals, that's taxable in a schedule C, meaning it's subject to self employment tax for the most part, if you're providing short term rental services. And what's interesting about the Airbnb thing is Airbnb hosts for me. Guys, I don't know about you, they don't really provide a lot of services. Right. I need to take out the garbage, I need to clean up, I need to pick things up. So. But ultimately, yeah, there is a tax advantage to Dunkin to taking those longer term leases. As a landlord.

[B]

Yeah. Where I live, some of the units are Airbnb and the nightly rate breaks out to be like double. You know what I'm. What I pay. Right. For a yearly lease for obvious reasons.

[C]

Right. It's probably. Those things are rented probably half the time, I would guess. Funny how math works that way.

[B]

Yep.

[A]

All right, we have one more about real estate.

[B]

Okay, last but not least, we got one from Ted. Is it worth selling your stocks to buy a house or condo when you know that your positions will do better over time?

[A]

All right. I mean, you don't know your positions will do better over time. Right. Just like real estate can underperform, stocks can too. I guess my questions for Ted would be, are you selling your stocks to buy a house or condo outright? Like you're paying in cash, Are you going to use it for a down payment? I guess. What's the point of investing in the stocks in the first place? Or are there other ways you can tap? Other areas you can tap to get that down payment or borrow more money. Do you need to sell stocks to buy the house? I guess some people, they have to use it for down payment these days because down payments are so much higher. But what's the lowest you can put for a down payment? Three and a half percent, 5%, something like that?

[C]

I actually don't know. I mean, 0% with a VA loan, but.

[A]

Yeah, yeah, 0% down for VA loan, I think. Right?

[B]

Yeah. For most people it's probably 5%.

[C]

Yeah, 5 cents.

[A]

About recently I did five for my first house. But if a house is a decent amount, it still could be a big number.

[B]

I Relate to this. So I'm curious to hear what you guys think about this because if we ever find a house, I will be pulling the down payment from a brokerage account.

[A]

Yeah, I mean, if you're doing that comparison, I look at owning a house and this is not rental properties. This is buying a house to live in. I view that as more of a personal finance decision than an investment decision. Because housing is a form of consumption. At the end of the day, yes, you're building equity. It's a form of forced savings. That's great. But there's ancillary costs involved. So I don't think you can say how would this down payment have done if it would have gone in S&P 500 index instead? People do that comparison. I think that is the wrong way of looking at this. You're looking at a roof over your head, a place you can make roots and make your own. And I don't think that you make that comparison like, oh my gosh, can you believe the opportunity costs here? If you are a spreadsheet person like that, then maybe it's probably not right for you. But I think this is a personal finance decision, not a portfolio decision.

[C]

Yeah, Ted, that would be my take too. Ultimately selling stocks to buy a house or condo for quote unquote investment purposes. I think that's a very silly thing to do for the most part. Right. Unless you're getting just a tremendous below market deal on the cost. We just took a look at an inflation adjusted chart showing that we're just barely above like the March 2007 peak in real estate prices of again, actual houses sold, not valuations. Maybe all the nice houses are held forever. Who the heck knows? But yeah, Ted, particularly if you know that your positions are going up on that hypothetical. I mean, nobody can know. But yeah, I wouldn't just willy nilly sell stocks to buy an investment property. I think that's probably a tremendous mistake.

[A]

Gentlemen, we've talked about this show before in Animal Spirits that a lot of young people who would have maybe bought a house before are instead saving that down payment in the stock market or putting those extra payments that they're saving from renting into the stock market and probably are ending up better. But the question is, I don't know, what do they want to do? So that's what it comes down to.

[B]

Which is clear based on this question from Ted. I think he's talking about his primary residence. I don't think he's talking about an investment.

[C]

Great, then you got to take a Look at what you're spending, like in rent. And there are compound benefits that go beyond the finances, beyond spreadsheet math, on owning you're home. Right. And again, Duncan, you're working very hard for that. Me and Ben have enjoyed the fruits of that. I think nothing is more American on our 250th birthday than owning your own property.

[A]

Bill keeps talking about how housing prices can go down, too. I was told that if you buy a place on the water, it never goes down in value. That's fair, right?

[B]

Yeah.

[C]

Ask anybody who suffered from Hurricane Irene or Sandy in Delaware whether that was true or not. I wouldn't go that far. So, Dan, can we pull up a chart? Back to question two. I had a chart that I didn't do. Gentlemen, going into the weekend, I'm very curious. So these are the. This is the Bill Sweet power rankings for holidays. I think we've discussed this in the past, but, yeah, if we can pull that up. Yeah, I would put Christmas at the top of the list. You have kids. There's nothing better than Christmas Day. Memorial Day for me, gentlemen, is number two. I just love that time of year. But Independence Day is number three on the list, so I'm very, very excited to be going into this weekend.

[A]

Well, you kind of have it number two.

[B]

You put Memorial Day. Like, we can't say anything to that, you know, like.

[A]

Yeah, I know.

[B]

I mean.

[C]

All right, fine.

[B]

That's not fair.

[A]

Yeah, you're biased, Bill.

[C]

That's absolutely true. And I mean, no shade to Dr. King, whose great speech everybody quotes. You know, the judge me by the content of my character, not the color of my skin, which is a great line from his speech. But I love the part that he quotes about the nation, you know, issued a check.

[A]

Right.

[C]

And he comes to Washington, D.C. in, I think, 63, basically, to cash a promissory note. That's such a powerful line in American rhetoric, and I think it rings through the ages. So it's more about the time of year. I don't. I don't really need or want a holiday in January after I've had my kids for two and a half weeks. They should be back in school in January.

[B]

I don't even think I know when Washington's birthday is. Is that President's Day?

[C]

Yeah, it's President's Day. It's. Yeah. They used to do President's Day for Washington in February, and then Lincoln's birthday, I believe, was in March, but they combined the two, which is a great shame to. To our 14th president so, gentlemen, I will be spending. Dan, can we pull up our. Our fort chart here? Our fort. I will be spending the holiday at Fort Ticonderoga at Lake George in New York. And this is an absolutely strategic place in American history in the end December of 73 and the early winter of 76. Can we flip to the next chart? Here we had Henry Knox, one of the founding fathers and the father of American artillery, moving 59 cannon from Fort Ticongo that he stole from the British in order to bombard the city of Boston from Dorchester Heights. Henry Knox, a great American founder. Can we flip to the next chart? My question to you and to the audience. Who is your favorite founding father up on the screen? I have one. But, gentlemen, who's yours?

[A]

I mean, it has to be Washington, right? Everyone's gonna say that. No.

[C]

Father of our country. I don't know. Some people were like Madison, Hamilton or Jefferson fans. I don't know. Duncan.

[B]

Yeah, I kind of enjoy a lot of Benjamin Franklin's tinkering and stuff that he did. That's kind of fun.

[C]

Yeah, yeah, the secret lightning bolt guy, you know, put up a lightning rod and get. Get zapped.

[B]

Yeah.

[C]

Inventing the bifocals. Great, great biography.

[A]

Now, Bill, I hope for the sake of your kids that you're taking them to the lake part and not the fort part in 95 degree weather. Oh, no one wants dad to drag him around the fort when it's so hot and sweltering and everyone's sweaty.

[C]

I have told them if they piss me off on the drive up, I will be firing them out of a cannon into Lake George from Fort Ticonderoga. And that's how we're going to celebrate the birthday. But I'm very excited. It's a great holiday. I want to wish the audience a very happy Independence Day. A very special one to me and you.

[A]

Yes, I like it. And happy 4th of July. Go USA. Tonight, I hope England comes back and wins because we want to take on the Brits on.

[C]

Because I want to defeat them in the World Cup Final in July of our 250th year. Bring the British. Bring them on.

[A]

All right. And with that, it's time to go to the lake. Thanks, everyone, for in the live chat. As always, send us your questions, ask the compoundshowmail.com and we'll see you next time.

[B]

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