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. Scott Hanson.

Pat: Pat McClain, thanks for joining us.

Scott: Yeah, glad you're with us. We're talking about financial matters, both myself and my co-host here. We're both financial advisors and broadcast our program, release it on the weekends to be your financial advisors on the air or podcast or whatever you call it these days.

Pat: Or just a second opinion or third opinion or fourth opinion, whatever, an opinion. Let's go with that.

Scott: We have plenty of opinions.

Pat: I certainly do.

Scott: Yeah.

Pat: And sometimes I moderate them, wondering if...

Scott: Sometimes? Don't you tip them all the time? At least you speak in your opinion.

Pat: Yes, but then I always want to test the other side of the opinion.

Scott: What do you mean?

Pat: Like if I say something and like am I missing something? Like I was telling my son, he wants to go into business himself and he's looking at these small businesses. And I said to him, "Don't ask yourself why you want to buy it. Ask yourself why they're selling it."

Scott: Always looking at buying some business?

Pat: Yeah, small business. "Don't ask why you're buying it. Ask why they're selling it." Like what's going on there that I'm not seeing?

Scott: Well, Pat, it's the same whether it's a small business or a stock.

Pat: That's right.

Scott: You buy a share of Tesla. Well, Tesla is down right. Maybe it's a good time to be investing in Tesla. So you think, all right, I'm going to buy Tesla. Well, when you take your capital, your savings and buy that company, which is what you're doing, someone else on the other side is thinking, "I want to sell."

Pat: That's right.

Scott: Always. Every transaction.

Pat: Every transaction. Every transaction. So when I say I have an opinion, you want to test both sides of your opinion against all the known information that you can actually. Well, it's hard to actually get real information today. So much information is available. And where it used to be when we started this show 30 years ago, there wasn't that much information available.

Scott: No, actually before the... So Barron's would come out with the Barron's magazine. it'd be delivered to the bookstore by Saturday afternoon. And we used to broadcast Sunday mornings. And one of us would drive to the bookstore.

Pat: Correct.

Scott: Now we're aging ourselves to get Barron's magazine because there was no online Barron's or no online anything. I remember used to calling a phone number to get stock quotes.

Pat: That's correct. Right?

Scott: And Morningstar, the big research company, would publish these.

Pat: And then we had and then with some points of time as it became affordable, we'd have the machines in the office. But the in-depth analysis, it was just numbers. I wonder, I wonder, Scott, is there's so much information, it actually is making it harder to make decisions. I don't know. I don't know. And AI, oh, AI. Oh, I've got a great story. Great, great story about AI.

Scott: All right. Mary's been on hold for a bit. Let's take Mary and then we'll get.

Pat: I'll just real quick, real quick. So I was with some friends of mine.

Scott: You're sharing the whole story?

Pat: No, it was a quick story. Their son, senior in college, had been contracting someone overseas to write his papers for this class that he wasn't very good at. So he had a contract. Wait. And then all of a sudden when AI, ChatGPT, the kid overseas started using ChatGPT to write the papers. So he's contracting with this brilliant son overseas to write his term papers for him. And then the kid starts overseas, adult, I don't know what it was, started what he or she was, started using ChatGPT. Boom, out of the class.

Scott: So here's how I look at it. Is that a good thing or a bad thing? As an employer, would you want the kid who is resourceful enough to figure out how to have an awesome product? I understand...

Pat: Yes, the point of education. I don't know how I feel about it. But anyway, I just thought that chat, when people talk about ChatGPT and the kid was mad that the person he was contracting with to write his papers.

Scott: You're like, wait a minute, you're cheating. You're violating the rules here.

Pat: And the kid was there telling me this story. And he was like, "I can't believe this guy did this to me." And I said, "Do you see the irony? You see what's going on here?" Anyway, his name will go unmentioned, but let's go to Mary because she has...833-99-WORTH, if you'd like to join the show.

Scott: Yeah, and love to take your calls. Mary, you're with Allworth's Money Matters.

Mary: Good morning, gentlemen. How are you today?

Scott: We are fantastic.

Mary: Fantastic. Good. Good. So where to start? Should I just kind of mention my question, my portfolio?

Scott: Hopefully it's something around finances.

Mary: It is around finances. So I called the right show.

Pat: So any information you want to share with us and then we'll follow up with our own questions.

Mary: Okay, I am 51 years old. I am an energy efficient sales for the home. I make between $150,000 and $170,000 a year.

Pat: Okay.

Mary: I am single. I have a home that is worth around 620,000. I owe 125 on it.

Scott: Awesome.

Pat: Low interest rate?

Mary: Yes, 2.25.

Pat: Wow. Okay.

Mary: I have a condo that is worth 365,000. I owe 125,000 on that, but it has very high management and HOA fees of around $600 a month.

Scott: Okay, do you rent that out or is that a vacation?

Mary: I do rent that out. It's in a senior community.

Pat: And give me those numbers again. What's the condo worth?

Mary: One sorry, 365. And I owe about 125 on that also.

Pat: And low interest rate as well.

Mary: Yes.

Scott: And is it an old building? Is that why the HOA is so high?

Mary: No, it's in a golf course community like the Sun City. And it's a condo. So I have the condo fees and then the facility fees also. So I don't generate a lot of income on that, around $600. But, but it is positive.

Pat: But they take care of the outside of the house, the envelope?

Mary: Yes, correct.

Pat: Okay.

Mary: So that's nice.

Pat: Yes, that's actually really good.

Mary: I have about 170,000 in a BlackRock account.

Scott: What does that mean?

Mary: Well, BlackRock, sorry, BlackRock's managing that 170,000.

Pat: Okay.

Mary: What else? I have an index annuity with 150,000 in that.

Scott: Where, did you buy that at a bank?

Mary: No, I bought it through a company called Bankers Life.

Pat: Okay.

Mary: I have about 100,000 in my work 401(k).

Pat: Okay.

Mary: And then I have 180,000 in a high yield savings account.

Pat: Okay.

Mary: So my question is, because my management fees are fairly high, I was thinking about selling that particular condo and then using the cash from that and then the cash from my high-yield savings and buying another rental without high HOA fees for income and doing like a 1031 exchange on the on the small.

Scott: That's not a bad idea. I mean, the condo is what from what it sounds like, a nice condo to live in or if it was a vacation condo of some sort and you didn't weren't trying to make any money on it, I should say. But from a from a just an investment standpoint of a rental, it's not the ideal kind of rental.

Pat: What's it rent for a month?

Mary: Twenty-two hundred.

Pat: And is that market or below market?

Mary: That's market. It's just a one bedroom, one and a half bedroom.

Pat: Do you ever plan on living there?

Mary: No, it's too small for me. I thought about it, but it's it's pretty tiny.

Pat: So why did you purchase it?

Mary: I inherited it.

Pat: Well, when did you inherit it?

Mary: Two years ago.

Pat: And what was the value when you inherited?

Mary: Maybe 350.

Scott: Oh, then you wouldn't need to do a 103...

Pat: I wouldn't bother.

Scott: ...exchange on it.

Pat: I wouldn't bother. You just sell it.

Mary: Okay.

Scott: Yeah, because your cost basis, assuming you inherited this, was this in a trust ahead of time, an irrevocable trust? Or is this just come from a, you know, it was from a living trust?

Mary: It was a irrevocable trust.

Pat: How long was it in the irrevocable trust?

Mary: So I don't know, probably only about two years.

Pat: Okay, so what you need to find out.

Scott: So did one parent pass away and then it get put into an irrevocable trust and then your second parent passed away?

Mary: Yes, that's correct.

Pat: And so it received a step up in basis at the first death.

Scott: But not this.

Pat: We don't know. Yeah, that's the question we want to ask is what is your basis on that? If your basis is high, I wouldn't mess around with an exchange.

Mary: Okay,

Scott: No.

Pat: At all.

Mary: Okay.

Pat: So are you putting the maximum into your work 401(k)?

Mary: Well, I'm only, I can put up to 15,000 because I do have the catch up, the 5,000. But I'm considered highly compensated at my work. So it's limited as to how much I can put in my 401(k).

Scott: Okay. Well, put in as much as they allow, as much as you can.

Mary: Yeah, about 15,000 a year.

Pat: Is the index annuity in an IRA or outside of an IRA?

Mary: Outside.

Pat: And how long have you owned it?

Scott: Two years.

Mary: Only like two years.

Scott: So my guess was you inherited some money along with the condo and someone sold you an annuity.

Mary: No, actually, that was my old 401(k) from a previous employer I put into this annuity.

Pat: So it's in an IRA. The index annuity is in an IRA because if it came from your old 401(k), you would have put it in IRA and that IRA, then you purchase that indexed annuity.

Mary: Okay, sorry about that.

Scott: Don't apologize.

Pat: That, you have no need for an indexed annuity.

Scott: But the surrender charges are probably 10 years.

Pat: Yes. Yes.

Scott: You know how long the surrender charges are?

Mary: Ten years.

Scott: Yes. Ten years.

Pat: So what's your question for us? That house. So you don't need to do an exchange. Just you can sell that house. My guess is your basis isn't that low. And you need to check is was it an irrevocable trust, when was it put in, and what was the approximate value in the day it was put in? Unless they had a lot of money or your parents' trust was really old, I doubt it went into the irrevocable side of it.

Mary: Okay, I'll check into that.

Pat: I doubt that. Yeah.

Mary: My question is kind of more like since I don't need the monthly income right now, should I possibly sell the condo and then take that other 180,000 that I have in a high yield savings and put it into the market for 10 years and at that point buy another rental so that that can supplement my income?

Pat: Well, there's a lot of different ways you could supplement your income or portfolio supplements your income. So the question is, what asset do you buy? The question you're asking is, do I buy real estate so that I can provide an income in retirement? When you say 10 years, you'll be 61 years of age. So I'm thinking you're looking for income in retirement. Do I buy real estate to do that or do I actually put it in a well-diversified portfolio, stocks, bonds and maybe some alternatives and provide income that way?

Mary: Exactly. I know it's a hard question.

Scott: Well, part of it depends on you and what you want and what your kind of tolerance for ups and downs in your portfolio. And the fact that you put $150,000 into an equity index annuity when you were in your late 40s, either someone sold you that and you don't quite understand it or you are terrified of any ups and downs in the market.

Mary: Well, I just bought the annuity actually two years ago.

Pat: That's right. Right. We understand that.

Mary: Just two years ago. It was more of a little safety net of money just to follow the S&P.

Scott: And but it doesn't. But you get...

Pat: Yeah, the cost associated with it.

Scott: I mean, it's like it's like saying, "I want some insurance on my house." And so not only do you buy the insurance, but you dig a moat and build a moat and you build a big fortress around the house and you have sentries out on the four quarters. I mean, that's kind of what...which all has a cost.

Pat: So you can do both. But it depends on where the kind of... When I buy a condo today... I wouldn't buy a condo.

Scott: I wouldn't buy a condo. Then again, I have some rentals and they're I just yesterday, I have a rental. I had a call from the property manager, the refrigerator that was placed a couple of years ago, something's wrong with the refrigerator. And I remember just having this conversation like my ETF never calls me. I never get a call from my portfolio. My 401(k) never calls me in the middle of the day to tell me about a refrigerator that's not quite right. Like those sort of things. They. I mean, your best bet, Mary, is and I once while you hear say this, it's to get a good financial plan. Sit down with a quality financial advisor, either pay for a financial plan or have someone who'll do it part of the portfolio management. And you can because what's important is that some point in time you're going to need to replace $150,000 a year income.

Mary: Correct.

Pat: Which is not easy, which is not easy. You've got a ways to go. I mean, to replace 150,000 in income, you're going to know need...

Scott: You don't have a pension. Right?

Mary: I do put away about 60,000 to 70,000 in savings a year.

Scott: Well, maybe that's too much. Maybe it's too little.

Pat: Yeah. And in the high-yield, if that's if you're putting it in that high-yield, then and that's for retirement, then that's the wrong place.

Mary: Well, I was putting it in there and hoped that I'd have enough money to buy another rental kind of outright along with the sale of the condo.

Pat: Well, then you can you can certainly do that. I hear this all the time, "Well, real estate never loses value." I don't know. There's a trade in San Francisco.

Scott: Oh, my gosh.

Pat: Where a commercial where it sold for 10% of what it did 10 years ago.

Scott: Commercial property.

Pat: Commercial property.

Scott: Went from 65 million to 6.5 million.

Pat: And the 6.5 million, they're going to have to put a lot of money into it and wait a long time to turn it. It's turning. I don't know the answer. The best thing you got going for you is you're actually a great you're, a good saver on your income. You could be blowing all this money. You're a good saver. The asset class that you put it in is going to, you know, if you are...

Scott: I feel like if you have a foundation for you're building a house, you've got the foundation laid. And now you're saying, "I don't know, should I use steel beams or should I use wood? Do I use this kind of joist or do I?" And you would only make those decisions after you determine what you were trying to build, right? Like, what's the ultimate objective here? So I think, Mary, that's why I think particularly at this stage, having a good financial plan saying, what is it you're trying to accomplish financially first, which my guess would be making sure you've got the assets set aside so that at some point in time you can quit work or if you have to quit work, you've got income coming in to support your lifestyle. My guess would be that would be your number one objective at this point.

Mary: That's correct. Yeah, right.

Scott: So start from there. Like if it's age 60, you want to make sure you have financial independence, okay, let's start from there. Let's work our way back. What are the things that we're doing today that are putting us on track and where might we have some shortcomings? And then we can look at we can do a variety of different what-if scenarios. And I say we like whoever good financial advice you're working with can do a lot of different scenarios. And then you can think about, all right, what makes more sense? Do I put some more money in S&P 500? Do I look at buying another rental real estate? What's that going to look like for cash flow? And then you can make an informed decision because otherwise we're just looking at investments that like what's going to do for the best next five years.

Pat: Yeah. And I don't actually know if this is actually due to the fact that the envelope of the building is actually covered with the condo. This $600 a month condo fee doesn't bother me at all. You're not going to have to replace a roof, a window, siding, paint, right?

Scott: People always get in trouble by HOA fees. It's like, no, the money's not just getting burned. It's going into the property.

Pat: Yeah. When you say that you want to get rid of this condo, first thing I question is why?

Mary: Yeah, it's a pretty easy condo as being single and working full-time. It's pretty much kind of a no-brainer.

Pat: So I think that I would go back and do the analysis on that. You mentioned the $600 specifically. That, I got to tell you, if I own that condo and it was generating $2,200 a month and I don't know, I'd have to look at what the net is. It may or may not be a good deal.

Mary: Yeah.

Pat: And if that were the case, what's the point of actually selling this condo and then buying another piece of real estate that it's the equivalent? Why not just...this is if I was sitting down as the advisor, I'd say, let's do the numbers on keeping the condo and then taking that high-yield savings account and actually making that much more aggressive because we'd look at the condo as the bond portion of the portfolio.

Scott: Oh, and she's got the equity-indexed annuity.

Pat: That's fixed income. And I would take a look at that high-yield portfolio and say, let's just go 100% equities in that.

Scott: Well, I don't know how the BlackRock is.

Pat: My guess is that that's pretty close. So I don't know. I wouldn't start with the thesis of sell the condo.

Mary: Okay.

Pat: I just flat out...

Scott: I would start with a thesis of what is that you're trying to accomplish.

Pat: Yeah. And then what are the the asset classes that we actually use to get there? But anyway, we answered nothing.

Mary: And then in and then in 10 years, I can make that determination when I get closer to retirement and then, you know.

Pat: Yeah, yes. But you sell energy efficiency, right? And you go into someone's home and you test the windows and then you say, you know, you put that little meter up against the window, you know, like you're losing 8% here and you're using here over to here. And if you spend this money today, this is how much it will save you over time.

Scott: Here's the return.

Pat: Here's your return. b\By you spending the time and energy with a financial advisor is no different than...

Scott: That's a good point. That's a perfect analogy as opposed to I've replaced my windows. Yeah, like, oh, but you've got this big draft coming through.

Pat: You know, you have no insulation in your roof. Well, the windows looked good. That's what I would do.

Mary: Okay, okay.

Pat: And I should probably have her come over my house for some energy efficiency.

Scott: The calm here. I know it's funny, but I've got like a pocket door in my house. We built our house almost 20 years ago, a pocket door in the laundry room. And when it's windy, man, wind just comes ripping through there. And I talked and like, unless I want to like tear apart the whole laundry room and...

Pat: Fix it. You got to live with it. Yeah.

Scott: I should have an energy consultant.

Pat: I just walk around the outside of the house with a big, huge, a caulk, big thing of caulk, just everywhere. The outside of my house just has caulk everywhere.

Scott: That's great. But you know, it's interesting on, I often hear this about condos, about the HOA's. Well, how high are the HOA's? And like particularly if it's one thing, if you've got you're paying for a golf course or whatever. But let's just take like a typical condo facility, maybe even a smaller one. There's oftentimes it's made up by a board. No one's getting paid on the board.

Pat: That's right.

Scott: Right. Oftentimes, no one's there's no profit that anyone's taken from this. Matter of fact, there's a board that's going to look at it. What's it going to cost to replace the roof and all that?

Pat: And they may be getting economies of scale out of that. Like when you go to get your house painted, you're not getting 50 houses painted at once. You're getting one house painted.

Scott: I think what happens oftentimes people look at and they go, "Oh, the HOA's are too high." And it's one thing if you're paying... It's again, it's like, what are you getting for that? Because if you own a house with zero HOA's and you don't set aside money each month for the repairs, you're going to end up one day have this, some massive repairs. They're going to like, "Whoa, how am I going to come up with 18 grand or?"

Pat: Yeah. And that was the question is does that HOA cover the envelope?

Scott: Okay. Let's talk now to Jafar. Jafar, you're with Allworth's Money Matters.

Jafar: Hi, how are you guys doing?

Scott: We're awesome. Did I pronounce your name correctly?

Jafar: Yeah. Jafar, like the bad guy in "Aladdin."

Scott: Oh, perfect. Okay, good. Yeah. Yeah. The bad guy in "Aladdin?" I don't know if I've ever seen one.

Jafar: Yeah, the bad guy in "Aladdin" and they made a really... Even your kids?

Scott: Oh, they probably have. I just stick them in front of the TV most days and just leave it going. Throw in a TV dinner tray every once in a few hours.

Jafar: Yeah, good parenting advice. Thank you.

Pat: Right. Thank you, Dr. Laura. What can we do for you?

Jafar: So I am calling to see if I could be doing anything else to better set my family up for the future, myself, selfishly. We do have a daughter that is almost two. We want to have at least one more and then I'm adopted, so is my father-in-law, so we want to adopt an older kid probably in about five to seven years.

Scott: I adopted two children after I had two biological ones, older kids, five, six and nine.

Jafar: And that's another reason why I look up to you guys is the adoption stuff is, yeah.

Pat: Oh, don't look up to me.

Scott: I was feeling sorry for myself yesterday as I had to discipline my 16-year-old, but anyway.

Pat: Don't look up to Pat. Pat didn't adopt any kids.

Scott: I'm like, I'm 57. I got teenage children.

Pat: How old are you?

Jafar: I am 38.

Pat: And you're married?

Jafar: I am married. My wife is 34.

Pat: And what's the family income?

Jafar: So family income, we gross about $22,000 a month from our W-2 jobs. Then we do have four rentals, soon to be five.

Scott: Why did I know when you first, when you started as a young man, I want to make sure, I think those that actually, I mean, I just had the feeling that you had been paying attention to your finances from an early age. So four rentals.

Pat: Four rentals.

Jafar: Yes, soon to be five. We're closing on our fifth one next week. So we gross, or sorry, net about $5,500 from the four. It'll go down a little bit after we add the fifth one next week, just with interest rates and stuff like that.

Scott: Where are these rentals located?

Jafar: Four of them are here locally and then...

Scott: Where's locally? Where are you?

Jafar: Sacramento.

Scott: Okay. Okay.

Jafar: And then the fifth one's in South Carolina.

Pat: And why South Carolina?

Jafar: My mom is not in the best financial situation. So to kind of give back to her...

Pat: Okay, very nice.

Jafar: ...is we're going to buy, I'm going to buy a place.

Pat: Okay. Which is why the income is going to go down because you're subsidizing the rent, I assume. How much life insurance do you have on yourself?

Jafar: I have two million on myself and then I have a million on my wife. And they're both term policies and we have about 15 years left on those.

Pat: Okay, 15-year level term.

Scott: Are you saving in your 401(k)s?

Jafar: Yes. We have... My wife, well, we both have 457s. So we've... Last year was our first... Sorry, 2022 was our first year. We maxed them out and we have continued down that path, the path going on second year. Yeah.

Pat: And do you have a 401(k) available as well? Do you work for the state of California or a municipality?

Jafar: State of California. No, no 401(k). Just... I guess I have the option to do the 401(k). I've just been kind of stuck on the 457.

Pat: Well, the 457 actually would be my first choice over the 401(k). It's got some more liability in it. But we've never actually seen it triggered. I don't know if I'd worry about it. It's actually an asset of the state, not in a trust like a 401(k) is. So the reason... And this plays... This show plays nationally on the podcast, but in the state of California, you have both a 401(k) and a 457 available.

Scott: And some other states as well, municipalities.

Pat: That's right. So I would... If I was going to save more money, and I assume you probably have $50,000 in liquid cash in a high-yield account.

Jafar: Yes, we do have about that. Of course, it's going down a little bit because we're closing on this place, but we will build it back up to about $75,000.

Pat: Okay. All right. Well, that was my guess. So, Scott...

Scott: And you have a 529 plan set up yet for your daughter?

Jafar: Yes, we set up the 529. We're putting $250 a month in it. One of the big questions is with the adoption stuff and adopting an older kid, we don't want to get... We want to kind of front load that stuff a little bit more since the kid would be older. I am prior military, so if the kids go to a UC system, they will be able to get free tuition at UC schools, but we will have to pay for room and board and books.

Pat: I got nothing for you. You're doing fine. Right? I know. I got nothing for you.

Jafar: You got something for me, please.

Pat: I might push a little bit more money into the 529. You could front-load it now in the child's name and just change the beneficiary at some point in time to another child. You can't split them though, can you? I don't know if you can split them. I don't think you can split them. Yeah, but if you front-loaded the one that is alive today and then you would just quit putting money in when the second one, when you had the other kid. Right? So you could front load that one, the 529, knowing that it's more money than you want to put in, but you can stop those contributions whenever you wanted. And so if you were going to save more, if you wanted to save more, I would use more of the 529. Maybe I'd put in 500 or 750 a month and then I would plug into the 401(k). But other than that, you're doing fine. I mean, I don't know what else to tell you. You're diligent. You're a good saver. What did you do in the military?

Jafar: So I was in two and a half years. So I actually got out at 20. So I was a petroleum supply specialist, even though I never really did that job.

Scott: And then did you go to college afterwards or did you just go right into career?

Jafar: No, I did. I started my career at 21, but I went to college and graduated, used my GI bill.

Pat: So actually, I had a friend in high school came back one day and he told me he got a job and I asked him what it was and he said he was a petroleum transfer engineer.

Scott: Worked at the gas station.

Pat: Worked at the gas station.

Scott: I have a set of jokes like that.

Pat: But you're fine. You're fine. You're fine.

Jafar: Do you feel like our term policies are good enough?

Pat: Yes.

Scott: What's your income?

Jafar: So I bring in gross about $15,000 a month.

Scott: And as you continue to have more children, will your wife continue to work outside the home or at some point in time does she want to spend more time?

Jafar: The agreement we had is that she continues to work. She can retire when I retire in 11 to 12 years. So she's going to work.

Scott: And so it's 11 to 12. Why do you want to rush to retire early?

Jafar: I'm getting tired.

Pat: You're 38.

Jafar: I want to be on my own schedule more. I don't know if I'll ever stop fully, but I don't want to be.

Scott: So age 50 is what you're shooting for.

Pat: Two million. If you added another million each to your wife's policy.

Scott: It might not, or even looking at what a new 20-year level policy...

Pat: Yeah. If you had three million, I could make an argument that you're fine and I could make an argument of three million. I think you should, you know.

Scott: He's got quite a few assets saved already.

Pat: That's right. I think you're probably fine.

Scott: If anything, look at getting a new 20-year term.

Pat: Yeah. And the reason is, is that when you re-qualify, there's less risk to an insurance company because you went through the medical. So it's okay to buy a 15 or 20-year policy and not hold it to the full duration and just re-qualify every four or five years. And you just have to price it. All you have to do. But you're doing fine. You're doing fine. You're perfect. All right. Appreciate the call. I appreciate you. All right.

Scott: Hey, on a side note on term level policy. So here's how these work. And I'm going to tell you a story about a friend of mine. So term policy, it's for a term of time, right?

Pat: Which means that the insurance premium and the face value or death benefit is guaranteed for that period of time.

Scott: Yes, only that period of time. And most of these, most if not all term policies have an option to convert to a universal life or a whole life policy at the end of that term. Okay? But the premiums are extremely high because the only people...

Pat: In the conversion.

Scott: Yes. Because the only people that keep those are the ones that can't get insurance anywhere else. So it's known as adverse selection in the insurance industry. And for most people, they'll need a term for a period of time, just like talking to Jafar. He needed term. And you just got a young kid. He's going to adopt a couple more, but down the road, the kids are going to be gone. He's not going to have the need for insurance. So I've got a buddy of mine that had two boys, had 20-year level term policies, raising the kids. His wife took care of all the taking care of the family finances and, just having a conversation, she said, she had made some mention about how their life insurance premiums were 700 bucks a month. And the term had run out.

Pat: Oh, it converted.

Scott: It converted. And she just thought, oh, I guess it's much more expensive now. And like two and a half years of paying.

Pat: And then does it start with a new surrender charge at the conversion? Do you know?

Scott: He didn't need the insurance anymore.

Pat: Oh, he just continued to...

Scott: No, he's retirement age. He financially could be retired. Yeah. So the only reason I'm bringing that up is like, pay attention to these things. If you've got it, like I have a 20-year term level policy. When I get my annual premium, I was like, how many more years do I have on this? Like make sure that you don't suddenly, you're suddenly paying for...

Pat: Yes, because their premium probably went from 150 bucks a month to $700 a month.

Scott: That's right.

Pat: And she just continued to pay. Paying all the bills and all that. Yeah. I'm thinking about it. Which is actually a positive selection for the insurance company there because he actually would have been able to re-qualify.

Scott: Well, I'm sure he's not the only family that that happens to, right? People just continue to pay. They just kind of don't think about it much. But that's the type of thing that if you're in health, if in good... The longer you have an insurance policy, it's the same thing with universal life. The longer people hold it, the mortality of that group actually starts to decline because people who are in good health oftentimes will go out and buy a new policy because they can get a better rate.

Pat: That's correct.

Scott: Yeah. So, all right. Let's talk now with Tina. Tina, you're with Allworth's Money Matters. Hello?

Tina: Good morning.

Scott: Hi, Tina.

Pat: Hi, Tina.

Tina: Hello. Hi. Thanks for taking my call.

Pat: Sure. What can we do for you?

Tina: My call is about company stock. And I just have a few questions about how much of your networth should be in your company stock? When should you start liquidating it? What are some strategies for liquidating it without paying a whole bunch of taxes, etc.?

Pat: This is a great question. And I watched a movie this last year about Enron and a documentary. And these people were out in front of Enron with their boxes leaving the building with the big E on the side, screaming about how they had lost all their money, all their money, in Enron stock. And how Enron... And I thought, you know, the day before they had drunk the Enron Kool-Aid...

Scott: Yes. Maybe they were defrauded, but they played along as well.

Pat: That's right. That's right. That's right.

Scott: So- And then we look at people who worked for companies like Apple their entire career and are extremely wealthy. And you're like, wow, look what happens when you hold on to your company stock. Maybe you're just lucky to work for a company who does extremely well year after year as opposed to one that...

Pat: And if you were at Apple in the first five years, you probably were highly disappointed in your selection as they went through Steve Jobs and then not Steve Jobs and then Steve Jobs. So tell us your situation. What is your overall investments and then what percentage of that is in your company stock?

Tina: Yeah. So my husband and I are later career and we've been pretty focused and intentional savers leveraging our company 401(k)'s and other savings opportunities, etc. So we have about, we can retire and we think, you know, our financial advisor says live to well beyond a hundred and not worry about it. And, you know...

Scott: You're at that point today?

Tina: We're going down that path. She says, yes.

Scott: Okay.

Tina: We're prepared to work for another year or two before we go.

Pat: And what's the dollar amount?

Tina: The amount in this...?

Pat: Yeah. And the 401(k)'s, IRA's, the overall. If you put it all in a suitcase, how big would the suitcase be?

Tina: Yeah. About three million in qualified funds. Another, you know, two in non-qualified after-tax. And then I'd say another 25% of our total in this stock. And it's a private company and it's done exceptionally well. It has a great trajectory, but it makes me very nervous.

Scott: Do you have any liquidity option in the company? I mean, private companies, you don't always have an opportunity to sell it.

Tina: Yeah. About twice a year, they make an offer to buy back.

Scott: Okay. So the 25... And what industry is that in?

Tina: IRO space.

Pat: Okay. So the, of the $5 million, 1.25 million is in your company stock. Is that correct?

Tina: No, it's an additional 25%.

Pat: Okay. Thank you. Thank you. Oh, thank you. Thank you. Thank you.

Tina: Yeah. So it's a bigger number.

Scott: And is any of it held in an ESOP or is it all individually held?

Tina: The majority of it is in just individually held. It's not in any like tax-favored status.

Scott: And there's not the... Okay.

Pat: And how soon, how close are you to retirement?

Tina: Let's just say a year and a half.

Scott: Let me ask you this question. If the stock went to zero, would you still be able to retire in a year or two?

Tina: I think we might put it out for another couple of years.

Pat: You want to?

Tina: I think we could. No.

Scott: See, I mean, the concept behind diversification is not, it's not designed to get wealthier. It's designed to protect where you're at. Right? So when we're young, working for a growing company, like, yeah, maybe I've got more in there than was prudent, but I'm taking a chance on it. If it works out, great. If it doesn't work out, that's all right. I'm still young. When we get to retirement age, particularly when retirement's right around the corner, for most people, they're more concerned about maintaining their lifestyle than they are about becoming wealthier. They don't want to go be poor. Right? That's when diversification comes into play.

Pat: What's the family income?

Tina: Right now with both of us working, let's just say 400 or 500k a year.

Pat: And so all of this is gain in this. So how old are you guys?

Tina: I just had my 59 and a half birthday.

Pat: Okay. So here's the thing that I look at too is the tax ramifications. So of course, right? So if you wait until after you retire and you start liquidating these, right, dollars...

Scott: Yeah, is there any pension income anywhere?

Tina: No, we have IRAs and 401(k)s, but not...

Scott: Are there any stocks that you could sell at a loss? Anything that can trigger a loss there?

Tina: We do that when there is opportunity. We don't have anything right now.

Scott: And you don't have any loss carry forward from that.

Pat: Yeah. This is really, I got it. This is oftentimes we, if you don't know what to do, you just split the difference and then you're right either way. But this one, because of the tax and retirement's so close...

Scott: If you were retiring December of this year, which said, okay, the next year, the next couple of years, we're going to have a strategy of reducing your exposure to this stock. And we're going to, we're not going to take an income from your 401(k)s or IRAs. We're going to make sure your non-qualified tax is managed in a tax-efficient manner so we can pay a very low capital gain tax on this.

Pat: Yeah. And if your income wasn't as high as it was today, I'd be inclined to, what's your family income today? Four to five. So I'd be inclined to, I'd be inclined to hold it. So when you said it's 25% more, right? So you've got almost a million and a half in it. You got a million and a half in it.

Tina: Times two.

Pat: Oh.

Tina: It's a lot. Yeah, it's a lot.

Pat: I'd start paring it down.

Scott: And how's the value today versus six months ago, a year ago, three years ago, eight years ago?

Tina: Like a rocket ship.

Pat: I'd start paring it down. I'd start paring it down. Either that...

Scott: Nothing goes straight up forever.

Pat: Either that or I would actually pick a similarly publicly traded stock and do put options on it to give me myself some downside protection.

Scott: Which is essentially, yeah, put options. It's a, you're paying a premium that...

Pat: ...that if it goes down in price, you get paid. And what you're doing there is you're, what you're doing is you're trying to identify companies that are in the same industry that do the same thing that actually will help you. So you're getting a, you know, a sibling stock, if you will. So you're using financial instruments that give you some downside protection and that you're paying that premium so that you can take advantage of the tax ramifications a year from now. And your advisor may or may not...

Scott: Is this, is this aerospace company affiliated with the billionaire who has other companies?

Tina: Yes.

Pat: Oh, I'd start, I'd pare it down and I most certainly would. I would consider paring down and doing some put options on at least half of the portfolio.

Scott: Put option using what?

Pat: A similar stock.

Scott: There's no similarity to that company.

Pat: Just because of the guy that runs it.

Scott: Yes, who's brilliant. Which is, listen, what makes you good, makes you bad.

Pat: Yeah. Yes. I, I would, I'd pare it down. I'd pare it down.

Tina: Okay.

Pat: Is your advisor saying the same?

Tina: Yeah.

Pat: It's hard to do though.

Scott: It's so much money. But you're at the finish line now. By the way, if you sell some, it's invariably, it's going to go up.

Pat: I just remember, I just remember working with clients with Agilent. And what was the spin off of AT&T back in the day?

Scott: High flyer. What was it? Was it Lucent?

Pat: Lucent Technologies. And I sold 50% of this client's portfolio and it went up for another year and a half and the client couldn't get over it. And how much money they would have made until it went down by 95%. Right? And so he was right. And I was right. But you're so close to the finish line. I would bite the bullet. And especially if you've got a charismatic or semi-charismatic leader.

Scott: How's the value even set, if it's private? Who's making up the share price?

Tina: Yeah.

Scott: How many times earnings is the share price? When there's a, when there's a, the nice thing about public markets, we know what's, we know what buyers and sellers, when it's a private company. Yeah, I would definitely look, if you were 35, like let it ride or whatever.

Pat: You're not, you're so close to the end. You're so close. You're like, and by the way, you said, "Oh, well, I could stay and work a couple more years." If this stock blows up, you might not be able to stay and work a couple more years. I mean, look at what they did with Tesla employees last week. They went to the gate, couldn't get in, 10%. Depending upon the location up to 10%. I would, I would get rid of 50% of it. I would bite the bullet.

Scott: I would too, immediately. Next time opportunity. Because capital gains the you're paying, your net's still going to be worth more than the company was worth six months ago.

Pat: Understand. And what changed our view on it is when you said times two. Right? Because now it's over $2 million in that particular stock, correct?

Tina: Yes.

Pat: Oh my.

Scott: Or three.

Pat: Probably.

Tina: No, it's two.

Pat: Okay, I would pare it. I'd bite the bullet.

Tina: This has been helpful. Thank you so much.

Scott: It's a hard, by the way, if you take half, you're right and wrong. Right? So equally, if you sell half and the goes up, you're like, "Well, I'm glad I kept half." And if you, if it goes down, you're like, "I'm glad I sold half."

Pat: So I'm 61. I'm 61 years of age and I'm trying to put myself in your situation, how I would act. I'd sell half.

Tina: Yeah.

Scott: Because it's meaning it's based on the size of your portfolio, it's meaningful. I mean, if this all went to zero, it would have an impact on your retirement.

Pat: Why wouldn't you just sell? Why are you waiting to retire?

Scott: Oh, maybe she enjoys what she does. She likes those 11 p.m. standing meetings.

Tina: We're enjoying what we're doing.

Scott: Okay, I'm sure it's a really, you and your husband both worked for the company?

Tina: No.

Scott: I'm sure it's an exciting place to work.

Tina: Yes.

Scott: It's got to be really interesting.

Pat: So yeah, sell half. Yeah.

Scott: Yeah. Appreciate the call. Yeah. Wish you well. Did you read the Elon Musk book, the latest one by...? It's fascinating.

Pat: I haven't.

Scott: As you said, those things that make you good and make you bad. Like, and, and I mean, so you look at Tesla stock is down about half over the last year. And some of it is because he's alienated a large portion of shoppers, right? Buyers of cars.

Pat: That's right.

Scott: Because he decided to become political, whether you think it's a good thing or not, the bad thing, it's irrelevant to this conversation. But that's the fact is that he took his reputation and applied it in a different area and he's alienated some people. So the demand for his automobiles aren't what it once was.

Pat: Yes. And the stock's been all over the place this week.

Scott: It's hard to, it's, it's hard to quantify risk on something like...

Pat: What makes you good, makes you bad.

Scott: But his, I mean, I think you'd find it's, I'd recommend anyone read it. It's fascinating just how he thinks about things is so different than most. And he works. I don't know if I've ever ran into anyone who works quite as hard as that guy. Like, and like what drives him to push so hard? And when you read the, it just, it's, but he has these standing meetings, they'll be behind it something and literally expect all his leadership team to be available at 11 p.m. every night for a standing meeting. You sleep as little as possible. You have no other life. When you're in these surges, he goes through, it's a surge trying to get the rocket. You have no life. You're expected to have the cot in the office. And I mean, it is really interesting.

Pat: Interesting guy. We'll see how it ends, see how it ends. Right?

Scott: I know he's an interesting guy, I know.

Pat: Right. You see how it ends. Look, look, the Truth Social stuff.

Scott: This last, this last, we'll go to this last call. It's not just the company. It's the leader. It's he's such a unique leader that, you know, like if, if Mark Zuckerberg did something else, I don't think someone would think, "Oh, Facebook and Instagram are all coming to an end because Zuckerberg's not around anymore." Right? But if something happened to Musk at SpaceX, people would be like, "Uh-oh."

Pat: What happens now? So, but I read an article this morning about this Truth Social.

Scott: Is that the Trump?

Pat: The Trump. And it's, it's still, they call it the new meme stocks because people are actually getting into it and not based on the fundamentals, but it's their way they could show support to Donald Trump.

Scott: Which by the way, it's worth billions and it has hardly any revenue, regardless of what you think of Trump. I love the guy. Just from the company standpoint,

Pat: It's turned into a meme stock. Like, you know, when there's people shorting it, but then they, they all get together and they're like, "Listen, we need to stand up for Donald Trump," and they're buying the stock, which by the way, whether you like Donald Trump or hate Donald Trump, it doesn't matter to me. It is a terrible way to make your investment selections based upon your political vote.

Scott: If you decide to buy that stock, only do it because you think you're for some political reason and expect to lose it all.

Pat: Exactly. And don't short the stock either on a political reason, because you may not be able to withhold the heat on the...

Scott: Well, if you buy a stock, the only amount you can lose is what you invested. So you put in 10 grand into a stock and it goes to zero, you're out 10 grand. You short a stock and...

Pat: It's unlimited.

Scott: That stock goes to the moon, I mean, people who shorted Tesla stock over the last decade have just gotten slaughtered.

Pat: They finally got right if they stayed the trade.

Scott: Only in the last couple of years.

Pat: That's right. That's right. That's right.

Scott: Went up like crazy for them.

Pat: That is correct.

Scott: Yeah, that's well anyway, this is a, these have been good calls to this program. And by the way, if you want to, if you want to ask us a question at some point in time, we schedule times when we're in the studio and love to take your call on your financial planning question. It might be that you're overweighted in a particular company or thinking about retirement, or you wonder if you've got the right kind of investment portfolio and you want just a second opinion, wondering if you got a question on your estate plan and how to structure things right this day and age, just send us an email at questions@moneymatters.com with what your topic is, questions@moneymatters.com. And we'll schedule a time to take you, we'll be in the studio and just like we were able to talk with Mary and Jafar and Tina, we will chat with you and help us.

Pat: We will help you any way we can.

Scott: And if this has been helpful to you, forward it onto one of your friends and give us a review or rating wherever you get your podcast. This has been Scott Hanson and Pat McClain of Allworth's Money Matters. Have a great rest of your weekend.

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.