- Understanding Municipal Bond Risk 0:00
- Listener Call: Building a Pre-Social Security Bridge 11:43
- Roth IRA vs. Cash Savings in Retirement Planning 13:15
- Health Insurance & Early Retirement Realities 16:50
- Listener Call: Financial Advice for Adult Kids 21:21
- Listener Call: Fed Chair Concerns and Retirement Strategy 35:41
- Listener Call: Real Estate-Heavy Retirement Plan 46:51
Smart Retirement Planning Strategies: Roth Conversions, Social Security Timing, and Income Gaps Explained
On this week’s Money Matters, Scott and Pat answer real-life questions about retirement planning strategies that every pre-retiree should hear. One caller asks whether it’s better to build a cash bridge or continue Roth IRA contributions ahead of retirement—prompting a thoughtful breakdown of retirement planning strategies around income gaps, Social Security timing, and tax-smart withdrawals. You’ll also hear about the role Roth conversions can play between retirement and age 70, how pensions and spousal benefits factor into planning, and why detailed income modeling is key. Scott and Pat also touch on risks tied to high-yield municipal bonds and illiquid assets, offering a broader context for smart portfolio construction. If you're planning to retire in the next few years, this episode delivers essential, real-world retirement planning strategies that can help you retire with clarity and confidence.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Automated Voice: 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-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah, glad you are here with us as we talk about financial matters. Myself, my cohost, longtime business partner.
Pat: Yes, we've been doing this for a while.
Scott: We're both financial advisers.
Pat: So, last week, I had mentioned in, I guess, the beginning of the show that I wanted to talk about these high-yield municipal bonds.
Scott: Oh, you never did.
Pat: We never got to it. We got tied up in, other conversations.
Scott: The fake tease.
Pat: It was a fake tease. And for that, I apologize.
Scott: Yes, good.
Pat: That I enticed you with such an incredible topic that you listened to the end of the show about high-yield muni bonds. So, I thought this is a really super interesting concept that applies to many asset classes.
Scott: What's the concept?
Pat: Is that because these high-yield municipal bonds that are sitting inside of ETFs and mutual funds don't trade very often.
Scott: Gotta remember...
Pat: So, let's step back. Municipal, these are municipalities that raise money by issuing bonds.
Scott: They become high yield when there's some question of whether they're gonna be able to repay these bonds.
Pat: Or pay them back on time, or just the credit quality of the of the issuer. And therefore, the interest rate is higher than you would normally receive because of the fact...
Scott: There's some risk there.
Pat: ...there's some risk there. And so, people sometimes will just reach for yield. And you hear it all the time like, "What's the yield?"
Scott: "I need yield."
Pat: "I need yield."
Scott: What's the yield, though?
Pat: "I need high yield. I need yield. I'm retired. I need high yield."
Scott: "I need yield"
Pat: Without understanding the underlying risk. And as if you know from our show, everything is risk-adjusted returns. Well, these things are so thinly traded, so thinly traded.
Scott: Well, all these missed bounties aren't that big. I mean, there's lots of little sanitation districts.
Pat: Or universities, too, colleges. All kinds of little districts, this district, that district.
Scott:. Little districts. Yes. And, you know, little water district that has three employees or park and rec district.
Pat: And when they go to sell, they say, "We're gonna issue a bond, a $50 million bond," let's say.
Scott: $10 million? $20 million?
Scott: They're gonna issue it. And it might be, a couple mutual fund companies might snap up the whole issue, right?
Pat: A lot of it, yes, yes.
Scott: And so...
Pat: Then they don't trade.
Scott: The bond market is so much larger than the stock market.
Pat: And it's not nearly as efficient.
Scott: No, because...
Pat: As this will demonstrate, right? As this will demonstrate. So, all of a sudden, the portfolio prices at one level in these ETFs because they have no...
Scott: How do you know what this is actually worth?
Pat: Yes, because it hasn't traded in six months or a year, a particular bond in the portfolio. And then all of a sudden, it trades inside of the municipal bond fund. You as an investor are gonna get whatever it trades at their price, their book value. It trades, and all of a sudden, it's not worth half of what they priced it at in ETFs. And it brings me back to...
Scott: How common is this?
Pat: In the high yield world, no one really knows because some they don't trade that often. So, the challenge is you put money in some ETF that owns it's... You seek out a high yield municipal bond fund.
Scott: Which is fine.
Pat: You put money in there thinking it's worth X. But because of...
Scott: And the portfolio managers might think it's worth X. They don't know. And if it's a small municipality, they can't take the time to sit and do a bunch of research on each individual holding.
Pat: Correct. But my point gets to is, illiquid assets don't have to be a 100% illiquid where you lack transparency to price. So, as we've talked about on this show, non-traded REITs are illiquid. And so, you think it's worth one thing until it prices. And then when a price is bam, you realize it's not worth nearly as much. It happens inside of bond funds as well.
Scott: And are we seeing big reduction in values of...?
Pat: Not that much.
Scott: Yeah. Because they're actually so highly diversified.
Pat: Yeah, correct, because they're small portions. But it just remain, you know, this one that talked about bond sales for Buckingham Senior Living Communities, which was a senior living community that they got the municipality to sponsor.
Scott: How do they get municipal financing for a senior community?
Pat: Well, because the municipality may wanna actually sponsor it, then hire an operating company to actually run it because they feel they need a senior community in their neighborhood. And then it's not that uncommon.
Scott: It's probably the other way around, Pat. A developer of senior community properties goes to some community and says, "Hey, you really would benefit by having this in your background. We'll put one in if you help us raise this money on a tax favorable basis."
Pat: So, the point being is that...
Scott: i.e., government subsidized.
Pat: ...the bigger the fund that you're in, the more broadly invested is. So, the example they give is, Easterly Asset management's high-yield, muni bond in June cost $6, right? The share price tumbled to $3 because of a bond trade.
Scott: One particular fund?
Pat: But it was it was pretty small. It was pretty small, right?
Scott: But if the buyer who bought the day before might have done some research, what's the highest performing...?
Pat: What's the highest yield?
Scott: Yeah. What is the highest yielding municipal fund out there? That's the one I want.
Pat: That's right.
Scott: And it might have had a five star rating.
Pat: But if you're going to these huge, massive, like, Franklin Templeton or ETFs, it gets thousands of thousands. But at the same time, you're gonna dilute that yield because they have a diversified portfolio. So, the reach to yield... You're right, you know. I just googled, what is the highest yielding municipal bond.
Scott: It's gonna be the one the most risk. It's probably the one that hasn't priced.
Pat: Priced in a while.
Scott: So, again, and you look at it from that, it's probably the one that doesn't take the repricing seriously, though.
Pat: Oftentimes, more information doesn't make an investor better, more information.
Scott: Well, this was good information.
Pat: I thought so. That's why I... No, by googling something, my point being, like, I could just Google high yield thinking... I've had three or four clients in my career tell me they I didn't understand it. The only thing that mattered were dividends and yields, not the underlying asset.
Scott: Well, and here's... I mean, it takes something else.
Pat: Three or four clients in my whole career. I had one guy insist that I had no idea what I was talking about. As long as you got the highest yielding bond...
Scott: Well, he was on the same floor.
Pat: ...or the highest paying dividend... Oh, I couldn't take him on the score.
Scott: Of course. He was foolish. Why would you? I mean, he doesn't know what he's talking about.
Pat: That's right.
Scott: And telling you you don't know what you're talking about, that's my definition of a fool. You're the expert, and he's not. And...
Pat: In this particular subject, if I was discussing another subject...
Scott: Yeah, I understand. I understand. Then you might be the fool.
Pat: I would probably be the fool.
Scott: But, look, I remember back when I was taking on client, this was actually years ago when we were using more mutual funds than ETFs, and it was more actively traded. I mean, go back 25 years ago or whatever.
Pat: Which is what it was done back then.
Scott: Yeah. And it was easy to... That's when Internet started making the information available. And so, someone put together a portfolio. Are these all five star funds? And you remember this. So, there was a battle because sometimes, you wanted to recommend a fund that wasn't the five star fund because the underlying holdings and whatnot, you thought it was a better opportunity.
Pat: The five star funds was Morningstar at the time, which is a rating service. Still around.
Scott: And it looked at historical returns.
Pat: That's right.
Scott: Well, we would look at underlying holdings and build portfolios. It's before the ETFs even came out. And sometimes, a three star fund or four star fund would be our recommendation.
Pat: Because it was more likely to have higher returns in the future.
Scott: Yes. But I remember the arguments would get over peep with people. Not arguments, but it was... To your point, sometimes, more information is not always helpful.
Pat: That's right. That's right.
Scott: That was a situation where they thought they were doing their own research and their own due diligence, and I only wanna buy five star.
Pat: Funds.
Scott: And sometimes I'd say, "Well, then we're not the place for you." The easiest thing for me to do is just go and...
Pat: Pick print out five star funds.
Scott: Print out last year's top five funds and sell you those.
Pat: Yeah, in 1999, right before the tech.
Scott: Exact. Yeah, my point. And the five star funds would have been the ones that are heavily taxed.
Pat: Janus funds. Do you remember the Janus funds? All five star funds.
Scott: Yeah. They were. That's right.
Pat: No one talks about Janus funds anymore.
Scott: They sold a part of Henderson, Janus Henderson. Are they just Henderson now?
Pat: I don't know. But they were part of a...
Scott: They have a presence in Denver. There's a downtown building there.
Pat: That is right, in Cherry Creek. It's a spin off for SP, Southern Pacific Railroad.
Scott: What was the railroad doing involved in the...?
Pat: Well, it used to manage their pension funds. That was where Janus came from. We all know that.
Scott: I didn't know that. Thanks for the history lesson, that useless trivia.
Pat: I said Sprint came from Southern Pacific Railroad. SPRINT the telephone company. Southern Pacific Railroad Inter-network Telecommunications, SPRINT.
Scott: And there are times I wonder, why don't we use rail more for transporting goods? They keep taking all the railroad tracks out.
Pat: Is that what you think?
Scott: I do.
Pat: Like, every downtown's got their rail yard that they're redoing in California.
Scott: They're taking out their trash.
Pat: You're not saying that when the rail yard's coming in the Midwest when they're...
Scott: Oh, it's coming in California, the bull train.
Pat: Okay. Let's go.
Scott: My grandkids are gonna look forward. They can go from Fresno to Modesto.
Pat: Oh, my God.
Scott: How do you get to Bakersfield from Fresno? It's gonna be awesome.
Pat: We're a laughingstock. California is a laughingstock.
Scott: It's unbelievable. Some of the stuff is unbelievable. You wait till gas is 8 bucks a gallon in a couple years because two more refiners just quit.
Pat: Shut down. That's gone. Won't be a...
Scott: And you're watching Newsom trying to reinvent himself right now. It's really...
Pat: Oh, I know. It's just something. Gas won't be $8 a gallon where I live.
Scott: Where are you living?
Pat: Not in California when it's $8 a gallon.
Scott: Is that your limit? That's the time you're leaving?
Pat: That's it.
Scott: Kathy's really happy about that, too?
Pat: We've discussed it.
Scott: When it gets $8, that's the time, we're selling our house.
Pat: Well, it's relative what they're charging in other states. Okay. Let's take some calls.
Scott: We're talking with Kevin. Kevin, you're with Allworth's "Money Matters".
Kevin: Hi, gentlemen. Thank you for taking my call.
Scott: Yeah. Thanks for joining.
Kevin: So, I'll be turning 60 here in a few weeks and probably planning to retire.
Scott: Happy birthday.
Kevin: Oh, thank you.
Scott: That's an exciting one.
Kevin: Yeah. No, I don't know about that. But it's exciting in that I'm planning to retire probably in that two to three year window. And I've got a pretty good nest egg with 401. I've continue to aggressively contribute through that. And in addition to my 401 contributions, I've been contributing to a Roth IRA. But as I'm getting closer to retiring, you know, pre-Social Security, I'd like to probably, you know, delay that. I'm wondering if it would be better, instead of contributing to a Roth, to just start building up a cash bridge maybe through something like treasury direct or what have you.
Scott: Well, here's the thing. You can take out your contributions to your Roth regardless of your age. It's just the earnings that have to wait till retirement time. And there's a five year clock that starts when you open that IRA, but you've already opened that Roth IRA. You've already opened.
Pat: So, how old are your Roth? When did you make your first contribution to the Roth IRA?
Kevin: Probably about two years ago.
Scott: Yeah. It's a three year, you had a three-year window. It's three more years, or is it five years?
Kevin: Three-year window of and I can pick up the principal, okay.
Pat: That's correct. That's correct.
Scott: Yeah. So, I would keep using that because you might not need that. You might, but you might not. But then if you don't, you've got it in this nice, tax-favored vehicle.
Pat: And so, how much money do you have in qualified dollars? 401(k)'s, IRAs, that sort of thing, 457.
Kevin: Yeah. So, my 401(k), well, between that all in, probably about a million 5, you know, excluding the wife. But then I was late to the Roth party, you know, so probably only a third of that is, you know, after tax dollars.
Pat: Okay. So, a third of it, so $2 million. And it's hard to exclude the wife if she's gonna be included in your retirement.
Kevin: Well, yes.
Pat: So, assuming...
Scott: But then he wanna exclude the wife.
Kevin: She's doing really well on herself, too. She's a teacher, so she'll have her pension. And then she's probably got another $400,000 or her pension in the Roth.
Scott: And, Kevin, will you have a pension?
Kevin: I will not. No. So, I'll be strictly Social Security, which I'm hoping to, you know, probably delay to 67, at least, you know, ideally.
Pat: All right. And the reason the reason I bring this up is, right, you wanna look at that bridge, because the time between your date of retirement and the day you start Social Security is a really good time to look at Roth conversions.
Kevin: Okay.
Pat: Right? So, if either build your own financial plan, or...
Scott: Of this $1.5 million, if you were to retire today, how much do you plan on taking out a year from that to replace your salary?
Kevin: No. Probably pretty close to $80,000, you know, probably on the bottom end. Plus when we retire, that's when I'm planning on some big expenses, vacations or weddings, kids.
Pat: How much do you make now?
Kevin: I make about... I'm in a commission sale, so it can it can range from $80 to $160, $180.
Scott: And how old are your kids?
Kevin: My kids are, 25 and 26.
Scott: Okay. You don't have to worry about them financially anymore.
Kevin: No. Their college is paid for. House is, you know, a few months away from being paid for. So...
Scott: Okay. So, house will be paid for as well. And do you plan on never going back to work, or you're just ready to this high pressure job, ready to call it quits, and...?
Kevin: No, I'd like to keep myself busy with something. So, that should be determined.
Pat: You should pay for a financial plan.
Scott: Yeah. Have you modeled this out?
Kevin: I have. I've worked with a financial adviser. I mean, we've modeled it out at the point where I just wanna make sure I'm gonna be okay. But tailored to a specific course of action, you know, is still a little squishy.
Scott: Well, because you're a couple years off.
Pat: Yeah. But I would I'd pick a date, name at it. I'd pick a date...
Kevin: Not certain.
Scott: Work with your adviser and say, "I'm gonna retire this particular date. And what does this look like? Let's assume what my portfolio is gonna be worth at that time. Where's the income gonna come from? And model it out.
Pat: Yeah. I'd pick a date. I would pick a date 18 months to 36 months in the future and just say, "Give me this number on this particular date if both myself and/or my wife go into retirement." Or give them... Look, I did it with my in-laws, my sister-in-law and brother-in-law. They were talking about retirement. They kept asking me questions. And I said, "Just go to an adviser..." Happened to be an Allworth adviser. I'm kinda partial to them. "Go to an adviser and show them everything you have, and then give them the dates that you both want to retire." They don't have to be the same dates. And they came back and said, "We're not gonna hit that date exactly, but we're within 12 months of that particular date." And it worked perfectly. He retired sooner, and she retired later.
Scott: Because one of the risks you have is you're pretty young to be retiring, right?
Kevin: Yes.
Scott: And you've had a pretty decent wage with your commissions and all, which is gonna... You don't have enough money saved up to replace that.
Kevin: Right. And, you know, you mentioned the Roth conversions, and, I mean, that's kinda top of mind, I think, for me, especially the first year or two if I didn't have income. That would allow me to convert more, correct?
Pat: That's correct.
Scott: That's correct.
Pat: But also, how old is your wife?
Kevin: Same age. We're within three or four months of age.
Pat: And in retirement, how do you pay for medical?
Kevin: Yeah, that would be... I think, well, that's a very good point. That she's...
Scott: She's a teacher.
Kevin: She's a teacher, so she has retiree health benefits. And I don't know the pricing if it would be beneficial for me to get onto her plan or just go out into the marketplace.
Pat: Oh, yeah.
Scott: The market's very expensive.
Pat: Yes, yes.
Scott: Probably her plan.
Pat: And so, I knew you had mentioned earlier that she was a teacher. So, you have to actually build that into the plan as well, is what kind of benefits health insurance. What makes it easier for you to retire, by the way, if you actually are covered under her retiree health insurance, unless she stays... The best thing that could happen is you retire and she works till she's 75.
Kevin: Yeah, I don't know if got that in.
Scott: He was excluding the wife anyway.
Pat: He didn't exclude the wife in the retirement.
Scott: Yeah. This trip north, they need to plan the cruise for one person.
Pat: I know I'd save so much money.
Scott: Save so much money.
Kevin: You know, I am starting to work on...
Scott: You just did it for one.
Kevin: You know, for, like, my monthly budget, you know, I'm factoring that. I am factoring in, you know, $1,500 a month for health insurance. I don't, you know...
Pat: So, a good financial adviser will actually model this at a date. And actually and a good financial adviser would be highly concerned about the health insurance between the dates you retire and...
Kevin: 65.
Pat: Yes.
Scott: Yeah. And, you know, so what happens if your wife suddenly has an early death? What's that do for your medical?
Pat: So, if you're engaged with an adviser now, just go and give them the actually very specific dates, and then just target to that, and then it makes it so much easier to plan.
Kevin: I will.
Pat: All right. Appreciate the call.
Kevin: All right. Thank you, gentlemen.
Pat: Wish you well.
Kevin: Good bye. Take care.
Scott: Yeah. It's pretty...
Pat: He didn't exclude his wife in retirement.
Scott: It's relatively young to be retired.
Pat: Very young.
Scott: Turning 50 and planning to retire in a couple years. We saw that in the '90s, and the stock market's kept on...
Pat: In '60s, yeah.
Scott: Yeah. A lot of people retiring younger and younger and for a while. And the market's fallible. They couldn't afford it, and then they push up retirement. And now, we're seeing a lot of people delaying retirement or continue to do some sort of employment, but they have financial assets.
Pat: Yes. And large part of that is that the health insurance is a driver.
Scott: That's right.
Pat: But the .com boom, do you remember the commercial with E-Trade, where the guy was on a gurney?
Scott: No.
Pat: You don't remember this? He was face down on a gurney. He was coming out of a room, and he had money come coming out of his rear end.
Scott: No, I don't remember that ad.
Pat: You don't remember?
Scott: They were pretty aggressive in some of their market campaigns.
Pat: It says you have so much money. You have this problem. And they had a guy, they were gonna operate on him because he had so much money.
Scott: Had an account at E-Trade.
Pat: He had an account E-Trade.
Scott: They also had the babies. It was, I mean, it's so easy. Baby can do it.
Pat: Yeah. For a while.
Scott: For a while. You don't see the name E-Trade anymore, do you?
Pat: No. They got bought by somebody. Morgan Stanley. Smith Barney?
Scott: I can't keep track.
Pat: Something like that?
Scott: I can't keep track no more.
Pat: They were bought by someone. Smith Barney name still exist? I don't think so. I don't know. No, I don't think so.
Scott: I don't think it does. I mean, there's been so much consolidation.
Pat: In the industry, and it will continue.
Scott: As most industries. And consolidation is part of what happens. Companies grow, and they merge with other ones, and continue to grow and all that stuff.
Pat: But, let's go to the...
Scott: But no medical is a big deal. And if you're counting on your spouses, and if you're that young, you need to think, "All right, what happens if my spouse passes away?" You might need life insurance on a spouse for a period of time.
Pat: Oh, yeah, you have to.
Scott: To ensure that, depending on your financial assets.
Pat: Like the last call is a little tight given...
Pat: Oh, very tight. That's why we said specific date.
Scott: And run the models.
Pat: And run the models.
Scott: Seems a little tight to me. Let's talk to Susan in Ohio. Susan, you're with Allworth's "Money Matters".
Susan: Hello.
Scott: Hi.
Susan: Thanks for taking my call.
Scott: Yes, glad you joined us.
Susan: Okay. So, I have two kids in their mid-20s who are both college graduates. They're working full-time. And I'm just trying to figure out the best advice to give them at this point for their financial future. One works in a company that has a 401(k), so he's contributing to that. And he's done well already three years in his career and he's saving a lot. And then the other one, doesn't have a 401(k). We've set up an IRA for her. Hopefully, she's gonna be getting a better paying job soon, but I don't know when that's gonna happen. So, we are just trying to... They're totally different. And so, it's like...
Pat: Of course.
Susan: Yeah. I'm sure there isn't, like, the same advice I should be giving both of them. But what would be the good parent thing to do?
Pat: Do they want your advice?
Susan: Well, that's a great question. I mean, we're not asking.
Scott: But so, it sounds like right now, one of your kids, their career is showing well. They're making great money. They're saving well. You have no worries about their financial future.
Susan: I mean, probably not. Yeah, right.
Scott: The other one, you love just as much, great person, but their career is not doing as well. They don't they don't have opportunities to save, and they haven't been saving. They've had opportunities, but they haven't been saving.
Susan: And a little bit. Yeah, a little bit.
Scott: And so, you've been saving helping that child by setting some money aside for their future, right?
Susan: I mean, a little bit. Right. I mean, you know, right. I mean, we did that for both of them. And both, we paid for, you know, both colleges and all of that. Which, I mean, they say all the time, "That was the best gift you could have given us," because most of their friends have a lot of college debt. And so, you know, we never wanted them to have to deal with that.
Pat: Oh, that's nice.
Susan: So, yeah. Well, I'm trying to get help.
Pat: It's nice that it's nice that they recognize it.
Scott: And are you in a position where you have substantially more assets than you may need in your lifetime?
Susan: Oh, I mean, I wouldn't say that. I mean, I wouldn't say that. But, you know, no. I mean, we don't have any big chunk of money that we can pass along to them or anything like that.
Scott: So, what is your question for...? What are you hoping...? Like, if you got off this call and said, "Man, I'm so glad I called those guys." What is it you're hoping to get?
Susan: Is there just, like, this is what every, you know, person in their mid-20s should be doing financially? You know, what are the top three things that we should tell them?
Pat: Oh, is save 15% of their income.
Scott: Focus on your career.
Pat: And focus on your career.
Scott: Save 15% of your income. Avoid all consumer debt.
Pat: And marry well.
Susan: Okay. Oh, yeah. I love it. I love it.
Pat: That's when she said, "Oh, yeah." That's funny. Oh, yeah. Save 15% of the income and focus on the career. But, you know, Scott has four children. I have four children. Mine are all... My oldest is 30 now. Some of them want your advice, some absolutely don't care.
Susan: Right. I mean, I guess it's not that they don't care. It's just they're, "Oh, we have so much time."
Scott: Different.
Susan: And so, you know, the idea of compound interest is, like, you have so much time, and you cannot talk them...
Scott: But this generation looks at it a little different too. I mean, there's this kind of whole movement where there's mini retirements, where they'll work for six years and then take four months off, five months off.
Susan: Time off, yeah, right.
Scott: Which I'm 58. If I did that, people would've looked at me like I was out of my mind. But that's, like, it's not that common, but it's becoming more common.
Pat: So, yeah, if she saves 15%, and if she doesn't have a plan available through her employer, then I would put it into a Roth.
Scott: She can save it on a monthly basis. She can set up something, just get sucked out of her checking account.
Pat: Because I assume her income's relatively low.
Susan: Right. I mean, it's low, and it's not even full-time. So, she's still on my benefits. So, it's, like, 30 hours a week, and then no benefits. And then it's not super low. But, you know, I think she's like, "Okay. I've got a year in now. I need to get more experience. I need to start looking for another job." But just having it, like, a percentage of 15%, I think, is a good number because that doesn't seem outrageous. That seems...
Pat: No, no. And they're not used to having any money anyway. And what what's her degree in?
Susan: Her degree is in graphic design.
Pat: Okay. Yeah. Unfortunately, it's a tough field right now because of AI.
Susan: It is a tough field, yeah. It is a tough field, exactly.
Pat: AI has displaced... In fact, I was talking to our graphic designer a couple weeks ago, and he had done a an internal video. And he asked me if I could tell what parts of it were AI, and I could not.
Susan: Yeah, it is.
Pat: He had still shots of an adviser meeting with clients, and he made the clients and the advisers interact with each other with no voice, but movement by using AI. And it was an internal, and I don't know if they were real clients or not real clients, but it was internal. But, anyway, different subject.
Scott: A part of this, so for you, Susan, saving and having financial security has always been important to you. It's one of your values. And...
Susan: Right. I mean, and that was something my dad instilled in me.
Scott: I understand.
Susan: Because he grew up with, you know, no money at all. But he also did...
Scott: Do you have siblings?
Susan: I do. I have two siblings.
Scott: And are you guys all the same financially?
Susan: I mean, they're better off than I am.
Pat: Oh, okay, well...
Susan: I would say I'm good. I would say one is very good. I would say one is very, very good. So, you know, none of us are horrible. But it goes back to that marrying for money thing. So, the one who's very, very good.
Pat: They married well.
Susan: Very, very well. Yeah, right. Yes, exactly. And the other one has no kids. So, wouldn't we all have a lot of money?
Scott: But I have three sisters. We are all very different financially. Extremely different.
Pat: How you view money. Not just your income, but how you view money.
Scott: All of it. And we have the same parent, right? And so, I think... I mean, I have adult kids as well.
Susan: Yeah. And there's not one way...
Scott: You know, it's always funny you get new parents, and they're all idealistic, "Oh, we're gonna raise them this way, and then they're gonna turn out like this." And then when somehow the teenage years come and you realize their hopes and dreams for their life may not be your hopes and dreams for their life.
Susan: Right, exactly. It's who they're around. Yes, exactly.
Scott: And what they're...
Susan: But the good thing is our kids, they don't blow money. They're very conscientious. They don't overspend. They're not into the consumer thing.
Scott: Nice.
Susan: I mean, neither one of them. They hate to shop, like, hate to shop. So, like, I have to say, "I think you need new socks," you know. So, they're not running around, like, blowing money like crazy. They're way more conservative than I am when it comes to spending. And I don't think I'm outrageous, but they're very conservative. So, you know, that's great. But I also just don't want, you know, in 5 years, 10 years, "Oh, wow, this is all I have." Or, "I wanna buy a house, and I should have been planning already," you know, so...
Pat: Well, the nice thing about the Roth is it actually allows you to do that because you could pull out your principal after the Roth's been established for five years. So, just have them do 15% of the income in Roth and develop the discipline. At this time, age, you just want them to develop the discipline. So..
Scott: Yeah. And it's one of those things where... I mean, there are moments with my kids I just like, "Hey, it's your life. You've learned." I mean, they're not gonna learn anything new from me. They've heard it all from me. If they ask my opinion, I'll give it to them. Otherwise, I try to just keep my mouth shut.
Pat: Do you spend a lot of time thinking about this, or...?
Scott: Yeah, I want good relations with my kids. I have thought a lot about it. And I don't wanna spend a lot of time... They don't always take it. I mean, you know.
Pat: I only give the advice if they ask.
Scott: Yeah. That's what I'm...
Pat: Because...
Scott: And if I saw something really serious in life, I'd probably sit down and have a conversation.
Pat: And you'd say, "Have you considered this?" Which is a nice way of actually giving advice.
Scott: Yeah. You know, before we go back to next call here, my son... And I've talked about his poker plane in in the past.
Pat: Yeah. But he's a pilot for JSX.
Scott: Yes. He's a pilot.
Pat: Which by the way, I flew JSX a couple weeks ago, and it was a little bit more expensive than Southwest. But...
Scott: It's probably substantially more. Southwest is, like, every week, the price goes up. And, you know, if you buy it two days before, it's expensive.
Pat: We bought this relatively short notice. But it was it was one of the most enjoyable flying experiences I've ever had. We drove up to a hangar. It was a hangar. And there was a roped off area with some carpet in the...
Scott: Where did you fly out of?
Pat: Reno. Burbank was the hangar. We flew out of Reno. It had a little place there. It was kinda crowded. You just went and got your ticket.
Scott: You pull your car up and they value your car, right?
Pat: Yes. They get you your ticket. And then they screen you once you're getting on the plane. So, they go through the screener where they're actually X-raying your bags.
Scott: Those are new screeners that require...
Pat: All that.
Scott: The other airlines quite foul.
Pat: Oh, got it. Because it is commercial airline. And then you get on the plane, and the seats are wide. And it was fast, and it was easy, and parking was easy. And it was comfortable. Anyway, JSX, real commercial.
Scott: I'm glad you get a pick with JSX, which I have not flown them even though my son's a pilot. But he used to play quite a bit of poker. And he would make money, like, on his tax returns. But it's actually a big chunk of his...
Pat: His income was playing poker.
Scott: Yeah. Well, and while he was in, you know, a pilot school, it was, like, his only source of income. And he was... But so, I asked him the other day. And I know that he'd kinda started to get burned out on it. He was playing less and less. And I talked to him, and he says, "I quit playing." He says, "I can't I can't play anymore because of the new tax law that's coming into it." And so, in the new, the One Big Beautiful Bill act...
Pat: A little bit of this, how much you can deduct.
Scott: You can only deduct 90% of your losses.
Pat: And is that a big enough delta that it makes...
Scott: He said... Like, I'm just gonna make up some numbers because... Like, last year, his margin was maybe 8%.
Pat: So, he tracks all his play.
Scott: Oh, yeah, yeah, yeah, 100%.
Pat: He takes it like a job. Like, that's his job.
Scott: Yes, of course. That's exactly what he said, "I view it like a second job for me. And I figure I can make X dollars an hour." But if let's say your margin, let's say somebody gambles a lot. Let's say they have a million dollars in in winnings and $900,000 in losses per year. They made a $100,000. Million in winnings, 900,000 in losses, you made a million dollars. In the past...
Pat: Oh, but then you only get to deduct $810,000 of that loss.
Scott: Correct.
Pat: You only get to deduct... I didn't think about it like that, okay.
Scott: So, you'd be taxed on $80,000. He says one of his buddies, he's like, he says, "There's no way. My tax bill..."
Pat: Because their margins aren't that large.
Scott: "My tax bill are gonna be more than what I..."
Pat: Got it. Got it. Got it. Got it. So, if you run it at 8% margin, I mean, it just wiped out a large portion. Unless you have big wins, but that's not how they play.
Scott: No. Because you're gonna have big losses. You might have... As he was talking about, he's got a lot of friends that are professional card players. And they might have a couple years where they make huge, and they might have a full year where they're at a loss. And if you can't deduct all your losses, it's completely chain... This must start next year. I don't think it starts this year. But it's one of those things. I don't know how that got pushed in there. I'm not a big fan of professional gambling.
Pat: But, again, back to you telling your kids what to do.
Scott: Yeah. It's my son. I love my son, and I was hoping that this would play his course. And it's just kind of a...
Pat: Well, it has. The government mandated it.
Scott: Yeah. Well, I just like win, win, win. I like business transactions where everybody wins,
not where it's a win loss.
Pat: Which is how...
Scott: Gambling things.
Pat: ...poker is. It's interesting. It will affect... I did read an article where they said this will definitely affect gambling centers, including Indian casinos, and Las Vegas and a couple others.
Scott: They have to re-appeal that piece of it. It'll destroy it.
Pat: It would destroy that industry.
Scott: Destroy it.
Pat: Yeah. Yeah, you affectively...
Scott: Whether you like the industry or dislike the industry, I mean, you could tell someone you can only deduct some of your business expenses.
Pat: That was the article I read. It talked about how there's no taxes on tips, but the fact that this will be offset because there'll be less people coming to Vegas to tip.
Scott: Yeah. That's it. That was the pieces.
Pat: It has to, I mean...
Scott: I don't know how much the casinos make off those kind of... I don't know where their mural money is. Because when you're playing poker, I think the house just gets... I don't know what they get.
Pat: They get a percentage of the... I don't know. I don't play poker.
Scott: They get something.
Pat: My understanding is that they're not in the pot.
Scott: They're not taking the winnings, though. Anyway, why did I start talking about that?
Pat: I give up. Whatever case.
Scott: What's the...
Pat: Big Beautiful.
Scott: One Big Beautiful Bill act.
Pat: Yes. Big Beautiful Bill.
Scott: And we're talking now with Nancy. Nancy, you're with Allworth's "Money Matters".
Nancy: Hi. Thank you for taking my call.
Scott: Sure.
Nancy: I'm a longtime listener.
Scott: Oh, good. Thank you.
Nancy: I have a couple of questions, but, the first one is, have you two changed your opinion about, cryptocurrency now the Genius Act has passed regarding stablecoin? I was kinda wondering how you were feeling about that.
Pat: That's a great question. I get the thesis behind the stablecoin. It just... I in fact, I was thinking.
Scott: The Genius Act, it was a bill that was passed to put some regulation on cryptocurrency and, primarily, stablecoins.
Pat: And stablecoins. So...
Scott: They're almost like banks and
Pat: Yeah. So, what let's...
Scott: Without the multiplying factor.
Pat: ...describe for the rest of the listeners what a stablecoin would be. One is, if I had a coin that was in an account and I owed Scott some money, rather than use the current financial situations in order to get that money, I actually could just give him access to the stablecoin and move some stablecoin over to him and rather than dollars.
Scott: Instead of using Venmo or Zelle or PayPal.
Pat: Or dollars or writing a check...
Scott: Or dollars, yeah.
Pat: ...or doing an electronic funds transfer. So, I was thinking about this. It's funny you asked, because yesterday, I was on a bike ride, and I was thinking about stablecoin. And I thought, does Intel come up with a stable coin? Does Microsoft come up with a stable coin? Does Apple come up with their own stable coin?
Scott: Or Amazon.
Pat: Or Amazon come up with their own stable coin? And then we all then start transacting in all these kind of different currencies that are all pegged to the dollar. And then what is the regulatory, which was what the idea behind the Genius Act was, is to create a framework for this regulatory environment, that fits it.
Scott: There's a lot to be worked out in this whole thing.
Pat: Yeah. That fits. Yeah, correct. And then how what is how does Apple make money? Did they make money on the carry, or meaning, people put in dollars, and then they invest those dollars in treasuries, and then they get the interest rate on it if read.
Scott: I think that's how it's structured.
Pat: But then then at that point in time, then why would I want a stable coin? Why wouldn't I just wanna keep my money in treasuries and just transfer it.
Scott: Yeah, that's what I... I haven't...
Pat: Right? Because why do I wanna give that carrier the interest rate to that particular currency, to Apple or Amazon or to anyone else? Why wouldn't I want it for myself? Which is why I keep my bank balances at a bare minimum. So, what do I think about it? I think about it... Obviously, I thought about it a fair amount. I haven't...
Scott: Well, you're unsure of what the future commercial application is going to be.
Pat: That's correct. Thank you.
Scott: And whether that's gonna be a tremendous benefit or negligible. And from an investment standpoint, you don't think, well, I should invest in these new companies that are putting out stablecoins.
Pat: No.
Scott: Because there's plenty of other good investment options in the universe that exist today.
Pat: And correct. And then what happens is, it's the same thing, you look at the history of credit cards. All of a sudden, one credit card offers more points and miles than another credit card, and then I start using that. What will happen in this over the long-term is that will happen with stablecoins too, which is, okay, we offer 3% interest, or we offer this. And they say, "Okay, we don't allow you to offer interest."
Scott: Didn't the bill say there's no interest?
Pat: Yeah. But then maybe something else of value, or maybe they're tied to Amazon, or maybe I get a 20% discount when I buy, you know, tape at Amazon, and they deliver it to my house with the rest of the stuff we buy every day.
Scott: Three deliveries a day.
Pat: I actually took some paint and marked off a place in the street for the Amazon guy to park. Just as Amazon did. He's got his own parking place. He's got his own... So, what are your thoughts?
Nancy: Sounds like I'm just not going there.
Pat: Really?
Nancy: No.
Pat: I just went there for you.
Scott: You're not going there in your thoughts?
Nancy: Well, I'm gonna give it time. That's for sure.
Pat: Well, you know, you're not all that positive about it.
Nancy: No, I am not.
Pat: I think it's right for fraud and corruption.
Scott: And so, at least, the government regulation is trying to prevent some of that. That's really what it's about.
Pat: I will not be using this stablecoin anytime soon. Let's just put it that way.
Scott: There's no need to.
Pat: Yeah. I was thinking about, and why would I put something in a noninterest bearing?
Scott: But if Amazon, if you had a 3% discount on all purchases if you use their coin, you probably would use their coin.
Pat: I might. Yeah, yeah.
Scott: But right now, there's no commercial reason for you to do so.
Pat: That's right. But if you think about how government works and the regulations, like... I was talking to a friend, I'm going off path here, but it just is an example of how the government actually sets up things and then businesses, like, figure their way around it, which is, why is your health insurance provided by your employer? Does anyone...? Why is that?
Scott: Because during World War II, they weren't allowed to increase wages, and so, these companies got around that by offering fringe benefits.
Pat: Right? Exactly.
Scott: Government intervention, yes.
Pat: Government intervention. And which is both a negative and a positive. Which is why we're so optimistic about U.S. companies in general, which is, there's a bunch of smart people that find their way around problems in order to make money, which is, you know...
Scott: I believe they weren't allowed to increase wages to entice new workers.
Pat: Thank you.
Scott: It could increase the wage. I don't know exactly the rules, but...
Pat: Anyway, all right. So, that's our view of that. Did you have another question for us, Nancy? And by the way...
Nancy: Do you have time for another question?
Pat: Oh, yeah. All the time. I'd talk to you. The mere fact that you wouldn't answer the question about the Genius Act compels me to wanna know what else you don't wanna talk about.
Nancy: Okay. This one is regarding when Trump replaces Jerome Powell in 2026, most likely, it's gonna be a yes, man. Okay, that's gonna be the Fed chair. So, I'm thinking, is now a good time to start maybe making some changes to my portfolio since the market's doing very well? This person, whoever he appoints, is gonna be the Fed chair for 10 years. So, even after Trump's out of office, that person's gonna be in control. So, I'm not sure. I know you always say...
Scott: There are certainly some things I don't agree with Trump on, and this whole area of Fed independence is one. But the markets are not worried about it.
Nancy: Yeah. But we don't have a new Fed yet, a new Fed chairman. So...
Pat: Oh. And what's your portfolio look like today? How much risk is in your...? How much do you have in equities in it?
Nancy: Okay. So, we have about maybe 65% equities and 35% in bonds.
Scott: Okay. And are you taking income from the portfolio?
Nancy: No. This is just our IRAs, and we will have to start withdrawing in two years. My husband will be 73.
Scott: And you're retired today?
Nancy: Yes, we are.
Scott: And your lifestyle doesn't isn't dependent upon your money in your...
Nancy: No, actually, it's not. We're kinda frugal.
Pat: So, that's the question. You're asking us like, "I can't see that far ahead, and I actually have no idea how the markets will react."
Scott: Well, the markets aren't spooked about it.
Pat: That's right. That's right. They're not at all. I mean, when they get up there and they're in that little tit for tat at the Federal Reserve, the markets are like, "Yee, this is just a Trump thing, and this too will blow over." So, the markets aren't. Look, for you, it doesn't matter one way or the other. If you're worried about it, then lower your equity position, but don't go crazy. I mean, lower it to 50% or 55%. What you don't wanna do is, if you're reacting to information that you perceive in the marketplace is going to be negative, then it's okay it's okay to move the portfolio around the edges as long as you don't bet the farm on it. Because there's a good chance you're gonna be wrong, and there's a good chance that you might be right. We don't know. We don't know. But one of the things that I would be telling you to do is, prior to when you start required minimum distributions is looking at Roth conversions for your husband.
Nancy: Yeah.
Pat: That's something that you can actually control and actually will add alpha or excess returns to an after tax portfolio.
Scott: Meaning, and if you have any charitable contributions that you've done, you know, written a check or whatnot, consider using required part of your RMD for that. You can actually do that at age 70.
Pat: So, which is weird when they change the whole thing.
Scott: Yeah, it's complicated.
Pat: But if you're worried about it, then move the portfolio. But don't go crazy, please.
Nancy: Okay. Now, I...
Scott: I mean, I think in some ways, you're kinda borrowing trouble if you're worried about what's gonna happen a year from now with the Fed thing.
Pat: Obviously, there's... I shouldn't say obviously. I sense there's a dislike for Donald Trump.
Scott: You don't have to ask her to admit to that or not admit to that.
Pat: I didn't tell her to.
Scott: I mean, I have friends that are on such extremes politically. Like, last thing I wanna talk about is politics with them. Either one because...
Pat: Oh, that's right. Oh, look, I spent...
Scott: What? You don't love Trump? You're not a huge shot.
Pat: I spent one weekend with a MAGA. I'm all in. And then the next weekend on the other side of the equation, like, you couldn't get further away.
Scott: I have people in my life I love dearly that are on both sides. And Nancy probably does too. She doesn't wanna come out of the closet,
Nancy: Yeah.
Scott: so to speak.
Nancy: I'm not a Trump supporter.
Pat: Okay. We got that. All right. Anyway, just try not to let this drive your emotion, your decision making. So, if it does, just do it on a little bit.
Scott: You know, I do think it it's important to have an independent Fed chair. But...
Pat: We're heading now to Ohio and talking with Janae. Janae, you're with Allworth's "Money Matters".
Janae: Hi. Thank you for taking my call.
Pat: Yeah, glad you're joining us.
Janae: My husband and I own a construction business, and all of our investing is in real estate. So, I'm wondering what else we should do for retirement.
Scott: And...
Pat: And... Go ahead, Scott.
Scott: Construction to individual homes, is that primarily what you guys do?
Janae: He does just about anything, so commercial or residential.
Scott: And how many employees?
Janae: One.
Pat: And is that you or just him? Or is it...?
Janae: Basically, it's just him and somebody one other guy he works with.
Pat: And they're on payroll, and they're not 1099. They are considered an employer or contractor.
Janae: They are actually one of the sub-contractor.
Pat: Okay. And the reason we asked that is because if you have employees, you have different retirement plans than if you don't have employees. And do you contribute to an IRA now, or...?
Janae: We don't.
Pat: And how old are you?
Janae: I'm 49, and he's 44.
Pat: And what's the approximate income last year? Not revenue, but income, the money that you actually paid taxes on.
Janae: Around $80,000.
Pat: And how much real estate do you own, like, in in dollar amount? $100,000, $300,000, $500,000, a million?
Janae: Between our house and our property is about $1.1. Then we have four rentals and a church, and they're about $800,000 in value.
Scott: And what do you owe on the rentals?
Janae: We own all of our rentals, and we have about $50,000 on the church and about $210,000 on our house.
Pat: And what's the interest rate on those?
Janae: Oh, goodness.
Scott: You own a church? Is that what you said?
Janae: Yeah.
Scott: The first time I thought maybe you misspoke or I misheard you, then you said it a second time.
Janae: Yeah. It was a COVID purchase. My daughter was getting married. It came for auction, and he bought it, and it will be an event center.
Pat: Oh, okay.
Scott: Okay. He's not a pastor/contractor.
Janae: No.
Scott: So, what do you feel your need is? I mean, just look at...
Pat: One second, Scott. Do you know what the interest rate is on those loans?
Janae: No. They're not super high, but I don't know what they are.
Pat: Okay. They were done in the last few years.
Scott: I mean, you've got $2 million of real estate, and you've got $250,000 of debt on it.
Pat: I know. Yeah, but I wouldn't count that personal real estate. But she said land, though, too, so that means he is a contractor. He gets subdivided any day. I think you should start putting money into a company 401(k) or unit k or self-directed 401(k) forms. So...
Scott: Or just IRAs for the two of you. Simple. That's the simplest thing.
Pat: That is the simplest thing. And the income is $80,000. And I would go a 100% total market.
Janae: Okay. So, when you say a 401(k), I thought those were only connected to where...
Scott: I don't think you... I mean, I would recommend doing an IRA for the two of you before I set anything else up.
Pat: Yeah. I think about this.
Scott: What's...?
Pat: Wait, wait, wait. One second, Scott. The 401(k)'s are just as easy to implement today as an IRA, plus you can borrow out of them if you need to. Not that I'd want them to. How much money do you have in the bank?
Janae: We have $12,000 in our rental account, and then about $9,000 in our business account.
Pat: You don't have enough cash on hand.
Scott: Yeah, you don't. How about your personal? Do you have any, like, emergency reserve? What happens if your husband has a serious illness or breaks his leg, or...?
Janae: We do have disability insurance through Medi-Share, but that's about it.
Pat: You need quite a bit more in in liquid reserves, especially for self-employed. And are you working outside the home?
Janae: No.
Scott: What's prompted this call? Because you don't have any... You've got you've done a good job with all these rentals. You don't have a lot of debt.
Janae: We are getting older, and I just start thinking, "Oh, we should have been putting money in an IRA or something all of this time." And, I don't really know anything about investing that way. My husband really likes the tangible type investments like property. So, I just really don't know what else we should be doing, I guess.
Pat: Well, I like investing. So, whether it's tangible, stocks, bonds, right? The investment doesn't know you own it. And the more diversified you are in your investment portfolio over the long-term, the less volatility that you will have in the portfolio over the long-term. I think...
Scott: And, I mean, if you continue down the path of rentals, you're gonna go from 4 rentals to 6 rentals to 8 rentals to 10 rentals, suddenly buy yourself another job.
Pat: Which is okay. She's 49?
Scott: Yeah, yeah. If that's what you want. But put some money in an IRA, own a total market index. You're now an owner of the largest companies in The United States, and you're gonna participate with their growth over the long-term.
Pat: And it's just good diversification. You need more liquid cash, though. You need more of a safety net there, too.
Janae: How much do you think?
Pat: At least $25,000. And you said you have some for the rental set aside. I think you said $12,000 then $9,000 personal. When I say, at least, $25,000, that's on the personal side, not on the rental side.
Janae: Is that all really personal?
Scott: You guys are pretty tight on the rental, too. I'd be a little...
Pat: I would, too.
Scott: What happens if one of the your tenants pulls all the appliances out and takes all the copper piping and...
Pat: She's calling from Ohio.
Janae: God forbid it happens?
Scott: Oh, they're all good people in Ohio?
Pat: Correct.
Janae: No. No, no, no.
Scott: Never happening like that in Ohio.
Pat: No, I agree with Scott. You, both, if you were sitting in my office, I would say, let's get some more money in the bank. Let's do that first on both the rental.
Scott: Yeah, I think I would agree with that.
Pat: And then let's go do the IRA.
Scott: I'm a little nervous. Something happens and you don't have the cash, and now you're...
Pat: Yeah. If you had called and said there was $50,000 between the rental...
Scott: It'd be simple.
Pat: ...and I'd say, do a Roth IRA and buy the total market, but I don't think I'd worry about the Roth IRA until I got, at least, $50,000, between those two accounts.
Scott: Yeah. And I'd get that saved up before you go out and buy another rental, because it's gonna be tempting to... Because that's what can really create some havoc in your financial life.
Pat: That can...
Scott: You're short on cash. And you've got the assets, but... And then, Pat, I think I just use a basic IRA to start.
Pat: Yeah, but why not Roth? $80,000 two of them?
Scott: You have to run the numbers. I think you're probably right. I'd probably use the Roth IRA.
Pat: I'd probably.
Scott: Before we sign off, I wanna let you know about a webinar we've got coming up. It's a case study in advanced portfolio optimization. Benjamin Abraham is one of our Allworth partner advisors going to be doing this. And what you're gonna learn here, you're gonna get a behind the scenes breakdown of our in-house experts and some industry leading tools that helped a high-net worth couple do several things. And this is a real life example there. How they eliminated some costly capital gain tax with some smart tax restructuring, how they're able to build confidence through retirement income modeling, and how they're able to refine their portfolio to unlock some longer term flexibility. So, it's really kind of a rare look at how all things come together. The webinar is going to be Wednesday, August 20th, at 10 a.m. Pacific, Thursday, August 21st, at noon Pacific, Saturday, August 23rd, at 9 a.m. Pacific. And, to register and get more information, go to allworthfinancial.com/workshops.
Well, Pat, I think that's all the time we've got today. As always, been good being here. We'll see you again next week. And if you like this program, give us a review, a rating, or whatever.
Pat: Yeah, whenever you get the podcast. Share it with a friend.
Scott: Thank you. See you next week.
Automated Voice: 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 a state-planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah, glad you are here with us as we talk about financial matters. Myself, my cohost, longtime business partner.
Pat: Yes, we've been doing this for a while.
Scott: We're both financial advisers.
Pat: So, last week, I had mentioned in, I guess, the beginning of the show that I wanted to talk about these high-yield municipal bonds.
Scott: Oh, you never did.
Pat: We never got to it. We got tied up in, other conversations.
Scott: The fake tease.
Pat: It was a fake tease. And for that, I apologize.
Scott: Yes, good.
Pat: That I enticed you with such an incredible topic that you listened to the end of the show about high-yield muni bonds. So, I thought this is a really super interesting concept that applies to many asset classes.
Scott: What's the concept?
Pat: Is that because these high-yield municipal bonds that are sitting inside of ETFs and mutual funds don't trade very often.
Scott: Gotta remember...
Pat: So, let's step back. Municipal, these are municipalities that raise money by issuing bonds.
Scott: They become high yield when there's some question of whether they're gonna be able to repay these bonds.
Pat: Or pay them back on time, or just the credit quality of the of the issuer. And therefore, the interest rate is higher than you would normally receive because of the fact...
Scott: There's some risk there.
Pat: ...there's some risk there. And so, people sometimes will just reach for yield. And you hear it all the time like, "What's the yield?"
Scott: "I need yield."
Pat: "I need yield."
Scott: What's the yield, though?
Pat: "I need high yield. I need yield. I'm retired. I need high yield."
Scott: "I need yield"
Pat: Without understanding the underlying risk. And as if you know from our show, everything is risk-adjusted returns. Well, these things are so thinly traded, so thinly traded.
Scott: Well, all these missed bounties aren't that big. I mean, there's lots of little sanitation districts.
Pat: Or universities, too, colleges. All kinds of little districts, this district, that district.
Scott:. Little districts. Yes. And, you know, little water district that has three employees or park and rec district.
Pat: And when they go to sell, they say, "We're gonna issue a bond, a $50 million bond," let's say.
Scott: $10 million? $20 million?
Scott: They're gonna issue it. And it might be, a couple mutual fund companies might snap up the whole issue, right?
Pat: A lot of it, yes, yes.
Scott: And so...
Pat: Then they don't trade.
Scott: The bond market is so much larger than the stock market.
Pat: And it's not nearly as efficient.
Scott: No, because...
Pat: As this will demonstrate, right? As this will demonstrate. So, all of a sudden, the portfolio prices at one level in these ETFs because they have no...
Scott: How do you know what this is actually worth?
Pat: Yes, because it hasn't traded in six months or a year, a particular bond in the portfolio. And then all of a sudden, it trades inside of the municipal bond fund. You as an investor are gonna get whatever it trades at their price, their book value. It trades, and all of a sudden, it's not worth half of what they priced it at in ETFs. And it brings me back to...
Scott: How common is this?
Pat: In the high yield world, no one really knows because some they don't trade that often. So, the challenge is you put money in some ETF that owns it's... You seek out a high yield municipal bond fund.
Scott: Which is fine.
Pat: You put money in there thinking it's worth X. But because of...
Scott: And the portfolio managers might think it's worth X. They don't know. And if it's a small municipality, they can't take the time to sit and do a bunch of research on each individual holding.
Pat: Correct. But my point gets to is, illiquid assets don't have to be a 100% illiquid where you lack transparency to price. So, as we've talked about on this show, non-traded REITs are illiquid. And so, you think it's worth one thing until it prices. And then when a price is bam, you realize it's not worth nearly as much. It happens inside of bond funds as well.
Scott: And are we seeing big reduction in values of...?
Pat: Not that much.
Scott: Yeah. Because they're actually so highly diversified.
Pat: Yeah, correct, because they're small portions. But it just remain, you know, this one that talked about bond sales for Buckingham Senior Living Communities, which was a senior living community that they got the municipality to sponsor.
Scott: How do they get municipal financing for a senior community?
Pat: Well, because the municipality may wanna actually sponsor it, then hire an operating company to actually run it because they feel they need a senior community in their neighborhood. And then it's not that uncommon.
Scott: It's probably the other way around, Pat. A developer of senior community properties goes to some community and says, "Hey, you really would benefit by having this in your background. We'll put one in if you help us raise this money on a tax favorable basis."
Pat: So, the point being is that...
Scott: i.e., government subsidized.
Pat: ...the bigger the fund that you're in, the more broadly invested is. So, the example they give is, Easterly Asset management's high-yield, muni bond in June cost $6, right? The share price tumbled to $3 because of a bond trade.
Scott: One particular fund?
Pat: But it was it was pretty small. It was pretty small, right?
Scott: But if the buyer who bought the day before might have done some research, what's the highest performing...?
Pat: What's the highest yield?
Scott: Yeah. What is the highest yielding municipal fund out there? That's the one I want.
Pat: That's right.
Scott: And it might have had a five star rating.
Pat: But if you're going to these huge, massive, like, Franklin Templeton or ETFs, it gets thousands of thousands. But at the same time, you're gonna dilute that yield because they have a diversified portfolio. So, the reach to yield... You're right, you know. I just googled, what is the highest yielding municipal bond.
Scott: It's gonna be the one the most risk. It's probably the one that hasn't priced.
Pat: Priced in a while.
Scott: So, again, and you look at it from that, it's probably the one that doesn't take the repricing seriously, though.
Pat: Oftentimes, more information doesn't make an investor better, more information.
Scott: Well, this was good information.
Pat: I thought so. That's why I... No, by googling something, my point being, like, I could just Google high yield thinking... I've had three or four clients in my career tell me they I didn't understand it. The only thing that mattered were dividends and yields, not the underlying asset.
Scott: Well, and here's... I mean, it takes something else.
Pat: Three or four clients in my whole career. I had one guy insist that I had no idea what I was talking about. As long as you got the highest yielding bond...
Scott: Well, he was on the same floor.
Pat: ...or the highest paying dividend... Oh, I couldn't take him on the score.
Scott: Of course. He was foolish. Why would you? I mean, he doesn't know what he's talking about.
Pat: That's right.
Scott: And telling you you don't know what you're talking about, that's my definition of a fool. You're the expert, and he's not. And...
Pat: In this particular subject, if I was discussing another subject...
Scott: Yeah, I understand. I understand. Then you might be the fool.
Pat: I would probably be the fool.
Scott: But, look, I remember back when I was taking on client, this was actually years ago when we were using more mutual funds than ETFs, and it was more actively traded. I mean, go back 25 years ago or whatever.
Pat: Which is what it was done back then.
Scott: Yeah. And it was easy to... That's when Internet started making the information available. And so, someone put together a portfolio. Are these all five star funds? And you remember this. So, there was a battle because sometimes, you wanted to recommend a fund that wasn't the five star fund because the underlying holdings and whatnot, you thought it was a better opportunity.
Pat: The five star funds was Morningstar at the time, which is a rating service. Still around.
Scott: And it looked at historical returns.
Pat: That's right.
Scott: Well, we would look at underlying holdings and build portfolios. It's before the ETFs even came out. And sometimes, a three star fund or four star fund would be our recommendation.
Pat: Because it was more likely to have higher returns in the future.
Scott: Yes. But I remember the arguments would get over peep with people. Not arguments, but it was... To your point, sometimes, more information is not always helpful.
Pat: That's right. That's right.
Scott: That was a situation where they thought they were doing their own research and their own due diligence, and I only wanna buy five star.
Pat: Funds.
Scott: And sometimes I'd say, "Well, then we're not the place for you." The easiest thing for me to do is just go and...
Pat: Pick print out five star funds.
Scott: Print out last year's top five funds and sell you those.
Pat: Yeah, in 1999, right before the tech.
Scott: Exact. Yeah, my point. And the five star funds would have been the ones that are heavily taxed.
Pat: Janus funds. Do you remember the Janus funds? All five star funds.
Scott: Yeah. They were. That's right.
Pat: No one talks about Janus funds anymore.
Scott: They sold a part of Henderson, Janus Henderson. Are they just Henderson now?
Pat: I don't know. But they were part of a...
Scott: They have a presence in Denver. There's a downtown building there.
Pat: That is right, in Cherry Creek. It's a spin off for SP, Southern Pacific Railroad.
Scott: What was the railroad doing involved in the...?
Pat: Well, it used to manage their pension funds. That was where Janus came from. We all know that.
Scott: I didn't know that. Thanks for the history lesson, that useless trivia.
Pat: I said Sprint came from Southern Pacific Railroad. SPRINT the telephone company. Southern Pacific Railroad Inter-network Telecommunications, SPRINT.
Scott: And there are times I wonder, why don't we use rail more for transporting goods? They keep taking all the railroad tracks out.
Pat: Is that what you think?
Scott: I do.
Pat: Like, every downtown's got their rail yard that they're redoing in California.
Scott: They're taking out their trash.
Pat: You're not saying that when the rail yard's coming in the Midwest when they're...
Scott: Oh, it's coming in California, the bull train.
Pat: Okay. Let's go.
Scott: My grandkids are gonna look forward. They can go from Fresno to Modesto.
Pat: Oh, my God.
Scott: How do you get to Bakersfield from Fresno? It's gonna be awesome.
Pat: We're a laughingstock. California is a laughingstock.
Scott: It's unbelievable. Some of the stuff is unbelievable. You wait till gas is 8 bucks a gallon in a couple years because two more refiners just quit.
Pat: Shut down. That's gone. Won't be a...
Scott: And you're watching Newsom trying to reinvent himself right now. It's really...
Pat: Oh, I know. It's just something. Gas won't be $8 a gallon where I live.
Scott: Where are you living?
Pat: Not in California when it's $8 a gallon.
Scott: Is that your limit? That's the time you're leaving?
Pat: That's it.
Scott: Kathy's really happy about that, too?
Pat: We've discussed it.
Scott: When it gets $8, that's the time, we're selling our house.
Pat: Well, it's relative what they're charging in other states. Okay. Let's take some calls.
Scott: We're talking with Kevin. Kevin, you're with Allworth's "Money Matters".
Kevin: Hi, gentlemen. Thank you for taking my call.
Scott: Yeah. Thanks for joining.
Kevin: So, I'll be turning 60 here in a few weeks and probably planning to retire.
Scott: Happy birthday.
Kevin: Oh, thank you.
Scott: That's an exciting one.
Kevin: Yeah. No, I don't know about that. But it's exciting in that I'm planning to retire probably in that two to three year window. And I've got a pretty good nest egg with 401. I've continue to aggressively contribute through that. And in addition to my 401 contributions, I've been contributing to a Roth IRA. But as I'm getting closer to retiring, you know, pre-Social Security, I'd like to probably, you know, delay that. I'm wondering if it would be better, instead of contributing to a Roth, to just start building up a cash bridge maybe through something like treasury direct or what have you.
Scott: Well, here's the thing. You can take out your contributions to your Roth regardless of your age. It's just the earnings that have to wait till retirement time. And there's a five year clock that starts when you open that IRA, but you've already opened that Roth IRA. You've already opened.
Pat: So, how old are your Roth? When did you make your first contribution to the Roth IRA?
Kevin: Probably about two years ago.
Scott: Yeah. It's a three year, you had a three-year window. It's three more years, or is it five years?
Kevin: Three-year window of and I can pick up the principal, okay.
Pat: That's correct. That's correct.
Scott: Yeah. So, I would keep using that because you might not need that. You might, but you might not. But then if you don't, you've got it in this nice, tax-favored vehicle.
Pat: And so, how much money do you have in qualified dollars? 401(k)'s, IRAs, that sort of thing, 457.
Kevin: Yeah. So, my 401(k), well, between that all in, probably about a million 5, you know, excluding the wife. But then I was late to the Roth party, you know, so probably only a third of that is, you know, after tax dollars.
Pat: Okay. So, a third of it, so $2 million. And it's hard to exclude the wife if she's gonna be included in your retirement.
Kevin: Well, yes.
Pat: So, assuming...
Scott: But then he wanna exclude the wife.
Kevin: She's doing really well on herself, too. She's a teacher, so she'll have her pension. And then she's probably got another $400,000 or her pension in the Roth.
Scott: And, Kevin, will you have a pension?
Kevin: I will not. No. So, I'll be strictly Social Security, which I'm hoping to, you know, probably delay to 67, at least, you know, ideally.
Pat: All right. And the reason the reason I bring this up is, right, you wanna look at that bridge, because the time between your date of retirement and the day you start Social Security is a really good time to look at Roth conversions.
Kevin: Okay.
Pat: Right? So, if either build your own financial plan, or...
Scott: Of this $1.5 million, if you were to retire today, how much do you plan on taking out a year from that to replace your salary?
Kevin: No. Probably pretty close to $80,000, you know, probably on the bottom end. Plus when we retire, that's when I'm planning on some big expenses, vacations or weddings, kids.
Pat: How much do you make now?
Kevin: I make about... I'm in a commission sale, so it can it can range from $80 to $160, $180.
Scott: And how old are your kids?
Kevin: My kids are, 25 and 26.
Scott: Okay. You don't have to worry about them financially anymore.
Kevin: No. Their college is paid for. House is, you know, a few months away from being paid for. So...
Scott: Okay. So, house will be paid for as well. And do you plan on never going back to work, or you're just ready to this high pressure job, ready to call it quits, and...?
Kevin: No, I'd like to keep myself busy with something. So, that should be determined.
Pat: You should pay for a financial plan.
Scott: Yeah. Have you modeled this out?
Kevin: I have. I've worked with a financial adviser. I mean, we've modeled it out at the point where I just wanna make sure I'm gonna be okay. But tailored to a specific course of action, you know, is still a little squishy.
Scott: Well, because you're a couple years off.
Pat: Yeah. But I would I'd pick a date, name at it. I'd pick a date...
Kevin: Not certain.
Scott: Work with your adviser and say, "I'm gonna retire this particular date. And what does this look like? Let's assume what my portfolio is gonna be worth at that time. Where's the income gonna come from? And model it out.
Pat: Yeah. I'd pick a date. I would pick a date 18 months to 36 months in the future and just say, "Give me this number on this particular date if both myself and/or my wife go into retirement." Or give them... Look, I did it with my in-laws, my sister-in-law and brother-in-law. They were talking about retirement. They kept asking me questions. And I said, "Just go to an adviser..." Happened to be an Allworth adviser. I'm kinda partial to them. "Go to an adviser and show them everything you have, and then give them the dates that you both want to retire." They don't have to be the same dates. And they came back and said, "We're not gonna hit that date exactly, but we're within 12 months of that particular date." And it worked perfectly. He retired sooner, and she retired later.
Scott: Because one of the risks you have is you're pretty young to be retiring, right?
Kevin: Yes.
Scott: And you've had a pretty decent wage with your commissions and all, which is gonna... You don't have enough money saved up to replace that.
Kevin: Right. And, you know, you mentioned the Roth conversions, and, I mean, that's kinda top of mind, I think, for me, especially the first year or two if I didn't have income. That would allow me to convert more, correct?
Pat: That's correct.
Scott: That's correct.
Pat: But also, how old is your wife?
Kevin: Same age. We're within three or four months of age.
Pat: And in retirement, how do you pay for medical?
Kevin: Yeah, that would be... I think, well, that's a very good point. That she's...
Scott: She's a teacher.
Kevin: She's a teacher, so she has retiree health benefits. And I don't know the pricing if it would be beneficial for me to get onto her plan or just go out into the marketplace.
Pat: Oh, yeah.
Scott: The market's very expensive.
Pat: Yes, yes.
Scott: Probably her plan.
Pat: And so, I knew you had mentioned earlier that she was a teacher. So, you have to actually build that into the plan as well, is what kind of benefits health insurance. What makes it easier for you to retire, by the way, if you actually are covered under her retiree health insurance, unless she stays... The best thing that could happen is you retire and she works till she's 75.
Kevin: Yeah, I don't know if got that in.
Scott: He was excluding the wife anyway.
Pat: He didn't exclude the wife in the retirement.
Scott: Yeah. This trip north, they need to plan the cruise for one person.
Pat: I know I'd save so much money.
Scott: Save so much money.
Kevin: You know, I am starting to work on...
Scott: You just did it for one.
Kevin: You know, for, like, my monthly budget, you know, I'm factoring that. I am factoring in, you know, $1,500 a month for health insurance. I don't, you know...
Pat: So, a good financial adviser will actually model this at a date. And actually and a good financial adviser would be highly concerned about the health insurance between the dates you retire and...
Kevin: 65.
Pat: Yes.
Scott: Yeah. And, you know, so what happens if your wife suddenly has an early death? What's that do for your medical?
Pat: So, if you're engaged with an adviser now, just go and give them the actually very specific dates, and then just target to that, and then it makes it so much easier to plan.
Kevin: I will.
Pat: All right. Appreciate the call.
Kevin: All right. Thank you, gentlemen.
Pat: Wish you well.
Kevin: Good bye. Take care.
Scott: Yeah. It's pretty...
Pat: He didn't exclude his wife in retirement.
Scott: It's relatively young to be retired.
Pat: Very young.
Scott: Turning 50 and planning to retire in a couple years. We saw that in the '90s, and the stock market's kept on...
Pat: In '60s, yeah.
Scott: Yeah. A lot of people retiring younger and younger and for a while. And the market's fallible. They couldn't afford it, and then they push up retirement. And now, we're seeing a lot of people delaying retirement or continue to do some sort of employment, but they have financial assets.
Pat: Yes. And large part of that is that the health insurance is a driver.
Scott: That's right.
Pat: But the .com boom, do you remember the commercial with E-Trade, where the guy was on a gurney?
Scott: No.
Pat: You don't remember this? He was face down on a gurney. He was coming out of a room, and he had money come coming out of his rear end.
Scott: No, I don't remember that ad.
Pat: You don't remember?
Scott: They were pretty aggressive in some of their market campaigns.
Pat: It says you have so much money. You have this problem. And they had a guy, they were gonna operate on him because he had so much money.
Scott: Had an account at E-Trade.
Pat: He had an account E-Trade.
Scott: They also had the babies. It was, I mean, it's so easy. Baby can do it.
Pat: Yeah. For a while.
Scott: For a while. You don't see the name E-Trade anymore, do you?
Pat: No. They got bought by somebody. Morgan Stanley. Smith Barney?
Scott: I can't keep track.
Pat: Something like that?
Scott: I can't keep track no more.
Pat: They were bought by someone. Smith Barney name still exist? I don't think so. I don't know. No, I don't think so.
Scott: I don't think it does. I mean, there's been so much consolidation.
Pat: In the industry, and it will continue.
Scott: As most industries. And consolidation is part of what happens. Companies grow, and they merge with other ones, and continue to grow and all that stuff.
Pat: But, let's go to the...
Scott: But no medical is a big deal. And if you're counting on your spouses, and if you're that young, you need to think, "All right, what happens if my spouse passes away?" You might need life insurance on a spouse for a period of time.
Pat: Oh, yeah, you have to.
Scott: To ensure that, depending on your financial assets.
Pat: Like the last call is a little tight given...
Pat: Oh, very tight. That's why we said specific date.
Scott: And run the models.
Pat: And run the models.
Scott: Seems a little tight to me. Let's talk to Susan in Ohio. Susan, you're with Allworth's "Money Matters".
Susan: Hello.
Scott: Hi.
Susan: Thanks for taking my call.
Scott: Yes, glad you joined us.
Susan: Okay. So, I have two kids in their mid-20s who are both college graduates. They're working full-time. And I'm just trying to figure out the best advice to give them at this point for their financial future. One works in a company that has a 401(k), so he's contributing to that. And he's done well already three years in his career and he's saving a lot. And then the other one, doesn't have a 401(k). We've set up an IRA for her. Hopefully, she's gonna be getting a better paying job soon, but I don't know when that's gonna happen. So, we are just trying to... They're totally different. And so, it's like...
Pat: Of course.
Susan: Yeah. I'm sure there isn't, like, the same advice I should be giving both of them. But what would be the good parent thing to do?
Pat: Do they want your advice?
Susan: Well, that's a great question. I mean, we're not asking.
Scott: But so, it sounds like right now, one of your kids, their career is showing well. They're making great money. They're saving well. You have no worries about their financial future.
Susan: I mean, probably not. Yeah, right.
Scott: The other one, you love just as much, great person, but their career is not doing as well. They don't they don't have opportunities to save, and they haven't been saving. They've had opportunities, but they haven't been saving.
Susan: And a little bit. Yeah, a little bit.
Scott: And so, you've been saving helping that child by setting some money aside for their future, right?
Susan: I mean, a little bit. Right. I mean, you know, right. I mean, we did that for both of them. And both, we paid for, you know, both colleges and all of that. Which, I mean, they say all the time, "That was the best gift you could have given us," because most of their friends have a lot of college debt. And so, you know, we never wanted them to have to deal with that.
Pat: Oh, that's nice.
Susan: So, yeah. Well, I'm trying to get help.
Pat: It's nice that it's nice that they recognize it.
Scott: And are you in a position where you have substantially more assets than you may need in your lifetime?
Susan: Oh, I mean, I wouldn't say that. I mean, I wouldn't say that. But, you know, no. I mean, we don't have any big chunk of money that we can pass along to them or anything like that.
Scott: So, what is your question for...? What are you hoping...? Like, if you got off this call and said, "Man, I'm so glad I called those guys." What is it you're hoping to get?
Susan: Is there just, like, this is what every, you know, person in their mid-20s should be doing financially? You know, what are the top three things that we should tell them?
Pat: Oh, is save 15% of their income.
Scott: Focus on your career.
Pat: And focus on your career.
Scott: Save 15% of your income. Avoid all consumer debt.
Pat: And marry well.
Susan: Okay. Oh, yeah. I love it. I love it.
Pat: That's when she said, "Oh, yeah." That's funny. Oh, yeah. Save 15% of the income and focus on the career. But, you know, Scott has four children. I have four children. Mine are all... My oldest is 30 now. Some of them want your advice, some absolutely don't care.
Susan: Right. I mean, I guess it's not that they don't care. It's just they're, "Oh, we have so much time."
Scott: Different.
Susan: And so, you know, the idea of compound interest is, like, you have so much time, and you cannot talk them...
Scott: But this generation looks at it a little different too. I mean, there's this kind of whole movement where there's mini retirements, where they'll work for six years and then take four months off, five months off.
Susan: Time off, yeah, right.
Scott: Which I'm 58. If I did that, people would've looked at me like I was out of my mind. But that's, like, it's not that common, but it's becoming more common.
Pat: So, yeah, if she saves 15%, and if she doesn't have a plan available through her employer, then I would put it into a Roth.
Scott: She can save it on a monthly basis. She can set up something, just get sucked out of her checking account.
Pat: Because I assume her income's relatively low.
Susan: Right. I mean, it's low, and it's not even full-time. So, she's still on my benefits. So, it's, like, 30 hours a week, and then no benefits. And then it's not super low. But, you know, I think she's like, "Okay. I've got a year in now. I need to get more experience. I need to start looking for another job." But just having it, like, a percentage of 15%, I think, is a good number because that doesn't seem outrageous. That seems...
Pat: No, no. And they're not used to having any money anyway. And what what's her degree in?
Susan: Her degree is in graphic design.
Pat: Okay. Yeah. Unfortunately, it's a tough field right now because of AI.
Susan: It is a tough field, yeah. It is a tough field, exactly.
Pat: AI has displaced... In fact, I was talking to our graphic designer a couple weeks ago, and he had done a an internal video. And he asked me if I could tell what parts of it were AI, and I could not.
Susan: Yeah, it is.
Pat: He had still shots of an adviser meeting with clients, and he made the clients and the advisers interact with each other with no voice, but movement by using AI. And it was an internal, and I don't know if they were real clients or not real clients, but it was internal. But, anyway, different subject.
Scott: A part of this, so for you, Susan, saving and having financial security has always been important to you. It's one of your values. And...
Susan: Right. I mean, and that was something my dad instilled in me.
Scott: I understand.
Susan: Because he grew up with, you know, no money at all. But he also did...
Scott: Do you have siblings?
Susan: I do. I have two siblings.
Scott: And are you guys all the same financially?
Susan: I mean, they're better off than I am.
Pat: Oh, okay, well...
Susan: I would say I'm good. I would say one is very good. I would say one is very, very good. So, you know, none of us are horrible. But it goes back to that marrying for money thing. So, the one who's very, very good.
Pat: They married well.
Susan: Very, very well. Yeah, right. Yes, exactly. And the other one has no kids. So, wouldn't we all have a lot of money?
Scott: But I have three sisters. We are all very different financially. Extremely different.
Pat: How you view money. Not just your income, but how you view money.
Scott: All of it. And we have the same parent, right? And so, I think... I mean, I have adult kids as well.
Susan: Yeah. And there's not one way...
Scott: You know, it's always funny you get new parents, and they're all idealistic, "Oh, we're gonna raise them this way, and then they're gonna turn out like this." And then when somehow the teenage years come and you realize their hopes and dreams for their life may not be your hopes and dreams for their life.
Susan: Right, exactly. It's who they're around. Yes, exactly.
Scott: And what they're...
Susan: But the good thing is our kids, they don't blow money. They're very conscientious. They don't overspend. They're not into the consumer thing.
Scott: Nice.
Susan: I mean, neither one of them. They hate to shop, like, hate to shop. So, like, I have to say, "I think you need new socks," you know. So, they're not running around, like, blowing money like crazy. They're way more conservative than I am when it comes to spending. And I don't think I'm outrageous, but they're very conservative. So, you know, that's great. But I also just don't want, you know, in 5 years, 10 years, "Oh, wow, this is all I have." Or, "I wanna buy a house, and I should have been planning already," you know, so...
Pat: Well, the nice thing about the Roth is it actually allows you to do that because you could pull out your principal after the Roth's been established for five years. So, just have them do 15% of the income in Roth and develop the discipline. At this time, age, you just want them to develop the discipline. So..
Scott: Yeah. And it's one of those things where... I mean, there are moments with my kids I just like, "Hey, it's your life. You've learned." I mean, they're not gonna learn anything new from me. They've heard it all from me. If they ask my opinion, I'll give it to them. Otherwise, I try to just keep my mouth shut.
Pat: Do you spend a lot of time thinking about this, or...?
Scott: Yeah, I want good relations with my kids. I have thought a lot about it. And I don't wanna spend a lot of time... They don't always take it. I mean, you know.
Pat: I only give the advice if they ask.
Scott: Yeah. That's what I'm...
Pat: Because...
Scott: And if I saw something really serious in life, I'd probably sit down and have a conversation.
Pat: And you'd say, "Have you considered this?" Which is a nice way of actually giving advice.
Scott: Yeah. You know, before we go back to next call here, my son... And I've talked about his poker plane in in the past.
Pat: Yeah. But he's a pilot for JSX.
Scott: Yes. He's a pilot.
Pat: Which by the way, I flew JSX a couple weeks ago, and it was a little bit more expensive than Southwest. But...
Scott: It's probably substantially more. Southwest is, like, every week, the price goes up. And, you know, if you buy it two days before, it's expensive.
Pat: We bought this relatively short notice. But it was it was one of the most enjoyable flying experiences I've ever had. We drove up to a hangar. It was a hangar. And there was a roped off area with some carpet in the...
Scott: Where did you fly out of?
Pat: Reno. Burbank was the hangar. We flew out of Reno. It had a little place there. It was kinda crowded. You just went and got your ticket.
Scott: You pull your car up and they value your car, right?
Pat: Yes. They get you your ticket. And then they screen you once you're getting on the plane. So, they go through the screener where they're actually X-raying your bags.
Scott: Those are new screeners that require...
Pat: All that.
Scott: The other airlines quite foul.
Pat: Oh, got it. Because it is commercial airline. And then you get on the plane, and the seats are wide. And it was fast, and it was easy, and parking was easy. And it was comfortable. Anyway, JSX, real commercial.
Scott: I'm glad you get a pick with JSX, which I have not flown them even though my son's a pilot. But he used to play quite a bit of poker. And he would make money, like, on his tax returns. But it's actually a big chunk of his...
Pat: His income was playing poker.
Scott: Yeah. Well, and while he was in, you know, a pilot school, it was, like, his only source of income. And he was... But so, I asked him the other day. And I know that he'd kinda started to get burned out on it. He was playing less and less. And I talked to him, and he says, "I quit playing." He says, "I can't I can't play anymore because of the new tax law that's coming into it." And so, in the new, the One Big Beautiful Bill act...
Pat: A little bit of this, how much you can deduct.
Scott: You can only deduct 90% of your losses.
Pat: And is that a big enough delta that it makes...
Scott: He said... Like, I'm just gonna make up some numbers because... Like, last year, his margin was maybe 8%.
Pat: So, he tracks all his play.
Scott: Oh, yeah, yeah, yeah, 100%.
Pat: He takes it like a job. Like, that's his job.
Scott: Yes, of course. That's exactly what he said, "I view it like a second job for me. And I figure I can make X dollars an hour." But if let's say your margin, let's say somebody gambles a lot. Let's say they have a million dollars in in winnings and $900,000 in losses per year. They made a $100,000. Million in winnings, 900,000 in losses, you made a million dollars. In the past...
Pat: Oh, but then you only get to deduct $810,000 of that loss.
Scott: Correct.
Pat: You only get to deduct... I didn't think about it like that, okay.
Scott: So, you'd be taxed on $80,000. He says one of his buddies, he's like, he says, "There's no way. My tax bill..."
Pat: Because their margins aren't that large.
Scott: "My tax bill are gonna be more than what I..."
Pat: Got it. Got it. Got it. Got it. So, if you run it at 8% margin, I mean, it just wiped out a large portion. Unless you have big wins, but that's not how they play.
Scott: No. Because you're gonna have big losses. You might have... As he was talking about, he's got a lot of friends that are professional card players. And they might have a couple years where they make huge, and they might have a full year where they're at a loss. And if you can't deduct all your losses, it's completely chain... This must start next year. I don't think it starts this year. But it's one of those things. I don't know how that got pushed in there. I'm not a big fan of professional gambling.
Pat: But, again, back to you telling your kids what to do.
Scott: Yeah. It's my son. I love my son, and I was hoping that this would play his course. And it's just kind of a...
Pat: Well, it has. The government mandated it.
Scott: Yeah. Well, I just like win, win, win. I like business transactions where everybody wins,
not where it's a win loss.
Pat: Which is how...
Scott: Gambling things.
Pat: ...poker is. It's interesting. It will affect... I did read an article where they said this will definitely affect gambling centers, including Indian casinos, and Las Vegas and a couple others.
Scott: They have to re-appeal that piece of it. It'll destroy it.
Pat: It would destroy that industry.
Scott: Destroy it.
Pat: Yeah. Yeah, you affectively...
Scott: Whether you like the industry or dislike the industry, I mean, you could tell someone you can only deduct some of your business expenses.
Pat: That was the article I read. It talked about how there's no taxes on tips, but the fact that this will be offset because there'll be less people coming to Vegas to tip.
Scott: Yeah. That's it. That was the pieces.
Pat: It has to, I mean...
Scott: I don't know how much the casinos make off those kind of... I don't know where their mural money is. Because when you're playing poker, I think the house just gets... I don't know what they get.
Pat: They get a percentage of the... I don't know. I don't play poker.
Scott: They get something.
Pat: My understanding is that they're not in the pot.
Scott: They're not taking the winnings, though. Anyway, why did I start talking about that?
Pat: I give up. Whatever case.
Scott: What's the...
Pat: Big Beautiful.
Scott: One Big Beautiful Bill act.
Pat: Yes. Big Beautiful Bill.
Scott: And we're talking now with Nancy. Nancy, you're with Allworth's "Money Matters".
Nancy: Hi. Thank you for taking my call.
Scott: Sure.
Nancy: I'm a longtime listener.
Scott: Oh, good. Thank you.
Nancy: I have a couple of questions, but, the first one is, have you two changed your opinion about, cryptocurrency now the Genius Act has passed regarding stablecoin? I was kinda wondering how you were feeling about that.
Pat: That's a great question. I get the thesis behind the stablecoin. It just... I in fact, I was thinking.
Scott: The Genius Act, it was a bill that was passed to put some regulation on cryptocurrency and, primarily, stablecoins.
Pat: And stablecoins. So...
Scott: They're almost like banks and
Pat: Yeah. So, what let's...
Scott: Without the multiplying factor.
Pat: ...describe for the rest of the listeners what a stablecoin would be. One is, if I had a coin that was in an account and I owed Scott some money, rather than use the current financial situations in order to get that money, I actually could just give him access to the stablecoin and move some stablecoin over to him and rather than dollars.
Scott: Instead of using Venmo or Zelle or PayPal.
Pat: Or dollars or writing a check...
Scott: Or dollars, yeah.
Pat: ...or doing an electronic funds transfer. So, I was thinking about this. It's funny you asked, because yesterday, I was on a bike ride, and I was thinking about stablecoin. And I thought, does Intel come up with a stable coin? Does Microsoft come up with a stable coin? Does Apple come up with their own stable coin?
Scott: Or Amazon.
Pat: Or Amazon come up with their own stable coin? And then we all then start transacting in all these kind of different currencies that are all pegged to the dollar. And then what is the regulatory, which was what the idea behind the Genius Act was, is to create a framework for this regulatory environment, that fits it.
Scott: There's a lot to be worked out in this whole thing.
Pat: Yeah. That fits. Yeah, correct. And then how what is how does Apple make money? Did they make money on the carry, or meaning, people put in dollars, and then they invest those dollars in treasuries, and then they get the interest rate on it if read.
Scott: I think that's how it's structured.
Pat: But then then at that point in time, then why would I want a stable coin? Why wouldn't I just wanna keep my money in treasuries and just transfer it.
Scott: Yeah, that's what I... I haven't...
Pat: Right? Because why do I wanna give that carrier the interest rate to that particular currency, to Apple or Amazon or to anyone else? Why wouldn't I want it for myself? Which is why I keep my bank balances at a bare minimum. So, what do I think about it? I think about it... Obviously, I thought about it a fair amount. I haven't...
Scott: Well, you're unsure of what the future commercial application is going to be.
Pat: That's correct. Thank you.
Scott: And whether that's gonna be a tremendous benefit or negligible. And from an investment standpoint, you don't think, well, I should invest in these new companies that are putting out stablecoins.
Pat: No.
Scott: Because there's plenty of other good investment options in the universe that exist today.
Pat: And correct. And then what happens is, it's the same thing, you look at the history of credit cards. All of a sudden, one credit card offers more points and miles than another credit card, and then I start using that. What will happen in this over the long-term is that will happen with stablecoins too, which is, okay, we offer 3% interest, or we offer this. And they say, "Okay, we don't allow you to offer interest."
Scott: Didn't the bill say there's no interest?
Pat: Yeah. But then maybe something else of value, or maybe they're tied to Amazon, or maybe I get a 20% discount when I buy, you know, tape at Amazon, and they deliver it to my house with the rest of the stuff we buy every day.
Scott: Three deliveries a day.
Pat: I actually took some paint and marked off a place in the street for the Amazon guy to park. Just as Amazon did. He's got his own parking place. He's got his own... So, what are your thoughts?
Nancy: Sounds like I'm just not going there.
Pat: Really?
Nancy: No.
Pat: I just went there for you.
Scott: You're not going there in your thoughts?
Nancy: Well, I'm gonna give it time. That's for sure.
Pat: Well, you know, you're not all that positive about it.
Nancy: No, I am not.
Pat: I think it's right for fraud and corruption.
Scott: And so, at least, the government regulation is trying to prevent some of that. That's really what it's about.
Pat: I will not be using this stablecoin anytime soon. Let's just put it that way.
Scott: There's no need to.
Pat: Yeah. I was thinking about, and why would I put something in a noninterest bearing?
Scott: But if Amazon, if you had a 3% discount on all purchases if you use their coin, you probably would use their coin.
Pat: I might. Yeah, yeah.
Scott: But right now, there's no commercial reason for you to do so.
Pat: That's right. But if you think about how government works and the regulations, like... I was talking to a friend, I'm going off path here, but it just is an example of how the government actually sets up things and then businesses, like, figure their way around it, which is, why is your health insurance provided by your employer? Does anyone...? Why is that?
Scott: Because during World War II, they weren't allowed to increase wages, and so, these companies got around that by offering fringe benefits.
Pat: Right? Exactly.
Scott: Government intervention, yes.
Pat: Government intervention. And which is both a negative and a positive. Which is why we're so optimistic about U.S. companies in general, which is, there's a bunch of smart people that find their way around problems in order to make money, which is, you know...
Scott: I believe they weren't allowed to increase wages to entice new workers.
Pat: Thank you.
Scott: It could increase the wage. I don't know exactly the rules, but...
Pat: Anyway, all right. So, that's our view of that. Did you have another question for us, Nancy? And by the way...
Nancy: Do you have time for another question?
Pat: Oh, yeah. All the time. I'd talk to you. The mere fact that you wouldn't answer the question about the Genius Act compels me to wanna know what else you don't wanna talk about.
Nancy: Okay. This one is regarding when Trump replaces Jerome Powell in 2026, most likely, it's gonna be a yes, man. Okay, that's gonna be the Fed chair. So, I'm thinking, is now a good time to start maybe making some changes to my portfolio since the market's doing very well? This person, whoever he appoints, is gonna be the Fed chair for 10 years. So, even after Trump's out of office, that person's gonna be in control. So, I'm not sure. I know you always say...
Scott: There are certainly some things I don't agree with Trump on, and this whole area of Fed independence is one. But the markets are not worried about it.
Nancy: Yeah. But we don't have a new Fed yet, a new Fed chairman. So...
Pat: Oh. And what's your portfolio look like today? How much risk is in your...? How much do you have in equities in it?
Nancy: Okay. So, we have about maybe 65% equities and 35% in bonds.
Scott: Okay. And are you taking income from the portfolio?
Nancy: No. This is just our IRAs, and we will have to start withdrawing in two years. My husband will be 73.
Scott: And you're retired today?
Nancy: Yes, we are.
Scott: And your lifestyle doesn't isn't dependent upon your money in your...
Nancy: No, actually, it's not. We're kinda frugal.
Pat: So, that's the question. You're asking us like, "I can't see that far ahead, and I actually have no idea how the markets will react."
Scott: Well, the markets aren't spooked about it.
Pat: That's right. That's right. They're not at all. I mean, when they get up there and they're in that little tit for tat at the Federal Reserve, the markets are like, "Yee, this is just a Trump thing, and this too will blow over." So, the markets aren't. Look, for you, it doesn't matter one way or the other. If you're worried about it, then lower your equity position, but don't go crazy. I mean, lower it to 50% or 55%. What you don't wanna do is, if you're reacting to information that you perceive in the marketplace is going to be negative, then it's okay it's okay to move the portfolio around the edges as long as you don't bet the farm on it. Because there's a good chance you're gonna be wrong, and there's a good chance that you might be right. We don't know. We don't know. But one of the things that I would be telling you to do is, prior to when you start required minimum distributions is looking at Roth conversions for your husband.
Nancy: Yeah.
Pat: That's something that you can actually control and actually will add alpha or excess returns to an after tax portfolio.
Scott: Meaning, and if you have any charitable contributions that you've done, you know, written a check or whatnot, consider using required part of your RMD for that. You can actually do that at age 70.
Pat: So, which is weird when they change the whole thing.
Scott: Yeah, it's complicated.
Pat: But if you're worried about it, then move the portfolio. But don't go crazy, please.
Nancy: Okay. Now, I...
Scott: I mean, I think in some ways, you're kinda borrowing trouble if you're worried about what's gonna happen a year from now with the Fed thing.
Pat: Obviously, there's... I shouldn't say obviously. I sense there's a dislike for Donald Trump.
Scott: You don't have to ask her to admit to that or not admit to that.
Pat: I didn't tell her to.
Scott: I mean, I have friends that are on such extremes politically. Like, last thing I wanna talk about is politics with them. Either one because...
Pat: Oh, that's right. Oh, look, I spent...
Scott: What? You don't love Trump? You're not a huge shot.
Pat: I spent one weekend with a MAGA. I'm all in. And then the next weekend on the other side of the equation, like, you couldn't get further away.
Scott: I have people in my life I love dearly that are on both sides. And Nancy probably does too. She doesn't wanna come out of the closet,
Nancy: Yeah.
Scott: so to speak.
Nancy: I'm not a Trump supporter.
Pat: Okay. We got that. All right. Anyway, just try not to let this drive your emotion, your decision making. So, if it does, just do it on a little bit.
Scott: You know, I do think it it's important to have an independent Fed chair. But...
Pat: We're heading now to Ohio and talking with Janae. Janae, you're with Allworth's "Money Matters".
Janae: Hi. Thank you for taking my call.
Pat: Yeah, glad you're joining us.
Janae: My husband and I own a construction business, and all of our investing is in real estate. So, I'm wondering what else we should do for retirement.
Scott: And...
Pat: And... Go ahead, Scott.
Scott: Construction to individual homes, is that primarily what you guys do?
Janae: He does just about anything, so commercial or residential.
Scott: And how many employees?
Janae: One.
Pat: And is that you or just him? Or is it...?
Janae: Basically, it's just him and somebody one other guy he works with.
Pat: And they're on payroll, and they're not 1099. They are considered an employer or contractor.
Janae: They are actually one of the sub-contractor.
Pat: Okay. And the reason we asked that is because if you have employees, you have different retirement plans than if you don't have employees. And do you contribute to an IRA now, or...?
Janae: We don't.
Pat: And how old are you?
Janae: I'm 49, and he's 44.
Pat: And what's the approximate income last year? Not revenue, but income, the money that you actually paid taxes on.
Janae: Around $80,000.
Pat: And how much real estate do you own, like, in in dollar amount? $100,000, $300,000, $500,000, a million?
Janae: Between our house and our property is about $1.1. Then we have four rentals and a church, and they're about $800,000 in value.
Scott: And what do you owe on the rentals?
Janae: We own all of our rentals, and we have about $50,000 on the church and about $210,000 on our house.
Pat: And what's the interest rate on those?
Janae: Oh, goodness.
Scott: You own a church? Is that what you said?
Janae: Yeah.
Scott: The first time I thought maybe you misspoke or I misheard you, then you said it a second time.
Janae: Yeah. It was a COVID purchase. My daughter was getting married. It came for auction, and he bought it, and it will be an event center.
Pat: Oh, okay.
Scott: Okay. He's not a pastor/contractor.
Janae: No.
Scott: So, what do you feel your need is? I mean, just look at...
Pat: One second, Scott. Do you know what the interest rate is on those loans?
Janae: No. They're not super high, but I don't know what they are.
Pat: Okay. They were done in the last few years.
Scott: I mean, you've got $2 million of real estate, and you've got $250,000 of debt on it.
Pat: I know. Yeah, but I wouldn't count that personal real estate. But she said land, though, too, so that means he is a contractor. He gets subdivided any day. I think you should start putting money into a company 401(k) or unit k or self-directed 401(k) forms. So...
Scott: Or just IRAs for the two of you. Simple. That's the simplest thing.
Pat: That is the simplest thing. And the income is $80,000. And I would go a 100% total market.
Janae: Okay. So, when you say a 401(k), I thought those were only connected to where...
Scott: I don't think you... I mean, I would recommend doing an IRA for the two of you before I set anything else up.
Pat: Yeah. I think about this.
Scott: What's...?
Pat: Wait, wait, wait. One second, Scott. The 401(k)'s are just as easy to implement today as an IRA, plus you can borrow out of them if you need to. Not that I'd want them to. How much money do you have in the bank?
Janae: We have $12,000 in our rental account, and then about $9,000 in our business account.
Pat: You don't have enough cash on hand.
Scott: Yeah, you don't. How about your personal? Do you have any, like, emergency reserve? What happens if your husband has a serious illness or breaks his leg, or...?
Janae: We do have disability insurance through Medi-Share, but that's about it.
Pat: You need quite a bit more in in liquid reserves, especially for self-employed. And are you working outside the home?
Janae: No.
Scott: What's prompted this call? Because you don't have any... You've got you've done a good job with all these rentals. You don't have a lot of debt.
Janae: We are getting older, and I just start thinking, "Oh, we should have been putting money in an IRA or something all of this time." And, I don't really know anything about investing that way. My husband really likes the tangible type investments like property. So, I just really don't know what else we should be doing, I guess.
Pat: Well, I like investing. So, whether it's tangible, stocks, bonds, right? The investment doesn't know you own it. And the more diversified you are in your investment portfolio over the long-term, the less volatility that you will have in the portfolio over the long-term. I think...
Scott: And, I mean, if you continue down the path of rentals, you're gonna go from 4 rentals to 6 rentals to 8 rentals to 10 rentals, suddenly buy yourself another job.
Pat: Which is okay. She's 49?
Scott: Yeah, yeah. If that's what you want. But put some money in an IRA, own a total market index. You're now an owner of the largest companies in The United States, and you're gonna participate with their growth over the long-term.
Pat: And it's just good diversification. You need more liquid cash, though. You need more of a safety net there, too.
Janae: How much do you think?
Pat: At least $25,000. And you said you have some for the rental set aside. I think you said $12,000 then $9,000 personal. When I say, at least, $25,000, that's on the personal side, not on the rental side.
Janae: Is that all really personal?
Scott: You guys are pretty tight on the rental, too. I'd be a little...
Pat: I would, too.
Scott: What happens if one of the your tenants pulls all the appliances out and takes all the copper piping and...
Pat: She's calling from Ohio.
Janae: God forbid it happens?
Scott: Oh, they're all good people in Ohio?
Pat: Correct.
Janae: No. No, no, no.
Scott: Never happening like that in Ohio.
Pat: No, I agree with Scott. You, both, if you were sitting in my office, I would say, let's get some more money in the bank. Let's do that first on both the rental.
Scott: Yeah, I think I would agree with that.
Pat: And then let's go do the IRA.
Scott: I'm a little nervous. Something happens and you don't have the cash, and now you're...
Pat: Yeah. If you had called and said there was $50,000 between the rental...
Scott: It'd be simple.
Pat: ...and I'd say, do a Roth IRA and buy the total market, but I don't think I'd worry about the Roth IRA until I got, at least, $50,000, between those two accounts.
Scott: Yeah. And I'd get that saved up before you go out and buy another rental, because it's gonna be tempting to... Because that's what can really create some havoc in your financial life.
Pat: That can...
Scott: You're short on cash. And you've got the assets, but... And then, Pat, I think I just use a basic IRA to start.
Pat: Yeah, but why not Roth? $80,000 two of them?
Scott: You have to run the numbers. I think you're probably right. I'd probably use the Roth IRA.
Pat: I'd probably.
Scott: Before we sign off, I wanna let you know about a webinar we've got coming up. It's a case study in advanced portfolio optimization. Benjamin Abraham is one of our Allworth partner advisors going to be doing this. And what you're gonna learn here, you're gonna get a behind the scenes breakdown of our in-house experts and some industry leading tools that helped a high-net worth couple do several things. And this is a real life example there. How they eliminated some costly capital gain tax with some smart tax restructuring, how they're able to build confidence through retirement income modeling, and how they're able to refine their portfolio to unlock some longer term flexibility. So, it's really kind of a rare look at how all things come together. The webinar is going to be Wednesday, August 20th, at 10 a.m. Pacific, Thursday, August 21st, at noon Pacific, Saturday, August 23rd, at 9 a.m. Pacific. And, to register and get more information, go to allworthfinancial.com/workshops.
Well, Pat, I think that's all the time we've got today. As always, been good being here. We'll see you again next week. And if you like this program, give us a review, a rating, or whatever.
Pat: Yeah, whenever you get the podcast. Share it with a friend.
Scott: Thank you. See you next week.
Automated Voice: 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 a state-planning attorney to conduct your own due diligence.