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

Scott: Welcome to Allworth's Money Matters. Scott Hanson...

Pat: Pat McLain.

Scott: Glad you are taking some time to join us. Both myself and my co-host, were both financial advisors, certified financial planners, chartered financial consultants. We spend our weekdays helping folks like yourself, and broadcast our program on the weekends to be your financial advisors on the air.

Pat: Yes.

Scott: Or via your AirPod...EarPods, whatever you...

Pat: However you consume this.

Scott: Yeah. So anyway, glad you're here. We love taking calls, and answering questions, and talking about what's going on with the economy, and financial planning issues, and all that stuff.

Pat: I know, I haven't seen you in a while. We've talked on the phone a couple of times... Before we begin, your take on Fitch downgrading...yeah, the debt.

Scott: This last week. Well Pat, you know, it's interesting. Normally, they broadcast this sort of thing for weeks in advance, and then they come out and do it, and there was nothing. But when you look at the amount of debt in the last four years... I mean, we went from roughly $20 trillion of debt, to what are we, $31 trillion today, $32 trillion?

Pat: A lot.

Scott: And our deficit spending is just, it's through the roof. I mean, it's just...

Pat: Yes.

Scott: So ,you know what was most surprising...not that they did it. I mean, that didn't surprise me at all. It's that...the lack of play it got in the press. I didn't really see it in the press. And I remember last...when was it when they last...

Pat: Well, that was Standard & Poor's before.

Scott: That might have... It's a little bigger, maybe a little more reputable than

Pat: More respected.

Scott: ...than Fitch, yeah. I would think.

Pat: Yes.

Scott: I don't know, the markets had a little bit of sell off. Not much. I mean, the markets are on a tear this year.

Pat: Well...

Scott: Who would have figured? Look, as an investor, it's good to every once in a while, to just pause and take a look, and say, how did I feel about things six months ago? Right? Because if you started this year, no one would have predicted that the market would be up roughly 20%.

Pat: Yes.

Scott: In that neighborhood somewhere, right?

Pat: Certainly not me.

Scott: Certainly not me. But then again, I try not to make many predictions, because I...it's impossible to figure out which way the markets are going to go. But here we are, at a time...we haven't entered a recession, which everyone thought we were going to have a recession, it's still anemic growth, Wall Street earnings aren't exactly right...as a matter of fact, we've got a decline in earnings year-over-year of the broad S&P 500 companies, and yet stock prices are up dramatically.

Pat: And interest rates have gone up, right? Which means that there's an asset class that is competing.

Scott: An alternative.

Pat: And alternative that isn't bad, relative to what it was a year and a half ago, or two years in terms of...

Scott: Yeah, and you can get 5% in a CD now.

Pat: Yes.

Scott: Right? So a year ago, when it's like, people were thinking, I can't afford to just have 5%, I've got to put my money somewhere where it's going to work, you've had those conversations with people, right?

Pat: Yes.

Scott: Even just money that they should keep absolutely in the bank, money market account or whatever...

Pat: They're like, it can't stay, I'm like, well, yes, it can. Investments are based on timelines.

Scott: But here we are, the market's way up. And who could have predicted it?

Pat: Especially in light of all the things that inflation...well, it's tamed slightly. It seems to have tamed slightly. Depending on /

Scott: Pat, the longer I'm in this industry, the more I realize that the secret to success in investing is not predicting where the markets are going to go, or even what asset class to own at a particular time, it's having a great long-term strategy, and sticking with it regardless of what the market is telling you, and the media is telling you, and your emotions are yelling at you.

Pat: Yeah, through thick and thin.

Scott: And it's hard. When you own something that's out of favor, small cap value stock, whatever it might be, it's really difficult to continue to own that.

Pat: Yes. Actually, it isn't from...obviously, I'm in the industry so I must believe this, it's hard for me to oftentimes articulate it to people, that it will be okay regardless of how bad it looks. If you have a well-diversified portfolio. If you don't have a well-diversified portfolio...

Scott: Well, who knows?

Pat: Who knows?

Scott: Yeah, who knows? And there was a story, this was in "The Wall Street Journal" this last week. Beneficent, a company called Beneficient...I mean, it just has a great name. Right off the bat.

Pat: How could you go wrong?

Scott: Beneficient, $2 billion default. There were warnings everywhere but to the investors. And this was...they would get money from smaller investors and say they're going to go buy stakes in private equity funds.

Pat: But did they?

Scott: A little bit.

Pat: But here's what I loved most about this, is that it recruited a cast of notable directors, including two formal Federal...two former Federal Reserve Bank presidents, and legendary Cowboys quarterback, Roger Staubach.

Scott: Staubach. Well, whatever Staubach's doing, obviously it's going to be a great investment, right?

Pat: I know, he played football.

Scott: He's a great quarterback, he must know what he's doing on investment. And to me, it looked no different than your typical Ponzi scheme.

Pat: Yeah.

Scott: Taking in more money, spending money...

Pat: Millions went to his 1500-acre East Texas ranch, and his personal travel via private jet [inaudible 00:06:27.081]

Scott: And they did this by having...he sold bonds through brokers.

Pat: Yes.

Scott: And there are... Here's the thing. You read about this again, where people...

Pat: They were selling them through commission brokers.

Scott: Commission brokers, so they'd get some sort of commission on these things. But you're reading the stories again about people who lost the majority of their life savings.

Pat: Well, I did read one where the guy put $400,000 in, and he said it was 80% of his life savings in there, and I thought to myself, what? First of all, what did... Well, even the worst commission salesperson, why would they do...? Well, I know why they would do it to you. But take responsibility a little bit for your own decision making, that you're going to put 80% into a single bond holding because someone told you how great it was, or because the yield was higher than anything else on the marketplace? There's a reason yields are higher. Don't get attracted to yield. I tell clients all the time, well, this one pays 7%...

Scott: Particularly on a bond.

Pat: ...and this one pays 5%. Why would I own the thing that had 5%? Well, because the market says that they have to pay above average yields.

Scott: They also raised money through a SPAC, which is...

Pat: Well, naturally. Everyone did.

Scott: ...down 85% from when it went out. And I read this, and it got me, it just reminded me, like... First of all, a lot of everyday investors can't tell good from bad.

Pat: That is correct.

Scott: But when someone's steering you to buy into one, an individual security tied up in one small strategy controlled by one organization, I mean, you should have a very small portion of your net worth there.

Pat: Well, the reality, Scott, my of our regular listeners are shaking their head right now, saying, well, that makes sense, but why are Scott and Pat talking about that? Because we know that already. Our listeners know that already.

Scott: Well, that's probably fair.

Pat: Right?

Scott: I know. But I mean [inaudible 00:08:39.245]so that's an extreme case. Right?

Pat: Yes.

Scott: An extreme case. But you hear all the time people will invest money with some broker that's...their compliance record is a disaster. And that's all public information. You can go online, and see what kind of customer complaints somebody's had...

Pat: Go to Broker Check.

Scott: Yeah, if they've had any sort of fines levied against them, or been censured in any way whatsoever, you can get all that history. But you see people investing with these folks, even though the most basic of due diligence...

Pat: Broker Check, Broker Check, Broker Check.

Scott: Yeah, google... And then, I think most firms, I think you have to have it on your website now, don't you, a link to it?

Pat: You have to have a link to it, yes.

Scott: So you can check...yeah. Anyone you're doing business with, any sort of...if they're licensed in any sort, they have to have...

Pat: They have to have it.

Scott: You can get your, get the whole thing...but I don't know. You read these things, and it's... I mean, here's a guy flying around in a private jet, as he's...

Pat: As he's fleecing people?

Scott: How do you sleep at night?

Pat: What do you mean? I sleep fine. Oh, you're not asking me how I sleep at night? How's this guy sleep at night?

Scott: I mean, I've been in this business, we've both been in this business three decades, we've led people through bear markets. I have sleepless nights when I know I'm doing the right thing, when people's account balances are going down, and I think of those people, my clients faces appear in my...right?

Pat: Well, of course they do.

Scott: And I think about this particular client, and that particular client, and this particular client, and I think about them, and it...

Pat: Well, as I tell the advisors, if you didn't do that, you wouldn't be a good advisor. If you didn't have compassion or empathy for your clients, you wouldn't be a good advisor. This guy obviously doesn't have that. He doesn't have that gene.

Scott: He doesn't have the gene. I don't if that...is it genetic?

Pat: Is it a gene?

Scott: Is it a genetic thing? It's not his fault, it's genes. That's how he was born, Pat. You can't blame him.

Pat: Okay. All right. Okay, we're not going to go there.

Scott: Well, I don't know. His moral compass was...he didn't have one.

Pat: Yes.

Scott: 833-99-WORTH. If you want to join us, we'd love to take your call. Or you can email us at questions@moneymatters.com. And let's start off here, we're talking to Pandu. Pandu, you're with Allworth's Money Matters.

Pandu: Hello. Good afternoon.

Scott: Hi. How are you?

Pandu: How are you guys doing?

Scott: Fantastic.

Pat: What can we do for you?

Pandu: Sure. I have a question. So, my son would be going to college starting this fall. It's going to cost me, I think it looks like close to $38,000, $40,000 per year. So, the question that I have with respect to that, with respect to that is that I will be sponsoring his undergraduation education, so I have, like, three pots in the kitty at this point in time. So I have, like, $15,000 in my savings bank account, a typical bank savings account...

Scott: Savings, is that $50,000, or $15,000?

Pandu: 1-5.

Scott: Okay.

Pat: Okay.

Pandu: And then I have close to $45,000 in a 529, in a scholar share 529 plan.

Pat: Okay.

Pandu: And I have $20,000 in treasury bonds, which were invested probably last year, and then this year. So basically, they have been invested in less than a year.

Pat: And what are the maturities on those bonds? Like six months, twelve months, five-year?

Pandu: These are the T-bonds, I think, which are like, perpetual...it's like 30 years or something? I'm not sure. And those are the...I think those are the...

Scott: Are these the savings bonds you're referring to?

Pandu: Yes, in the Treasury Direct, where you purchase the bonds, right?

Scott: Oh, the Treasury Direct.

Pandu: Yeah.

Scott: So, they're treasure bills, probably. But you don't know the maturity length?

Pandu: Yeah, I don't remember it, but I'm definitely...it's like, my understanding is like, 30 years, or 15 years kind of thing. It was not, definitely, like a [crosstalk 00:13:06.867] years kind of thing.

Pat: Okay. All right, well, we'll try to answer the question, but that's a bit of information that would be helpful.

Scott: Yeah, that one.

Pat: Okay, so what's your question for us?

Pandu: Yes. So basically, I have these three pots where I can dip my money in...dip in, and take the money out. So, I wanted to know what are your guys' recommendations in terms of which one should be touched first? And ultimately, I have to touch all three of them at one point in time. But to start off with, based on how the economy or the market is doing, I just want to get your opinion, and like, yeah, an expert opinion so that I can follow that to make sure that I am doing the right thing.

Pat: Okay. How many children do you have?

Pandu: I have two.

Pat: And where's the other one? What's the other one going to do?

Pandu: The other one is a fifth grader, so I have six more years to do something.

Scott: Okay, long time.

Pat: Okay.

Scott: And is the 529, is that invested in equities, stocks, or is that...?

Pandu: So, yeah, I moved it to...it was in stocks, but back in 2020 or 2021, I think, a couple of years back, I moved it to principal plus interest. So, it's almost like a cash [crosstalk 00:14:21.605]

Pat: Yeah, yeah.

Scott: Perfect. Okay.

Pandu: So I moved it, because I didn't want to lose money, you know? Even though how the market [crosstalk 00:14:27.644]

Scott: No, that was the right call, because you don't know...Look, I remember my next door neighbor in the year 2000, late '99, he says, "Hey, Scott, do you mind if I asked you a financial question?" And he had his one child, his daughter was going to go to college, an expensive private university. He had I forget how much money, but he had a lot of money in his 529, and it was almost all in stocks, and he says, "What do you think? The market's going well, but what do you think I should do?" I was like, "You're going to be spending these dollars the next few years. Your timeline is very short, get it out of the market." And then, that was right before the dot-com, you know, blew up, and the markets were down. Now, had his daughter been going...10 years before she went to school, it would have made sense to continue his approach, but nobody knows what's going to happen. So I think that was the right call, getting it to cash a couple of years before your kid goes to college.

So it's going to cost you, you say, $40,000 a year.

Pat: Is the student...is your son taking any debt on, student loans on?

Pandu: No, we are not eligible, based on the salary for the last, based on income last year.

Pat: Yeah.

Scott: Okay. And so, it's going to cost you about twice what you've got saved, right? Because you've got about $80,000 saved.

Pandu: Yes. Yes.

Scott: So is the plan to pay for the rest out of your current earnings, current wages and whatnot?

Pandu: Right. Right, that's my plan. So I mean, I think I have...I think, at least as you said, right, I think I have a plan for the next two years. And within the next two years, I'm hoping that I will be able to pay something. But in the worst case, I will go for a loan kind of stuff at this point in time. But then, yeah, I have some savings back in India.... I'm sorry, I am from India, so I have some savings back in India. It's not very huge, but at least I would be able to cover at least like a $20,000 kind of thing in his third year. That's my backup plan for his third year. But for the first two years, I think I have enough to...I think I have enough not to take a loan.

Pat: I would use the 529 plan.

Pandu: Okay.

Scott: I would use the 529 plan.

Pat: For all of it.

Scott: That's what it's for.

Pat: That's what it's for.

Pandu: Okay.

Scott: But the only question I have is your treasuries. Like, are they treasury bills that mature in the next three to twelve months, or are they treasury bonds that mature 10 years, 20 years down. I seriously doubt they're longer than 20 year bonds.

Pandu: Yeah, I think it's the T-bonds. It's not bils...I don't remember. Because I was told that those are the common, like typically, like folks like me usually go to Treasury Direct to get... Give me one second. I can probably log into Treasury Direct, and see what type of bond it is.

Pat: Okay. All right. We can look at that, yeah.

I just actually combined... Of my four children, there were some left in the 529s, so I combined them all into one...

Scott: You're allowed to do that, what, once a year?

Pat: You're allowed to change the beneficiary, I believe, once a year. Yeah.

Scott: And you combined all the accounts for your four kids?

Pat: Yes. There were two left. We have had four of them, two of them were empty, one had a little bit of money, and one had a lot of money, and my daughter starts law school next week. If you seen me on Highway 5 in a Ford Edge, towing a U-Haul trailer...driving from Sacramento...

Scott: Are you driving down with your daughter?

Pat: I don't know if she's coming with me or not. I haven't gotten there yet.

Scott: What do you mean?

Pat: She said that she's not quite certain her timeline of getting there, but this...

Scott: So, you might be driving her car and U-Haul, and she might be flying down?

Pat: It may happen like that.

Pandu: Hey, I have [crosstalk 00:18:23.338]

Scott: Dads and daughters.

Pat: All right, Pandu...

Pandu: [crosstalk 00:18:29.794] okay, yeah, sorry, I just logged in. Sorry, I was confusing myself, it was a Series I savings bond.

Scott: [crosstalk 00:18:38.538]

Pat: Oh, okay. Perfect. Okay, okay...

Scott: Yeah, so those...

Pat: You can go to cash any time you want on those.

Scott: Yeah, but then don't you lose some interest the first...for three months, or something like that?

Pat: Yeah, you do.

Scott: I would use those last.

Pat: Yeah.

Pandu: Okay.

Scott: I'd use those last. I'd use that 529 first.

Pat: Use all of the 529 first.

Pandu: Okay. Okay.

Pat: Yeah.

Pandu: So 529, and then my savings bank, and last would be the [crosstalk 00:19:06.227]

Pat: I would do it in that manner. Is your son going to work in college?

Pandu: I don't know. He doesn't have any plans at this point in time. He's going to University of California Irvine for mechanical engineering. I'm not sure if he'll have bandwidth to [crosstalk 00:19:28.721]

Pat: Yeah, that's a tough school, and a tough major.

Pandu: Yeah.

Scott: Hey, could have taken recreation or something, he would have...

Pat: I know. If he got a marketing degree, like the rest of us...

Scott: Yeah. Hey, appreciate appreciate the call. Wish you well, and good luck for your son down in...

Pat: UC Irvine.

Scott: Yeah. I remember I had some friends who were rec majors in college, I'm like...

Pat: What do you do?

Scott: I don't know. I think they...I don't know. I didn't keep up to see what they're up to now. But I just remember at the time thinking, a rec major?

Pat: Yeah.

Scott: You really need to go to college to learn how to recreate, to go out and have fun? Isn't college all one, like... Yeah, I don't know.

You know, essentially, I was thinking about, and maybe this last caller, it was how many months ago, it was maybe a year ago when people were pushing these I bonds, right? The savings I bonds, whatever...

Pat: And you could only put...there was a limit on how much money...

Scott: There was a limit. So for good savers, it...

Pat: It was like, $10,000 or something, whatever the law...yeah.

Scott: [crosstalk 00:20:29.561] yeah. Excuse us for not knowing what it is. But it wasn't...I think it was a little [inaudible 00:20:32.785] but it wasn't that significant. But it appeared attractive at the time, right, because it was yielding, like, 9%. It just so happened to be this window when inflation was high. But you lock your money up, these savings bonds are locked up for many years, and then you have a prepayment penalty if you...an early withdrawal penalty [crosstalk 00:20:50.161] Yeah, you've got to pay a penalty on it.

And so I think where the market is now, we're in a time when interest rates are much higher, the Fed's continuing to increase short-term interest rates, and the inflation rate declines. So there's a good chance that if you own those, that the rates going forward are going to be less than what you can receive just in the bank account, or in just a treasury bill.

Pat: A treasury, it just happened to be that. By the way, just for the listeners out there, this happened to me this last week. I saw an ad from the banking institution that I bank at, that had an interest-plus account.

Scott: Interest-plus?

Pat: It was interest plus.

Scott: Oh, I like the plus. Everyone wants the plus.

Pat: And it was in checking. It was in checking. So I'm like, I read the qualifications, I go to their website, I'm like, yeah, this makes sense for me. So I call the bank, and I said...

Scott: This is your bank you currently deal with?

Pat: I currently deal with. And I said, hey, I see this interest plus thing you guys are advertising. Is mine in that account? And they said, no, but it should be. And I said, well, why isn't it? And they said, well, because we don't do it automatically. You have to call and ask for the better deal. I said, well, I'm here, I'm asking for a better deal.

And the reason I bring this up is had I not seen that ad, I haven't been in a branch in who knows how long, if I hadn't seen that ad in a general publication, I would have never known about it. And I had just been telling my wife two weeks before, I'm like these interest rates, I don't care how little money you have in the bank, the interest rates are so low relative to what you could get even in a three-month or six-month CD that you should really pay attention to it now. So the reason I'm sharing...

Scott: Agreed.

Pat: ...I'm sharing that is go to your bank's website, if you've got a regular checking account, and see if they've enhanced it, that pays a higher interest rate. So this one has a minimum balance that you have to keep, and if it drops below that, they charge you $15 a month. But just go to the website, and look to see if there's an offering for any of the services that you're using now from your financial institution

Scott: And not only that, just on cash assets in general.

Pat: Yes.

Scott: Because these banks, they're quick to lower... And I mean, the reality is banks, some banks are kind of struggling right now because they've got really low...they've loaned out money at super low rates, and now they're having to pay higher rates for deposits. Sometimes it's inverted. But so, they're trying to pay as little as possible, as any other business does, right?

Pat: Yes.

Scott: Like, it's, you know, trying to maximize profits, it's funny. But they're super slow at raising rates.

Pat: Scott, not only that, they're trying to protect their balance sheet so much. I was talking to a gentleman that works for a large, large bank. In their mortgage division, they laid off almost all of their loan originators that work with jumbo loans, loans over the Fannie Mae and Freddie Mac limit.

Scott: Yeah. Really?

Pat: Because they don't want...

Scott: There's no demand for it?

Pat: No, it has nothing to do with the demand. It's their lack of ability to actually lend the money, because it will push...

Scott: Was it First Republic? Because they were the ones big in that space, right?

Pat: No, it's another large, large bank. But...

Scott: That's what happened to First Republic, right?

Pat: That's exactly what happened to First Republic. But the reason they're doing it is because they're trying to protect their balance sheet. So they don't actually want to lend out this money, they'd rather just broker transactions between agency debt and the consumer. Because...

Scott: Because the conventional mortgages get packaged and resold, and...

Pat: This stuff, we talked about it when it happened, when First Republic and Silicon Valley Bank, this will hurt small businesses and local economies, with the lack of lending, because these small banks are now trying to protect their balance sheets. It will have an effect.

Scott: Yeah. By the way, on a cash alternative, if you've got a brokerage account, you can buy...there's ETFs that invest in treasury bills. So one simple way, instead of monitoring your T-bills, and buying one for 90 days, and then worrying about it maturing, or buying a CD, and then having to wait until it matures, you can buy an ETF that just...they own treasury bills, and they cost almost nothing to...in that ETF.

Pat: Yes.

Scott: And it's a simple way to...

Pat: And you don't have to worry about rolling them every three months or six months, and...

Scott: You don't have to worry about rolling it. You might... I mean, you give up a little bit of... Because there's no maturity date on them, they just continue to roll, they can fluctuate in value a bit.

Pat: But if you're rolling your treasuries anyway, you're going to see that regardless.

Scott: Yeah, but people are finding when they have bonds, they say, well, it doesn't really matter. As long as I hold it to maturity, I haven't lost anything.

Pat: You can tell yourself that.

Scott: I understand, you can tell yourself... The market value is the market value, regardless.

Pat: You can tell yourself... You're going to get all your money back, but yes...

Scott: It's still worth something different today.

Pat: Yes. The opportunity cost is still there, whether you want to recognize it or not.

Scott: Yeah. We're taking a quick break, we'll be right back.

Announcer: Can't get enough of Allworth's Money Matters? Visit allworthfinancial.com/radio to listen to the Money Matters podcast.

Scott: Welcome back to Allworth's Money Matters. Scott Hanson...

Pat: And Pat McClain.

Scott: Thanks for sticking back with us here. Let's take this call, and then I want to talk about this. Did you see this change to high-income earners can't contribute as much to their 401(k )under the Roth?

Pat: Yes.

Scott: Yeah, All right, let's talk about that in a bit. But let's go to Pennsylvania, and talk with Charles. Charles, you're with Allworth's Money Matters.

Charles: Hey, guys. How are you?

Scott: Good. How you doing?

Charles: Not bad, thanks. So Pat, I have a huge favor to ask of you, okay?

Pat: Okay. Do we know each other?

Charles: No.

Pat: Okay. All right, well, before I commit...

Scott: Have fun with that, Pat, yeah. A huge favor...

Pat: Well, he's from Pennsylvania. I have lots of family in Pennsylvania, so...

Charles: Oh, okay. Well, this goes back to where you were talking about the social security benefits, the legislative risk, you know, for higher income people, that you know, if you don't need the benefits, don't wait 'til 70 to take it, because they might be reduced, you know, with the legislative risk.

Pat: That's right.

Charles: Okay. So that makes sense, and it's something that I definitely want to do. The problem is that sparked a heated domestic debate, which I need to drag you into, since this was your idea.

Pat: Oh. Oh, I can't. I actually, I specialize in domestic debates.

Scott: Thirty-five years of practice.

Pat: Oh, yeah, I'm almost an expert at losing the domestic debate, so...

Charles: Oh, okay. Well, my wife did have a point, though. She's saying that, well, you know, your expert, and that's you, is assuming that a recipient, someone already getting it, will not have benefits reduced already getting it.

Pat: Yes. That is...

Charles: In other words, even if you...let's say you just take it early, take it earlier than 70, but then, you know, you're assuming that that person is already grandfathered in, correct?

Pat: No, I've not had...

Scott: Well, here's the... The statute is that when the trust fund is depleted and goes negative, there's going to be an automatic across the board reduction for everybody.

Charles: Correct.

Pat: And that won't happen.

Scott: And that's somewhere within '32 or '33, or 2032, '23?

Pat: Charles, they're not going to look at Charles, and say, look, Charles makes $200,000 a year, and he's receiving $2,500 a month in social security benefit, and his wife is getting $2,500 a month. So they're getting $60,000 a year, and he's making $200,000 a year, and that's Charles and his wife from Pennsylvania. And then they go, but Margaret from Maryland makes $20,000 a year, and no other income, and all $20,000 is social security benefit. Let's cut both of these are the same percentage. We're going to cut everyone's social security by a third. And so, what happens? They cut it by a third. So your income goes from $60,000 a year between you and your wife to $40,000 a year, and the lady making $20,000, her only form of income is social security, is going to now go to $13,000 a year. Is that real... Do you believe that that's how it's going to happen? Do you think that our tax code would lend itself to the belief that that's how they would cut social security benefits?

Charles: No. No, not at all.

Pat: Right? And this is precedent by the way. This isn't that...you know, you could say, well, they've never done this. They actually have, but they did it in such a manner as most people probably didn't recognize it.

So about 20 years ago, 25 years ago, you would receive social security benefits tax-free regardless of your income. They didn't care. Then they said okay, well listen, individuals with incomes over $25,000, and couples with incomes over $32,000 we're going to start taxing 50% of that social security benefit as ordinary income. In fact, we're going to give it a name. We're going to call it provisional income, and we're even going to include tax-free municipal bond income in that calculation. So, this is called provisional income. So the next thing you know, you're getting the same as everyone else, but you're paying more taxes on it. Who are you paying taxes to? The same people that sent it to you. So, is that not a degradation of your benefit?

Charles: Hm.

Pat: Then, it gets better...

Scott: They argued it wasn't, because half of your contributions came from your employer, who took a tax deduction.

Pat: But so did it for the people that didn't make high incomes, but they didn't have to pay taxes on it.

Scott: I'm just saying that was the argument at the time. This was like, in '84, I think.

Pat: Yeah. Then, a few years later, they said, wow, this seems to be working, and they said it was $40,000...$35,000, $36,000, something in there for individuals, and $42,000 or $44,000 a year for married couples, that 85% of the social security benefit was now taxed. And by the way, this wasn't...this had no Inflation adjustment on it. I mean, that number was set in stone, and stays in that number today.

So historically, you could say, well, why would they do this, and you're like, well, they've done it twice before, right? And so, every article I read about social security talks about look, take it the later the better, because it's going to move by X-amount of dollars. Well, it also ignores the fact that you're using other dollars to live on in the meantime. So, there's there's an opportunity cost that's lost there.

But I don't see that as is the issue. I see it as legislative risk is the issue. Look, I'm 60, my wife does not work outside of the home. As soon as she is eligible for social security, the day she is eligible, we will start taking her social security. As soon as I quit working and am eligible for social security, I will start social security.

Scott: Or you're still working, and hit your normal retirement age.

Pat: Or I hit my normal retirement age. And is your wife listening?

Charles: Okay. No.

Pat: Okay.

Charles: No, not at all.

Pat: She's going to... Does she ever listen?

Charles: No.

Pat: Okay, well then...

Scott: My wife doesn't either, so [crosstalk 00:32:50.058]

Pat: So, that's the argument behind it, is this... And I see this legislative risk as being real. I mean, I don't... Look, who do... We have a progressive, and I'm not arguing whether it's right or wrong, but in the United States we have a very progressive tax rate. Extremely progressive.

Scott: Yes. I mean, roughly half Americans pay zero income taxes. Zero.

Pat: And so, social security has become needs-based, right? And look, the perversion of the tax code, it's constant. Like what they did with Roths, you look at when they started allowing a Roth IRA, and then what you could take money out for, and they've expanded it year over year over year, and made it less lenient. The idea that tax rates aren't going to change, or that we're not going to move to a flat tax, or some other sort of consumption tax...

Scott: [crosstalk 00:33:44.557]

Pat: ...there are so many different things. So you're not going to know what those are, but you want to build a strategy that actually takes into account changes in your environment, including the tax environment.

Charles: Sure.

Pat: And if you don't need the money, look, Chris Christie, Mr. Republican, came out when he was running for office, I don't know how many times ago...

Scott: He's back, I think, isn't he?

Pat: He is back. He's back. He was the one that even suggested that incomes over $100,000 social security benefit should be titrated down.

Scott: Yeah, it's on both sides of the aisle, that one. Hey, appreciate the call, Charles.

Charles: All right, thank you.

Pat: All right.

Scott: Yeah, and Pat, there's a couple more things when we're talking about taxes, but I think this is...I think we kind of beat the...

Pat: The social security drum?

Scott: Yeah. But look, here's just in the last couple of weeks...

Pat: But who doesn't love listening to the history of social security taxation, Scott?

Scott: So, this applies to you if you are 50 and older, and you're making catch-up provisions to your 401(k.) In other words, you're putting in more than $22,5000 a year because you're over age 50, and can do catch up. So if you're over age 50, and working, you can contribute an extra $7,500 into your 401(k.) But starting next year, this why it's always so crazy, if your income is more than $145,000, if it was the previous year, your W-2 income was more than $145,000, that catch-up cannot go into the pre-tax 401(k.) It has to go to the after-tax.

So Congress, someone...it would be interesting to know who came up with this concept, and threw it in whatever bill it was, right? So you're making more than $145,000 a year, they say on this catch-up, you're not allowed to take a tax deduction on your 401(k,) it has to go into the Roth. You're looking at me because the cost of compliance alone is ridiculous.

Pat: That's...It's just absolutely ridiculous. It's just... Look...

Scott: So, here we go. So as an example, New York State Deferred Compensation Board, they have 2,200 local employers that are all part of this board. Only 1,200...I'm sorry, 1,200 do not use the Roth, and they...but by next year, they're supposed to, and a lot of them say we can't, our systems aren't structured for that, and like, we need more time. Even Fidelity, Fidelity has almost 25,000 corporate 401(k) clients, almost 25,000 plans they've got out there.

Pat: How many...

Scott: Some have two participants, some have 20,000 or whatever. 30% lack a Roth feature.

Pat: Yes. This is what we're worried about as a country? This is what legislature... This is an argument why we should not have full time legislators.

Scott: Okay, but...it is. So, we never know what's going to...

Pat: Part of the point is this is a change in tax code that came out of the blue.

Scott: And quite often, and people, my experience...

Pat: And was it designed to tax?

Scott: The wealthy.

Pat: The wealthy.

Scott: Only.

Pat: That was a 100%...

Scott: Well, some would argue that $145,000 isn't necessarily wealthy.

Pat: Depends on where you live.

Scott: Correct. And there's no...this doesn't...

Pat: [crosstalk 00:37:08.063] geography...

Scott: It makes no difference on this whether you live in San Jose, or you live in...

Pat: In Timbuktu.

Scott: ...in Bakersfield.

Pat: Or whatever, Timbuktu. Let's go...not Bakersfield. You've got to go outside of California.

Scott: I realized that after I said that.

Pat: I know.

Scott: But I couldn't think of a city quick enough. Where's a really low-income, low-cost city? Anyway, it doesn't matter. It's irrelevant. You get the point. But here's the interesting thing about it, Pat, when you think about it, a lot of people, in the 50s is their highest earnings years. They might even accumulate millions of dollars in savings, but by the time they retire, typically their income is going to be lower, for those that are in high incomes. Because they're at the top of their career...

Pat: That's right.

Scott: ...they're focused on, like, we've got to make it happen. Oftentimes, the spouse who had stayed home says, I'm going back in the workplace, we've got to save for retirement. So now you've got two couples, both working a lot at their highest incomes, it's sometimes the highest income they'll ever have, so odds are it's the highest tax bracket many families are going to be in.

Pat: And they lose that.

Scott: They lose that.

Pat: And the deduction.

Scott: And if you reside in a state like New York or Connecticut or California, where tax rates are super high, and you're thinking as soon as I retire, I'm going to go to Nevada or Florida or Texas, or whatever tax-free state, it's just going to be detrimental to you.

Pat: By the way, I said deduction. It isn't a deduction, it's just a pre-tax contribution.

Scott: Yeah, exactly.

Pat: But to what to what?

Scott: And we also just saw the change in beneficiary IRAs. You used to be able to stretch them out over your lifetime, now it's over 10 years. So, you did all this planning and strategizing...

Pat: Oh, do you remember all the workshops? On the stretch IRAs that were offered in our industry?

Scott: Oh, in our industry.

Pat: Yeah, in our industry.

Scott: Yeah. I was going to say, I don't remember doing any of those.

Pat: No, we didn't do them, but they were offered in our industry, like how to actually make your clients' IRAs last forever.

Scott: Yes. Well, they took that away from us.

Pat: They did.

Scott: And so, tax law changes. And Congress, who knows what they're up to next? They don't know what they're up to next, right? But ideally, you want to come into retirement with a diversified tax strategy as well, not relying upon one thing or the other.

So let's continue on, and let's talk to Martha. Martha, you're with Allworth's Money Matters.

Martha: Good morning. How are you this morning?

Pat: We are wonderful. Thank you.

Martha: Good. I have a long-term care question.

Scott: Okay.

Martha: Apparently, I have two policies. One policy is unlimited, and I don't have to pay premiums because of a spousal rider when my husband passed away. And the second policy, apparently there was some kind of settlement made on it, and they're giving me coverage options, what to do with my policy on this settlement that they made?

Scott: Okay. How much, on your first... Go ahead. I'm sorry.

Martha: Yes, go ahead.

Scott: On the first policy, how much monthly benefit is there on that?

Martha: It's almost $340 a day.

Scott: And for what period of time? Would that pay for a year, two years, lifetime...?

Martha: That is unlimited. That one's unlimited.

Pat: And what is the...

Scott: That's a nice [crosstalk 00:40:36.443]

Pat: And it kicks in right away? There's no waiting period before it starts paying the $340?

Martha: No, there's a 90-day waiting period.

Pat: Ninety days...

Martha: Yes.

Pat: Okay. And then, tell us about the other policy.

Martha: Okay, the other policy that I have to make the decision on is a total lifetime benefit of $203,399, and a benefit period of two years, 30-day waiting, 5% inflation, daily benefit of almost $300 a month. A day, I'm sorry.

Scott: Pat, do you know, will insurance companies pay concurrently?

Pat: I don't know.

Scott: Well, you're not going to have $600...or $500, $640 a day in expenses.

Pat: Yeah. What's the rest of your financial situation look like? Like, how much monthly pension do you receive?

Martha: I have about $4 million in portfolio retirement, including real estate.

Pat: Okay, and so... Including real estate.

Scott: And how is your health...

Martha: Excluding...excluding real estate.

Pat: How much do you have in real estate?

Martha: About $1 million.

Pat: Including your home?

Martha: Yes.

Scott: And how's your health, relative to your colleagues, other people your age?

Martha: I'd say pretty good.

Pat: Okay. So, I'm going to make some assumptions here. For the rest of the listeners, we're located in Sacramento, California, which is the state capital of California, and there are lots of retirees that work for the state of California. I assume that you worked for the state of California at one point in time, and that the class action was against the long-term care policy that they had. Is that correct?

Martha: No, I've never worked for the state.

Pat: I'm completely wrong. I'm completely wrong. Because we've received...

Scott: So, tell us about the second policy, then. What's going on?

Pat: Yeah, like, what's the settlement? What's that?

Martha: Well, I didn't even know anything was going on with it until I got this letter, a 13-page letter about there was a settlement, and they're giving me three options.

Pat: Okay.

Martha: Option number one is enhanced, reduced, paid up benefit, and it keeps the daily benefit amount the same, the elimination period is the same. Benefit period says NA, so I don't know what they mean, because my policy says two years. My current benefits are two years.

Pat: Okay.

Martha: And then, it reduces the total lifetime benefit down to almost $38,000.

Pat: From $203,000 to $38,000?

Scott: And no more premiums.

Martha: Yes [crosstalk 00:43:16.578] no more premiums, correct. Correct.

Pat: Okay. And it's a 30-day wait?

Martha: And I...It's still a 30-day wait.

Pat: Okay, that's option one.

Scott: Yeah.

Martha: Option two is they give me a cash payment of $5,100, they keep the daily benefit at almost $300, they take away the inflation benefit. It's still a 30-day waiting, and the benefit period again is NA, whatever they mean by that. Total lifetime benefit is almost $14,000 and no annual premiums.

Scott: Okay.

Pat: And what's option three?

Martha: Option three is cash payment of $4,400, daily benefit amount is reduced to $100, inflation benefit is taken away. The elimination period is 30 days, the benefit period is two years, the total lifetime benefit is $73,000, and an annual premium of $1,140 a year.

Scott: If you were my sister or my mother, I would say take option two, given your situation. Because you have a long-term care policy that pays $124,000 a year, that kicks in after 90 days. You've got this other one, it's only a two-year benefit, but it kicks in after 30 days. So, you've got... That's a 60-day window, essentially, of additional insurance. You're not going to blow through $500 a day in expenses.

Pat: That's right.

Scott: So, the difference between the 30-day and the 60-day is about $18,000 of insurance benefit you'd receive. So if you do option two, they're going to give you $5,000 now, and they're going to give you $14,000 in benefits, so that's $19,000, that more than covers your...

Pat: Yeah. In fact, you had a rider on your husband's policy where yours kicked in when he died, correct?

Scott: That's a great...

Martha: Yes, one of the policies I no longer had to pay a premium on.

Scott: That's amazing.

Pat: That is amazing.

Scott: That's like you won the lottery on that one.

Pat: I would have questioned whether you should have continued the second policy class action or not.

Scott: Well, here we are though, and I would do option two.

Martha: Well, my thought there is my first policy, where I don't have to pay the premium, does not have home care. It's just assisted care, nursing care, and residential care. And this is the policy that has the home health care in it, which is, of course, where most people want to be at, in their home.

Scott: Which policy does?

Pat: The second one.

Martha: The policy that they made the settlement on, that they're giving me all these options on. That's the one that has the home health care in it.

Scott: So if you came in and said, hey Scott, I want to talk about my finances, do some financial planning, do you think I need long-term care insurance, I'd say, no, you don't need long-term care insurance. You have $4 million. Just the interest, if that's managed even pretty conservatively, the return on that should be more than enough to pay for any care you have for the rest of your life, whether you're 60 years old or 90 years old.

Pat: And you take that...so basically, you take that risk in-house. So...

Scott: Unless you want to live in some mansion, and have multiple servants [crosstalk 00:46:23.424]

Pat: And the reality...yeah, and the reality is home care doesn't... People don't stay in... If they've got home care, they normally don't stay in home care for very long. That's just the reality of the situation. You don't have...you know, you're not five years in your own home, just what we've seen, where you've got in-home health care. So, I agree with Scott. I'd take the option two.

Martha: Option two?

Scott: Option two.

Pat: Yeah, option two.

Martha: And for really good peace of mind, just leave it alone?

Pat: Yes. Yeah, absolutely.

Martha: Okay. Okay.

Pat: Yeah.

Scott: You've got a phenomenal... Should you require... Should you have... Like, the worst thing is some sort of long-term dementia, right? Nobody wants that for a variety of reasons, but it's also a horrible thing from a financial standpoint.

Martha: Right.

Scott: Because you can be in great health otherwise, and yet you can't take care of yourself, and it...right? I mean, that's the worst situation. And your policy that's paid up from your husband will take care of that.

Martha: Right. Right [crosstalk 00:47:40.327] the home health care. Yeah, okay.

Pat: You're well protected. You are well protected. You are well protected.

Scott: And I assume you have a living trust or a will in place, and those sort of things?

Martha: Yes. Yes.

Scott: Good.

Pat: Yep.

Scott: All right, Martha.

Martha: Yes. I had another question kind of off the wall from this.

Scott: Sure.

Pat: Okay.

Martha: Is there way...is there any organization, or anybody that can figure out if your property taxes are being figured correctly?

Pat: Oh, there are a number of them. There are a number of them.

Martha: Ah.

Pat: What makes you question whether your property taxes are actually being figured out correctly?

Martha: Well, I had a neighbor who was a realtor, and she ran all of the houses on the street, and my property tax, everybody's went up 1% to 2%, mine went up 5%. So...

Pat: And you're in California...

Scott: How long have you been in the house?

Martha: Yes. Since '08.

Scott: Okay, it might've had... Let's say you bought a house, let's just make it simple, let's say you bought a house that was worth $100,000, and it drops in value to $80,000, right? Then, so your property taxes are now going to be assessed at an $80,000 property, not a $100,000 property. But five years down the road, the house is worth $140,000, that property can suddenly jump up to...it's basically the 1.25% inflation from the time you bought it. So, you could have a 5% increase that's just simply a catch up from a decreased property valuation from a previous year.

Pat: And what year did you buy it?

Scott: '08.

Pat: Okay.

Martha: In '08.

Pat: There you go. That makes sense.

Scott: [crosstalk 00:49:23.670]

Pat: And you can actually, you can appeal it directly to the county that you live in. Did you do any improvements on the house that required permitting?

Martha: No, the house was brand new when we bought it, so [crosstalk 00:49:37.994]

Pat: Okay.

Scott: What did you pay for it?

Martha: I believe almost $700,000.

Scott: And what's it worth today? Or what's the appraised value?

Pat: Well, not the appraised value. What's the county, the tax assessed value?

Scott: Yeah, I'm sorry. Yeah, the assessed value, that's what I meant.

Martha: Oh, that's a good question. I don't have that paperwork in front of me. I had it appraised when my husband passed, and it appraised...maybe we didn't pay $700,000. Possibly $600,000, and it was appraised at $800,000 when he passed.

Pat: The appraisal at his death is irrelevant.

Scott: It has nothing to do with that.

Martha: Oh, okay.

Pat: It is for state, but not for taxes, in the state of California. You can appeal it directly to the county, and there are other firms that actually do it, where they take a percentage of the savings, if they find it. It isn't really big in California because of Prop 13, versus states like Texas, where there is a cottage industry because they reassess the value of the home every year.

Scott: Yeah, and there's no income taxes, so they've got to get the money from somewhere, and that's in high property taxes.

Pat: Yeah, and they have high property taxes. So I'd go right to the county first, and make them justify, ask them to justify it, and then there's firms doing it. But it's not...typically in California, it's not an issue. In other states, where they reassess every year, it is a cottage industry.

Martha: Hm. So, what kind of firms do that? Attorney firms, or...?

Pat: Oh, no, there are property assessment firms.

Scott: I would run some... And my guess...

Pat: But by guess is that you're fine.

Scott: If the value is much north of $725,000, then I'd deal with it. If it's not, or it's around there, that's what, 1.25%, I don't know if it's 1.2% or 1.25% that's the statutory increase over a 15-year period, so that's where it'd be on that. So, appreciate the call, Martha. Wish you well.

Pat: Actually, I looked at a firm, my son worked for a firm as an intern in college that actually...out of Texas, that did...that's all they did, was property assessments to question what the taxable value was.

Scott: Yeah, because it's oftentimes someone just driving by your house.

Pat: Or yeah, or using the same...

Scott: ...some government employee, and like, here's what your house is worth.

Pat: ...algorithms as the algorithms that show comps, and those sort of things.

Scott: Well, unfortunately, that is all the time we have in the show. And anyway, if you don't subscribe to our newsletter, go to allworthfinancial.com to sign up. I think you'll find it beneficial.

Anyway, thanks for being with us. We'll see you next week. This has been Scott Hanson and Pat McClain.

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