Roth Conversions, Financial Advisors You Can Trust, and Portfolio Risk Management
Roth conversions can save you thousands in taxes — but only if you know when and how to use them. Scott and Pat take listener calls that reveal the importance of strategy, trust, and risk management in retirement planning.
They begin with a caller asking about complicated yield notes, sparking a discussion on portfolio risk management and why trusting the right financial advisor matters more than chasing products.
Next, another listener wants to understand Roth conversions and Social Security timing — and Scott and Pat explain when Roth conversions make the most sense for long-term tax efficiency.
Finally, a retired couple checks back in to share how they handled market volatility after following Scott and Pat’s advice. Their story shows why portfolio risk management isn’t just about protecting money — it’s about protecting peace of mind.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Automated Voice: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters", call now at 833-99-WORTH, that's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters".
Pat: I'm Pat McClain.
Scott: I'm Scott Hanson. And we're going to do something a little different. We're going to get right to the calls today.
Pat: Yes, we've been reading some of the reviews and you said take more calls.
Scott: Yeah. So, we are going to start off talking with Mike.
Mike: Hi, guys. How are you doing today?
Scott: Good. How are you doing, Mike?
Mike: I'm good. Listen to you guys every week.
Scott: Thank you.
Pat: Thank you.
Mike: Enjoy your show.
Pat: Thank you. I appreciate that.
Mike: I have also talked to one of your advisors in the Denver area and I just haven't made the leap yet.
Pat: Okay. Well.
Mike: But here's my question. I'm working with an advisor I've been with for quite a while, and we had some money just sitting in these buffered accounts with Schwab, about 360 grand, and it wasn't doing much. And I wanted some income from that cash. So, he put me into yield notes and I've done some research on it, but you guys have a way of explaining things simply. And I'd like the fifth grade explanation of how yield notes work.
Pat: Well, before we go there, why don't you tell us what your interpretation, either from what you have researched or what the advisor, or depending upon how they're being compensated, commission salesperson is describing them.
Mike: Okay. I have four ETFs that I'm in, and they have a bottom and a top. The bottom is if it loses more than 70%. And there's four of these in this in this trust fund.
Pat: And what are they tied to? What's the underlying index that they're...?
Mike: So, the one is QQQ, which is technology, IWM, which is Russell 2000, TLT, which is bonds, and utilities with the XLU. So, those four ETFs are tied to a 70%. If you lose 70% or it goes up 1% or one cent from what we paid it, then they're what they call, let me see where I put that, not callable, but issuer called notes. And so, I believe...
Pat: Okay. They're not callable.
Mike: They're issuer called notes.
Pat: They can be called by the issuer, yeah.
Mike: Correct, correct. So, for the last, I don't know, seven, eight, nine months, I've been collecting about $3,300 a month off this $360,000 bucket of money. And...
Scott: Yeah, good yield.
Mike: It's a good yield. And I'm like, and the and the principal hasn't gone down much. I mean, it's gone down a little bit, but not much. And what happens is if one of those ETFs goes above 1 cent or below 70%, then the bank can call the note and we start over, and we take that principle and decide what we do next.
Pat: When you said it hasn't gone down by much, what dollar amount is it gone down?
Scott: What happened when the Liberation Day and the tariff Liberation Day was announced?
Mike: Didn't go down much. I watch it every week. I'm probably a nerd like that. But right now, the cost basis is about $355,000.
Pat: So, the value today is $355,000.
Scott: No, the cost is $360,000 today.
Mike: Yeah, that's correct
Scott: So, I remember when I first started this industry, my manager had a plaque on his desk, tin stifle. There is no such thing as a free lunch.
Mike: Right. I understand. That's why I'm calling you, guys.
Scott: So, I've always remembered that any sort of an investment product that has what appears to be an above-average return, I question like, how can it have above average return? Where is the underlying risk in this investment? Because if this were 10%, 11% yield or whatever, 12% yield, if this was without any risk, people would bid up the price. And the next thing you know, the yield would be the same thing as treasuries. So, the risk you've got in here is that the underlying index, as long as the index stays within a band, and I don't know exactly how these particular ETFs are structured, but as long as the index stays within some certain band, you're on easy street. But if we have something where the index goes below some floors, that's where it starts triggering some losses. Let me ask you this, so how much money do you have with this other advisor now?
Mike: Let's see. Well, my total portfolio is about $3.6 million, but it's not all with him. And that's another story. And that's why I was looking for other provider.
Scott: And how much income are you trying to generate?
Mike: So, I generate about $42,000. And I'm retired. I'm 67, wife's 65. $42,000 in Social Security, $20,000 in another financial loan that I've loaned to somebody for a business that I've been getting paid from. I have an equity or an annuity that was annuitized that pays about $7,800 a year. And then this particular bill notes are paying us about, let's see, $39,000 a year. So, it's a big piece of our income. We're spending at about $140,000 thousand a year, and our income is at about $139,000 with this yield note in income. But I also realize that that income could stop.
Scott: Yeah, it just it just it seems strange to me is that this is where they went to generate income.
Pat: I would agree. Well, just...
Mike: Well, there's other things within the portfolio that are coming to bear, that are going to generate substantial income. But I don't want to get into a lot of that detail now. That's something I definitely talk to one of your advisers about.
Pat: You believe they are going to come to bear?
Mike: I do. Yeah, I do. I think there's... Yeah, I do. I also have about a million to an annuity that is going to mature in about three years. And I've been looking at that to think, you know, this was a waste of money. Yes, the people that I'm with sold it to me. Yes, they made a bunch of money on it. And I'm not making a whole lot.
Scott: They sold... So, you said, "I've got some cash," and they said, "What can we sell Mike? Mike's interested in yield, let's give them a portfolio that's got yield so good that he's like, 'How can I pass up on this yield?'"
Mike: Yeah.
Scott: There's an old saying on Wall Street, "When the ducks quack, feed them." If you show an interest, they're going to throw you some bread. And look, the financial industry is no different than other industries, in that they want to manufacture products that people want to buy. They have some sales structures. They've got wholesaling distribution. They have marketing teams that come up with the proper names. So, like, I mean, I don't personally own any of these.
Pat: My view of this is you've made this much, much more complicated. Or whoever's selling this stuff to you made it much, much more complicated than you actually need it to be. So, of that three point 6 million, how much is an IRAs?
Mike: $384,000.
Pat: Oh, wow.
Mike: So, most of its cash because we had a business that we sold back in '17.
Pat: And do they have a tax efficiency overlay on top of this portfolio?
Mike: No, they do not.
Pat: Okay. So, I could make an argument right now that, look, we could turn around and start a 3% distribution out of this total account, which I think, actually probably...
Scott: How old are you, Mike?
Pat: 67.
Mike: 67.
Pat: ...makes a lot of sense to start a 3% distribution, and lay a tax overlay on top of this, and sell off individual holdings at a capital gains rate, put all the bonds inside the IRA. This is...
Scott: One of these ETFs is going to blow up. It's going to lose 70% one day.
Pat: Scott, but this is just completely tax inefficient. I mean, I don't even know how to explain it. There's no view of your after tax return at all. It's just return. And all you're really interested in is the money you can spend, right? You're interested in maintaining your lifestyle, making sure that you can maintain the rest of your life with inflation adjustments, and having your net worth grow up as much as possible and maintain your lifestyle. That's your number one concern, I imagine.
Mike: Yeah, that's right. And I do have more money in fixed income than I should. I should have more inequities than I don't. Maybe I got cash...
Scott: I would call these are more equity equivalents. These are riskier than equities. I mean, I haven't seen them. I don't know the exact ETF, but anything that's paying out 11% yield. If the if the underlying bonds are paying four or five or even six, where's that extra yield coming from? They're selling options to generate that income, which is what given away the upside.
Mike: All three of these ETFs are up. The only one that's down is the bond. That's the only one. It's down, you know, 9 bucks.
Scott: You've owned them for how long?
Mike: I bought them in October of '24.
Scott: Okay, great. They're up. Super.
Pat: But you're not going to die in a year or two.
Mike: I know.
Pat: You're going to die in 25 years, or your spouse will die in 25 years. If we look at an actuarial table, you're acting like a short term investor with a high risk profile on parts of your portfolio.
Mike: So, my...
Scott: And, I mean, the only way to really look at the... I mean, I don't have these notes, but...
Mike: That's my question.
Scott: And my patience to do in-depth analysis is not there, so I rely upon a team. But I mean, what this should go through is a screen that says, "What happens to these in a variety of different markets? What happens if this...?"
Mike: To ask my question, are yield notes, they're high risk?
Scott: Well, there's no such thing as a free lunch. Where is that yield coming from? They are selling options on this portfolio.
Pat: And you've got the downside. And you've got the downside. Yeah, and if you read through the perspectives, there's some floor. If these indexes pop through that floor, I don't know how big the downturn can be, but it can be substantial.
Mike: Well, I think it would be based on any of these ETFs falling 30%. That's where they have to fall, 30%.
Scott: Well, I don't know that.
Pat: Well, that's what he believes.
Scott: Okay. Well, that's happened.
Mike: No, that's what they have to do. That's what they have to do.
Scott: And then what happens to you? And then it drop 70%?
Mike: If it drops 30%, 31%, then I get my principal back, probably less than 30%. If three of the four are up, if the fourth one goes up, the bank calls the note, and we get our principal back and we start over something else.
Scott: Yeah. And this comes back to me.
Pat: Mike, what kind of...
Scott: It's like, it's not manna from heaven. Like, where is the extra yield coming from?
Pat: Mike, what kind of business did you sell?
Mike: So, I was in the restaurant business for 40-plus years.
Pat: Okay. Rough, tough business, right? Without question.
Mike: Very tough.
Pat: Very, very tough business. You didn't go in with a theme selling tacos one day, hamburgers the next, Greek food the third day, right? You had a unified concept going into a particular theme or thematic restaurant.
Mike: That's right.
Pat: Your portfolio is, you've got tacos over here in this corner. You're like a food court. That's what your portfolio looks like to me. There's no overall arching...
Scott: And you're asking like, "Hey, what do you think about these sausages?"
Pat: Yeah. And I'm like, well, how long are the sausages going to stay on the menu?
Scott: What's even in these sausages?
Pat: Well, these sausages...
Scott: Are they going to kill you? What kind of garbage are they...?
Pat: We've taken the analogy too far, but you view this your portfolio, you have to have a thesis behind it as to what you're trying to achieve. You're not just picking and pulling concepts out of the thin air. And so, the first thing you want to do is start at the very beginning, which is, how much risk am I willing to take in a portfolio for a given rate of return over a period of time?
Scott: And modeling, whether you use Monte Carlo simulation or some other modeling to what happens to this portfolio during severe downturns? Because, look, in the last 25 years, we've had twice with the stock markets falling about 50%. One would expect in the next 25 years, we'll have two other times like that.
Pat: But, Scott, that isn't the weirdest thing about it. The weirdest thing is that we're reaching for yield on this with turns of risk.
Scott: This is the guy, his advisor got a commission selling him annuity, probably got a commission selling him these.
Pat: Well, understood. How does your advisor get paid?
Mike: He gets paid based on the portfolio's growth or value, actually, the value of the portfolio.
Pat: Assets under management fee, except for that annuity.
Mike: The two... Correct, because they already got their money on that.
Pat: Okay. I just...
Mike: They get a percentage of what they're managing, so value.
Pat: Got it. Got it. Got it. There's no underlying thesis to your portfolio whatsoever. That's what the problem is. If you don't have an investment policy statement, there's no direction behind it. There's parts of this and this. There's no tax efficiency in it whatsoever.
Scott: Zero.
Pat: I would make an argument that if you were going to do these sorts of things, you would do it in your IRA over that because of the yield on this. That's the argument I would make. But if you were to do it at all, if you were to do it.
Scott: I totally agree with you, Patt. It's highly tax inefficient, 11% yield, taxable yield.
Pat: So, just take all the pieces and try to construct a portfolio that is weatherproof. Weatherproof doesn't mean that it's not going to go down in value. Weatherproof says that it's going to live until your dying day with an expected rate of return. And I think you should actually start spending more money, quite frankly. I mean, you've got $3.6 million. Part of it is actually an annuity that's being paid out. I think that you can probably tolerate a little bit more pressure on this portfolio for income and then build it...
Scott: And you're going to want to also structure what's this annuity that you've got. You call it maturing. I don't know what that means. I think it means that the surrender charges are gone, but...
Mike: Well, we turned on one annuity that we had. And we had we had two others that are maturing in three years through Allianz.
Pat: What does maturing mean? Does it mean this surrender charge comes off?
Mike: You know, you start, but it's a 10-year contract. And once a 10 year set, you turn on the income.
Pat: You can turn on the outcome.
Mike: You can. And my decision now is, I don't know if I want to keep the money in with Allianz. I think I might take the money out at the three year mark, or take it out now. I've done the math. I could probably invest it in, you know, something else through a good advisor that is going to make me 4%, 5%, 6%.
Scott: The challenge you've got is the tax. Again, to Pat's point, it's the tax. All the growth in there is going to be taxed as ordinary income.
Pat: But that doesn't mean you can't move it into a low-cost, fee-only annuity. Which, by the way, they were pretty uncommon 10 years ago. You can find them very easily, low-cost.
Scott: And the advisor manages it like another portfolio.
Pat: And the advisor manages it like another portfolio.
Scott: It still has that tax overlay that you may or may want longer term.
Pat: Yes. Or you might want to do a variable annuitization on it, right. There's nothing wrong with that.
Scott: You got a lot of options.
Scott: You're not getting good advice. Fortunately, this is only 10% of your portfolio.
Pat: That's good.
Scott: I wouldn't own this.
Mike: Correct. Okay. That's what I wanted to know. That's kind of where I was trying to get at.
Pat: By the way, Mike, nice job. You did a great job saving. You did a great job saving.
Scott: Building your business.
Pat: And you did it in...
Mike: I tell you what, though, it's this point in your life when it gets difficult to, you know, take the money, where do you invest it? Who do you invest it with? Who do you trust? It's like, you're right, I made a lot of money in in the business of what I did for four years. And I knew what I was doing. And now, it seems like all of a sudden I'm a dummy.
Scott: It's hard.
Mike: It is hard. It's not easy.
Scott: It's hard, and you'll never be an expert, right? So, it still comes down...
Mike: No, and I don't want to be an expert.
Scott: I understand. You need to educate yourself enough so you kind of know what's going on and you know how to pick the right advisors and the people to trust. But it really does come down to someone you really trust and having that relationship.
Mike: Exactly.
Scott: And it's not it's when the times are easy, it's when the times are rough, and the financial markets are going poor.
Pat: Yeah, it's hard. You know, and it's a good problem to have.
Mike: I think I'm going to go visit one of your guys here in the state where we're at.
Pat: There are lots and lots of firms out there. The problem for the average consumer is trying to figure out what's good and what's bad, right? You know, it's difficult.
Mike: It all it all comes down to one thing. It comes down to trust. And, you know, you have to have the trust and have the confidence in the person you're with.
Scott: Well, I think it's two things. It's that and a cohesive strategy. What is our long-term strategy here? Not just like, "Well, here's some products that'll work for you." But like, how does this all work together?
Pat: Yeah. So, look for a competent firm, right?
Mike: I will.
Scott: All right, Mike, wish you will.
Mike: I appreciate it, guys. Thank you.
Scott: But you did the hard part. You accumulated the assets, so...
Pat: In a restaurant that probably has... What's the failure rate in the restaurant industry? I'm going to guess it's 70%.
Mike: Pretty high. You know, it's pretty high, yeah. I got out at the right time, I'll tell you that.
Pat: Well, you would have been... There's people that have been getting out of that industry for 30 years and say the same thing. I never got in the business
Mike: I know. I didn't want to be in it during COVID. You know what I mean?
Pat: Oh, gosh. What a nightmare?
Scott: Yeah, just a nightmare. So...
Pat: I appreciate it.
Scott: I appreciate the call, Mike.
Mike: That probably would have killed me. Take care, guys.
Scott: Yeah. It's amazing. And I think about some of these restaurants that went through that period and like, holy smokes, you know.
Pat: So, I bicycle ride with a gentleman that ran two restaurants through COVID. Owned one, and was the management team on the other contract management. And we had lots of time to bike-ride during COVID. And I'm just like, "How's it going?" And one of the biggest problems they had is when they reopened, even partially, is that the money that the government was paying the employees not to work cause them not to work.
Scott: You couldn't get people back.
Pat: You couldn't get people back. It was rough. It was rough.
Scott: But anyway, you know, Wall Street will create any product you can imagine. And any time you've got a payout, whether it's monthly or quarterly payout that is higher than what the market is paying, you need to ask yourself, where is that additional yield coming from? Is it coming from my principle? Sometimes we see that with real estate investment trusts. They've got a payout, but actually, the principal value is declining. So, we see that, is it coming from principle? Is it becoming because there's some options that are being sold to generate that? And if that's the case, well, what's the trigger point where my assets are now going to get called away from me? That's 100%. And then what's my downside here?
Pat: So, Scott, I...
Scott: Whether it's... And there are there are times when these things might be appropriate as a piece of one portfolio managed within...
Pat: Typically over the short term. You have to have a reason behind it for the short term. Because otherwise, it puts a drag on the portfolio, which normal market cycles you can live through and not pay that insurance premium from the sum you own.
Scott: That's exactly right.
Pat: So, I pulled this article, just happened to pull this article from "Jeff Sommer" from The New York Times. And he talked about investing. But he said, one of the ways, it isn't easy to invest. "First, much of the financial service industry is dedicated to incessantly selling new products and services, including advice intended to keep you buying and selling the latest new thing. That kind of behavior generates profits for asset managers and advice givers, but not necessarily for you."
Scott: So, he just wrote that. You just read that this week.
Pat: I read it last night. And I said...
Scott: Read that one more time? I was...
Pat: It said, things are different. Why it's Difficult to Invest, by Jeff Sommer, "New York Times." "First, much of the financial service industry is dedicated to incessantly selling new products and services, including advice intended to keep you buying and selling the latest new thing. That kind of behavior generates handsome profits for asset managers and advice givers, but not necessarily for you."
Scott: So, one of the reasons you hear us talk about the importance of working with an independent advisor, look, the big Wall Street firms, I'm not going to pick out the names, you know the names, they manufacture this stuff.
Pat: They manufacture products.
Scott: So, I'm going to pick a company. What's the difference? Because it's true. Like Merrill Lynch. Merrill Lynch has many lines of business. One of the business lines is offering advice to clients, and they'll do some on a fee basis, where they'll try to make sure that the interests of the advisors are lined up with the clients. And so, when the clients do better, they'll do better. That's part of the structure. But they also manufacture some products, things like this, may not these particular ones, but they have other financial instruments that they manufacture. Further, they are in the business of helping other companies raise capital by selling their bonds or their stocks. So, they're going to some company and say, "Hey, we can raise $4 billion of bonds for you." Where do you think those bonds go
Pat: To those families, right?
Scott: Partly, yeah.
Pat: They also are in the business of selling home loans and banking advice, and they're scored on it. So, what's the point of having that advisor?
Scott: Your financial advisor.
Pat: ...take money from your portfolio and pay off the home loan, if they can get you to borrow the money from them.
Scott: Their pay grid, as they call it. To your point, Pat, they're scoring. I remember talking to one guy who says they have to have a certain amount of credit cards. They have to have people sign up every year. Home loans, whether it's against the portfolio, security back lending, or it's a mortgage.
Pat: Really? I've heard about it, but I've never talked to anyone that... You talked to one that had it.
Scott: Yeah. Yeah, yeah.
Pat: Did he hate it?
Scott: You know the guy I talked to, yes.
Pat: Oh, I've never talked to him about this. But imagine selling credit cards to clients. Holy smokes.
Scott: Pat, they got all kinds of benefits. You kidding me? Look at this. You can get a go on the cruise. You get free upgrades on the cruise. And...
Pat: Anyway. Just but, Scott, in all fairness, it's independent advisors. There's good ones and there's bad ones for sure.
Scott: And at Merrill Lynch, there's great advisors that say, "Hey, I don't care about your management. I'm serving my client. My client comes first. I'm going to ignore you and all that other garbage," for sure, for sure. And you can have an independent advisor.
Pat: Their bag.
Scott: Yeah, correct. Or an actor, both. All right. Let's continue on. We're talking with Dave. Dave, you're with Allworth's "Money Matters".
Dave: How come you guys never talk about options, huh?
Scott: You want us to?
Dave: You remember that call?
Scott: Oh, yes I know.
Dave: Oh, gosh.
Scott: This is things that I try to suppress, Dave. A lot of painful things in my childhood and the call a couple of weeks ago on the options.
Pat: Oh, I didn't know. I didn't hear...
Dave: Come on. The options. I want to hear about the options.
Pat: I didn't know what the...
Scott: That's right. He was angry, man. I couldn't figure out what his agenda was.
Dave: He was very angry. Yeah, he's not a happy man all that.
Pat: He's not. Well, you sound like a happy man. So, you could spend all day on this call.
Dave: Well, hello, neighbors. I moved to the beautiful Hills of El Dorado in 1997.
Pat: Well, there you go.
Scott: Wow. You've been there a long time.
Dave: Long time, long time, long time. A lot of changes, but still a nice place.
Scott: I moved there in 1995, a couple of years before you, El Dorado Hills. I probably will die there. So, what can we do to help?
Dave: I have a couple of questions about Roth conversions and asset allocation.
Scott: All right. How old are you?
Dave: I'm 65. I'll be 66, and my spouse will be 65 in December. And I'm thinking of suspending my Social Security at full retirement age and suspending my wife's. I started taking Social Security at 62. And that'll enhance my ability to do the Roth conversions before required...
Pat: You can suspend it any time. You don't have to wait till then.
Dave: Is that right?
Pat: Yeah, yeah. And so, what's your income now?
Dave: Income now is Social Security. Between the two of us at $42,000. Pension, it has no cola at $41,000. Dividends off my non-tax deferred, not qualified brokerage account of about $15,000. And then my wife has part time work, about $7,000 a year. That's about $105,000.
Scott: And how much do you have in IRAs for one case?
Dave: In the in qualified IRAs, $3.3 million.
Pat: And how much money do you have outside of it.
Scott: In your brokerage, savings, CDs?
Dave: $1.3.
Scott: And of the $1.3, how much of that doesn't have a huge capital gain built up in it? How much could you withdraw without any taxes?
Dave: It's all capital gain, mostly. Probably 80% capital gains.
Scott: Well, good for you.
Dave: Yeah, I started in 1987. I got my first job real job and sat down and wrote a check to Vanguard and started. Every paycheck, I tried to put $100 with them.
Scott: Excellent.
Pat: That's how it works.
Scott: You know what's funny, there's no easy way.
Pat: That's how it works. That's how it works.
Scott: There's no easy way to accumulate.
Pat: And as your income went up, it went to $200, then it went to $400, and then went to $1,000.
Dave: Yeah. If I got a bonus check, that I didn't change my spending. That's...
Pat: You went and bought a new Hummer?
Dave: No, I did not. So, that's $4.6 million. And the total asset allocation is 60/40, 60% equity, 40% bonds.
Scott: And are you taking any money from these IRAs right now?
Dave: Yeah. You know, when I needed a new deck, yeah. When I got the front yard redone, yeah. But otherwise, we're pretty much living off them. Yeah. Other case sometimes, but not very much, not very much.
Pat: Why would you? You can do plenty of Roth conversions without suspending the 401(k). I mean, the Social Security.
Dave: You're forgetting something.
Pat: Oh, Okay. We're going to talk about Medicare.
Dave: My Affordable Care handcuffs.
Pat: Oh, because you're...
Dave: The golden handcuffs.
Pat: How long do you have the Affordable Care?
Dave: I retired at I retired at 53.
Pat: I know, but you're 65 now.
Dave: Right. I'm on Medicare, but my wife's not.
Pat: Okay. And when does she qualify? When does she come off?
Dave: The handcuffs come off in December this year.
Scott: And that's when she goes on Medicare.
Dave: Right.
Scott: Okay. So, you're not going to do anything this year.
Pat: So, let's explain that to the listeners real quick, Scott.
Dave: Let me say, over the 12 years, you know what that Affordable Care Act was for me?
Pat: Yes, a lot.
Dave: How much?
Pat: They had...
Scott: Tell me, tell me.
Pat: ...$140,000.
Dave: $250,000 to $300,000.
Scott: Holy smokes.
Pat: Good lord.
Scott: Well, they had you in.
Dave: I had premiums of $2 a month.
Pat: They had you in mind when they designed the Affordable Care Act, Dave. That's what they were thinking.
Scott: Yeah, because, so this is for our listeners, Affordable Care, it's based upon your income, not your assets. And so, what happens is that we do it all the time, right? Which is you spend down brokerage accounts or money in the bank...
Pat: Don't touch your retirement accounts for a period of time, so you have...
Scott: ...or you don't touch your retirement or anything that... You can even actually take loans out, and actually bridge you, and you can make an economic sense to actually do that.
Pat: If maybe. That's right. Of course, yes. Even paying 7% or 8% loan cost.
Dave: And quite frankly, you know, I kept my income low on what I told them it was. And then at the end of the year, you know, we evened up, and I kept the money for the year. So...
Pat: Yeah. So, once that comes off, let's talk about 2026, right?
Dave: Yeah. So, that's why I haven't done the conversions, because, you know, for a while there was a cliff. And if I went over, then I was paying... You know, the premiums were $25,000 a year. And if I went over the cliff, then I owed him $25,000. So, that's why I did not turn it into Roth.
Pat: But just start the Roth conversions in 2026. I don't know if I would touch that Social Security.
Dave: Yeah, that was my question. And should I suspend my $42,000 in Social Security income?
Pat: I wouldn't.
Scott: I wouldn't. You know, here's why, look at this, in 2033 or 2034, we're talking about eight, nine years from now, you want to talk about a cliff, there's a cliff in the Social Security. The way that the current law is written on Social Security, when that trust fund goes negative, there's an automatic reduction of 23%, 24% across the board.
Dave: Yeah. That's why I took it at 62.
Pat: Yeah, but it won't be across the board.
Scott: You've got $4.6 million. Right now, Obamacare is only looking at your income, they don't look at your assets.
Pat: That won't be the case.
Scott: And now when you've got required minimum distributions, I don't care how good a job you do in Roth conversions, you're still going to have pretty substantial required minimum distributions. That's going to put your income at a high level. I would not suspend.
Pat: So, I would actually keep the Social Security doing and start the Roth conversions in January.
Dave: Okay. That's right..
Scott: Yeah. Brilliant management with this.
Pat: Nice job.
Scott: You know, it's funny, as a taxpayer, I hate hearing these things, but as an advisor, I love it.
Dave: I didn't write...
Scott: Oh, no, no, no. I totally... Look, we help people figure out how to drive trucks through little mouse holes. We do it all...
Dave: I mean, you know what? Quite frankly, I'm thrilled with my retirement. Everything's just wonderful. And it would have been tough without that, you know, without the Affordable Care Act at that point.
Pat: Okay, I don't think anyone out there is feeling for you, Dave.
Dave: No.
Scott: So, instead of instead of $4.6, you would have $4.3.
Dave: Sure, I would.
Pat: Yeah, I don't think anyone out there is like, "Oh, poor Dave." Just telling you.
Dave: Come on. Come on. Come on. Let's talk about options.
Scott: Okay. All right. All right.
Pat: I wish you well.
Dave: My other question.
Pat: Okay, quick.
Dave: It's just the asset allocation. I'm 60/40, but 100% of the non-qualified is in equities. So, that means about 50/50 in the qualified. Since I'm not planning to touch that qualified until required minimum distributions, I should be more aggressive there and bring the whole thing to 70/30, or...?
Scott: It depends on... I mean, I'd model it through and say, all right, given these scenarios, my $4.6 is now worth $3.1. How am I going to react versus... Because you're not...
Pat: You're not going to...
Scott: You are 65. You've got, you know, odds are, at least, one of you are going to be alive at 90. So, you got a long time ahead of you. And if you've got the stomach to withstand the ups and downs, you don't... It's not like you're having to pull 8% on this portfolio or something.
Pat: I could make an argument that you should keep it 60/40, and I can make an argument why it should be 90/10.
Scott: And it's easier when the market's been on fire and has done as well as it has the last five years to make an argument why you should increase your allocation.
Pat: Yes. Which is exactly the counter argument that I would use.
Scott: Correct. So...
Dave: It's just 10 year money, right, the qualified part? So, that's... Because I don't plan on touching it, so my required minimum distribution.
Pat: Yeah, I understand. But you don't take it all out either. There's money going to be there the day you die.
Scott: It's 30-year money.
Pat: Yeah. And it doesn't mean that you actually have to spend it when you take it out. We have plenty of clients that actually take required minimum distributions and send it right over to their brokerage account to reinvest tax efficiently.
Dave: Sure, sure, sure.
Pat: I mean, it's just... So, anyway, great talk with you, Dave. We're going to run now.
Dave: Thank you.
Scott: Thanks, Dave.
Dave: Thank you, guys.
Scott: Glad you called.
Dave: I appreciate it.
Scott: Yeah. Wish I had all of our clients were as friendly, as happy as is Dave.
Pat: All right. So, we have a House Call. These are, quite frankly, other than the chit chats, Scott, my favorite part of the show.
Scott: Someone we've given some advice to and then hear what's happened.
Pat: And it's called the House Call. And what we do is we follow up with someone we gave advice to and we find out whether they took the advice, ignored the advice, took part of the advice.
Scott: Yeah. We just follow up. And two weeks after Liberation Day, beautiful Liberation Day, the markets were highly volatile. We spoke with Anne and Patrick. They're not Allworth clients. They were nervous about what was going on. One of them wanted to sell one of them didn't. Here's a clip from that original call.
Anne: We're both retired, have been for some time. My husband is going on 72. I just turned 70. And so, recently, my husband said to me that he would like to basically go all in to cash...
Patrick: Well, in the money market, or stock market.
Anne: Yeah, money market with, you know...
Pat: Yes. And you know, how long have you been retired? How many years?
Anne: Well, our first retirement was in 2005. And then the financial crisis hit when we both went back to work, and then recently, we retired in the end of 2013.
Pat: So, you first retired at 50 and 52.
Anne: Correct.
Scott: Relatively, that's young.
Pat: And do you have pensions?
Anne: No.
Patrick: We've been riding this wave of the stock market for good 20 years now.
Pat: And how did you guys navigate through the financial crisis? Like, what were some of the investment decisions you made as the markets were going crazy then?
Patrick: We didn't do a good job of that one, 2008.
Pat: Yeah, tell us about it.
Patrick: We lost 50% of our portfolio in that crisis. And since then, we learned that we needed to have more cash available to write out these waves. And that's what we've done for this one. But my feeling is, is that this is going to be a long downturn that even if our leaders decide something different, it's going to take a while to build that trust back with these other countries, and that it's going to be a long, long, slow growth back. And I expect that it's going to get far worse before it gets better.
Pat: So, let me ask you a question. So, back in 2008...
Scott: That's exactly where I was going to go to go.
Pat: Go ahead, Scott.
Scott: No, go ahead.
Pat: Back in 2008, you said you lost 50% of the portfolio. At one point in time, the portfolio of your 100% equities was down by about 50%. What did you do at that point in time? How did you react?
Anne: So, we were actually professionally managed during that. And, you know, basically, the professional management managed the portfolio through much of that process. Again, whatever buy and sell processes, it was done by professional managers. And it was, I believe, in 2009, was when we, basically, stopped doing the professional management. We did not... We went...
Pat: You went to cash? Did you go to cash?
Anne: No, we went very slowly into cash. You know, it wasn't like we sold off a bunch, and then went into cash.
Pat: Ultimately, you went to cash, though.
Anne: We went to... Again, it was about how much we would need to be able to last four to five years in cash. And then the rest we kept... And so, where we're at currently, I can give you the numbers.
Pat: Yeah. Fire away, please.
Scott: And by the way, if you tell me today you're 100% stock and you're relying on your portfolio, we would say, you need to sell some of your stocks today to have enough cushion.
Anne: No, we're not.
Pat: So, tell us the account balances and how much income you're taking from them.
Anne: Okay. So, in my IRA, I have $1.2, and then I have a Roth of. My husband is pretty much the same, $1.2 in the IRA, and $380,000 in the Roth. The breakdown is about 63% to 64% in stock, 23% in bonds, and about 13% in cash. We pull out about $110 per year, and that's before taxes. We are...
Scott: So, it's a little less than 4% of your portfolio.
Patrick: Yeah.
Anne: Correct, yeah. We collect Social Security of about $5.4K per month. I have a very, very small pension, and my husband has an inherited IRA. And that combined is about $1,000 per month.
Patrick: We have the ability...
Pat: How much time is left on the inherited?
Anne: The interesting thing is, the thing that's different for me is, in 2008, I had the ability to go back to work including my wife, so did Anne. And now, we're looking in our 70s, that's going to be a lot harder.
Pat: All right. Well, let's...
Patrick: And we went back to work, by the way, in 2008. So, you know, she got it. We both got jobs and work for five years.
Pat: Well, early 50s is pretty young to retire. So, let's think about this, right? Because it's not an all or nothing, Patrick. It's not an all or nothing. It doesn't mean, hey, either we're in or we're out. So, right now you're at about 65%, 50% equities, and the rest is bonds and cash.
Scott: You've got about a decade to go with your withdrawals, that's even if you increase your withdrawals for inflation before you have to start selling these stocks, 10 years.
Pat: You've got a long, long time. So, this is... Look, part of being a financial advisor, Scott and I have done this for a long, long time, is managing emotion. That is probably the most difficult part of the portfolio, is not actually the portfolio itself, it's the client attached to the portfolio. Did that come out wrong?
Scott: No.
Anne: No.
Patrick: No. That's understandable.
Pat: Behavioral finance. So, if you were my client, Patrick, if you were my client, I'd acquiesce a little bit. I'd give up 10% of the portfolio in equities just to keep you grounded in the rest, to make you feel good. Because the problem is, you want to feel like you're doing something. Like, no one wants to sit in a burning building and think, "Why am I sitting in this burning building?"
Scott: That's what it feels like.
Anne: I draw the analogy as to, you know, I think we ordered a lift to come to our house and pick us up. And what showed up is an Uber and the driver's drunk. And we can't get out of the car.
Scott: Okay, well, we have Anne and Patrick with us now to tell us what has transpired. Welcome, Anne and Patrick.
Pat: Hopefully, we didn't create too much disharmony in the relationship.
Anne: No, not at all.
Patrick: No, we're still together.
Scott: You know, if you step back sometimes and just kind of think of this, it's all kind of just a big game. I mean, like, you've been married a long time. You understand how interesting each individual is and our strengths, our weaknesses, our concerns, and...
Pat: How we react to things.
Scott: ...our irrationality. I mean, that's just in...
Pat: In a relationship. It's part of what...
Scott: You've been trying to say...
Pat: You've been my business partner for over 30 years. I'm 100% rational all the time. So, where did you guys end up? Just kind of fill us in on what you did.
Anne: Okay. So, what we did is we basically took your advice, Pat. We gave up 10% and moved that into cash. And so, now, we're sitting at about 53% in stock, 23% in bonds, and about 24% in cash.
Pat: And the portfolio value is much higher than when you called.
Scott: As the market, it's high as well.
Pat: Had you not done that, your portfolio value would be higher today.
Anne: It would.
Pat: How do you feel about that?
Anne: You know, I feel personally, that the tradeoff was worth it.
Pat: Good. Thank you.
Anne: Because, you know, since that down portion in the in the market, our portfolio has still gained over $300,000.
Pat: That's right. That's right.
Anne: And now, it could have been more.
Pat: Okay. It could have been less.
Anne: Yes, and it could have been less. Absolutely. It could have been less. But the anxiety that I personally would have experienced would have been far greater.
Pat: Let me... I'm going to share a quick story because this reminds me. And I use the word acquiesce, right? Which is, look, as an advisor, if the portfolio structure correctly, which we believe that our portfolios are structured correctly for the client, given the resources that we have and what comes into us, sometimes they're high, the concentrated stock positions that are a little bit harder to build around, but we still do. The idea is to keep the client invested for the long term.
Scott: Through the cycle.
Pat: So, I'm going to share a quick story. When I started years and years ago, I had this portfolio, and inside of it was this little mutual fund, the GT Global Emerging Markets Fund, this is...
Scott: Submerging market, which we later renamed.
Pat: Yeah, which we later renamed. And this guy...
Scott: This is, like, 30 years ago.
Pat: This is over 30 years ago. And it made up about 1% of his portfolio. And he came into my office and I was a relatively new advisor. And, you know, you get better at handling clients as you go along. And he came into my office and he said, "I've been looking at this portfolio, and this particular holding is terrible. Why is it in here?" And I said to him, "I'm going to get rid of it." And he said to me, "Wait, you have no confidence in this." I said, "No, no, I have confidence in my investment selection. I don't want this thing that actually, if it goes up by three times...
Scott: It's such a small piece of the portfolio, it makes no difference.
Pat: ...it makes no difference. I don't want to spend time or energy discussing with you why it's there, because it really doesn't make that much difference."
Scott: You mean to say, you had a client that came in and looked at the worst performer and wanted to spend time on that and not time on the best performer. That is strange. I've never had that experience.
Pat: Amazingly enough, amazingly enough. And the point being was, I got rid of it because it was distraction to everything else. It was a distraction of what we were trying to do.
Scott: And that's what he was looking at on a daily basis.
Pat: And that's what he was focused on. And as I said to him, "It could go up by three times. It could go up by five times. It's not going to change your lifestyle. You going to all the cash would have changed your lifestyle," right? So, the thing going forward is, don't let this portfolio run. And when we say run, right now, your portfolio is no longer 50/50. Because you stayed in those equities and we brought it to 50/50. My guess right now is probably 57% equity.
Scott: She thought 53. But I don't... Did you calculate the numbers recently?
Anne: Fifty-three.
Scott: What is it now?
Anne: Yesterday.
Scott: Okay, so it's 53. So, to Pat's point, if your objective is like, we're going to have 50% of our retirement savings in equities, then when it starts going up, that means you have to sell a little. And conversely, when things go down, you need to buy a little. So, that automatic rebalancing alone will give you quite a bit of extra return with reduced risk.
Pat: So, on our portfolio, most of our portfolios, we screen on a weekly basis to see if they're out of alignment with the models that we want them to be in. Because what we're interested in is a risk adjusted rate of return. And if you don't have that discipline and do that...
Scott: Ten years from now, you're going to be back to 65%.
Pat: Yes. Which means that the downturn is that much harder.
Patrick: Where should we be?
Anne: So, you know, years ago, back when we were first kind of getting interested in, you know, how to structure portfolios and how the balance should be, it used to be that the advice was when you're younger, in your 40s and 50s, you should be 60% stock, 40% bonds or equivalent. And then when you retire, you should actually do opposite, that you should be 40% bonds.
Scott: That's what I don't know.
Pat: There's also, they take 100 minus your age.
Scott: Which is kind of the same thing. That's what we were taught. That's all garbage. It's all garbage. It's based upon two things, your needs. Like, how much need do you have from this portfolio? If you don't have to touch any of it, then you can invest however you want. You can bear it in the backyard if you wanted to, if you didn't need this for your income. On the other hand, if you are highly dependent upon this portfolio, and you need to generate a certain amount of return to manage your lifestyle, now you're kind of forced to take on some volatility in that. And then the key is, how do we balance the two so you don't go insane, but you still have enough extra return in there to generate what your needs are.
Pat: And then you look at it another way, which I have a 80%... I think he's probably 81. I have, I think, it's 85% of his portfolios in equities because he's got a big pension coming in. And so, it doesn't really... And when we look at the overall, the net present value and it's repayment...
Scott: And his view is it's going to go to his kids or grandkids or whoever is going to get that.
Pat: That's right. So, we're managing for something completely different. For you, 50/50. And quite frankly, you would be well served to hire a good financial advisor. And the problem is, is you had a bad experience with a financial advisor before, and you don't think that they add value.
Scott: They're going to add value in the rebalancing the way that equities are structured, and frankly, in the fixed income and the cash management side of things.
Pat: Because you fired your advisor in '09.
Anne: It's true.
Pat: So, you had a bad experience.
Anne: Yes.
Pat: So, you would be well served.
Scott: At a minimum, have a...
Anne: Yeah, I wouldn't necessarily blame the financial advisor, per se. You know, it was, again, we were brand new in the retirement.
Scott: Well, it's okay to blame them sometime.
Anne: And, you know, we've been told, you know, by so many people when we were taking a look at, can we retire, can we not? It's like, "Oh, you're perfectly safe. No problem." And then with that financial crisis, I mean, everything went south.
Pat: That was nasty.
Scott: That was terrible.
Anne: I mean, that was a pretty horrific experience. And, you know, I mean, we were pretty lucky. A lot of people got hurt, so much worse that we did, right?
Pat: That's right. Over the long term, the cost of a financial advisor to you will be de minimis relative to the value they add...
Scott: They have to research it.
Pat: ...especially as you age, especially as you age. I have a meeting this afternoon with children of 85 and 86-year-old clients that they've been clients for 30 years. And we're discussing things that are really difficult to discuss. Yep. But that need to be discussed.
Scott: That's what it is.
Pat: So, we appreciate the call. I'm glad you actually won this argument, Anne.
Scott: I think this sounds really great. I mean, I'm really happy with this outcome.
Pat: Just make sure that...don't let that portfolio run on you.
Scott: And always remember, your goal is not to die with the highest net worth possible. That's not your goal. That would be nice, but that's not your objective. Your objective is to maintain your lifestyle and have some peace as the markets do what the markets do.
Anne: That's exactly what we're trying to achieve.
Scott: That's right. Well, good. That's right about that. Thank you.
Pat: And if you were really good at prognosticate, you would actually figure out how the last check you wrote bounced.
Anne: That's what we tell our kids.
Pat: That's not going to happen.
Scott: No, it's not.
Pat: It'll never happen. It'll never happen.
Anne: It won't. I know.
Scott: All right, I appreciate the call. It's been so good having everyone with us today. I enjoyed the program. If you like our show, make sure you give us a good review, rating, or whatever it is. Let your friends know about it. And follow us. So, it means you get the thing delivered automatically each week. Anyway, this has been Scott Hanson and Pat McClain, Allworth Financial. We'll see you next week.
Automated Voice: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state-planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters".
Pat: I'm Pat McClain.
Scott: I'm Scott Hanson. And we're going to do something a little different. We're going to get right to the calls today.
Pat: Yes, we've been reading some of the reviews and you said take more calls.
Scott: Yeah. So, we are going to start off talking with Mike.
Mike: Hi, guys. How are you doing today?
Scott: Good. How are you doing, Mike?
Mike: I'm good. Listen to you guys every week.
Scott: Thank you.
Pat: Thank you.
Mike: Enjoy your show.
Pat: Thank you. I appreciate that.
Mike: I have also talked to one of your advisors in the Denver area and I just haven't made the leap yet.
Pat: Okay. Well.
Mike: But here's my question. I'm working with an advisor I've been with for quite a while, and we had some money just sitting in these buffered accounts with Schwab, about 360 grand, and it wasn't doing much. And I wanted some income from that cash. So, he put me into yield notes and I've done some research on it, but you guys have a way of explaining things simply. And I'd like the fifth grade explanation of how yield notes work.
Pat: Well, before we go there, why don't you tell us what your interpretation, either from what you have researched or what the advisor, or depending upon how they're being compensated, commission salesperson is describing them.
Mike: Okay. I have four ETFs that I'm in, and they have a bottom and a top. The bottom is if it loses more than 70%. And there's four of these in this in this trust fund.
Pat: And what are they tied to? What's the underlying index that they're...?
Mike: So, the one is QQQ, which is technology, IWM, which is Russell 2000, TLT, which is bonds, and utilities with the XLU. So, those four ETFs are tied to a 70%. If you lose 70% or it goes up 1% or one cent from what we paid it, then they're what they call, let me see where I put that, not callable, but issuer called notes. And so, I believe...
Pat: Okay. They're not callable.
Mike: They're issuer called notes.
Pat: They can be called by the issuer, yeah.
Mike: Correct, correct. So, for the last, I don't know, seven, eight, nine months, I've been collecting about $3,300 a month off this $360,000 bucket of money. And...
Scott: Yeah, good yield.
Mike: It's a good yield. And I'm like, and the and the principal hasn't gone down much. I mean, it's gone down a little bit, but not much. And what happens is if one of those ETFs goes above 1 cent or below 70%, then the bank can call the note and we start over, and we take that principle and decide what we do next.
Pat: When you said it hasn't gone down by much, what dollar amount is it gone down?
Scott: What happened when the Liberation Day and the tariff Liberation Day was announced?
Mike: Didn't go down much. I watch it every week. I'm probably a nerd like that. But right now, the cost basis is about $355,000.
Pat: So, the value today is $355,000.
Scott: No, the cost is $360,000 today.
Mike: Yeah, that's correct
Scott: So, I remember when I first started this industry, my manager had a plaque on his desk, tin stifle. There is no such thing as a free lunch.
Mike: Right. I understand. That's why I'm calling you, guys.
Scott: So, I've always remembered that any sort of an investment product that has what appears to be an above-average return, I question like, how can it have above average return? Where is the underlying risk in this investment? Because if this were 10%, 11% yield or whatever, 12% yield, if this was without any risk, people would bid up the price. And the next thing you know, the yield would be the same thing as treasuries. So, the risk you've got in here is that the underlying index, as long as the index stays within a band, and I don't know exactly how these particular ETFs are structured, but as long as the index stays within some certain band, you're on easy street. But if we have something where the index goes below some floors, that's where it starts triggering some losses. Let me ask you this, so how much money do you have with this other advisor now?
Mike: Let's see. Well, my total portfolio is about $3.6 million, but it's not all with him. And that's another story. And that's why I was looking for other provider.
Scott: And how much income are you trying to generate?
Mike: So, I generate about $42,000. And I'm retired. I'm 67, wife's 65. $42,000 in Social Security, $20,000 in another financial loan that I've loaned to somebody for a business that I've been getting paid from. I have an equity or an annuity that was annuitized that pays about $7,800 a year. And then this particular bill notes are paying us about, let's see, $39,000 a year. So, it's a big piece of our income. We're spending at about $140,000 thousand a year, and our income is at about $139,000 with this yield note in income. But I also realize that that income could stop.
Scott: Yeah, it just it just it seems strange to me is that this is where they went to generate income.
Pat: I would agree. Well, just...
Mike: Well, there's other things within the portfolio that are coming to bear, that are going to generate substantial income. But I don't want to get into a lot of that detail now. That's something I definitely talk to one of your advisers about.
Pat: You believe they are going to come to bear?
Mike: I do. Yeah, I do. I think there's... Yeah, I do. I also have about a million to an annuity that is going to mature in about three years. And I've been looking at that to think, you know, this was a waste of money. Yes, the people that I'm with sold it to me. Yes, they made a bunch of money on it. And I'm not making a whole lot.
Scott: They sold... So, you said, "I've got some cash," and they said, "What can we sell Mike? Mike's interested in yield, let's give them a portfolio that's got yield so good that he's like, 'How can I pass up on this yield?'"
Mike: Yeah.
Scott: There's an old saying on Wall Street, "When the ducks quack, feed them." If you show an interest, they're going to throw you some bread. And look, the financial industry is no different than other industries, in that they want to manufacture products that people want to buy. They have some sales structures. They've got wholesaling distribution. They have marketing teams that come up with the proper names. So, like, I mean, I don't personally own any of these.
Pat: My view of this is you've made this much, much more complicated. Or whoever's selling this stuff to you made it much, much more complicated than you actually need it to be. So, of that three point 6 million, how much is an IRAs?
Mike: $384,000.
Pat: Oh, wow.
Mike: So, most of its cash because we had a business that we sold back in '17.
Pat: And do they have a tax efficiency overlay on top of this portfolio?
Mike: No, they do not.
Pat: Okay. So, I could make an argument right now that, look, we could turn around and start a 3% distribution out of this total account, which I think, actually probably...
Scott: How old are you, Mike?
Pat: 67.
Mike: 67.
Pat: ...makes a lot of sense to start a 3% distribution, and lay a tax overlay on top of this, and sell off individual holdings at a capital gains rate, put all the bonds inside the IRA. This is...
Scott: One of these ETFs is going to blow up. It's going to lose 70% one day.
Pat: Scott, but this is just completely tax inefficient. I mean, I don't even know how to explain it. There's no view of your after tax return at all. It's just return. And all you're really interested in is the money you can spend, right? You're interested in maintaining your lifestyle, making sure that you can maintain the rest of your life with inflation adjustments, and having your net worth grow up as much as possible and maintain your lifestyle. That's your number one concern, I imagine.
Mike: Yeah, that's right. And I do have more money in fixed income than I should. I should have more inequities than I don't. Maybe I got cash...
Scott: I would call these are more equity equivalents. These are riskier than equities. I mean, I haven't seen them. I don't know the exact ETF, but anything that's paying out 11% yield. If the if the underlying bonds are paying four or five or even six, where's that extra yield coming from? They're selling options to generate that income, which is what given away the upside.
Mike: All three of these ETFs are up. The only one that's down is the bond. That's the only one. It's down, you know, 9 bucks.
Scott: You've owned them for how long?
Mike: I bought them in October of '24.
Scott: Okay, great. They're up. Super.
Pat: But you're not going to die in a year or two.
Mike: I know.
Pat: You're going to die in 25 years, or your spouse will die in 25 years. If we look at an actuarial table, you're acting like a short term investor with a high risk profile on parts of your portfolio.
Mike: So, my...
Scott: And, I mean, the only way to really look at the... I mean, I don't have these notes, but...
Mike: That's my question.
Scott: And my patience to do in-depth analysis is not there, so I rely upon a team. But I mean, what this should go through is a screen that says, "What happens to these in a variety of different markets? What happens if this...?"
Mike: To ask my question, are yield notes, they're high risk?
Scott: Well, there's no such thing as a free lunch. Where is that yield coming from? They are selling options on this portfolio.
Pat: And you've got the downside. And you've got the downside. Yeah, and if you read through the perspectives, there's some floor. If these indexes pop through that floor, I don't know how big the downturn can be, but it can be substantial.
Mike: Well, I think it would be based on any of these ETFs falling 30%. That's where they have to fall, 30%.
Scott: Well, I don't know that.
Pat: Well, that's what he believes.
Scott: Okay. Well, that's happened.
Mike: No, that's what they have to do. That's what they have to do.
Scott: And then what happens to you? And then it drop 70%?
Mike: If it drops 30%, 31%, then I get my principal back, probably less than 30%. If three of the four are up, if the fourth one goes up, the bank calls the note, and we get our principal back and we start over something else.
Scott: Yeah. And this comes back to me.
Pat: Mike, what kind of...
Scott: It's like, it's not manna from heaven. Like, where is the extra yield coming from?
Pat: Mike, what kind of business did you sell?
Mike: So, I was in the restaurant business for 40-plus years.
Pat: Okay. Rough, tough business, right? Without question.
Mike: Very tough.
Pat: Very, very tough business. You didn't go in with a theme selling tacos one day, hamburgers the next, Greek food the third day, right? You had a unified concept going into a particular theme or thematic restaurant.
Mike: That's right.
Pat: Your portfolio is, you've got tacos over here in this corner. You're like a food court. That's what your portfolio looks like to me. There's no overall arching...
Scott: And you're asking like, "Hey, what do you think about these sausages?"
Pat: Yeah. And I'm like, well, how long are the sausages going to stay on the menu?
Scott: What's even in these sausages?
Pat: Well, these sausages...
Scott: Are they going to kill you? What kind of garbage are they...?
Pat: We've taken the analogy too far, but you view this your portfolio, you have to have a thesis behind it as to what you're trying to achieve. You're not just picking and pulling concepts out of the thin air. And so, the first thing you want to do is start at the very beginning, which is, how much risk am I willing to take in a portfolio for a given rate of return over a period of time?
Scott: And modeling, whether you use Monte Carlo simulation or some other modeling to what happens to this portfolio during severe downturns? Because, look, in the last 25 years, we've had twice with the stock markets falling about 50%. One would expect in the next 25 years, we'll have two other times like that.
Pat: But, Scott, that isn't the weirdest thing about it. The weirdest thing is that we're reaching for yield on this with turns of risk.
Scott: This is the guy, his advisor got a commission selling him annuity, probably got a commission selling him these.
Pat: Well, understood. How does your advisor get paid?
Mike: He gets paid based on the portfolio's growth or value, actually, the value of the portfolio.
Pat: Assets under management fee, except for that annuity.
Mike: The two... Correct, because they already got their money on that.
Pat: Okay. I just...
Mike: They get a percentage of what they're managing, so value.
Pat: Got it. Got it. Got it. There's no underlying thesis to your portfolio whatsoever. That's what the problem is. If you don't have an investment policy statement, there's no direction behind it. There's parts of this and this. There's no tax efficiency in it whatsoever.
Scott: Zero.
Pat: I would make an argument that if you were going to do these sorts of things, you would do it in your IRA over that because of the yield on this. That's the argument I would make. But if you were to do it at all, if you were to do it.
Scott: I totally agree with you, Patt. It's highly tax inefficient, 11% yield, taxable yield.
Pat: So, just take all the pieces and try to construct a portfolio that is weatherproof. Weatherproof doesn't mean that it's not going to go down in value. Weatherproof says that it's going to live until your dying day with an expected rate of return. And I think you should actually start spending more money, quite frankly. I mean, you've got $3.6 million. Part of it is actually an annuity that's being paid out. I think that you can probably tolerate a little bit more pressure on this portfolio for income and then build it...
Scott: And you're going to want to also structure what's this annuity that you've got. You call it maturing. I don't know what that means. I think it means that the surrender charges are gone, but...
Mike: Well, we turned on one annuity that we had. And we had we had two others that are maturing in three years through Allianz.
Pat: What does maturing mean? Does it mean this surrender charge comes off?
Mike: You know, you start, but it's a 10-year contract. And once a 10 year set, you turn on the income.
Pat: You can turn on the outcome.
Mike: You can. And my decision now is, I don't know if I want to keep the money in with Allianz. I think I might take the money out at the three year mark, or take it out now. I've done the math. I could probably invest it in, you know, something else through a good advisor that is going to make me 4%, 5%, 6%.
Scott: The challenge you've got is the tax. Again, to Pat's point, it's the tax. All the growth in there is going to be taxed as ordinary income.
Pat: But that doesn't mean you can't move it into a low-cost, fee-only annuity. Which, by the way, they were pretty uncommon 10 years ago. You can find them very easily, low-cost.
Scott: And the advisor manages it like another portfolio.
Pat: And the advisor manages it like another portfolio.
Scott: It still has that tax overlay that you may or may want longer term.
Pat: Yes. Or you might want to do a variable annuitization on it, right. There's nothing wrong with that.
Scott: You got a lot of options.
Scott: You're not getting good advice. Fortunately, this is only 10% of your portfolio.
Pat: That's good.
Scott: I wouldn't own this.
Mike: Correct. Okay. That's what I wanted to know. That's kind of where I was trying to get at.
Pat: By the way, Mike, nice job. You did a great job saving. You did a great job saving.
Scott: Building your business.
Pat: And you did it in...
Mike: I tell you what, though, it's this point in your life when it gets difficult to, you know, take the money, where do you invest it? Who do you invest it with? Who do you trust? It's like, you're right, I made a lot of money in in the business of what I did for four years. And I knew what I was doing. And now, it seems like all of a sudden I'm a dummy.
Scott: It's hard.
Mike: It is hard. It's not easy.
Scott: It's hard, and you'll never be an expert, right? So, it still comes down...
Mike: No, and I don't want to be an expert.
Scott: I understand. You need to educate yourself enough so you kind of know what's going on and you know how to pick the right advisors and the people to trust. But it really does come down to someone you really trust and having that relationship.
Mike: Exactly.
Scott: And it's not it's when the times are easy, it's when the times are rough, and the financial markets are going poor.
Pat: Yeah, it's hard. You know, and it's a good problem to have.
Mike: I think I'm going to go visit one of your guys here in the state where we're at.
Pat: There are lots and lots of firms out there. The problem for the average consumer is trying to figure out what's good and what's bad, right? You know, it's difficult.
Mike: It all it all comes down to one thing. It comes down to trust. And, you know, you have to have the trust and have the confidence in the person you're with.
Scott: Well, I think it's two things. It's that and a cohesive strategy. What is our long-term strategy here? Not just like, "Well, here's some products that'll work for you." But like, how does this all work together?
Pat: Yeah. So, look for a competent firm, right?
Mike: I will.
Scott: All right, Mike, wish you will.
Mike: I appreciate it, guys. Thank you.
Scott: But you did the hard part. You accumulated the assets, so...
Pat: In a restaurant that probably has... What's the failure rate in the restaurant industry? I'm going to guess it's 70%.
Mike: Pretty high. You know, it's pretty high, yeah. I got out at the right time, I'll tell you that.
Pat: Well, you would have been... There's people that have been getting out of that industry for 30 years and say the same thing. I never got in the business
Mike: I know. I didn't want to be in it during COVID. You know what I mean?
Pat: Oh, gosh. What a nightmare?
Scott: Yeah, just a nightmare. So...
Pat: I appreciate it.
Scott: I appreciate the call, Mike.
Mike: That probably would have killed me. Take care, guys.
Scott: Yeah. It's amazing. And I think about some of these restaurants that went through that period and like, holy smokes, you know.
Pat: So, I bicycle ride with a gentleman that ran two restaurants through COVID. Owned one, and was the management team on the other contract management. And we had lots of time to bike-ride during COVID. And I'm just like, "How's it going?" And one of the biggest problems they had is when they reopened, even partially, is that the money that the government was paying the employees not to work cause them not to work.
Scott: You couldn't get people back.
Pat: You couldn't get people back. It was rough. It was rough.
Scott: But anyway, you know, Wall Street will create any product you can imagine. And any time you've got a payout, whether it's monthly or quarterly payout that is higher than what the market is paying, you need to ask yourself, where is that additional yield coming from? Is it coming from my principle? Sometimes we see that with real estate investment trusts. They've got a payout, but actually, the principal value is declining. So, we see that, is it coming from principle? Is it becoming because there's some options that are being sold to generate that? And if that's the case, well, what's the trigger point where my assets are now going to get called away from me? That's 100%. And then what's my downside here?
Pat: So, Scott, I...
Scott: Whether it's... And there are there are times when these things might be appropriate as a piece of one portfolio managed within...
Pat: Typically over the short term. You have to have a reason behind it for the short term. Because otherwise, it puts a drag on the portfolio, which normal market cycles you can live through and not pay that insurance premium from the sum you own.
Scott: That's exactly right.
Pat: So, I pulled this article, just happened to pull this article from "Jeff Sommer" from The New York Times. And he talked about investing. But he said, one of the ways, it isn't easy to invest. "First, much of the financial service industry is dedicated to incessantly selling new products and services, including advice intended to keep you buying and selling the latest new thing. That kind of behavior generates profits for asset managers and advice givers, but not necessarily for you."
Scott: So, he just wrote that. You just read that this week.
Pat: I read it last night. And I said...
Scott: Read that one more time? I was...
Pat: It said, things are different. Why it's Difficult to Invest, by Jeff Sommer, "New York Times." "First, much of the financial service industry is dedicated to incessantly selling new products and services, including advice intended to keep you buying and selling the latest new thing. That kind of behavior generates handsome profits for asset managers and advice givers, but not necessarily for you."
Scott: So, one of the reasons you hear us talk about the importance of working with an independent advisor, look, the big Wall Street firms, I'm not going to pick out the names, you know the names, they manufacture this stuff.
Pat: They manufacture products.
Scott: So, I'm going to pick a company. What's the difference? Because it's true. Like Merrill Lynch. Merrill Lynch has many lines of business. One of the business lines is offering advice to clients, and they'll do some on a fee basis, where they'll try to make sure that the interests of the advisors are lined up with the clients. And so, when the clients do better, they'll do better. That's part of the structure. But they also manufacture some products, things like this, may not these particular ones, but they have other financial instruments that they manufacture. Further, they are in the business of helping other companies raise capital by selling their bonds or their stocks. So, they're going to some company and say, "Hey, we can raise $4 billion of bonds for you." Where do you think those bonds go
Pat: To those families, right?
Scott: Partly, yeah.
Pat: They also are in the business of selling home loans and banking advice, and they're scored on it. So, what's the point of having that advisor?
Scott: Your financial advisor.
Pat: ...take money from your portfolio and pay off the home loan, if they can get you to borrow the money from them.
Scott: Their pay grid, as they call it. To your point, Pat, they're scoring. I remember talking to one guy who says they have to have a certain amount of credit cards. They have to have people sign up every year. Home loans, whether it's against the portfolio, security back lending, or it's a mortgage.
Pat: Really? I've heard about it, but I've never talked to anyone that... You talked to one that had it.
Scott: Yeah. Yeah, yeah.
Pat: Did he hate it?
Scott: You know the guy I talked to, yes.
Pat: Oh, I've never talked to him about this. But imagine selling credit cards to clients. Holy smokes.
Scott: Pat, they got all kinds of benefits. You kidding me? Look at this. You can get a go on the cruise. You get free upgrades on the cruise. And...
Pat: Anyway. Just but, Scott, in all fairness, it's independent advisors. There's good ones and there's bad ones for sure.
Scott: And at Merrill Lynch, there's great advisors that say, "Hey, I don't care about your management. I'm serving my client. My client comes first. I'm going to ignore you and all that other garbage," for sure, for sure. And you can have an independent advisor.
Pat: Their bag.
Scott: Yeah, correct. Or an actor, both. All right. Let's continue on. We're talking with Dave. Dave, you're with Allworth's "Money Matters".
Dave: How come you guys never talk about options, huh?
Scott: You want us to?
Dave: You remember that call?
Scott: Oh, yes I know.
Dave: Oh, gosh.
Scott: This is things that I try to suppress, Dave. A lot of painful things in my childhood and the call a couple of weeks ago on the options.
Pat: Oh, I didn't know. I didn't hear...
Dave: Come on. The options. I want to hear about the options.
Pat: I didn't know what the...
Scott: That's right. He was angry, man. I couldn't figure out what his agenda was.
Dave: He was very angry. Yeah, he's not a happy man all that.
Pat: He's not. Well, you sound like a happy man. So, you could spend all day on this call.
Dave: Well, hello, neighbors. I moved to the beautiful Hills of El Dorado in 1997.
Pat: Well, there you go.
Scott: Wow. You've been there a long time.
Dave: Long time, long time, long time. A lot of changes, but still a nice place.
Scott: I moved there in 1995, a couple of years before you, El Dorado Hills. I probably will die there. So, what can we do to help?
Dave: I have a couple of questions about Roth conversions and asset allocation.
Scott: All right. How old are you?
Dave: I'm 65. I'll be 66, and my spouse will be 65 in December. And I'm thinking of suspending my Social Security at full retirement age and suspending my wife's. I started taking Social Security at 62. And that'll enhance my ability to do the Roth conversions before required...
Pat: You can suspend it any time. You don't have to wait till then.
Dave: Is that right?
Pat: Yeah, yeah. And so, what's your income now?
Dave: Income now is Social Security. Between the two of us at $42,000. Pension, it has no cola at $41,000. Dividends off my non-tax deferred, not qualified brokerage account of about $15,000. And then my wife has part time work, about $7,000 a year. That's about $105,000.
Scott: And how much do you have in IRAs for one case?
Dave: In the in qualified IRAs, $3.3 million.
Pat: And how much money do you have outside of it.
Scott: In your brokerage, savings, CDs?
Dave: $1.3.
Scott: And of the $1.3, how much of that doesn't have a huge capital gain built up in it? How much could you withdraw without any taxes?
Dave: It's all capital gain, mostly. Probably 80% capital gains.
Scott: Well, good for you.
Dave: Yeah, I started in 1987. I got my first job real job and sat down and wrote a check to Vanguard and started. Every paycheck, I tried to put $100 with them.
Scott: Excellent.
Pat: That's how it works.
Scott: You know what's funny, there's no easy way.
Pat: That's how it works. That's how it works.
Scott: There's no easy way to accumulate.
Pat: And as your income went up, it went to $200, then it went to $400, and then went to $1,000.
Dave: Yeah. If I got a bonus check, that I didn't change my spending. That's...
Pat: You went and bought a new Hummer?
Dave: No, I did not. So, that's $4.6 million. And the total asset allocation is 60/40, 60% equity, 40% bonds.
Scott: And are you taking any money from these IRAs right now?
Dave: Yeah. You know, when I needed a new deck, yeah. When I got the front yard redone, yeah. But otherwise, we're pretty much living off them. Yeah. Other case sometimes, but not very much, not very much.
Pat: Why would you? You can do plenty of Roth conversions without suspending the 401(k). I mean, the Social Security.
Dave: You're forgetting something.
Pat: Oh, Okay. We're going to talk about Medicare.
Dave: My Affordable Care handcuffs.
Pat: Oh, because you're...
Dave: The golden handcuffs.
Pat: How long do you have the Affordable Care?
Dave: I retired at I retired at 53.
Pat: I know, but you're 65 now.
Dave: Right. I'm on Medicare, but my wife's not.
Pat: Okay. And when does she qualify? When does she come off?
Dave: The handcuffs come off in December this year.
Scott: And that's when she goes on Medicare.
Dave: Right.
Scott: Okay. So, you're not going to do anything this year.
Pat: So, let's explain that to the listeners real quick, Scott.
Dave: Let me say, over the 12 years, you know what that Affordable Care Act was for me?
Pat: Yes, a lot.
Dave: How much?
Pat: They had...
Scott: Tell me, tell me.
Pat: ...$140,000.
Dave: $250,000 to $300,000.
Scott: Holy smokes.
Pat: Good lord.
Scott: Well, they had you in.
Dave: I had premiums of $2 a month.
Pat: They had you in mind when they designed the Affordable Care Act, Dave. That's what they were thinking.
Scott: Yeah, because, so this is for our listeners, Affordable Care, it's based upon your income, not your assets. And so, what happens is that we do it all the time, right? Which is you spend down brokerage accounts or money in the bank...
Pat: Don't touch your retirement accounts for a period of time, so you have...
Scott: ...or you don't touch your retirement or anything that... You can even actually take loans out, and actually bridge you, and you can make an economic sense to actually do that.
Pat: If maybe. That's right. Of course, yes. Even paying 7% or 8% loan cost.
Dave: And quite frankly, you know, I kept my income low on what I told them it was. And then at the end of the year, you know, we evened up, and I kept the money for the year. So...
Pat: Yeah. So, once that comes off, let's talk about 2026, right?
Dave: Yeah. So, that's why I haven't done the conversions, because, you know, for a while there was a cliff. And if I went over, then I was paying... You know, the premiums were $25,000 a year. And if I went over the cliff, then I owed him $25,000. So, that's why I did not turn it into Roth.
Pat: But just start the Roth conversions in 2026. I don't know if I would touch that Social Security.
Dave: Yeah, that was my question. And should I suspend my $42,000 in Social Security income?
Pat: I wouldn't.
Scott: I wouldn't. You know, here's why, look at this, in 2033 or 2034, we're talking about eight, nine years from now, you want to talk about a cliff, there's a cliff in the Social Security. The way that the current law is written on Social Security, when that trust fund goes negative, there's an automatic reduction of 23%, 24% across the board.
Dave: Yeah. That's why I took it at 62.
Pat: Yeah, but it won't be across the board.
Scott: You've got $4.6 million. Right now, Obamacare is only looking at your income, they don't look at your assets.
Pat: That won't be the case.
Scott: And now when you've got required minimum distributions, I don't care how good a job you do in Roth conversions, you're still going to have pretty substantial required minimum distributions. That's going to put your income at a high level. I would not suspend.
Pat: So, I would actually keep the Social Security doing and start the Roth conversions in January.
Dave: Okay. That's right..
Scott: Yeah. Brilliant management with this.
Pat: Nice job.
Scott: You know, it's funny, as a taxpayer, I hate hearing these things, but as an advisor, I love it.
Dave: I didn't write...
Scott: Oh, no, no, no. I totally... Look, we help people figure out how to drive trucks through little mouse holes. We do it all...
Dave: I mean, you know what? Quite frankly, I'm thrilled with my retirement. Everything's just wonderful. And it would have been tough without that, you know, without the Affordable Care Act at that point.
Pat: Okay, I don't think anyone out there is feeling for you, Dave.
Dave: No.
Scott: So, instead of instead of $4.6, you would have $4.3.
Dave: Sure, I would.
Pat: Yeah, I don't think anyone out there is like, "Oh, poor Dave." Just telling you.
Dave: Come on. Come on. Come on. Let's talk about options.
Scott: Okay. All right. All right.
Pat: I wish you well.
Dave: My other question.
Pat: Okay, quick.
Dave: It's just the asset allocation. I'm 60/40, but 100% of the non-qualified is in equities. So, that means about 50/50 in the qualified. Since I'm not planning to touch that qualified until required minimum distributions, I should be more aggressive there and bring the whole thing to 70/30, or...?
Scott: It depends on... I mean, I'd model it through and say, all right, given these scenarios, my $4.6 is now worth $3.1. How am I going to react versus... Because you're not...
Pat: You're not going to...
Scott: You are 65. You've got, you know, odds are, at least, one of you are going to be alive at 90. So, you got a long time ahead of you. And if you've got the stomach to withstand the ups and downs, you don't... It's not like you're having to pull 8% on this portfolio or something.
Pat: I could make an argument that you should keep it 60/40, and I can make an argument why it should be 90/10.
Scott: And it's easier when the market's been on fire and has done as well as it has the last five years to make an argument why you should increase your allocation.
Pat: Yes. Which is exactly the counter argument that I would use.
Scott: Correct. So...
Dave: It's just 10 year money, right, the qualified part? So, that's... Because I don't plan on touching it, so my required minimum distribution.
Pat: Yeah, I understand. But you don't take it all out either. There's money going to be there the day you die.
Scott: It's 30-year money.
Pat: Yeah. And it doesn't mean that you actually have to spend it when you take it out. We have plenty of clients that actually take required minimum distributions and send it right over to their brokerage account to reinvest tax efficiently.
Dave: Sure, sure, sure.
Pat: I mean, it's just... So, anyway, great talk with you, Dave. We're going to run now.
Dave: Thank you.
Scott: Thanks, Dave.
Dave: Thank you, guys.
Scott: Glad you called.
Dave: I appreciate it.
Scott: Yeah. Wish I had all of our clients were as friendly, as happy as is Dave.
Pat: All right. So, we have a House Call. These are, quite frankly, other than the chit chats, Scott, my favorite part of the show.
Scott: Someone we've given some advice to and then hear what's happened.
Pat: And it's called the House Call. And what we do is we follow up with someone we gave advice to and we find out whether they took the advice, ignored the advice, took part of the advice.
Scott: Yeah. We just follow up. And two weeks after Liberation Day, beautiful Liberation Day, the markets were highly volatile. We spoke with Anne and Patrick. They're not Allworth clients. They were nervous about what was going on. One of them wanted to sell one of them didn't. Here's a clip from that original call.
Anne: We're both retired, have been for some time. My husband is going on 72. I just turned 70. And so, recently, my husband said to me that he would like to basically go all in to cash...
Patrick: Well, in the money market, or stock market.
Anne: Yeah, money market with, you know...
Pat: Yes. And you know, how long have you been retired? How many years?
Anne: Well, our first retirement was in 2005. And then the financial crisis hit when we both went back to work, and then recently, we retired in the end of 2013.
Pat: So, you first retired at 50 and 52.
Anne: Correct.
Scott: Relatively, that's young.
Pat: And do you have pensions?
Anne: No.
Patrick: We've been riding this wave of the stock market for good 20 years now.
Pat: And how did you guys navigate through the financial crisis? Like, what were some of the investment decisions you made as the markets were going crazy then?
Patrick: We didn't do a good job of that one, 2008.
Pat: Yeah, tell us about it.
Patrick: We lost 50% of our portfolio in that crisis. And since then, we learned that we needed to have more cash available to write out these waves. And that's what we've done for this one. But my feeling is, is that this is going to be a long downturn that even if our leaders decide something different, it's going to take a while to build that trust back with these other countries, and that it's going to be a long, long, slow growth back. And I expect that it's going to get far worse before it gets better.
Pat: So, let me ask you a question. So, back in 2008...
Scott: That's exactly where I was going to go to go.
Pat: Go ahead, Scott.
Scott: No, go ahead.
Pat: Back in 2008, you said you lost 50% of the portfolio. At one point in time, the portfolio of your 100% equities was down by about 50%. What did you do at that point in time? How did you react?
Anne: So, we were actually professionally managed during that. And, you know, basically, the professional management managed the portfolio through much of that process. Again, whatever buy and sell processes, it was done by professional managers. And it was, I believe, in 2009, was when we, basically, stopped doing the professional management. We did not... We went...
Pat: You went to cash? Did you go to cash?
Anne: No, we went very slowly into cash. You know, it wasn't like we sold off a bunch, and then went into cash.
Pat: Ultimately, you went to cash, though.
Anne: We went to... Again, it was about how much we would need to be able to last four to five years in cash. And then the rest we kept... And so, where we're at currently, I can give you the numbers.
Pat: Yeah. Fire away, please.
Scott: And by the way, if you tell me today you're 100% stock and you're relying on your portfolio, we would say, you need to sell some of your stocks today to have enough cushion.
Anne: No, we're not.
Pat: So, tell us the account balances and how much income you're taking from them.
Anne: Okay. So, in my IRA, I have $1.2, and then I have a Roth of. My husband is pretty much the same, $1.2 in the IRA, and $380,000 in the Roth. The breakdown is about 63% to 64% in stock, 23% in bonds, and about 13% in cash. We pull out about $110 per year, and that's before taxes. We are...
Scott: So, it's a little less than 4% of your portfolio.
Patrick: Yeah.
Anne: Correct, yeah. We collect Social Security of about $5.4K per month. I have a very, very small pension, and my husband has an inherited IRA. And that combined is about $1,000 per month.
Patrick: We have the ability...
Pat: How much time is left on the inherited?
Anne: The interesting thing is, the thing that's different for me is, in 2008, I had the ability to go back to work including my wife, so did Anne. And now, we're looking in our 70s, that's going to be a lot harder.
Pat: All right. Well, let's...
Patrick: And we went back to work, by the way, in 2008. So, you know, she got it. We both got jobs and work for five years.
Pat: Well, early 50s is pretty young to retire. So, let's think about this, right? Because it's not an all or nothing, Patrick. It's not an all or nothing. It doesn't mean, hey, either we're in or we're out. So, right now you're at about 65%, 50% equities, and the rest is bonds and cash.
Scott: You've got about a decade to go with your withdrawals, that's even if you increase your withdrawals for inflation before you have to start selling these stocks, 10 years.
Pat: You've got a long, long time. So, this is... Look, part of being a financial advisor, Scott and I have done this for a long, long time, is managing emotion. That is probably the most difficult part of the portfolio, is not actually the portfolio itself, it's the client attached to the portfolio. Did that come out wrong?
Scott: No.
Anne: No.
Patrick: No. That's understandable.
Pat: Behavioral finance. So, if you were my client, Patrick, if you were my client, I'd acquiesce a little bit. I'd give up 10% of the portfolio in equities just to keep you grounded in the rest, to make you feel good. Because the problem is, you want to feel like you're doing something. Like, no one wants to sit in a burning building and think, "Why am I sitting in this burning building?"
Scott: That's what it feels like.
Anne: I draw the analogy as to, you know, I think we ordered a lift to come to our house and pick us up. And what showed up is an Uber and the driver's drunk. And we can't get out of the car.
Scott: Okay, well, we have Anne and Patrick with us now to tell us what has transpired. Welcome, Anne and Patrick.
Pat: Hopefully, we didn't create too much disharmony in the relationship.
Anne: No, not at all.
Patrick: No, we're still together.
Scott: You know, if you step back sometimes and just kind of think of this, it's all kind of just a big game. I mean, like, you've been married a long time. You understand how interesting each individual is and our strengths, our weaknesses, our concerns, and...
Pat: How we react to things.
Scott: ...our irrationality. I mean, that's just in...
Pat: In a relationship. It's part of what...
Scott: You've been trying to say...
Pat: You've been my business partner for over 30 years. I'm 100% rational all the time. So, where did you guys end up? Just kind of fill us in on what you did.
Anne: Okay. So, what we did is we basically took your advice, Pat. We gave up 10% and moved that into cash. And so, now, we're sitting at about 53% in stock, 23% in bonds, and about 24% in cash.
Pat: And the portfolio value is much higher than when you called.
Scott: As the market, it's high as well.
Pat: Had you not done that, your portfolio value would be higher today.
Anne: It would.
Pat: How do you feel about that?
Anne: You know, I feel personally, that the tradeoff was worth it.
Pat: Good. Thank you.
Anne: Because, you know, since that down portion in the in the market, our portfolio has still gained over $300,000.
Pat: That's right. That's right.
Anne: And now, it could have been more.
Pat: Okay. It could have been less.
Anne: Yes, and it could have been less. Absolutely. It could have been less. But the anxiety that I personally would have experienced would have been far greater.
Pat: Let me... I'm going to share a quick story because this reminds me. And I use the word acquiesce, right? Which is, look, as an advisor, if the portfolio structure correctly, which we believe that our portfolios are structured correctly for the client, given the resources that we have and what comes into us, sometimes they're high, the concentrated stock positions that are a little bit harder to build around, but we still do. The idea is to keep the client invested for the long term.
Scott: Through the cycle.
Pat: So, I'm going to share a quick story. When I started years and years ago, I had this portfolio, and inside of it was this little mutual fund, the GT Global Emerging Markets Fund, this is...
Scott: Submerging market, which we later renamed.
Pat: Yeah, which we later renamed. And this guy...
Scott: This is, like, 30 years ago.
Pat: This is over 30 years ago. And it made up about 1% of his portfolio. And he came into my office and I was a relatively new advisor. And, you know, you get better at handling clients as you go along. And he came into my office and he said, "I've been looking at this portfolio, and this particular holding is terrible. Why is it in here?" And I said to him, "I'm going to get rid of it." And he said to me, "Wait, you have no confidence in this." I said, "No, no, I have confidence in my investment selection. I don't want this thing that actually, if it goes up by three times...
Scott: It's such a small piece of the portfolio, it makes no difference.
Pat: ...it makes no difference. I don't want to spend time or energy discussing with you why it's there, because it really doesn't make that much difference."
Scott: You mean to say, you had a client that came in and looked at the worst performer and wanted to spend time on that and not time on the best performer. That is strange. I've never had that experience.
Pat: Amazingly enough, amazingly enough. And the point being was, I got rid of it because it was distraction to everything else. It was a distraction of what we were trying to do.
Scott: And that's what he was looking at on a daily basis.
Pat: And that's what he was focused on. And as I said to him, "It could go up by three times. It could go up by five times. It's not going to change your lifestyle. You going to all the cash would have changed your lifestyle," right? So, the thing going forward is, don't let this portfolio run. And when we say run, right now, your portfolio is no longer 50/50. Because you stayed in those equities and we brought it to 50/50. My guess right now is probably 57% equity.
Scott: She thought 53. But I don't... Did you calculate the numbers recently?
Anne: Fifty-three.
Scott: What is it now?
Anne: Yesterday.
Scott: Okay, so it's 53. So, to Pat's point, if your objective is like, we're going to have 50% of our retirement savings in equities, then when it starts going up, that means you have to sell a little. And conversely, when things go down, you need to buy a little. So, that automatic rebalancing alone will give you quite a bit of extra return with reduced risk.
Pat: So, on our portfolio, most of our portfolios, we screen on a weekly basis to see if they're out of alignment with the models that we want them to be in. Because what we're interested in is a risk adjusted rate of return. And if you don't have that discipline and do that...
Scott: Ten years from now, you're going to be back to 65%.
Pat: Yes. Which means that the downturn is that much harder.
Patrick: Where should we be?
Anne: So, you know, years ago, back when we were first kind of getting interested in, you know, how to structure portfolios and how the balance should be, it used to be that the advice was when you're younger, in your 40s and 50s, you should be 60% stock, 40% bonds or equivalent. And then when you retire, you should actually do opposite, that you should be 40% bonds.
Scott: That's what I don't know.
Pat: There's also, they take 100 minus your age.
Scott: Which is kind of the same thing. That's what we were taught. That's all garbage. It's all garbage. It's based upon two things, your needs. Like, how much need do you have from this portfolio? If you don't have to touch any of it, then you can invest however you want. You can bear it in the backyard if you wanted to, if you didn't need this for your income. On the other hand, if you are highly dependent upon this portfolio, and you need to generate a certain amount of return to manage your lifestyle, now you're kind of forced to take on some volatility in that. And then the key is, how do we balance the two so you don't go insane, but you still have enough extra return in there to generate what your needs are.
Pat: And then you look at it another way, which I have a 80%... I think he's probably 81. I have, I think, it's 85% of his portfolios in equities because he's got a big pension coming in. And so, it doesn't really... And when we look at the overall, the net present value and it's repayment...
Scott: And his view is it's going to go to his kids or grandkids or whoever is going to get that.
Pat: That's right. So, we're managing for something completely different. For you, 50/50. And quite frankly, you would be well served to hire a good financial advisor. And the problem is, is you had a bad experience with a financial advisor before, and you don't think that they add value.
Scott: They're going to add value in the rebalancing the way that equities are structured, and frankly, in the fixed income and the cash management side of things.
Pat: Because you fired your advisor in '09.
Anne: It's true.
Pat: So, you had a bad experience.
Anne: Yes.
Pat: So, you would be well served.
Scott: At a minimum, have a...
Anne: Yeah, I wouldn't necessarily blame the financial advisor, per se. You know, it was, again, we were brand new in the retirement.
Scott: Well, it's okay to blame them sometime.
Anne: And, you know, we've been told, you know, by so many people when we were taking a look at, can we retire, can we not? It's like, "Oh, you're perfectly safe. No problem." And then with that financial crisis, I mean, everything went south.
Pat: That was nasty.
Scott: That was terrible.
Anne: I mean, that was a pretty horrific experience. And, you know, I mean, we were pretty lucky. A lot of people got hurt, so much worse that we did, right?
Pat: That's right. Over the long term, the cost of a financial advisor to you will be de minimis relative to the value they add...
Scott: They have to research it.
Pat: ...especially as you age, especially as you age. I have a meeting this afternoon with children of 85 and 86-year-old clients that they've been clients for 30 years. And we're discussing things that are really difficult to discuss. Yep. But that need to be discussed.
Scott: That's what it is.
Pat: So, we appreciate the call. I'm glad you actually won this argument, Anne.
Scott: I think this sounds really great. I mean, I'm really happy with this outcome.
Pat: Just make sure that...don't let that portfolio run on you.
Scott: And always remember, your goal is not to die with the highest net worth possible. That's not your goal. That would be nice, but that's not your objective. Your objective is to maintain your lifestyle and have some peace as the markets do what the markets do.
Anne: That's exactly what we're trying to achieve.
Scott: That's right. Well, good. That's right about that. Thank you.
Pat: And if you were really good at prognosticate, you would actually figure out how the last check you wrote bounced.
Anne: That's what we tell our kids.
Pat: That's not going to happen.
Scott: No, it's not.
Pat: It'll never happen. It'll never happen.
Anne: It won't. I know.
Scott: All right, I appreciate the call. It's been so good having everyone with us today. I enjoyed the program. If you like our show, make sure you give us a good review, rating, or whatever it is. Let your friends know about it. And follow us. So, it means you get the thing delivered automatically each week. Anyway, this has been Scott Hanson and Pat McClain, Allworth Financial. We'll see you next week.
Automated Voice: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state-planning attorney to conduct your own due diligence.