Man: 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." I'm Scott Hanson.

Pat: I'm Pat McClain. Thanks for joining us.

Scott: Yeah. Glad to be here in the studio with my longtime partner, Pat McClain. We're both financial advisors, certified financial planner, charter financial consultant, help people manage their finances throughout the week. Broadcast on the weekends. Broadcast drops Saturday mornings.

Pat: The whole thing.

Scott: And if you're still listening to us on the radio, great. But the nice thing about the podcast is you can listen to it whenever you feel like it.

Pat: Okay. [inaudible 00:00:55] I think most people know that.

Scott: I'm talking to the radio listeners.

Pat: Oh, the people radio. Got it.

Scott: And avoid the commercials.

Pat: Yeah, both of you guys. It's interesting how industries can get completely transformed. You know, Scott, but in all fairness, I listen to the radio quite a bit just because I happened to be there when that particular program is running. But then, oftentimes, if I miss that program, I will actually then listen to the podcast. So, one of my favorite programs is "Planet Money," and then Wall Street "Journal House." But you can't listen to that on the radio.

Scott: It's a little 15-minute thing.

Pat: Yes. Correct. Sometimes it's 21, or... But it is, it's amazing how quickly industries transform.

Scott: Yes. Be disrupted.

Pat: Completely.

Scott: And you're thinking the radio business?

Pat: Television?

Scott: Right.

Pat: Movies. You know, I was thinking about it today. I was thinking, you know, every time this AMC, the meme stock kind of takes off, these guys actually sell more stock.

Scott: Yes, they do. Yeah.

Pat: They sell more...

Scott: The company does.

Pat: The company sells more stock.

Scott: The leadership of the company.

Pat: And not that they are actually gonna take any of that money and reinvest it back into the...

Scott: I'm like, "This is ridiculous. People are gonna pay us how much for this company that's not worth this much?"

Pat: Yes. So that if we could go through the list of all the industries that have been absolutely transformed...

Scott: Yeah. And companies. I mean, the leaders today, odds are they're not gonna be the leaders tomorrow. If you look at the S&P 500, if you look at the top 100 companies, most of those didn't even exist 30 years ago.

Pat: That's correct. And some have completely reshaped themselves, right? So think about this. I saw this last week. Meta, Facebook was buying part of a sunglass company. A sunglass company.

Scott: Just regular sunglasses?

Pat: Yeah. But a big one. Big...

Scott: Well, Zuckerberg's trying to look cool now. I don't know if you saw 4th of July surfing behind a boat in Tahoe with a Tuxedo drinking a beer. I guess he's every man now. We could all relate to him.

Pat: A Coors Banquet.

Scott: It was a Coors, nonetheless?

Pat: It was Coors Banquet. Then when he threw it into...

Scott: I made a joke about Bud Light, but I'm not gonna go there.

Pat: Then when he threw it into the lake, that was appalling. All right. Back to Meta. [crosstalk 00:03:47] into Lake Tahoe, right there, over his shoulder. But, fortunately, he had a group of minions following behind...

Scott: Back to Meta.

Pat: ...to pick up his garbage. I thought that was really interesting that they're actually going into that. And then you think about, "Well, why is that so strange?" Because Amazon bought Whole Foods. At the time I thought, "This is kind of..." And is it just diversification where they actually just don't know where their business is, or that they have so much excess cash?

Scott: I think so much cash. And they've already controlled so much of the social media...

Pat: And they're worried about regulations actually tearing them down.

Scott: Well, they should be.

Pat: Yes. Well, it depends on who comes into power in the House, the Senate, and the President, whether they should continue to worry about monopolies or non-monopolies. But I just was thinking about how companies just change over time or just go out of business.

Scott: Go out of business.

Pat: Go out of business.

Scott: They're not going to the Woolworths.

Pat: They're not.

Scott: There are all kinds of different companies.

Pat: Yes.

Scott: Yeah. Well, which is always comes back to... Look, as investment advisors, we talk about making sure you've got a broad diversified portfolio because we don't know which industry's gonna be disrupted next, or we don't know which leader today is going to be a has-been tomorrow. I mean, you look at a company like Intel. Okay? Remember Intel? So, Intel, I don't know if they were the creator of the microchip, but they certainly were the ones that created the market for the microchip. I mean, they got it in everything.

Pat: Yeah. I mean, their whole sales thing is, I have friends that work there and they sell chipsets to all these different industries. I'm like, "What do you do?" "Well, I sell chipsets to the airline industry?"

Scott: But they were a tremendous market leader...

Pat: For many, many years.

Scott: Helped create Silicon Valley along with Hewlett Packard, and maybe another one or two companies. But Intel was massive market leader. Stock was just on fire. Pat, I don't think the stock is higher than it was in the year 2000 today. They've had roughly 25 years.

Pat: Of nothing.

Scott: While inflation has more than doubled the cost of things over that time.

Pat: Exchange. Before we go to calls, quick story. I had a friend that was a restaurateur and owned a piece of ground that he wanted to put a hotel up on, and quite successful restaurateur. So, he shows me the business plan, and he says, "How could anything go wrong?" I remember that quote. He goes, "How could you lose on this?" And I said to him, "We don't actually have enough time to discuss all the things that could go wrong with this investment." And he said, "Why would you say that?" And I said, "There are things in the environment that we don't know are gonna... You just can't see." And so he broke ground, they're ready to open and in blows COVID.

Scott: Right, right.

Pat: So, I said to him, "Remember that conversation we talked about what could go wrong?" I said, "We could have spent three days making a list of all the things that would've gone wrong, and a government lockdown would not have been one of those answers."

Scott: That's right. Never would've thought of that one.

Pat: Never would've thought of that one. Wouldn't have even been on a distant radar, let alone our radar. And I thought, that, actually... When I was talking to him, I'm like, "So this is why..."

Scott: That's funny. So, you had this conversation with them prior to COVID?

Pat: Three years prior to COVID.

Scott: Yeah. We can make a list of all the things that could go wrong. And that was when that happened, like...

Pat: This wouldn't have been on it. And he said, "It's strange." And I said, "Yes, it's strange." And by the way, the hotel's doing well. I mean, it's moving along. They got through it. And nothing according to plan, nothing. Zero.

Scott: That's often how life is.

Pat: Look, that is how life is.

Scott: And it's how investing is.

Pat: And that's why I actually go through life without a plan. And that way I'm always surprised.

Scott: All right. We should take some calls here. If you wanna be part of our program, you could call 833-99-WORTH. Again, 833-99-WORTH. We'll set up a time for you to join us, or you can send us an email at questions@moneymatters.com. And we're gonna start off with Jim. Jim, you're with Allworth's "Money Matters."

Jim: Hey, how are you guys doing today?

Scott: We are great. How are you doing?

Jim: Pretty good. Pretty good. I had a question about more of an ETF than a mutual fund. And it would be the dividend-type paying ETF. And is it true that on 1/1, let's just say the first quarter of the year, the dividend is in the net asset value of the fund every day, is that true?

Scott: Say that again.

Jim: The dividend is built into the NAV. As the shares collect dividends, is it built into the net asset value price each day?

Scott: Yes, until it goes X dividend. lt'll be included in the share price, and then there'll be a date. They'll say, "We're gonna distribute the dividend on the 15th, or whatever it is. And the X dividend date is," whatever that date is, normally like... So, if you buy it after that date, you don't get that next dividend. So, the price goes [crosstalk 00:09:36]. The price will drop by exactly the same amount of the dividend, theoretically.

Pat: And, Scott, and normally, when do they go X? I don't remember this, five days, seven days, something like this? Every company's a little bit different. They announce the dividend and then they go X dividend after it's been paid.

Scott: What's the relevance?

Jim: Well, what I'm asking about is that, suppose the fund has a 100 shares on January 1st and someone like me, just a 100 shares just, for example, buys an additional 400 shares, just before it goes X dividend. Where's that dividend at in those 400 shares?

Pat: Oh, it depends on who the owner is on the date that it goes X dividend.

Jim: Suppose the fund grew?

Pat: Well, the fund will grow by the expected dividend, right? Stocks normally will actually move up by the expected dividend until they go X dividend. So, when you ask, if you bought that 400, whoever the owner of record is on the date that the dividend is paid...

Scott: Gets the dividend.

Pat: ...gets the dividend.

Scott: So, if you buy 400 additional shares the day before it goes X dividend, you get that dividend even though you only own the fund a couple days or even an hour because it's an ETF. So, it's priced throughout the day. You buy it at the closing bell, right before the closing bell, and then you get the dividend even though you owned it for minutes.

Pat: I mean, what's driving the question, are you looking for some sort of a way to game this, or...?

Jim: No, no, no. Not at all. In fact, that's why they built it in the NAVs. So you can't game it, in my mind.

Pat: That's right.

Jim: But if the fund had 100 shares and had 100 shares from January till, let's just say March 25th, and on March 26th, I plow enough money into the ETF that they had to create new shares. There's no dividend there for those new shares.

Scott: Well, when they create new shares, they go in the marketplace and buy those underlying securities.

Pat: The same day.

Scott: So, they're going in the market and buying that basket of securities...

Pat: The same day that you're purchasing.

Scott: That's right.

Pat: Quite frankly...

Jim: But then supposedly some of those stocks are paying dividends. I guess most dividends stocks are quarterly...

Pat: That's right.

Jim: ...because they're paying in January and February, and then some into March. And then those new shares came on board just before exhibiting. There was no dividend to be collected for those shares.

Scott: It's built...

Pat: Built into the price.

Scott: ...into the price of the stock.

Pat: And of the ETF.

Jim: But, their brand new shares?

Pat: No. Forget the ETF, just pretend it was an individual stock. Forget the ETF. Just pretend it's an individual stock, right? So, if I went into a dividend-paying ETF today, and I put in $10 million, right, $10 million, what do they do with that $10 million? They go and buy the stocks.

Scott: Or bonds, or whatever the ETF is designed to do.

Pat: Whatever the ETF is designed to do.

Scott: Or the mutual fund's designed to do.

Pat: And there's a little bit more to that because oftentimes, they'll use lines of credit to actually, you know...

Scott: Smooth it out a little bit.

Pat: Smooth it out. But by its very nature, they're buying the underlying basket.

Jim: So, every time when they're buying those stocks, the dividend is built into the stock, just, for example, for ETF?

Scott: Exactly. It's the same concept.

Pat: Exactly. That's why I said, forget the ETF, if you just bring it to an individual stock basis, it will make sense to you. Then you say, "Okay. Well, it's not an individual stock, it's an ETF." You're like, "Yeah. But it's 50 stocks that act the same."

Jim: Okay. That makes more sense then. It was the growth of the shares. I got another one for you, [crosstalk 00:13:24].

Pat: Wait, wait. I have a question for you. Are these ETFs in an IRA, or outside of an IRA?

Jim: Inside of an IRA.

Pat: Okay. Okay. Makes sense. What's your question?

Scott: What's the next question?

Jim: Oh, the next question was, if all the small-cap managers are running small-cap funds, and all the large-cap managers are running large-cap funds, if small stocks, which have been on the rise here recently, new money's coming into the area. Where's it coming from?

Pat: Oh, it's coming from everywhere.

Scott: Might be coming from cash.

Jim: Okay. Large-cap managers can't put money in there?

Pat: What's that?

Jim: Large cap managers, shouldn't be buying small cap stocks.

Pat: No, no, no. But investors are selling their large-cap. I'm not suggesting that people do this, but an investor might sell their large-cap stock and turn around and buy the small-cap.

Scott: Or sell their money market account, or take money out of the bank.

Pat: Or sell their house.

Scott: Or their business.

Jim: So the small investors have that much power?

Pat: Oh, yeah. Are you kidding? The question you just asked, it depends on the size of the market, how much power the small investor has. So, earlier, we started this show by talking about AMC, the theater chain.

Scott: Small investors have all the power.

Pat: They blew out.

Scott: And these meme stocks.

Pat: And these meme stocks...

Scott: GameStop.

Pat: ...they blew out some of the largest institutional investors in the United States because they actually used Reddit and other social forums in order to communicate with each other and had a planned attack against short sellers.

Scott: Short [crosstalk 00:14:59]. Yeah, that's right. The individual investors. Small investors.

Pat: Yeah. Yeah. So, what happens is the reason they had so much power is because the market cap of the stocks that they actually decided to go after, which was GameStop and AMC was not that large, right? Was not that large. So, a smaller investor would have a larger impact on small-cap stocks than a smaller investor would have on a large-cap stock, just because of the size of the market.

Jim: Okay. We got that one. I got one more quickie.

Pat: Does that make sense?

Scott: I like these questions, Jim, you know, because...

Jim: Thank you.

Scott: Well, a couple things I hadn't really thought about for years, but...

Pat: Like, where's the money come from?

Scott: But it was part of my educational process has becoming a financial professional. And, obviously, you're going through this process.

Jim: I've been doing this for a long time, and I just think about things here and there, but I got another good one for you.

Pat: Okay.

Scott: Okay.

Jim: How does a global mutual fund ever have a closing NAV when it's open 24/7, Monday through Friday, globally?

Pat: Got it. Excellent. Excellent. So, normally, in a lot of the global funds, the ADRs is what they're trading in on, ADRs. Other than that, they just have to...

Scott: Which stands for?

Pat: American Depository Receipt.

Scott: Thank you. I forgot.

Pat: Other than that, they just have to pick a point in time. They pick a point in time, which would be the close of market in the U.S. So, if it's a global fund, right, what you're doing is, the minute that market closes in the U.S., that U.S. stock, let's say that they own something in Italy, whatever that particular price of that stock is on that minute, that's when they close the fund.

Scott: And 40 years ago, an individual might have been able to find some market where there was a price discrepancy and bought in one market and sold short in the other market and created an arbitrage for him or herself. That's all been replaced by computerized trading. That happens all the time. And it squeezes out...the inefficiencies don't exist anymore.

Pat: With the exception of cryptocurrencies. With the exception of cryptocurrencies. Because the cryptocurrencies, that's exactly what they were doing.

Scott: That's right. You're right.

Pat: Is taking advantage of the arbitrages in different marketplaces...

Scott: That's right. That's exactly right.

Pat: ...for the same currency.

Scott: Yeah. But in publicly traded securities...

Pat: Regulated industries.

Scott: Yes. There's enough quants and stuff that are...they squeeze out. There's no inefficiencies.

Pat: But it's a great question. They have to choose the point in time. And look, I remember this, ah, this is a crazy story. Strong mutual funds. Do you remember this, Scott?

Scott: Yeah, yeah. Out of Wisconsin.

Pat: Milwaukee, Wisconsin.

Scott: Dick Strong was his name. Was it not?

Pat: Yeah, Dick Strong.

Scott: Okay. They were very popular in the '90s.

Pat: And actually, they were good small-cap managers, super popular in the '90s. So what they did...this is just awful.

Scott: Who did he sold out to?

Pat: Bank of America. He had to sell out. But what they did... Jim, this is crazy. They wouldn't pay their people very much money, their executives or even their sales team, very much money. But what they would let you do is buy their own mutual fund after close of market.

Scott: I don't remember this.

Pat: That's why he ended up selling to Bank of America after close of market. So, it goes back to what you just asked is if it's a global fund, when do you set the price? Because, otherwise, you could trade after-market and you could do that arbitrage.

Scott: How in the world could someone think that this is ethically okay to do?

Pat: Scott...

Scott: Front running.

Pat: I'm going from memory here because it's 20... I think they sold to the Bank of America, I'm 99% sure. [crosstalk 00:19:01] But what they were doing is, they were allowing their own employees... And remember, a mutual fund is actually owned by the shareholders.

Scott: By the shareholders.

Pat: Mutual, it's a mutual fund. And you hire an investment management team, which is the mutual fund company or an investment management company, like Strong, in order to manage it.

Scott: Or Fidelity or Vanguard, or whatever. But what ends up happening is these funds, these investment companies create their own mutual funds, but it's still owned by [crosstalk 00:19:32] the shareholders. And the shareholders could fire Strong, they could fire Vanguard, could fire Fidelity.

Pat: Correct. And they're supposed to have outside board of directors that actually represents the shareholders. But they did exactly what you were saying, which is, you could do arbitrage if you know the closing price. So, what would happen is because they allowed their own employees to trade after-market, if it went down, they would sell. And if it went up, they would get the previous day's close. And so just those little bit fractions of percentages...

Scott: That's terrible.

Pat: ...isn't it awful?

Scott: Boom up.

Pat: They ended up selling out to Bank of America. So, you know, you talk about regulation and...

Scott: They also got in trouble for doing the directed trades.

Pat: Oh, yeah. Directed trades [crosstalk 00:20:23].

Scott: Yeah. I think he had some family members needed a visa to go to travel somewhere and got it through some investment firm. And the way they paid it is the investment firm then placed trades on behalf of their clients.

Pat: Yes. So, the market has cleaned up significantly since we've entered the business 30-some-odd years ago. I don't know why that brought that up, but it reminded me when you were asking like, when is the closing price?

Scott: Well, the financial services industry has a horrible reputation, and it's well-earned.

Pat: Oh, listen, Scott, if it was the food industry, most of America would be dead.

Jim: Just for information, that's where Artisan Mutual Funds came from, was from Strong.

Pat: Oh, is that right? So, some of the management team?

Jim: Yeah. Carly, what was her name? I forget that. She had a co-manager on one of the Strong funds. And when we broke up, she started Artisan Mutual Funds.

Pat: You have been doing this for a while. You have been doing... Anyway, any other questions for us?

Jim: No. I just gotta go get another hobby. I'll think of some more questions.

Scott: All right. Thanks, Jim.

Pat: Thanks, Jim. Appreciate it.

Scott: Enjoy the rest of your weekend.

Jim: Thank you.

Scott: Bye.

Pat: That's funny.

Scott: That's funny. All those little useless bits of trivia, you remember.

Pat: I just remembered this. Do you remember, we were back there talking to him at one point in time?

Scott: Yeah, I remember.

Pat: Absolutely disgusted.

Scott: I mean, a lot of weird things used to go on in the industry. Not so much anymore. They've done a pretty good job cleaning. But these due diligence meetings were... I just remember years ago, I went to Bahamas, Franklin Templeton, maybe they weren't even part of Templeton, Franklin Group. They had these things where they paid for me to... This is many, many years ago.

Pat: Thirty years ago?

Scott: Yeah. And down in the Bahamas, and I met some... They put me in some nice hotel, I had my wife there, and we had this nice dinner. And I remember thinking, this is kind of odd because I've only been in business a few years, but I also remember I told my wife, "I would never take her on one of these again because..."

Pat: It just felt dirty?

Scott: No. Because we're having dinner and the egos...

Pat: No, wait. Scott, the financer would've been...

Scott: I know.

Pat: Yes, it felt dirty.

Scott: I'm just telling you, we're having dinner, and I just never forget this one broker, he thought... I mean, he wouldn't shut up about his wine collection, his Ferrari, his house. And he was so full of himself. I told my wife, "I'm never bringing you to another one of these work functions." But anyway.

Pat: And in return, you didn't have to go to any of your wife's functions either.

Scott: No Bunco.

Pat: Oh, remember the Bunco Craze. I'm so glad...

Scott: Oh, no, my sister still plays Bunco with her friends.

Pat: They still do that?

Scott: I guess. She's 60 [inaudible 00:23:05]. Fortunately, those kind of trips have been killed.

Pat: Except for the annuity industry. Fixed annuity, because it doesn't have the same kind of regulations. These equity index annuities, they still have stuff like that. I was invited to one...

Scott: You wanna talk about just creating a total conflict of interest?

Pat: I was invited to one a couple years ago, and I'm like, "We don't do that."

Scott: In this day and age.

Pat: We don't do... They're thinking...

Scott: First of all, [crosstalk 00:23:31], if we can get Pat McClain on this nice trip, we'll put him on this luxury yacht in the Mediterranean. Maybe he'll steer some of the $20 billion that Allworth manages our way, right? That's probably what someone was thinking. But because it wasn't regulated through the Securities Exchange Commission, because it's an insurance product, they still do those kind of trades.

Pat: Get away with it.

Scott: Which is one more reason we are always suspect of the annuity industry, not to state that there isn't a place in time for an annuity. But the vast majority of the time, there are other products that are gonna be more suitable, and preferable, and...

Pat: Normally less expensive.

Scott: Much less expensive. All right. Let's continue on with some calls here. We're talking with Ken. Ken, you're with Allworth's "Money Matters."

Ken: Hi, Pat and Scott, how are you today?

Scott: Fantastic.

Ken: Wonderful. Love your show. I am a previous caller, called a few years ago. And out of all the podcasts I listen to, regardless of the subject, you guys are my favorite.

Pat: Well, thank you.

Scott: Well, thank you.

Ken: I had a question...

Scott: Now we're feeling good about ourselves. What's the question?

Ken: I buttered you up nicely. So, I have a question on, just wanted to run a scenario by you. Long-term planning, my wife and I, obviously, married long time. We have 3 children, mid-20s to late-20s. And I am thinking ahead of time, and we have an issue with tax-deferred IRAs and 401(k)s. We're not retired yet, but the current value is approximately $5 million.

Scott: How old are you?

Ken: I am 57, so is my wife.

Scott: And so you're talking about 401(k)s and IRAs?

Ken: Correct.

Scott: Five million?

Ken: Self-employed. Yeah. And we have a rough date when we wanna retire. And that future value of that based on an assumption of 7% would be $6.4 million.

Scott: So you're planning on retiring in a few years?

Ken: Yeah, probably two-and-a-half, three years.

Scott: And is your business something you can sell?

Ken: Yes, I can sell, but it's not something that would bring in... It's more of a service-type business.

Scott: Got it.

Ken: It's not gonna be very useful or expensive.

Scott: The tax-deferred accounts, qualified accounts, were you overfunding a pension plan for yourself?

Ken: Yeah. So, we have a defined benefit plan. Yeah.

Pat: Okay. And you're the only employee of the company?

Ken: As well as my wife. Although she wasn't on payroll the whole time, as she was raising our children. So, 95% of those funds are in my name, and only about 5% in her name.

Pat: Okay. Scott, can we step back for a second? So, Ken, brilliant, by the way. For the rest of the listeners, because Ken is self-employed, he has a defined benefit pension plan, which is kind of a quirk that allows him to put a lot of money away if he wants to, because it defines a benefit in the future.

Scott: You're not limited like a typical 401(k).

Pat: Or an IRA. So, it defines a benefit in the future. So, you see this a lot with professionals, architects that are self-employed, or doctors, or dentists that are self-employed, anesthesiologists that are in a group.

Scott: That's right. Yeah.

Pat: This is where you actually see this done. And I go through the list and Ken's like, "Check, check, check. I'm one of those."

Ken: Yeah. And that's why you hit it on the head when I said service industry, you knew that selling the business, there's not much of value.

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

Scott: Unless you wanna keep working.

Ken: Exactly.

Scott: What's your income been the last couple years, pretending you didn't contribute to the defined benefit plan?

Pat: Without the contributions to the defined benefit, what's your income?

Ken: Right. So my AGI?

Pat: Yes.

Ken: About $335,000.

Scott: All right. And then how much have you been contributing to the pension?

Ken: The defined benefit, about $95,000 and then...

Scott: Sorry, go ahead.

Ken: But we're also contributing or fully maxing out a Roth 401(k), both of us.

Scott: Yeah. But you're not bothered by that because that's not the issue you called about, obviously.

Pat: How much money is in the Roth side of these qualified plans?

Ken: So the Roth has about $425,000. And if we, once again, assuming a 7%, you know, return per year at 75, it should be worth about $1.8 million. There's different layers to this, and it's somewhat... That's why I wanted to talk to you guys.

Scott: So, what's your question?

Ken: So, we would like to leave our children something. And we know that it's better for, at this point in time with the way the laws are, a step-up in basis on our brokerage as well as our Roth. So, we wanna go through, and once we retire, start Roth converting from the deferred accounts. Okay? My thought [crosstalk 00:28:47].

Scott: How much do you have in brokerage?

Ken: So, that's another layer. So, I have, and you might remember this conversation, I have invested in tax-free munis for quite a while, where we're able to live off the tax-free muni income, plus we have some rentals and plus some, you know, minor dividends, and taxable interest. So, the plan is to... That would be our minimum that we would live off of.

Pat: But you don't have anything in there that has a step-up in basis to speak of other than the real estate?

Ken: No, no. The brokerages would all be step-up. The munis plus our equities would definitely be all step-up in basis.

Pat: How much do you have in inequities?

Ken: Two point six.

Scott: Okay. All right. That makes sense. You said earlier, I've got munis in there. Okay. All right.

Pat: What's your net worth?

Ken: Honestly, I haven't added it up but it's probably 10-plus. This is more of a family long-time planning because...

Scott: Yeah, I get it.

Ken: ...where I'm going with this is I don't wanna touch the brokerage or the Roth and try to spend down or convert the other deferred until about 75. Because the way I've planned it is the tax-free munis should be able to give us income until we turn 25. That's where the maturities level out.

Pat: I disagree. I think there's a mistake here. I don't understand why you have tax-free munis.

Ken: Because...

Scott: What do you mean?

Ken: ...we're getting...

Pat: Look...

Scott: In his tax bracket, what's wrong with [crosstalk 00:30:43]?

Pat: No, no, no. With this size estate, you should have nothing but equities in that brokerage account to get the full step-up in basis and should replicate that fixed income inside of the qualified plans.

Scott: I would agree with that. So, in other words, if you could wave a wand and say, "I'm gonna take a million dollars and my brokerage account, I'm gonna sell the equities and have a million dollars of fixed income, taxable fixed income because it's in a taxable account, and at the same time, I'm gonna sell my munis and buy a million dollars of equities in the brokerage."

Pat: That's right. So, Ken, when we think about this, and I did interrupt you here, but just before you go into this line of thought. So, what you just said to us is, look, I have earmarked a portion of this portfolio that I plan on not spending, which was your brokerage account, but you're taking the income off the tax-free munis, which you said is a minimum I need to live on. I would look at this and I'd say, "I think that brokerage account and the Roth, all goes to the kids on a step-up in basis, even maybe a little bit before where we actually gift some of those stocks to them if they're in a lower tax bracket than you are." When you go to retire, I'd start a distribution from the 401(k)s and IRAs immediately to live on, right? To live on. And if I had anything excess over that for tax reasons, I'd think about converting to a Roth.

Ken: Okay. All right.

Pat: So, what would happen is, and this is exactly how I manage my own money, this is exactly, there is a portion that I know is going to my kids that will not... And by the way, we sit down and I explain to them, this is my investment thesis, this real estate, this stock, this will go to you when your mother and I pass. And this is why. And so, what you wanna do is take advantage of that step-up in basis. And so you're taking a diminished return on those munis. And my point being is, you're gonna have to pay taxes on the IRAs at some point in time anyway. Let's just start that earlier rather than later and get rid of the munis altogether.

Scott: And if you replace those munis with a stock portfolio that is gonna grow fairly tax efficient and have a stepped-up basis, you're essentially gonna be eliminating most of the taxes on that anyway.

Pat: That's right.

Scott: I would agree with that.

Pat: And there's going to be more net worth in 20, 30 years by using that technique and taking the income from the IRAs today when you go to retire.

Ken: Okay. [crosstalk 00:33:25]

Scott: This is the kind of planning, Ken, that I think really could be valuable to you. And do some what-if scenarios. Okay. If we do this, how's this gonna impact our taxes today? How's it gonna impact cash flow, etc. And then you could say, "All right. If we go Avenue A, here's where we're gonna be, Avenue B, here's where we're gonna be, Avenue C, here's where we're gonna be."

Pat: I'd take it one step further. If I sold those munis, and I wouldn't wait on this, by the way, I would do this as...

Scott: Frankly, don't recall the call a few years ago, but it sounds like this has been your strategy for years, these munis, you're so super comfortable with them.

Pat: I don't care.

Scott: I understand. That's what Ken's just sitting there thinking, "Oh, wait a minute. I built my financial life off this strategy."

Pat: But he gives advice for a living. And sometimes the people you give advice to come in with a thesis, and it's wrong.

Scott: Fair, Ken?

Ken: Yeah. It's fair. I'm literally absorbing everything you're saying and I will go back over when this airs and listen to it again so that way, I can really get down and analyze what you're saying. I had a completely different way of thinking about this because the probability is that I am going to pass before my wife.

Scott: That's correct.

Ken: So, I had some other things that I wanted to do once we retire. My thought was take a $300,000 rollover, or Roth conversion rather, which would be about 4.7% distribution rate from all of my IRAs, and keep on putting that into my IRA account for, you know, 15 years until I have to do RMDs.

Scott: That's right.

Ken: And assuming a 7% growth rate again, my 401(k) or Roth would still be $9.4 million, assuming, you know, probabilities that I will pass before my wife. If once I pass, I was thinking of, obviously, everything passes to my wife, but if my wife disclaims half of those deferred accounts to my children, my three children, and split it up evenly, because, obviously, with the whole widow tax and everything, she would be in a much higher tax bracket. And what I wanna do is distribute it to my three children evenly half of what that account would be at the time. And then my wife would have a much more optimal tax situation where she doesn't have to have this huge RMD. And then she can take from the brokerage or the Roth.

Pat: Well, let's just slow for a second. We just completely ignored the tax-free munis. That was the easy part of my answer to you, which is, I would sell that off immediately and I'd put it in a direct index, which is individual stocks that mimic an underlying index. That's easy. It doesn't mean the other things that you're doing. And by the way, your wife doesn't need to disclaim anything because you name beneficiaries on a IRA. And so, you can name the kids as the primaries and the wife as the contingent. So, there's no disclaimer there, whatsoever.

Ken: But it gives her the option. Just in case there's a major drop in the market or something, it gives her the option. And I would put it in writing and say, "Hey..." Because I handle all the finances for the family, if this is gonna be an issue where the reminds, after I'm gone are gonna...

Scott: Well, you can't...

Pat: You can't do that.

Scott: You can't do that.

Pat: You can't do that.

Scott: You can have it all in writing all you want, if there's a beneficiary listed, there's a beneficiary listed.

Pat: You can't do that. You can't do that because the beneficiary is the beneficiary.

Scott: Unless the beneficiary is a trust, then you can have a trust with all kinds of stipulations, but then that's gonna void...

Pat: I think you're too focused on the Roth conversion. I don't know if the Roth conversion is exactly the right thing for you. My guess is it's not. My guess is that you're probably better off, leaving everything else alone and then start taking the income from that IRA and then deciding after that income, why. I know you're certainly better off doing that than you are living off these tax-free munis. There's no question, in my mind, right? Because the Roth conversion, remember the tax-free muni...

Scott: And, Pat, you're approaching... And people are like, "Why doesn't Pat like..." It's not, you don't like tax-free munis. You're thinking, if we have an allocation, let's just say our allocation's 50% in fixed income, 50% equities, just to be really clear on this, right? And the objective is to have this tax efficient as much as possible so that our kids have the most amount to inherit, rather than own munis in a taxable account and equities in our tax-deferred account, let's flip it. Let's own that fixed income in our retirement account. And if we're gonna do that, there's no sense owning munis because it's all taxable there anyway. So, now we can go from something that was yielding as 3% to something that's yielding as 5%.

Pat: And you're gonna pay the taxes on the IRAs anyway,...

Scott: That's right.

Pat: ...either you or your children.

Scott: Regardless of how it's invested.

Pat: Regardless of how it's invested.

Ken: Right. And I've thought about that. And I've got some tax-loss harvesting that would take care of the first year of our retirement. I also have some basis in the brokerage account that I could take some out to...

Scott: You've got a lot of planning ahead of you. We just gave you a few ideas.

Pat: So, Ken, I'm just telling you, I could sit on a Zoom meeting with you in less than 20 minutes, walk you through and get to your objective by small moves and show you why my thesis is better than yours. That's the way it is. I mean, it's flat out because what happens is I'm not gonna do the work myself. We've got a bunch of advisors here. We've got these young interns that we run models and I say, "What happens if we do this?" And the young guy goes in there and he goes, "Boom, boom." Or the young lady, and they go and do this.

Scott: It's a pretty sophisticated software now.

Pat: Yeah. I go, "Let's run these five different models, and let's actually see where it looks like."

Scott: I mean, that's the only thing. That's what you're gonna have to do.

Pat: I know exactly where we're gonna end up. I just have to show you.

Scott: Ken, I appreciate the call. It sounds like you got the right kind of thought process going on.

Pat: Yes. Listen to this podcast again and consider getting rid of those munis. And don't worry as much about the Roth conversion.

Scott: Yeah. So appreciate the call. And I guess those are... Anyway, it's...

Pat: This is a...

Scott: I listen to something like that, I'm thinking, had he been working with a really good financial advisor over the last number of years, he probably would've been set pretty well. And is it the reluctance to hire advisors because we charge too much because there's too many idiots in our industry? Because there are.

Pat: Well, there are.

Scott: You don't know who you're getting good and not good.

Pat: You do charge, but actually it's the higher the amount, the percentage that you pay on the portfolios, less and less. So...

Scott: That's right.

Pat: All right. So, this is the part of the show, which I really love. I really do. This reminds me of the old...

Scott: This was your idea.

Pat: Click and clack.

Scott: You kept saying, "Why don't we do this?" And it took years before the team finally did.

Pat: Well, part of it was, you can't do it with clients because we [crosstalk 00:40:50] test.

Scott: Our house calls.

Pat: We call them house calls. But click and clack. The Tappet brothers used to do this, and that's where this idea came from, which is, we actually call someone back that we talked to and gave marginal advice to at some point.

Scott: And see how much we screwed up their life.

Pat: And see how we did.

Scott: Yeah. So, in March, this last March, we spoke to a man named Matt from Texas. He's a podcast listener, not an Allworth client. He wanted some advice about his allocations and keeping his own tendencies in check. Here's a clip from that call.

Matt: Well, I think perhaps I feel like I may be too much in cash, but I get a little nervous when I think about going into the market these days.

Pat: Okay. Walk us through it, please, Matt.

Matt: Okay. The numbers...

Scott: By the way, Matt, two things. One, I always feel nervous going into the market. Secondly, I don't know if this is statistically accurate or not, but based on our experience, whenever you buy a stock or get in a stock fund, the next day it goes down, just...

Pat: Yes, Scott, that is statistically accurate.

Scott: And if you sell it, it is gonna go up.

Pat: That's statistically accurate.

Matt: Well, one guy told me one time, "You don't lose until you sell." How's that?

Scott: Yeah. I've heard that, but I...

Pat: [crosstalk 00:42:19] it's just a paper loss.

Scott: Yeah. Not really.

Pat: It ignores opportunity cost, which is actually a big number in investing.

Scott: It's paper loss. Well, the paper you take to the store is, you know, the dollar bills are paper as well, so...

Pat: Yes. Yeah. So, tell us how big the portfolio is.

Matt: Okay. Let me give you some numbers real quick. Well, first off, let me mention that I'm retired and my wife is 62 and I'm 64. And I'm her full-time caregiver. She's got some serious health challenges. And so that's probably why I'm heavy in cash right now. It makes me feel a little bit more secure.

Scott: Okay. That matters.

Matt: Okay. But the numbers are, I got 135,000 in cash in the bank. And then CDs, I got 2.1, and then fixed IRA income is 1.6, not income, fixed IRA is 1.6.

Scott: And when you say fixed, what do you mean by fixed IRA?

Matt: It's not a money market. It's called an income fund.

Pat: It's a bond fund, or is it a guaranteed investment contract?

Matt: Well, I don't know that.

Scott: It's all in one fund?

Matt: Yeah, it's one fund. It's a Saudi Aramco Income Fund, is what it's called. It's something Vanguard put together for that company to offer their employees.

Scott: Got it. [crosstalk 00:43:50]

Pat: And what is it paying? What's it yield?

Matt: Well, right now it's pretty good. I think it's around 5. But it has been quite low. Of course, you know, a few years back, it was in the 1s. So, that's that. And then I got $705k in a brokerage. And then I've got...

Scott: And how's that invested?

Matt: That's invested in Chevron. And then I've got the S&P, and this is in the IRA also. I got a million in the S&P. So, that's it. That's all. Nothing more coming. Well, we are getting Social Security too.

Scott: What are you living off?

Matt: I'm living off of Social Security. My wife and I are both taking Social Security, and I'm getting $40,000, well, let's say, $10,000 a quarter from that fixed income fund.

Scott: From the IRA?

Matt: Yes, sir.

Pat: And what is your Social Security benefit?

Scott: And you're not taking any... The interest on the CDs, are you taking that to live off at all?

Matt: No, just letting it ride in there.

Pat: And what's your Social Security benefit?

Matt: Well, combined, it's 2.5 a month. I got hit with the WEP. They were basically behind by 25%.

Pat: All right. And so are you receiving a government pension then?

Matt: No. When I retired from my job, I had a pension. It wasn't a government pension. I took and put it in a lump sum.

Pat: We're curious why you have a windfall elimination on your Social Security. That's usually when you have a government pension.

Matt: I worked overseas for a company. Yeah.

Scott: Overseas, so you weren't paying into Social Security?

Matt: Correct.

Pat: Okay. Thank you.

Matt: And we don't have a lot of expenses right now. I mean, my expenses probably run $3,500 to $4,000 a month.

Scott: And how are you paying your taxes, your quarterly tax bill?

Matt: That's a good question because this year, it jumped up quite a bit with the interest.

Scott: Yeah. Interest rates are high. Right. Suddenly, it's significant, it's gonna be more so to the end of this year. So, how are you paying? Are you taking money out of your cash or CDs, or is it coming out of...?

Matt: No. It's coming out of cash [inaudible 00:46:38].

Pat: All right. And so what did this portfolio look like? You know, obviously, the numbers were different, but the percentages of the investment, what did they look like 10 years ago? Did you have more in the market, less in the market?

Matt: Probably less.

Pat: And you want us to do what for you?

Matt: I want you to either convince me to go more into the market with what I've got in my fixed CDs, or tell me that, you know, just everything's okay. Just do what you're doing.

Scott: Here's the reality. You could take these dollars and bury them in your backyard and just pull them out when you need them and not earning any interest. And you have enough money to last you to your dying day.

Pat: At your current standard of living.

Scott: Yes. So you have the luxury of either being as conservative as you feel like being, or, frankly, you have the luxury of also saying, "I'm gonna be much more aggressive because I've got more money than I need based on standard of living. I could take half my portfolio and invest it, not necessarily for my life expectancy, but invest it for the next generation. And I'm not gonna worry about what's gonna be worth this month, this quarter, this year. I'm gonna be worried about what it's worth 10 years out."

Pat: And quite frankly, we use it here at Allworth as a technique for clients like you that intellectually know that but emotionally have a hard time dealing with it.

Scott: That's right.

Pat: And so, it isn't unusual for us to set up two different accounts and say, "This is the account that's invested for you and for your needs. But can we all agree that you're never going to run out of money? Yes, we can."

Matt: Okay. Well, I might have forgotten something. You know, I told you my wife had some health challenges.

Pat: That was my next question.

Matt: Yeah. She's got a pump attached to her heart. And we live in an area where the people who can manage that care are in the Dallas-Fort Worth area. And we're 350 miles to the west of there. So, I think in our future, we're gonna have to pull up and make a move and get closer.

Scott: Yeah. Make [inaudible 00:48:53] easier.

Pat: Matt, I wouldn't...

Scott: You can afford to do that too.

Pat: Matt, I wouldn't make a change in this whatsoever.

Scott: All right. So, we are talking now with Matt. Matt's with us. Matt, thanks for being part of Allworth's...

Pat: Again.

Scott: Yeah.

Matt: Yeah. Hi, guys.

Scott: So what's...

Pat: Before we start, how's your wife doing?

Matt: She's hanging in there. She's stable, and we're just doing the best we can with it.

Scott: Well, God bless you.

Matt: Thank you.

Scott: So what's transpired in your financial world since we talked?

Matt: Well, I'm a little disappointed in myself. I got a little fearful back in May and I reduced my allocation of equities by about 30%. I knew I shouldn't. And I understand the reasons why, but it's just something in me just keeps wanting to put it in a safe haven.

Pat: So, the good thing about listening to this call again, is remember how we started the answer to the call, which was, you can do anything you want, right?

Matt: Yeah. Right.

Pat: So, you saved this money, you saved this money.

Scott: And you're in a unique season of life right now.

Pat: And remember, money is a tool. It's a tool. And I don't think that... Look, I don't think you should beat yourself up for reducing the allocation. In fact, if it makes you feel okay, then that's the right thing to do. Scott?

Scott: Yeah.

Matt: Well, I appreciate you guys saying that because, you know, I just worry about not keeping pace with inflation and [crosstalk 00:50:51].

Scott: You're not gonna have that problem.

Matt: Okay.

Pat: Look, if I met you in the street and I was with one of my kids and I pointed to you and I'd say, "You know, that guy's worth millions and millions of dollars." My kids would say, "How could he be worth millions and millions that he dresses like a normal guy? He drives an old car."

Scott: And he bought that shirt at Costco.

Pat: Right. And I bet...how old is your pickup?

Matt: Well, I just got a new one.

Scott: There goes [crosstalk 00:51:23].

Pat: Well, good for you. Good for you. How old was it? You don't buy a new car every three years though?

Matt: No, no. The one prior to that was a 2000.

Pat: A 2000?

Scott: Twenty some-odd years. [crosstalk 00:51:41] You were right on that.

Pat: Right. Actually, I was looking at new cars last night on the internet, and I just can't get myself to buy one. But you are fine. You're fine. Inflation isn't a problem. And have you moved closer to Dallas?

Matt: No, we hadn't crossed that bridge yet. Still looking. That's a whole nother issue, you know, the housing market.

Pat: I don't think you should buy.

Scott: You got the money.

Pat: I don't think you should buy.

Scott: Just go rent something.

Pat: Go rent and keep your house. Do you like the house you're living in now?

Matt: Yeah. No, no, sorry. Particularly, I don't care for it that much. But I wouldn't wanna keep it as a rental either, because [crosstalk 00:52:24].

Scott: What if you just kept them both? What if you rented a place in Dallas and you're there when you need to be there for medical purposes and maintain your existing house? Just realizing your expenses are gonna be a little higher during this season than normal.

Pat: And then you get to decide.

Scott: You've got the money to do that.

Pat: You don't have to sell that house that you're living in. But I don't think you should buy in Dallas. I think that you should rent. And look, and we don't know whether this is, you know, a one month, nine months, you know, two years, three years, right? And the finances, remember you've got so much money that if... Scott said if you wanted to bury it in the backyard and just go dig it up when you needed it, you'll be fine.

Matt: I appreciate you guys, and I'm gonna download this and listen to it over and over. But, you know, I might have some money, but it doesn't feel [crosstalk 00:53:21].

Pat: Correct. Correct. You show me someone that doesn't care about money and I'll show you someone that doesn't have any, right? The reason you have money is because you have this mindset, this poverty mindset, right? And you're not gonna change that. There's nothing you could do about that.

Scott: I mean, there's certain times...

Matt: [crosstalk 00:53:40]

Scott: There's certain times in life though that like, this now, that hard work you've done by saving this, it's given you way more options than I think you realize on your lifestyle. And your lifestyle right now is about taking care of your wife, right? That's...

Pat: Have you ever saved for a rainy day?

Matt: All the time.

Pat: It's raining.

Scott: [crosstalk 00:54:00] That's right.

Pat: It's raining.

Scott: That's right.

Pat: It's actually pouring. It's pouring. Look, this isn't the first conversation that we have had with clients that have run into these life situations. When you go to rent a place in Dallas, get it close to the medical facilities, and don't go cheap. Get a condo that has full services. And you're gonna say, "Well, geez, Pat, it's $5,000 a month." And you know what I'd say?

Scott: Okay.

Pat: Okay.

Matt: Oh, boy. You don't know how hard that's gonna be.

Pat: Oh, I know, I know, I know.

Scott: But I think Pat's point really is, let's make this as comfortable as possible for everybody right now.

Pat: You've got the money to do so. And whether the portfolio is...

Scott: It's not gonna make any difference.

Pat: Ten percent equities...

Scott: [crosstalk 00:55:01] It's not gonna make a difference.

Pat: ...or 20%, or 30%, or...

Scott: It's not gonna have any impact on your life.

Pat: Not any impact on your life. What is going to be impactful in your life is the last years or months with your wife.

Matt: Right, right.

Pat: And that's hard to talk about. I mean, it's really hard to talk about, right?

Matt: Well, I appreciate it, you guys make me feel better. I'm going about the wrong things, I guess. The mindset, it's hard to shape.

Scott: That's what got you here though. That's the thing, right?

Pat: Right.

Scott: If you didn't have this mindset,...

Pat: You wouldn't be here.

Scott: ...you wouldn't have these dollars. And we wouldn't be talking about being able to afford a nice condo by the medical center.

Pat: That's right. I mean, this is what... And you can't change yourself much, but you can change yourself a little for a period of time. So, God bless you.

Scott: Yeah. For sure. Thank you.

Matt: Thank you, guys.

Scott: All right. Well, with that, I think... All right.

Pat: Here you go. I'm mostly drained [inaudible 00:56:11]. Weren't you?

Scott: Yes. I was almost getting teared up a little bit.

Pat: You know what though, Scott? You know, because you've seen it with clients, you've seen it.

Scott: This is what life is.

Pat: We've been there. We have been...

Scott: You do all this financial planning and then life happens.

Pat: That's right.

Scott: But not everything goes as we plan. We have certain kind of plans and then a spouse has a significant illness that derails our retirement plans. The child's got a major issue. Now, they've moved back home at 32 with their kids. I mean, all kinds of things happen.

Pat: People, they ask me to come to where they were in hospice to visit with them. And sometimes to say thank you and sometimes just to get reassurance one more time that their spouse will be okay, right?

Scott: Yep. Hey, real quick before we sign off. I wanna let you guys know, we've got an in-person financial planning workshop, which these historically, lots of people come to these because they're just...

Pat: They're well attended.

Scott: Yeah. And they're great. It's the "5 Must-Knows of Financial Planning." That's what our title is for this, the "5 Must-Knows of Financial Planning." Some of the things you're gonna learn, some sound investment management strategies. So, we'll talk about, kinda go a little more in-depth in what we do here. Some good tax planning because we have that silent partner is Uncle Sam that we can choose to pay. Sometimes we have some choice of how much to pay.

Pat: Not so silent right now. Silent about taking the money.

Scott: Oh, that's right. And also, just some other strategies that are critical to your planning and retiring well. So, that's gonna be in both the Sacramento and Cincinnati areas, Sacramento and Cincinnati areas, the week of August 14th. To sign up, go to allworthfinancial.com/workshops. All right. So, anyway, good being with you.

Pat: If you liked that podcast, please rate and review.

Scott: Yeah. Or we had interesting calls on this program. And if there's someone in your life that you think could benefit from hearing this, forward it onto them as well. So, this has been Scott Hanson, Pat McClain of Allworth's "Money Matters." We'll see you next week.

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