Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.

Scott: Welcome to Allworth's "Money Matters". I'm Scott Hanson.

Pat: I'm Pat McClain.

Scott: By the way, welcome to the program.

Pat: Thank you.

Scott: I was listening to...

Pat: You weren't welcoming me. We were welcoming the listeners. I said thank you. Thank you, Scott. I am the host. Why am I thanking him?

Scott: I was on a flight yesterday and listened to a couple podcasts. This program started as a radio. We're still broadcast in Northern California on the radio. But the podcast I was listening to, it's so informal. There's no real open, no real close.

Pat: Just someone rambling?

Scott: Yeah. As I'm listening, I'm thinking...well, not just rambling, but it's purposely under-produced. That's how a lot of podcasts are, right, particularly if it's just someone having a conversation with somebody else, interviewing somebody else.

Pat: So is ours that way? Middle of the road?

Scott: Well, I think we still, "Hey, welcome to..." Not quite as bad as we used to. When it was just radio, we did a lot of training on, like, how to have the radio voice on.

Pat: Oh, yes. Don't pop your Ps. Give them lead-in teasers.

Scott: Yeah, the Ts. And what do they call it when you carry through the break? You got to tease something...

Pat: Tease the lead or something. I don't remember. Anyway, your point.

Scott: Anyway, I don't know what my point is. My point is like... I don't know. I don't know what my point is.

Pat: All right.

Scott: Just thinking. But I do like this, our own show here, being less formal sounding and just more real life. Let's have direct conversations with people. Let's have people call with their stories.

Pat: And we do have an agenda.

Scott: Well, most people have some agenda.

Pat: We have an agenda, which is...

Scott: If no one listened, we wouldn't bother coming in the studio.

Pat: That's a good point. The agenda is to actually help people live a more peaceful financial life. That's the agenda. And, oh, by the way, if you want to become clients of ours, I would really like that as well.

Scott: Yeah, that's right.

Pat: Right? We are an investment advisory firm. We manage somewhere around $20 billion. I would like that. I think we have value there, obviously.

Scott: And frankly, I mean, I think we probably both got in the business, as young men, in large part because it was a profession that you could really make a difference in people's lives. Yeah. Individual people's lives.

Pat: Yes. Yes. I bought my first stock when I was 16, so I kind of had...I didn't understand financial planning, and I understood investing. I didn't actually understand financial planning probably until my second or third year in the business. I knew how to do a financial plan. I knew how to do it. I knew how to put the spreadsheet in. I just didn't know how to relate that spreadsheet into real life for people.

Scott: Yeah, it's funny. I remember, Pat, when I was...it was probably my first year or so in the industry, first or second, I referred to someone. He had a dental lab. They made teeth, right, if you have a crown or whatever. And I remember talking to him, and he had some debt, but he wanted to start saving for retirement because he didn't have anything saved for retirement. He didn't have a retirement plan. He was self-employed. He had a few kids at the house. But he had this credit card debt and some consumer debt. So I'm talking to him, like, "Well, you're paying 18%," or whatever the number was. And I said, "Look, I could set up a retirement plan for you, but if you run the numbers, because you're paying such a high interest rate, why would you want to put money in something that's going to earn lower than 18% when we have this guaranteed 18%?" So we put together this plan, how he's going to get his debt paid off. I met with him a year later. His debt had gone up.

Pat: And he had how much saved for retirement?

Scott: Zero. So I thought, I'm just going to set up a retirement account for him, which we did a year later. The debt hadn't changed, but now he had money saved for retirement.

Pat: He lacked the discipline or he had a debt comfort level, right?

Scott: He wasn't making a ton of money and managing his household and his kids. Like, most Americans, they were trying to...

Pat: But if it comes out of your paycheck before you get it, it works.

Scott: Yeah. So to your point, Pat, that's kind of the...

Pat: The difference.

Scott: That you only get after being in the industry for a number of years. Anyway, what are we talking about it?

Pat: I did want to talk about... We'll take some calls. Scott, there's two things I want to talk about the show. One is about inheritances and sitting down with the people that are going to inherit the money prior to death. Often called family meetings, but these are nice family meetings. These aren't where we're... When I was growing up in a family of five kids, the family meetings were almost always very, very terrifying.

Scott: Terrifying? What do you mean terrifying?

Pat: It was like...okay, it was the airing of the grievances, the family meetings when I was growing up. They happened about once every four months or when things would boil over.

Scott: Is this basically when your parents felt that the children were completely out of control and they were losing control of the household and they're trying to bring in the reins a bit?

Pat: That's right. And then two or three times a year we'd have a family meeting.

Scott: So five siblings Irish kids.

Pat: Irish Catholic.

Scott: Four boys and a girl, right? What was the age span between the oldest and youngest?

Pat: Oh, eight years. Yeah. Yeah. Feral. I grew up in a feral household. A little wild. I want to talk about family meetings. And then I'm going to talk about a new app that I've been using called Libby.

Scott: Libby?

Pat: Libby. L-I-B-B-Y. Which has nothing... Well, it has a little bit to do with finance, but I've told so many people about this great app that I want to do it on the air.

Scott: Now that's the carry T. What's the tease?

Pat: Let's take this call and then I'll do it.

Scott: I understand.

Pat: I'm not teasing it. I'm not trying to tease.

Scott: "And later in the show..."

Pat: Let's just go with the call.

Scott: All right. Let's talk with Eric. Eric, you're with Allworth's "Money Matters."

Eric: How's it going, guys?

Scott: We're doing great.

Eric: All right. So I'm kind of in an interesting situation here.

Scott: Fire away.

Eric: So I am 19 years old currently. I turned 20 in a couple of weeks and my grandfather's cousin recently passed away and I am set to inherit about $400,000 to $450,000.

Scott: Wow. Okay. Your grandpa's cousin?

Eric: Yeah. And I feel kind of really bad about it because I didn't know the guy very well. And I'm very grateful that he's left me in this situation, but never saw this coming at all. So kind of random.

Scott: How much money...how large was his estate if this is your grandpa's cousin?

Eric: I'm receiving one-eleventh of half of it. So multiply that by 22.

Scott: Yeah. Okay.

Eric: Larger than I was expecting. So.

Scott: All right. Well, it had to go somewhere.

Eric: Yeah. So.

Scott: That's right. No one takes it with you. We're all going to give our money, either when we're living or in death.

Pat: So what's your question for us?

Eric: So my question is how do I set this up for success for my future? Because I'm currently 19. I don't need the money now. And I've been working since I was 15 years old. I have about $12,000 in a brokerage account, about $7,000 in a Roth IRA and then another $5,000 just in savings.

Scott: Yeah. Beautiful. Beautiful. Beautiful. Look, if he tells us that I'm like, "He's fine."

Pat: He could not have left the money to someone more responsible than you.

Eric: I appreciate that. I appreciate that.

Pat: Just like flat out...19 years.

Scott: I was expecting, "I have nothing. I got 32,000 in student loans and I owe money on my car."

Pat: Are you going to school?

Eric: Yes. I'm currently a sophomore in college. I don't have to pay for any college money out of pocket. My parents are the ones providing for that. I've been working jobs since I was about 15 years old. So I've been working my whole life pretty much. So I'm not really planning on touching this money until like 5 to 10 years down the road. I maybe want to buy a house or something. I don't really know. But what can I do in the meantime, once I receive the money to like... How do I go about it?

Pat: What do you think you should do?

Eric: I was planning on just throwing it in the brokerage account, but I don't know if I want to diversify or just leave it at that.

Pat: Okay. Well, you could put it in the brokerage account and still get diversification inside the brokerage account. So...

Scott: Because you can own just about anything.

Pat: If you were my nephew, I would say, look, we don't know what we're going to do. What you do know you're going to do is that you're going to continue to fund your Roth IRA. You know that.

Eric: Yeah, I'm planning on maxing that out for as long as I can.

Pat: I would go 50-50.

Scott: But how much do you have saved? Because when you started saying this, I started laughing. I didn't hear the...

Pat: It was 12,000 in a brokerage, 7,000 in a Roth, correct?

Eric: Yeah. And then I just, I just maxed my Roth out for 2023 in the last couple of weeks and I've got like $5,000 left over just in savings so I can pay for groceries and stuff.

Scott: And are your parents... Now that you've got this inheritance, are they still willing to help you pay for your college?

Eric: Yes, they are. Thankfully, which is kind of shocking, honestly, but they've had a college fund for me and my sister for pretty much my whole life. Yeah.

Scott: And, did either one of...

Pat: Wait, wait, stop, stop, stop, Scott, Scott. They have a 529 plan?

Eric: Yes.

Pat: Well, why wouldn't you spend some of your own money, let that 529 plan bleed off and convert to a Roth IRA?

Scott: How much is in the 529 plan? Do you know?

Eric: Honestly, I have no idea. I can talk to them about that.

Pat: Okay, look, so this was a legislation that took place last year, where if the money isn't used in the 529 plan after I think it's 10 years or so...there's some...

Scott: It's only $35,000, but it's 35 grand that can go to a Roth.

Pat: That can convert to a Roth. So look that up. It's such an obscure...

Scott: Yeah, that's a new one. It's in the SECURE 2.0 Act or whatever it was.

Pat: It was such an obscure thing that I didn't think that I'd ever really run into anyone that this would apply to, but this would work for you.

Scott: Do you have any idea how much is in that Roth?

Eric: The Roth currently?

Scott: Yeah. I mean, not the Roth, the 529.

Pat: Yeah, he doesn't.

Eric: Oh, the 529, I honestly, I have no idea. Okay. I wish I could tell you a number, but...

Pat: All right. So you get the concept, right? Yeah. So if you said to your parents, "Hey, Mom, Dad, look, can I, you know, if the max is $35,000..."

Scott: Is it the beneficiary who can put the money in the Roth?

Pat: That's correct.

Scott: Not the one who deposited the money?

Pat: I believe it is the beneficiary, yes. It would work perfectly here. Perfect. Perfect.

Scott: Not only that, odds are you'll have children of your own someday.

Pat: You can then convert to that.

Scott: Because this...you've got money that's in a tax-deferred account. It's a unique wrapper that is already there. So instead of yanking that money out...

Pat: So Eric, you seem bright enough that you're kind of tracking on this, which is, "Hey, Mom and Dad, how about if I use $35,000 of my own money to pay for my education and then I get to convert this to a Roth based upon the rules?" You'll have to look up the rules. Yeah. Minus that, if you were my nephew, I'd go 50-50.

Scott: 50-50 what?

Pat: I would go 50% high-yield money market account and 50% fully invested in equities.

Scott: Your point is just going to take half, that's long-term money. When you're 20 years old, long-term money should be 100% in equities. That's right.

Eric: Okay.

Pat: And long-term money, we're going to call 10-plus.

Scott: I always like to bring up, and maybe it sounds boring on the program, but I got in this industry in 1990, I was 20-something, 23, or whatever. The Dow Jones Industrial Average, which is almost $40,000 today, was $2,600. That's the kind of gain over a 30-some-odd-year period of time. I don't know what the gain is going to be the next 30 years, but if the markets don't do well over the next 30 years, nothing's doing well. Yeah. So...

Pat: I would take half of it and put in a high-yield money market account so that it's completely liquid. And you don't know what's going to happen after college. I have four children. My youngest, when he graduated, had worked all the way through college, worked before college, traveled through Europe on his own dime, and then went to New Zealand and worked at a ski resort for five months, and then bought a van and drove it around New Zealand and surfed. And then when he was done with that, he shows up at home and then he's like, "Hey?" "What are you doing?" He goes, "I'm not certain." And he's like, two weeks later, I'm moving to Beaver Creek because I got a job working at a ski resort there. Who's to say whether he's not the brightest one in the row? Right?

Scott: You knew that about him when he was young, right? You could tell which ones are the ones career-motivated.

Pat: I went skiing with him a couple weeks ago, and he had skied 40 days this year, and he's supporting himself, and he's having a good time, and he'll get serious at some point in time. You don't know where you're going to land, my point. So half and half, and make it tax-efficient, and then convert the Roth every year. So you want to use a tax-efficient portfolio.

Eric: So I've got one last question to follow up on that.

Scott: Sure.

Eric: So obviously, I've never seen this amount of money before. Could you in some way put this in perspective for me for how this is going to work for my future? Because it's obviously a ton of money, but I don't plan on really doing anything with it now. But how is this really going to set me up for a ton of success in the future?

Pat: So this is why we're going 50-50 on this.

Scott: This is like... Well, this can be a good foundation for you. It's still going to be based upon your career that's going to make the difference between having financial success or not.

Pat: This is a kickstart.

Scott: Yeah. I mean, so as an example, if you said, hey, I want this to have income for me today, we'd probably say someone of your age, take like a 3% withdrawal. Well, that's...

Pat: Twelve grand a year. Don't take anything. You want to use it as a tool to further your...

Scott: Your retirement and home down payment.

Pat: And a home down payment. So the reason... Or you might take a year off after, you know, whatever. It's your life, and these are tools. So that's why we go 50-50 on this is because in the traditional financial, me sitting down and saying this could be worth X amount of money when you're 71, you're like, "Great. I've got a long time between now and 71." Right? You're going to get the highest return.

Scott: "Hey, let's save for retirement."

Pat: You're going to get the highest return on your investment in yourself. Like, flat out.

Scott: No question.

Pat: Like you're 19. You're going to graduate from college. Hopefully, you're studying something that actually will turn into a job. What are you studying?

Eric: Construction management.

Pat: Okay, so good. Because the interpretive dance companies are not hiring right now. None of the interpretive dance gender study companies are actually hiring at this point because of the student loans. So 50-50 and I would just go super tax efficient. I'd use a lot of total market and maybe some international tax efficiency in there on the 50 percent. Talk about that 529 conversion to the Roth with your parents and then continue the Roth contributions and pretend you don't have it.

Eric: Perfect.

Pat: Don't tell any of your friends either.

Eric: No, I haven't. I haven't. Don't worry.

Pat: Don't tell anyone. And whatever you do... How old is... You mentioned your sister. She's inheriting the same amount?

Eric: Yes, she's inheriting the same amount. She's two and a half years older than me.

Pat: Okay. And this technique should work similar to her. So listen to this podcast when it runs and send it over to your sister.

Scott: And did your parents get any money?

Eric: My whole family listens, so it'll be perfect.

Scott: Did your parents get any money?

Eric: What's that?

Pat: Your mom and dad get some money, too?

Eric: No, they actually didn't. So it was just all the youngest generation.

Pat: Wow. Good for him. Good for your uncle. I'm going to actually get really close with my uncle now.

Scott: He lives in a trailer by the river. But you never know. He might be one of those guys.

Pat: I'm going to call him after this show.

Scott: All right. Appreciate it. Eric, where are you going to school?

Eric: Thank you guys. What's that?

Pat: Where are you going to school?

Eric: I'm currently at Cal Poly in San Luis Obispo.

Scott: There we go.

Pat: SLO. Have fun.

Eric: Yeah, thank you.

Pat: So they have a very, very big problem at SLO in Santa Barbara. There was an article in The Wall Street Journal with people from out of town, college students from out of town coming to celebrate different holidays at San Luis Obispo and Santa Barbara.

Scott: What holidays?

Pat: Yeah, they make them up, college holidays. Right?

Eric: Oh, yeah. Yeah, you got it right.

Pat: Yeah, an excellent school for construction management, by the way.

Eric: Yeah, I'm very fortunate to be here.

Scott: By the way, my sister owns Pizza Republic in SLO. So if you're there, yeah, you can take some of your $400,000 and buy a pizza.

Eric: I might have to do that.

Scott: All right. Appreciate the call.

Eric: Thank you, guys.

Pat: Thanks, Eric. Thanks. Well, that was fun.

Scott: Well, you know, it's funny. It's just as I think we're both a little taken back that he's already this responsible. Look, the reality is most 20-year-olds don't have a dime saved. Granted, he comes from a family that's helping him through college. It's a little easier, right?

Pat: Yes.

Scott: He's not responsible. But he says he's got five grand he's going to set aside for food. So my guess is that his parents were probably like, we'll pay for some. You've got to contribute some to your livelihood.

Pat: And if he didn't go to Cal Poly San Luis Obispo, he would have gone to community college and then a state school.

Scott: It's interesting, though, when this gentleman decided to leave this generation 20-year-olds, it's quite a lot of money just to leave to a 20-year-old.

Pat: Oh, yes.

Scott: If I was that person's adviser, I would have said, why don't we have some restrictions on these dollars?

Pat: That's right.

Scott: Have an independent trustee make these decisions prior to them receiving these dollars.

Pat: That is correct. That's a risk. And maybe he did.

Scott: My 28-year-old daughter, I wouldn't...

Pat: Scott, maybe he did. Maybe he did. Because you can write your trust in such a manner, rest of the listeners, Scott knows this, you can write your trust in such a manner that some of the money is gifted directly and some of it actually is managed by a trustee. And maybe uncle knew enough about the kid in the family that said, "Yeah, these kids will be fine. But, you know..."

Scott: "This other one..."

Pat: "...Margaret over here who's 23..."

Scott: No 23 year olds named Margaret.

Pat: Okay. Renee.

Scott: Is Renee a popular name again?

Pat: Yes. I went to a wedding last weekend. The 28-year-old was named with Renee. We're going to with Renee.

Scott: Okay, we'll go with that.

Pat: Renee...now I feel bad because I'm thinking about this young lady who was quite responsible...needs a trustee. Someone needs to control the flow of money. If you're...back to what I want to talk about now, which is family meetings, you want to know who's inheriting your money and what the expectations are that you have for them and how it's going to go to them. Right? So I've had these meetings with my children to say, "Okay, this is what mom and dad. This is how it gets paid out. When we die, it goes to a trustee."

Scott: do they know the amounts?

Pat: They do now? We've had conversations.

Scott: You're relatively young to have those conversations as a family.

Pat: I'm 61. Yes. Correct. But I had...

Scott: I mean, the odds are one of you or both...

Pat: Odds are one of us going to live to our 80s, right?

Scott: At least. Yes. Statistically speaking.

Pat: But you don't know.

Scott: Of course. Of course.

Pat: And the idea behind a family meeting is kind of get things out in the open and let people know. Some people...I had a friend who kept telling me, man, when my in-laws die, we're going to come into it.

Scott: Friend?

Pat: An acquaintance. "When my in-laws die, we're going to come into it."

Scott: Come into it?

Pat: Money. He expected that they were going to inherit all kinds of money because these people lived a big lifestyle.

Scott: And?

Pat: Nothing. Big hat, no cattle. Zero. Zero. Other times, there's people that don't appear to have anything and that work. The point being is the family meetings lay out not only financial assets but homes, right, jewelry, keepsakes.

Scott: So I'm just getting this straight. Did you go with your family, with your kids, and go through all that stuff?

Pat: We did. So we have a house up in...a cabin up in Lake Tahoe. The kids said, "Well, who gets that?" And I walked them through what would happen if Kathy and I were to die. What would happen with that house? I said, what would happen is if one of you wanted that house, it is not left to all of you. And they're like, "Why wouldn't you just leave it to all of us?" And I said, well, because what happens is let's say one of you ends up living in Boston and this is on the West Coast and one lives in Sacramento, that's two hours away, and you had to hold it in the trust, then I would have unintentionally created disharmony or conflict in the family where I didn't want any to exist. So the home in Tahoe, I don't care how you feel about it. It is an asset like any other asset. And you could purchase your...you could purchase it from the estate if you want it. But it's not being left wholesale to the family. Right? And, you know, this is just the experience of being an advisor. I saw family leave a house on Martha's Vineyard to three children and one never gets any use out of it. A Martha's Vineyard home. Millions and millions of dollars.

Scott: I saw one. I talked to somebody, it was a nice vacation property. I think she was one of five owners. Grandpa and grandma had left it in some sort of trust for the family. And one of the five had to sell. So they came to her and said, "Hey, we're gonna buy that person out. If you wanna continue to own, we have a capital call. You need to come up with X dollars." She had very modest means, she couldn't come up with the money. She was forced to sell her portion.

Pat: And this is not what grandpa and grandma...

Scott: And she was in tears. It was not healthy for the family. We'll talk about all kinds of estate plans at this point.

Pat: The idea behind the family meeting is just to start the conversation. And where it really comes into is when it gets down to jewelry and keepsakes.

Scott: Well, it'd be easy in my family. Anyway, there we go. Well, yeah, we're going to get the calls here again in just a second. But look, unless you feel completely confident that all of your heirs are in a point in their life where they can make wise choices with their finances, you're going to want to have a trust set up with some restrictions on it, particularly if you have minor kids.

Pat: In a trustee. So $84 trillion is expected to be transferred in estates by the year 2045. $84 trillion will move from one generation to the next...

Scott: In the next 20 years.

Pat: ...in the next 20 years.

Scott: It's going to be concentrated the same way wealth concentrated.

Pat: That's right. But there is a lot of people that listen to this show that have networks of $4, $5, $8, $10, $25, $30 million, especially important for those people.

Scott: I would say it's important for anybody.

Pat: Especially. I didn't say it wasn't important. I said, especially important.

Scott: Yeah, that proper... I mean, I think about my own. I have four children. My older two in their late and mid-20s. My trust is set up. So I think it's age 35 they have full control over. My younger two that we adopted, the trust right now is...if something happens, there would be a trustee in perpetuity for them.

Pat: Oh, because you don't know.

Scott: Now they're getting... one is 16 and it's getting closer to...she's got a good head on her shoulders and all that.

Pat: And the trustee actuallyhas the ability to turn the dollars over to the child at some point in time.

Scott: That's correct. It's that protection because, look, when we adopted them I'm like, "What happens if one of them has a drug problem at the time that my wife and I are killed in a car accident?"

Pat: You don't know.

Scott: I doesn't have to be a lot of money...

Pat: To ruin it.

Scott: Correct.

Pat: Money has a tendency to make people more of what they already are.

Scott: Amplifier. Age does the same thing.

Pat: Oh, is that why I'm so bitter? When I was younger, I was just a little bit bitter.

Scott: Maybe a little bit better. Let's continue on with calls. We are in Wisconsin talking with Jesse. Jesse, you're with Allworth's "Money Matters."

Jesse: Hi. Good morning, guys.

Scott: Hi, Jesse. By the way, real quick, if you want to join us, you can join us at 833-99-WORTH. 833-99-WORTH. Sorry about that. Go ahead, Jesse.

Jesse: Well, that's quite right. The reason I'm calling is I am 36 years old and married and have a five-year-old daughter. We are trying to do what we can to provide for our daughter in terms of her future should something happen to one of us or both of us. Me, personally, I have...yesterday marks four years since my heart transplant. Yeah. So we're trying to stay ahead of the game in terms of something were to happen to one of us in particular, me, making sure that there's something here for our daughter. And we do have retirements and a Roth set aside, 401(k) and Roth. However, with our age, we're trying to think what we can do to comfortably provide for her should something happen to me, my wife having a job already.

Scott: Yeah. I mean, it's... I mean, the challenge is you...I would presume, you're uninsurable, or if someone would want to ensure you the premiums would be so astronomical you could never think about being able to afford to pay.

Jesse: Yes.

Pat: How much money do you make?

Jesse: Annually we make $225,000.

Scott: Just to be real frank here, like what's your expected mortality atmid-30s with a heart transplant?

Jesse: I realistically look at near retirement. I'm going for an age 55 with a life expectancy of 65.

Scott: Okay. And that's in 2024 medical, who knows what is going to be in the future?

Jesse: Absolutely.

Pat: And out of this 225, how much is you and how much is your spouse?

Jesse: I'm at $50,000. My wife would be the additional one

Pat: $175,000. And how much insurance does your wife have on herself?

Jesse: $1 million policy.

Pat: Okay. She needs a lot more. She needs about $3 million in term life insurance policy.

Jesse: Okay. That's good to know.

Scott: Yes. So let's assume she had $3 million. Let's just throw this out here, she had $3 million in life insurance and she passes away for whatever reason. You have $3 million dollars show up in your account, take a 4% withdrawal. Your young, this needs to last a long time. That's $120,000 a year of income. And then you have Social Security would be kicking in as well for it because you've got a child.

Pat: Are you putting money into her 401(k), 403(b) tax deferred account?

Jesse: Yes, we are.

Pat: And are you putting the maximum?

Jesse: Yes, we are.

Pat: And are you putting money in yours?

Jesse: Yes, I try to. Mine pretty much gets maxed out as well as my wife's every year.

Pat: Okay. And the Roths, correct?

Jesse: That's correct.

Pat: Are you funding a 529 plan for the daughter?

Jesse: We do not have anything set up.

Pat: Okay. You want to start funding the 529 plan for the daughter. And what do you owe on your home?

Jesse: $110,000.

Scott: And what's the value of the house?

Jesse: $600,000.

Pat: So you listen, you guys are in good shape.

Scott: I mean, you really are. Now, if you had told me you were making $175,000 and she was making...that would have been a little more concerning. Then it's like something happens to Jesse and family finances are going to be a bit of a... So one thing, do you have like an accidental death policy?

Jesse: Yes, I do.

Pat: Okay. And I assume you're buying as much life insurance as your employer will offer you.

Jesse: Yeah, through my through my wife. Yes, through her policy.

Scott: A guaranteed.

Jesse: It's a one-time, yeah.

Pat: Yeah. Okay. So for both of you. Look, you're doing well. You want to fund this 529 plan heavily. I mean, heavily. I would be putting 15 grand a year.

Scott: Why?

Pat: What do you mean why? They have excess cash flow. Their mortgage is nothing. Their mortgage payment is nothing. They make $225,000 a year. Look at what they're putting in their 401(k)s and the Roths. They have enough money to do it. Why wouldn't you front-load this?

Scott: Well, you put 15 grand a year... I mean, I'd run the numbers. Fifteen grand a year in over the next five years.

Pat: I'm not saying 13 years, I'd front-load it.

Scott: Got it.

Pat: Right. Because what he said is he's worried about his... You wouldn't be making this call if you did not have a heart transplant four years ago.

Jesse: That's correct. You're absolutely right.

Pat: So I'd front load it. Got it.

Scott: Got it. I'm 100% with you.

Pat: So I'd be putting in $15,000 to $20,000 a year into the 529 plan. I'd use the age-weighted plan for your daughter. And then just live life. Spend as much time with them as you possibly can.

Scott: You're in good financial safety. The only thing is if your wife had some more term life. Just buy more term life insurance. I would look at like a 20-year level policy.

Jesse: Okay, sure. That's something I would look into.

Scott: Yeah. And then within and then within 20 years, you probably have enough money saved up.

Pat: Is $3 million enough? How much does she have through her employer? Probably $0.5 million through her employer.

Scott: That's it. I would think it'd be enough. And there's Social Security coming. And the house is almost paid off. But a 20-year level term policy that gets you to your age 55, which presumably you guys are in a position at that point financially to be fully retired. And so you wouldn't you wouldn't need the life insurance. The life insurance is to replace her paycheck.

Pat: So you want term, 20-year level term.

Jesse: Twenty-year term. Okay.

Pat: And what's the interest rate on your home? I assume it's in the threes.

Jesse: 3.25%.

Pat: Okay. Yeah, don't prepay a dime on that thing.

Jesse: Okay. Let it ride and pay as needed.

Pat: As little as possible. If you could pay less than as little as possible, you should.

Jesse: Okay.

Scott: And was this... Can I ask you a little question? Because it's not every day I talk to someone who's had a heart transplant, particularly as a young man. Was this life-changing when you got the new heart?

Jesse: It was not financially.

Scott: No, I didn't mean that. I mean, most of your life, did you have issues?

Jesse: Oh, yeah. I mean, at 15, I was aware that there would be problems down the road. But these problems came a couple of decades earlier than I would hope to have dealt with. But we dealt with them and...

Pat: Did it impede your standard of living?

Jesse: No, I don't let that happen to me.

Pat: And it didn't before the transplant.

Jesse: No, it did not.

Scott: Well, God bless you. Good for you.

Jesse: I appreciate that.

Scott: What a blessing to be able to... I mean, there are times I feel so fortunate to be alive in this era and in this country.

Jesse: Absolutely.

Pat: So I had a daughter that died at 18 months from a congenital heart defect and complications to surgery. And in talking, which is, you know, you wouldn't wish that on anyone. And how long ago was that? Probably 28 years ago. But when talking to the doctor...she lived 18 months. And talking to the doctor, he said, you know, "If this was 10 years before," he said, "she would have never, ever survived. Not a day." He'd be like, "It'd be done." And so when Scott just said, like, you think your life expectancy is 20 years, you got a plan like it's normal.

Scott: Yeah, that's right. Obviously.

Jesse: Absolutely.

Pat: Or longer.

Jesse: So much can happen to longevity.

Scott: That's right.

Jesse: Medical advancements I've always relied on in terms of confidence, and I don't see it going downhill with advancements.

Pat: Oh, yeah. I mean, it's it's like...what a great time to be alive for for many, many reasons. I mean, especially, you know, medical advancements. So anyway...

Scott: I wish you well, Jesse.

Pat: I appreciate the call.

Jesse: Well, thank you guys. And I appreciate all the advice.

Scott: Yeah. Yeah, it's pretty...I mean, I think about my own life, my own family, just some various surgeries we've had over the years. I had a pretty significant ankle break and some screws and stuff. And I asked the doctor when I said, what would happen if I was in a third-world country? Oh, you know, we walk with a cane the rest of yourlifeand pretty significant.

Pat: Do you have to go through the security?

Scott: I had the screws taken out.

Pat: Oh, you did. I was traveling with a guy from work and he could never go through the metal detector.

Scott: Yeah. Odds are, as I get older, I will have some sort of medical medicine...

Pat: Metal pieces holding you together, staples, a Lego arm.

Scott: I remember, Pat, this was years ago. We're going to continue on just a second here. But I was...actually, we are continuing. I was talking to a client that he was retired. His employer offered him retirement medical. He was not 65 yet. Right. Retirement medical and his premium went up. It was negligible, went up a little bit. And he's sitting there. He starts off by complaining for several minutes about he feels like he's getting ripped off...

Pat: Went up by 100 bucks a month or...

Scott: less than that. And then I'm talking to him and he says, "Oh, I had a knee replacement six months ago. It's amazing. I'm back golfing." And there was a complete disconnect between...

Pat: Like between the two things.

Scott: Complete disconnect.

Pat: Like the cause and effect didn't even exist.

Scott: I mean, we don't want to get a big topic about medical expenses, but part of the reasons medical expenses have gone up is because we're doing so much more, like, giving a guy, a 31-year-old a heart transplant.

Pat: Yeah, it's shared risk.

Scott: Yeah. All right. We're going to.

Pat: And by the way, if you want to email us regarding what we just said about medical expenses and insurance premiums, save time, we're not going to read them.

Scott: And I had asked one of our advisors to join us on the program because we had...a few months, I mean, several weeks back, we had an annual advisor get-together. There was a couple hundred people or so all at a hotel for a couple of days and shared stories. There was a story that talked about our advisor, Andy Shafer, and how he worked with a client during COVID. And it was my favorite story I heard over that time because I think it really showed the greatest value an advisor can bring to a client. So, Andy, thanks for taking some time to join us.

Andy: Yeah. Hey, Scott, how's it going?

Scott: Good. This is Andy Shafer. First of all, how long have you been a financial advisor?

Andy: I started out of college in '99 and I've been with Allworth Financial for about 10 years now.

Scott: All right.

Pat:And Andy works in our Cincinnati office.

Scott: Yeah, so give us give us the story of this experience.

Andy: Well, if you remember back in 2020 when the pandemic was just coming upon us and it was such a weird time. And we all remember kind of what we were doing, where we were.

Scott: Of course.

Andy: It was wild. And I remember talking with Amy Wagner, who's another advisor in our office. And, you know, I thought the pandemic was going to blow over. You know, I thought, you know, this is this is going to be short-lived. We were all sent home. We'll probably be back in the office in a couple of months. And then, you know, towards the end of February, you know, people started to realize that this is going to be around for a while. The markets fell off a cliff.

Scott: Yeah, I think what down 30-some percent, 32% or something there.

Andy: It was wild. And I'm sure you guys remember and clients were panicking. And it was a time of uncertainty. We didn't know what was going to happen as far as the world was concerned, let alone the markets.

Scott: Well, if you remember, Andy, at the time, from an organizational standpoint, I remember stating, sorry, but we can't take on any new clients right now. We're going to be 100% focused on making sure none of our clients throw in the towel on their financial plan, don't give up on their investment program.

Pat: We're not going to let the noise in the emotional environment derail someone's long-term future.

Scott: Yeah. So continue.

Andy: Yeah. And I remember Andy Stout, who is our chief investment officer, you know, he was saying to the advisors, listen, this is an event-driven recession. It's not cyclical. It's not structural. Historically speaking, when we have an event-driven recession, the market comes back fairly quickly. You just have to be patient. So, you know, I was on the phone every day with all of my clients. And I had about 250 households at the time. And I had two clients, you know, after the market kept falling and kept falling. And my job was really to reduce the stress of these clients and just encourage them to hang in there knowing that the market would come back as long as you were patient, had some poise, and didn't overreact.

And so, you know, I had 2 separate clients of the 250 households that just had enough. And they said, "Andy, we just can't take it anymore. We know what you've been telling us. We know your advice." And they got out. And, you know, I was regretful of that, but I didn't let that decision continue. So my focus was calling them every single day thereafter to have a conversation, not necessarily to talk them into getting back in the market, but just to encourage them about the resiliency of the markets. And within days, I think one of the clients got back in within two days and another one of the clients got back in within five. And they were grateful because the market did recover. You know, but they did miss some of those up days and that hurt their returns for the year by jumping out like they did.

Pat: So did they get out, just out of curiosity, before bottom, after bottom?

Andy: Right at the bottom.

Pat: They got out right at the bottom,

Scott: Which is pretty typical, right? That pain just gets in...

Andy: Well, and they were with me for a while, right? You know, so I encouraged them. I said, "Hey, just hang in there, hang in there." And they did. They trusted what I had to say. And, you know, just from a stress standpoint, they couldn't. So they rode it all the way down, got out. And if you remember, we had a couple of days there that were, you know, 1000, 2000 points days on the Dow. And, you know, they missed a few of those.

Scott: Well, Andy, I mean, here's why I think it's so important. People think, "Someone misses a little bit of the stock market, like, so what if they got out?" I'll never forget. Every time I heard this story, I have a client's picture in my mind. During the financial crisis, this person would call about every three weeks, wanted to get out. I'd hold their hand, get through it. One day he calls, made sure he didn't speak with me, spoke to somebody else and just said, get me out of the market. It was like three days before the bottom of the market. Right? And that was when the market was down greater than 50%. And he wasn't all in stocks by any means. He had a diversified portfolio.

Pat: So his portfolio wasn't down 50%?

Scott: His plan was designed to withstand...to go through stuff like this.

Pat: We had stuff in fixed income that...

Scott: Yeah. But anyway, he had gotten out of the market and it changed his life because he never fully got back in. There was an age gap between he and his spouse. And they ended up having to do a reverse mortgage later because their asset base was not back to the point where it was to provide the income that they needed for retirement. It wasn't just like a number on a page.

Pat: But it is hard, Scott, not to react emotionally to a marketplace. And that's what a good advisor like Andy does is help people get through their logic in the face of uncertainty.

Scott: Andy, we are grateful for you. And I know your clients are as well.

Andy: Thank you, guys. Good talking to you.

Scott: Yeah. Good talking to you. And obviously, I just loved hearing that story. Let's go to talk with Lawrence. Lawrence, you're with Allworth's "Money Matters."

Lawrence: Hi there. Thanks for taking the call. Yeah. So I have... I'm not sure how to frame my question. I would describe it as sort of a macro question about the values of the stock market.

Pat: Okay.

Lawrence: So I guess I started paying attention to stuff in the 1990s. And well, lots happened since then. But if you look at the P to E ratios for the market over the past 100-plus years, throughout the 1900s, like the P to E ratio for the S&P 500.

Scott: 16, 17.

Lawrence: Right. I mean, when it would get up into the 20s, people would say, you know, it's getting kind of high. And that would often be the beginning of a peak, of getting close to a peak. And then starting in the '90s and the dot com era, it sort of has...

Scott: Some companies had no Es, so they went price to sales and stuff like that.

Lawrence: Yeah. So the S&P 500 P to E ratios have changed, whereas now a number that...when you see it going down toward the 20s or certainly upper teens, we seem to see it getting near the bottom of the market. And that's about where it goes back up. So I guess I can't quite wrap my head around that.

Scott: And in the '70s, it was what, seven or eight, the P to E ratio got really low.

Lawrence: Right. Throughout the whole 1900s, a P to E ratio of the 20s was considered very high.

Scott: Yes. But that's been the norm the last 30 years. 20. Yeah.

Lawrence: Exactly.

Scott: It got a high of like almost 30 in 2000.

Pat: Yeah. Right before the blow-up.

Scott: What's your question?

Lawrence: Yeah. So well, my question is, you know, just looking at that, it sort of seems like what I would call long-term irrational exuberance. Like, we're all sort of now very comfortable with high P to Es. And are we unwise to do that?

Scott: Well, then with that, let's assume that.

Pat: Can we step back for a second? Can you describe to the rest of the listeners what we're talking about, Scott, and the price-to-earnings ratio?

Scott: How much earnings a company has relative to its price. And the higher the price to earnings, the more an investor is willing to pay for each dollar of earnings.

Pat: So if a company is priced at $20 a share and it earns a $1 per share, it has a price-to-earnings ratio of 20. So the ratio is 20 to 1. If the same company keeps the same earnings of a dollar, but the stock price goes to $30 a share, it is now 30 to one. And it's implied that there's more risk the higher the price-to-earnings ratio is.

Scott: But what's interesting... Us financial guys, good financial guys, talk about how hard it is to predict where the markets are going to go in any particular short period of time, particularly because, one, we don't know where the economy is going to be and earnings, but we don't know what investors' sentiment is going to be. And that's one of the big wild cards, right? So like when you retire, are the price-to-earnings ratio going to be 22? Are they going to be 16? Are they going to be 12? Are they going to be 30? We don't know. But let's assume that we have a regression to the mean and that this has been an anomaly the last 25, 30 years where the price-to-earnings ratios have been, and it's going to revert back to where it's been historically 16 or whatever. One, if you run the numbers, you would still be better off with equities over a long period of time.

Lawrence: So it doesn't trouble you, basically, end of the story.

Pat: No. And one of the things is investors' sentiment...

Scott: I have no control over it.

Pat: But investors' sentiment moves around based upon what are the alternatives to the stock. The stock market isn't the only place to invest money, right?

Scott: Yeah, well, we saw what happened in '22 when the feds jacked up rates so many times, right? And then we've seen what's happened with the market when the feds said, "I think we're done." I mean, if you go back to the '70s, that's when they kept going higher and higher. Short-term rates were almost 20%.

Pat: So the alternative.

Scott: Correct. Why should I own stocks when I can get 20% in the money market?

Pat: Right. And which, by the way, made it harder for companies to earn money because the cost of borrowing, which they use, companies use money to borrow...

Scott: And raising capital.

Pat: ...was much more difficult. So your question is, are we troubled by the price-earnings ratio?

Lawrence: Yes.

Pat: I'm no more troubled by the price-to-earnings ratio than I am weather. It is what it is.

Scott: Yeah, that's yeah.

Lawrence: Well, the weather doesn't affect your finances or at least not much.

Pat: I understand, but I'm not in the market...I'm not going to predict the weather next year, nor am I going to predict the market next year. Or even six months from now.

Lawrence: Even if it reverts back to where it used to be, where it rarely gets above 20, you would still say the numbers are in favor of equities?

Pat: For long-term investors.

Scott: Yeah, for long term, not someone who needs money in a couple of years.

Lawrence: No. Okay. Well, that's why... Because, you know, looking at the charts, it just looks like, wow, we're just living in a strange era. What if we go back to the norm? Seems like, you know, the value of things could take a cut by 50%.

Scott: Oh, yeah, or it could be...it could happen over a long period of time and you still end up with outsized returns, even if price-to-earnings ratios went to 12.

Pat: But let's throw out the top 20% highs and lows and tell us where we're at.

Lawrence: In terms of PEs

Scott: Yes. I mean, there'sactually lots of reasons why the P.E. ratios are higher and why they may...I mean, one is just the democratization of investing.

Pat: There's no question.

Scott: I mean, how many people own stocks 50, 75 years ago? Not very many. Right. I mean, in other words, we have no problems with this.

Pat: Yes.

Lawrence: All right.

Scott: I wish I could predict where they're going to be. I have no idea. But yeah. And I'm with you. But that's one of the great variables that we have when we invest in equities or really, for that matter, lots of other investments. We don't know what investors are willing to pay for those in the future, whether we buy a house...well, it doesn't matter.

Pat: Real estate or...

Scott: We don't know what people are willing to pay.

Lawrence: No, yeah.

Scott: All right. We have to make some assumptions.

Pat: What we do know is that this market is pretty liquid, which actually causes it to react much faster than illiquid markets because it's easy to buy and sell. It is not so easy to buy commercial real estate. No one really knows the... Like, you read all these articles about commercial real estate. And I think no one really knows. No, you can't even speculate to guess other than those that are fully leased. And even those that are fully leased, you don't even know because you don't know what the competitive pressures are on the other side.

Scott: That's right.

Pat: And so you're like, it is what it is. But I never bought a building to own it for 3 years, I bought it to own it for 10 years or 15 years or 20 years. Right? And you should think the same thing about your equities in your portfolio.

Lawrence: All right. Well, I appreciate appreciate you taking the call.

Scott: Yeah. Thanks for calling, Lawrence. Appreciate it. It's a good question. We don't... I'm trying to think last time we had that question. Years. Many years since we've had that question.

Pat: Yeah, I was trying to think, did we get that a lot?

Scott: It's not really esoteric, it's just a little more in the weeds than a lot of people get.

Pat: Yeah. Did we get that question a lot prior to the dot com? Do you remember?

Scott: Well, I do remember a time when we're thinking, "It's getting crazy at these valuations. It's getting crazy. Like, make sure you diversify here."

Pat: Pets.com when they went into bankruptcy, the number one thing, out of the bankruptcy, they sold for the most amount of money was that puppet dog.

Scott: What happened to the puppet?

Pat: I don't know where the puppet dog is today.

Scott: Okay, hey, we're going to wrap up here shortly, but I want to let everyone know we've got a Social Security planning webinar coming up. It's a complete Social Security planning webinar. It's really our most popular event. And during this, we'll cover some filing strategies to help you figure out how to maximize your benefit, how and when to apply, how the program's taxed, why preparing for some, maybe, potential legislation changes might be important, and even some more by a post-Q&A event session. So these are...I think people really enjoy them because it's our most popular event. Wednesday, April 24th and Thursday, April 25th at noon Pacific time. Wednesday, April 24th and Thursday, April 25th at noon Pacific time. And Saturday, April 27th at 10:00 a.m. Pacific time. And you can sign up and get all more information at allworthfinancial.com. Again, allworthfinancial.com. And if you haven't been on our website in a while, I encourage you to do that. There's some great information there. We'll see you next week. This has been Scott Hanson and Pat McClain, Allworth's "Money Matters."

Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.