Ricky Mulvey (6:08)

Frankly, you've galvanized Canadians. I'm noticing more Canadian flags on my X account. There's a lot of intense personal feeling about this. You know, I've been hearing stories from members who are deeply concerned, rightfully so, about the economic consequences of trade wars. They rarely end well for both economies. The impact of this is they're thinking about moving to cash. At the same time, the S and P is up the, the tsx, your composite, the Canadian index hasn't really budged on, on these trade war threats. And granted, we've seen this happen the first Trump administration. But I wanted to see if you had any thoughts on that disconnect as someone with intense personal feelings about what's going on with this trade war and also being a disciplined investor.

Jim Gillies (6:52)

Yeah. Sell nothing, period. The end. I'm going to really shorthand it for you, unless it's an individual company where you had a very specific thesis that hinged on a very specific exit and you have reached that exit goal. Okay. At that point, it's rational to sell. Like, you know, if a company you bought because you thought it would be taken over for whatever reason, in fact receive a takeout offer and the stock prices say 2% below where the ultimate takeout price is going to be. So don't ever react to political machinations, regardless of how intense you feel them. And you are correct. You know, this is, again, it's been pretty galvanizing up here. Do not substitute your investing long term investing thinking brain for short term political ramifications brain. Because, and we have a very good example, literally Yesterday at the 11th hour again, President Trump said, oh, we'll take it off for 30 days. Now, I'm going to say the attitude, the prevailing attitude is basically going to be, yeah, that's cool and fine up here. We're probably not going to trust the thing you say going forward. Okay? Put it bluntly. I think there's opportunity for Canada here and I am almost positive our political leaders will fumble the ball. But I think Canada should be essentially expanding east west pipelines. I think we should be fast tracking refineries. I think we should be seeking to end the discounted oil we're selling to you guys by putting it out to both of our coasts to Tidewater and shipping it to the rest of the world. I think we should be making long term strategic plans to attract more capital to this country. Folks can go Google the Celtic tiger economic miracle in Ireland in the 1990s and 2000s for an example. I think we should be exploring other trade agreements. I think I've even thought, frankly, we should go explore the concept of joining the EU or at least affiliations there. But all of these are wonderful things to think about. But from your investing brain, if you were selling yesterday morning, because, and you are correct, trade wars, you know, if they get intense, can beggar everyone, okay? And you guys are bigger than us, so we'll suffer more than you, and that's fine. But you know, we will take our pound of flesh and that's not like it doesn't benefit anyone really. Right? And trade wars, essentially, I mean, it's going to be inflationary, right? All your prices go up. If our oil coming to you costs 10 or 25% more, you're going to feel that at the pumps. If our potash, you guys, you need potash to grow food. You import 95% of your potash. 90% of those imports come from Canada. If you slap a 25% tariff on it, or if Canada, for example, were to respond, slap, I don't know, 50% export tax or something on it like that, you're going to feel the pinch at the grocery store. And no one's unaware of this, right? Like, you know, it's like, okay, if we're going to get into a spat, it's going to be worse for the population on both sides. And so I like that we step back. But I don't know that because it's so volatile, because it's so unpredictable, I have no idea what's going to happen in 30 days. It would not shock me if Canada gets the apologies in advance. The Kim Jong Il treatment. Kim Jong Un treatment. I guess it was in the first term where Trump was aggressive with them and then all of a sudden they fell in love or something. If I remember misremembering the quote like North Korea went from the biggest problem in the world to buddies. Okay, cool, great. I am equally expecting in 30 days time, President Trump says, hey, Canada's our best friend or hey Canada, get ready for a trade war beat down. Both of those are on the table. You can't know what it's going to be. You can't know how fast it'll be rescinded. If they pick one or the other lane, it could get rescinded a day later because you can't know. Stay invested, stay diversified, keep adding capital. Try to ignore it as much as possible and focus on the businesses that you own and the reasons why you own them.

Ricky Mulvey (11:16)

We can continue our conversation about Potash, North Korea and your run for Canadian Prime Minister after the show. Let's move on to PayPal earnings. It's one of the biggest turnaround stories. Taking a step back, PayPal down about 9 to 10% this morning. I'm still kind of struggling to figure out what the market doesn't like as Alex Chris is pointing that PayPal has returned to profitable growth with transaction margin dollars up 7% while take rate slipping a little bit. What this means for you is that PayPal is making a little less on every transaction, but it's getting more efficient with the dollars that come in. Or at least that's the way I read it. To be fair, PayPal still up 30% about over the past 12 months. But I mean what questions does Mr. Market have about this PayPal turnaround story?

Jim Gillies (12:00)

Jim Honestly, I don't know. I think the transaction margin has to be the thing. Full disclosure, I am a PayPal shareholder. As I shared with you before we started recording. Were we not talking about PayPal today, I would be buying shares today. Additional shares. Our friend, our mutual friend, foolish analyst Jim Mueller, longtime PayPal shareholder and follower, has some wonderful charts that he updates every quarter with basically KPI's key product, key performance indicators, key product indicators, depending on your point of view. Basically things to watch. He tracks KPI for, for PayPal and has done so for like a decade. But when, whenever they, I think there was it was 2015 when they split from ebay, so, so it's at least a decade and showing basically these how everything is literally up and to the right except for the stock price. And that's interesting to me. I think the valuation looks perfectly fine Today I like what new management is doing here or newish management. I suppose I'm joining you that I'm kind of befuddled by this market reaction, to be honest with you.

Ricky Mulvey (13:12)

Yeah, PayPal is one of my largest individual stock positions. And when I am allowed to on the show, if we talk about a stock, we can't trade it within a few days. But it's one that I'm looking at continuing to add. As a long term shareholder, I felt loved and considered in this earnings report. With a $15 billion share repurchase authorization, PayPal likes using a lot of its free cash flow on stock buybacks. That 15 billion, that's not nothing for an $80 billion company. You know, sometimes management can get a little ahead of their skis in terms of big stock buybacks. But I don't know, it seems like I should be cheering this on. Jim.

Jim Gillies (13:56)

Well, I mean, yes, now, now recognize they're not going to spend that full 15 billion this afternoon. And in fact, many share repurchase authorizations are authorizations only. They never actually enact anything meaningful. And even if they do chase down some of the they actually do go and actively pursue buying back stock on this plan. You know, there's always the question when companies have, you know, the buybacks don't fully accrue valuation wise to the remaining shareholders. Quite often, frankly, companies are just overpaying, frankly. So, you know, if you're buying something worth $1 for $2, that's not good use of shareholder capital. You should only, in theory, buybacks should only be being done when the stock prices is a meaningful discount to intrinsic value. That's when you maximize the value of your buybacks. I've already said I think PayPal's valuation here actually is pretty good. So I'm not terribly worried if they're buying back here. I would be worried if they're buying back at say $300 a share. And what I also want to see is what percentage because especially in the tech world or things with a tech flavor and PayPal qualifies a lot of times buybacks barely sop up dilution to insiders. So if, for example, I'm just going to make up a hypothetical here, PayPal goes and spends the entirety of this $15 billion over the next year. But at the same time they hose out $15 billion worth of new shares to insiders and what have you, then it would be more efficient just to get a big pile of money and set it on fire. You know, that's not value Creative for outside shareholders. I understand why you'd want to give equity to workers. I mean, I get that. But as a perspective of someone who only makes money when the external share. External shareholders only make money when stock price go up. That's the interest that I'm going to have to argue from. But overall, yeah, I looked at this and go, okay, business is decent. Valuation is decent. They seem to be pursuing at least a reasonably intelligent pursuit with their, with their shareholder capital capital allocation plans. Again, I, I would be adding shares personally today if we weren't talking about it.

Ricky Mulvey (16:14)

Shrug emoji.

Jim Gillies (16:15)

Shrug emoji. Good. Yes.

Ricky Mulvey (16:16)

All right, Jim Gillies, appreciate you being here. Thank you for your time and your insight.

Jim Gillies (16:19)

Thank you, Ricky.

Ricky Mulvey (16:26)

Up next, Allyson Southwick and Robert Brokamp offer up some tips to get your 401k in better shape.

Allyson Southwick (16:38)

For most Americans, their number one strategy for accumulating enough money to retire is to contribute to a defined contribution plan. You know them as a 401k, a 403b, or the federal Thrift Savings Plan. Now, according to the Investment Company Institute, these accounts held a total of 12, $12.5 trillion as of the third quarter of 2024. To put that dollar amount into context, it's higher than the annual GDP of every country except China and the U.S. these accounts are so popular because they offer valuable tax advantages, but they also have some major drawbacks.

Robert Brokamp (17:17)

Yeah, so I would say, first off, the defined contribution system really requires that people become their own financial planners, their own investment experts, their own, you know, in their spare time, on top of a career and raising a family. Because each participant has to determine which account to choose. Traditional Roth how much to save, how to invest those savings, and then how much they can safely withdraw once they retire. And then there's sort of the captive nature of the system. Employees are usually stuck with the plan chosen by the employer with limited control over cost investment choices.

Allyson Southwick (17:45)

Still, while not perfect, contributing to your employer's plan year after year can provide a foundation upon which to build your retirement, especially if you follow these 11 recommendations. Yeah, that's right.

Robert Brokamp (17:56)

Right.

Allyson Southwick (17:57)

This amp of financial advice goes all the way to 11. All right, and just a programming note before we get into it, when we say the term 401k, we really mean all types of defined contribution plans. You try saying Federal Thrift Savings Plan a million times over and see how that goes for you. All right, today we're going to tackle the first five, and then we'll be back next time with another six. So first up, you'll want to save enough to get the full match.

Robert Brokamp (18:24)

Yeah, the consensus among experts these days is that workers should aim to be having a savings rate of 15% of their household income and maybe even higher if they're getting a late start on saving for retirement. Fortunately, the majority of workers don't have to come up with that all on their own because more than 90% of employers match contributions, with the most common formula being a match of 50 cents for every dollar saved up to a savings rate of 6%. So for those workers, they need to save 12%, and then the employer will kick in another 3%. Unfortunately, most people aren't saving that much. In fact, a third of employees don't even contribute enough to get the full match, according to Vanguard. So at the very least, make sure you're grabbing that free money that your employer is offering.

Allyson Southwick (19:06)

All right, the next piece of advice is to choose the right type of account.

Robert Brokamp (19:10)

Yeah, most 401 s allow for both the traditional and Roth account contributions. So your first decision is really, when do you want a tax break? If you want it today at the cost of paying taxes on withdrawals in retirement, then you go with the traditional account. But then make sure you're doing something smart with the money you saved by having a lower tax bill this year by contributing to that traditional right, you should use that money to maybe save even more for retirement or some other goal like college. Don't just squander those tax savings. Now, on the other hand, if you're willing to give up a tax break today in exchange for tax free withdrawals in retirement, perhaps because you expect to be in a higher tax bracket in retirement, then go with the Roth. And the other benefit of the Roth is that you aren't forced to take required minimum distributions at age 73 or age 75 if you were born in 1960 or later. And just know that this doesn't have to be an either or decision. You can actually contribute to both the traditional and the Roth account as long as the combined amount that you can contribute doesn't exceed the annual contribution limits. Now, there are some situations in which an employee actually has a choice of account provider. This is most common for teachers where some school districts allow for more than one 403 provider. And you have to choose the one from Fidelity, Vanguard, TIA, Voya, whoever's there. And some government employees can contribute to a 457 in addition to their 401k or 403b. So in these cases, go first with the account that offers a match and then choose the provider with the lowest cost and the best investment choices. A good resource for teachers and other employees of nonprofits is 403.org which rates the 403 and 457 plans offered by many of the school districts here in.

Allyson Southwick (20:46)

The U.S. all right, third piece of advice is to save more each year.

Robert Brokamp (20:52)

Everyone loves getting a raise, right? But a 2020 report from Morningstar found that it actually can postpone a worker's retirement. Why? Because most people use a raise to increase the cost of their lifestyle rather than sort of banking that extra money, which in turn increases how much they need to have saved by the time they can retire. Because everyone wants to maintain their lifestyle in retirement. The report found that even those workers who save a percentage of their income save 10% or so even though they're contributing more to their 401ks after a raise. It's often not enough. They need to also increase their savings rate. Morningstar suggested a few guidelines, with the most effective being a rule they dubbed spend twice your years in retirement. So, for example, if you plan to retire in 15 years, spend 30% of your raise, but then contribute the remaining 70% to your 401.

Allyson Southwick (21:44)

Fourth piece of advice is to max out the account early. Oh, wait. Or don't.

Robert Brokamp (21:49)

Yes, it might make sense. Or it might not. So let's start with the contribution limits, right? This year, 2025, the amount that you can contribute is $23,500 for those who will be 49 or younger by December 31st. That's up from $500 from last year's limit. The additional catch up contribution for those 50 and older will remain 7,500, but with a twist. This year, the additional limit for employees 60 to 63 will be $11,250, something that's sort of becoming known as the super catch up. And I'll point out that these figures are just how much you can contribute the employer matches on top of those numbers. Now, some savers try to max out their accounts as soon as possible because, as the old saying goes, it's not about timing the market, but time in the market. And in most scenarios, the sooner you invest your money, the more money you'll eventually have. So contributing the maximum to your 401k as soon as possible, rather than gradually over the course of the year should result in a bigger nest egg. However, before you pursue this strategy, it's very, very important to make sure this won't reduce the match you'll receive from your employer. The match is distributed on a per paycheck basis. And if you max out your 401 early, you may miss out on some of those matching contributions. The key here is to find out if your plan offers what's known as a true up. That's T R U E U P in which any mismatches are sort of deposited toward the end of the year. If your plan does not offer a true up, then you should avoid maxing out the account before the final paycheck of the year.

Allyson Southwick (23:22)

All right, and our fifth piece of advice is to create a mega backdoor Roth if your plan allows it. Oh, people get so excited hearing backdoor Roth, don't they?

Robert Brokamp (23:32)

They should.

Allyson Southwick (23:32)

And then you put mega in front of it.

Robert Brokamp (23:34)

Oh, it really is the most powerful way to build up even more tax free assets. So in addition to the previously mentioned contribution limits, there's another sort of all in limit in 2025 of $70,000 plus the relevant catch up limits for Those who are 50 and older or 100% of compensation, whichever is less. And this includes the employee contribution and the employer contribution, the match or profit sharing. If your office does that, if your account hasn't reached that annual limit, you can make additional so called after tax contributions, but only if your plan allows it. And now don't confuse these after tax contributions with Roth contributions which are also considered after tax, but they grow tax free. The growth attributed to these other after tax contributions is tax deferred. That is you don't pay taxes until you make withdrawals and then the withdrawals are taxed as ordinary income. Now this is where things get interesting. When you leave your employer, you can segregate these after tax contributions from the growth, transfer the after tax contributions to a Roth IRA and then the growth into a traditional ira. On top of that, some plans allow for in plan Roth conversions, or sometimes called in plan Roth transfers of these after tax contributions, which then basically allow them to grow tax free. This is the strategy that has come to be called the mega backdoor Roth. It can get complicated, so make sure you take the time to learn more about it. And it's only available to 401 s that allow for one after tax contributions and two in Plan Roth conversions, which unfortunately most plans don't. So ask your plan administrator if it's available to you.

Allyson Southwick (25:14)

Okay, so we just covered five ways you can make the most of your 401k, but because we are so rock and roll, we promised 11. So come back next time for six more ways to make the most of your 401k or 403b or thrift.

Ricky Mulvey (25:37)

As always, people on the program may have interests in the stocks they talk about. The Motley fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. All personal finance content follows Motley editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.