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December 16, 2023 - Money Matters Podcast

2024 financial resolutions, worries about a Roth conversion, and when cashing out an annuity makes sense.

On this week’s Money Matters, Scott and Pat start the show by talking about index funds. Allworth advisor Mark Shone joins to discuss specific money resolutions to make for the new year. A 71-year-old retiree asks whether his recent Roth conversion was a bad decision. A caller married for ten years wants to know whether he should finally combine finances with his wife. Finally, you’ll hear why Scott and Pat think a California caller should cash out her annuity.

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

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Announcer: Would you like an opinion on a financial matter you're dealing with, whether it's about retirement, investments, taxes, or 401(k)? Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

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

Pat: Pat MacClain.

Scott: Glad you are taking part of our program today. Myself, my co-host, both financial advisors, certified financial planner, charter financial consultant. We work with people throughout the week as financial advisors, lead financial advisory teams, and then broadcast this program on the weekends.

Pat: That is correct. That is what we do.

Scott: Both terrestrial radio as well as our podcast listeners.

Pat: Many more on the podcast than terrestrial, so that's the way of the world, it's where it's going. In fact, my children were making fun... I subscribe to SiriusXM and my kids were in the car recently, my adult children, and they're like,

Scott: What is Sirius? Oh, the old...

Pat: Satellite.

Scott: Yeah.

Pat: And they're like...

Scott: How many people subscribe to that anymore?

Pat: Well that was their question, which was...

Scott: That was really, you know, it's an interesting point because how technologies can disrupt industries. Because that was a hot stock back in the day.

Pat: It was.

Scott: There was Sirius... There was two competing ones.

Pat: Yeah, and they merged.

Scott: That's 20 years ago or whatever.

Pat: Yeah, they merged and hoping to be able to control prices.

Scott: I don't like them because their sound quality is not the same. At least it appears to me, maybe it isn't the same. Maybe it's my deaf ears, but the sound quality does not sound quite as rich as listening to Spotify.

Pat: My children wanted to know if I actually knew the people that ran the satellite company because I was probably their last client. But then I was in...

Scott: I think there's like, didn't Howard Stern... It was not the only place he... That I've ever been a Howard Stern fan.

Pat: How could you not Miss Howard Stern? That is not why I signed up.

Scott: I don't think I've ever listened to Howard Stern.

Pat: That is not why I signed up. He's actually, somewhat crude, but I'll tell you, he gets great...

Scott: You listen to Howard Stern? I and you read "Playboy" for the articles.

Pat: I don't even, I'm just... Okay.

Scott: He's crude if you set that aside.

Pat: But he has some great... He interviews some really outstanding rockstars and not politicians.

Scott: Do you actually listen to him? This is way off base what we're talking about now.

Pat: Yes, I have. Not on a regular basis, it's not like I tune into the guy.

Scott: That's not why you subscribed to Sirius.

Pat: No, no.

Scott: To listen to...

Pat: All right, let's just move on.

Scott: And your kids are probably like, "That old guy?" Because he's gotta be

Pat: Older than me.

Scott: Mid-70s or something by now, I would think, if not older.

Pat: But listen the Rolling Stones are still touring in their 80s, there's hope for all of us.

Scott: That is amazing when you look at the Rolling Stones still touring like they're touring. I mean, to figure that those four guys are all still healthy enough at that. First of all...

Pat: There're only two of them that are touring, Scott. Not...

Scott: I didn't know that.

Pat: Only two, not all four of them.

Scott: Don't Interrupt my story.

Pat: But I saw Elton John last year and I'll tell you, so they show close-ups on the large screens of his hands.

Scott: This is a financial program, we'll get to it.

Pat: Of his hands and you'd think...when he's playing the piano and you're thinking, "This guy's unbelievable. How can he do that?" And then when he gets up to walk across stage, you realize, "Oh, he is that old." But his music was unbelievable. But you didn't realize he was, "What's he in his late 70's, early 80's?

Scott: I don't know, I have no idea.

Pat: All right, let's move on. It's a financial show, but again, we got sidetracked and that's an all-time record. We didn't get into the show more than two minutes before we got sidetracked.

Scott: But as you mentioned, SiriusXM...

Pat: It is a good example of how industries can be...

Scott: And that was supposed to revolutionize radio. And we've been broadcasting long enough, so we remember back at Clear Channel.

Pat: People kept asking us, "Why aren't you on Sirius?"

Scott: iHeartRadio was called Clear Channel. What was it called before? There was a conglomerate... There was all kinds of consolidation within the radio industry in the 90's. And then when SiriusXM... Everyone was worried that, that was going to displace terrestrial radio.

Pat: But Apple displaced...

Scott: Yeah, but Apple did, yeah. But Apple did...

Pat: Someone completely outside the industry.

Scott: Yeah. So, anyway...

Pat: Things change. And look at...

Scott: Things change.

Pat: The perfect example. Go back the beginning of the Dow Jones Industrial average. It had 11 stocks in it. So now it's called the...

Scott: Nine of them were railroad, I believe.

Pat: Nine were railroad. How many of those... And that means that they owned...essentially the capitalization of the marketplace in the U.S. was railroad.

Scott: Well, one of the reasons why index investing has become so popular, right? So the S&P 500 index, they essentially own the 500 largest companies. And as new...

Pat: Which represents somewhere between 75% and 85% of the market cap in the United States.

Scott: And so as companies emerge, they get added to the S&P 500, and as larger companies... Maybe they get merged into somebody else, or they blow apart...

Pat: They get dropped.

Scott: They become irrelevant, they get dropped from that index fund. So it's not exactly buying and holding, like, because there is some changes there with companies that are still relevant.

Pat: Yeah, there's movement inside of the index.

Scott: But oftentimes, Pat, I know we all see it, particularly when someone inherits a stock and they think, "Well, my dad said never sell this stock. Never sell Woolworth Company. That company, everybody needs the five and dime store."

Pat: Okay. That's a 100% true what you just said. And when I always say to my clients that tell me that is, "You know, the stock doesn't know you own it. It has no emotional attachment to you. You should not have an emotional attachment to an asset." You can have an emotional attachment to your home, but it still is an asset. Everything else, there should be no emotional attachment to it.

Scott: And last week we had Suzanne Conrad, director of tax solutions at Allworth, talking about some year-end things. We're still in the middle of December. Look, if you've got... Maybe you have some inherited assets, there's some gain in it. You might wanna realize some of those gains this year. Maybe this is a time for you to be serious about it.

Pat: And most certainly dig through the portfolio and see if you've got losses.

Scott: So anyway, we've got a great program. We've got some callers lined up, and we've got a special guest as well. But let's do a couple of...

Pat: And who is this special guest?

Scott: We will... Let's take the guest first then.

Pat: We're teasing it.

Scott: We're gonna let the callers...we'll do the callers in a minute. So we got Mark Shone, he's one of our financial advisors here at at Allworth. We started with Mark 30-some years ago, kind of took a couple paths. And then Mark, you became part of Allworth when?

Mark: In May of '21.

Pat: May of '21.

Mark: Yes. About two and a half years.

Pat: Right in the middle of kind of, lockdown-ish era still.

Mark: Yeah. We'd just got through it there in '20, but yeah, May. Started talking late '20, in the middle of lockdown and May of '21.

Scott: And you spend most of your time with existing clients and like, what's your typical client like that you work with?

Mark: Yeah, so I have about...

Scott: In the last week, give us an example of two or three clients you talked with and what kind of stuff you did with them.

Mark: Yeah. So, had a meeting a couple days ago, someone who's selling some real estate, and we're looking at doing a DST, taking part of it as taxable, doing a DST. So it's a real estate transaction and going through tax issues there. Just got off the call...

Scott: A DST for those that don't know what a DST is.

Mark: Yeah. It's a way to do a 1031 exchange, Delaware Statutory Trust. They're pretty complex, there's a lot of them with a lot of fees. There's some of them without fees. So you've gotta do a lot of work there, we do that. Just got off a call before coming here, somebody who's looking to downsize in retirement, sell their home, what does that taxation look like? What should the portfolio look like coming out of that? What's the new purchase? Those kind of things.

Scott: For single people, they exclude 250, and married couple can exclude 500. But there's a lot of homes now, particularly in California, gains can be much greater than that.

Mark: Yeah. I just did a little tax calculation. That was the worst part of the call, just for the record.

Pat: Just to tell how much.

Mark: Yeah. But yeah, so it's those things, I mean, a lot of these things around this time of the year are really around planning. So, I know you kind of, did some year-end planning things and teeing things up for next year. So, all the work that you've done throughout the year, you're just coming in with a final check of saying, "Have we done everything we need to do?" Because financial world kind of has a stop and a start on December 31st. So, you better get your ducks in a row, and you should be doing the work throughout the year. But that's the kind of stuff.

Scott: Let's pivot to next year because, for most of us, if we look back to the beginning of the year, a lot of us had, "I'd like to do this year and these sort of things, and I've got these resolutions." And now it's the end of the year. But now we've got some of those things done. We didn't do some, now it's time for kicking things off in 2024. What are some of the key things that you've experienced in working with people that have led to success as far as doing some planning?

Mark: Yeah. So, I think the one... I'll start with the worst topic that everyone hates, which is budgeting. So, I think it's important.

Scott: I hate budgeting.

Mark: Yeah, no, I hate it too. I actually tell clients it's kind of, we go through this and, you know, we're not like dialing in like how much you spend at Starbucks. I'm like, "Don't worry, I won't walk across the street at the Starbucks, see you buying a Starbucks. 'Hey, I didn't see that in the budget.'" So, you don't wanna do that. But I think you wanna get two different types of clients. So there's the pre-retirees from a budget standpoint. And really it's kind of big picture budget and looking at what you're gonna earmark to do the important things in pre-retirement, one is savings, how we're gonna earmark savings to do that?

Scott: Like what percentage or dollar amount?

Mark: Yeah, yeah. And how does that fit into your plan, just to make sure that you're getting a spot check on that, or buying down debt, or gifting, or... There's a lot of things that you're looking at. So, that's where budgeting kind of fits in to make sure that you get a check there. The bigger one around budgeting in my opinion, is to really get a good understanding of the budget for tax reasons. Because if you're in retirement and you're recreating the paycheck, as I call it, you wanna understand how do I go about recreating the paycheck? So, I may have social security, I may have a pension, I may not, I've got IRA, I've got Roth, I've got a taxable account. I need $8,000 a month. How do I get it? How do I do that? So, it's doing some of that tax planning, understanding what the total spend is gonna look like.

Pat: In retirement?

Mark: In retirement. So, you can cap the tax rates that you're dealing with.

Scott: Which is why, you know, the Roth... When you and I first started in the industry, you had no such thing as a Roth, right?

Pat: $2,000 IRA contributions.

Scott: And we would use tax-efficient investing on an after-tax basis. And then the Roth comes in, and it just makes it... And so it falls into the seventh part of our seven personal decision points planning, which is the distributions, where are they gonna come from in retirement. So, some people are like, "Well, I'm in such a high tax bracket, does the Roth make sense or not make sense?" Well, it may or may not, right? If it allows you to have that net spendable income in retirement and keep yourself in a low marginal tax rate, right? That's the goal, right?

Mark: Right. And then to come back to the pre-retirement is you wanna start with the end in mind, right? So, you can't get to retirement and say, "Okay, how do I recreate the paycheck?" And you're like, "Well, all your money is in an IRA, so you're gonna take $1 and I'm gonna send 30 cents of it to the federal government and you're gonna get the rest, you know. Have a nice day, right?" So we don't wanna...

Scott: We've certainly all had a lot of clients like that though. That's not uncommon, right?

Pat: It's more common than not.

Mark: It's more common than not. So, that's why when you're in pre-retirement, you know, should I get started? Should I do retirement plan modeling? Why am I doing it now when it's 10 years away? Because the things you're doing today set you up to do the right things late later on. So, it's illustrating conceptually those types of things. So, that budgeting and you look at it around portfolio, what kind of dividends are gonna be kicked off there? What kind of capital gains are we looking at? Do we have any capital loss carryforwards? We really wanna get down to what's the tax return gonna look like at the end of 2024.

Pat: Conceptually.

Mark: Conceptually. And then you get down to the end, it allows you to do some things around, you know, everyone's like Roth conversion. You can only do it once now, right? Can't take it back. Used to be able to recharacterize. So, do you save that to the end of the year? Depends on how much room you have. If you get a big market downturn, do you do it then because you're using depreciated assets? So, I think it's that conversation around...budgeting feeds that, it's not to, you know, get down to the nickels and dimes.

Scott: I just know my wife and I have never been... I mean, from early on in life, it's like, well, these are the things that we make sure we have got money for savings and etc., etc. And then it's, we'll just enjoy the rest as long as we're... Particularly, works when you're a young person, right? These are...

Pat: These are things that I have to do first.

Scott: I gotta pay my mortgage, I gotta pay my insurance.

Pat: And then everything else.

Mark: The other thing, I mean, I think another thing that, you know, when you're talking about resolutions and things to do, this is more of a thing that I think would be really helpful for people. And it's to dive into behavioral finance a little bit for folks. So, if you think about what the next three weeks are gonna look like, what happens at the end of December every year, you're home for the holidays. And a lot of people, if they're interested, they flip on CNBC, and then you're gonna have a whole predictions show.

Scott: In the family or on the show?

Mark: You're gonna have... On the show. You're gonna have...

Scott: And in the family.

Mark: And in the family, you're gonna have six...

Pat: Well, that's, obvious.

Scott: Because my family, we make it a tradition every Christmas morning to watch CNBC.

Mark: This would be like, then let us just go between Christmas and New Year, I would do that. But, you know, they'll have six economists on, and here's the contest, where's the S&P gonna end? What's the yield gonna end? What's gonna do this? And I always kinda laugh because does anybody ever go back and checks these things?

Scott: No, of course not.

Mark: Right? So I say, you know, they have last year's winner on, I'm like, "Get a good look at them or her, because you probably won't you won't see them again." That's right.

Scott: It's pure luck.

Mark: It's pure luck. And what happens is people it is... There's something called confirmation bias. So, if you feel very strongly markets are gonna do well on this, you're gonna listen to those people. If you're always kind of like, "Ah, I'm worried about the markets..." you're gonna listen to those people. So, behavioral finance has a big part in what you're going to...on what you're gonna do. So, I think people should spend some time reading about behavioral finance early in the year. If you're gonna put on your reading list, put Daniel Riley from Duke, Richard Thaler, Daniel Kahneman, to understand the emotions of investing, because I think it'll really, really help you. And a story that's not a story, a truth that I share with clients all the time, particularly as we're kind of onboarding a new client and we've set up a portfolio. I tell them, I say, "If you watch the market every day, you check your value every day, and watch the market every day," I go, "Here are the numbers roughly," I haven't looked in a couple years, but they haven't changed that much. "Markets are up 52% of the time."

Scott: On a daily basis?

Mark: On a daily basis, "52% of the days they're up, and 48% of the days are down. Behaviorally, it's proven losses hurt twice as bad as winning feels good."

Scott: That's right.

Mark: So 48 times two?

Scott: Ninety-six.

Mark: It's 96 bad minus 52, you're perpetually feeling awful while making a lot of money over time. And it's just kind of no way to live.

Pat: That's a great way to explain it. I have never heard it like that. What a great way to explain it, Mark.

Scott: That's the reality though.

Pat: That is.

Mark: It is. And if you look weekly, it's a little better. Quarterly. You look annually, it's 75%, 25%. So, you get there eventually.

Scott: There's an advisor in our industry that's become a bit of a spokesperson named Nick Murray. And he's big on behavioral finance and I've heard him speak a couple times. He always starts off with that, "I love equities." [inaudible 00:17:19.350], "I love equities." And the older I get, the more I actually have that feeling. Because they're not easy to own over any periods of time, right? Just when things are going crazy, you're like "Oh-oh, it's too high." But if you look over a longer period of time, I started in the industry in 1990, the Dow Jones Industrial average was roughly $2,600.

Right? Look where it's at today. 30-something years later. I'm pretty confident the next 30 years, I don't know if it'll be the same kind of growth, I'm pretty confident it's gonna grow and it requires very little work. Well, I don't have to worry about...

Pat: Scott, I believe that that is the truth for any asset. It's just because the stock market and bond market are traded on a daily basis, you know what the value is.

Mark: Oh, Pat, I always say, like, when I say real estate, why people can be more successful in real estate, someone doesn't knock on your door every day and tell you the price of your house.

Pat: That's right.

Mark: But now you can get it on Zillow.

Pat: Yeah, I know. But even...

Scott: It's a little different.

Pat: But even still, right? You don't pay any attention to the Zillow because you know that, "Eh, you know, if I sold my house, my house is probably worth that much more than that." But any asset... So the more information doesn't necessarily make you a better investor. How you consume that information makes you a good investor. How you react to that? And that's where personal finance or personal... Understanding, your own view of the world.

Scott: Well, the behavioral finance has an impact too on your spending and your savings, right?

Mark: Yeah. You feel more empowered, "Markets-going up I can spend more. Markets-going down, you know, I better watch it."

Scott: How many conversations do you have with people over the years? Right? Like, it's been a good year, they wanna take some extra money outta their..."Hey, had such a great year, we're gonna take this trip or buy this car or whatever." And then they're like, "Well, wait a minute, there's gonna be a down year we need..."

Mark: Well, not only that, I mean, there's just some interesting things the way returns come to you. So, if you earn 7% a year in a portfolio, history says only 1 out of every 10 years are you within 10% of that annual return. So, if you earn 6.3% to 7.7%, 1 of every 10 calendar years, are you gonna be in that range? The rest of them, you're gonna be up 12%, down 1%, up 4%, up 22%, down 6%, and then you put it all on the watch, 7% a year., right?

Scott: That's good.

Mark: Yeah. Right? So...

Pat: Only if you stay.

Mark: Only if you stay

Pat: Only if you stay.

Mark: And behaviorally, it's really difficult. And let's just look at last year versus this year. I think this is one of the most interesting times the way people look at portfolios.

Scott: You mean, 2023 versus 2022?

Mark: Yes. So, if you look the market bottomed in... So far, who knows where it'll go? But it's bottomed in October 15th, 2023.

Pat: And look at it.

Mark: From that time, it's up 25% and nobody knows it. And you know why they don't know it? Because the market was down 25% and then it rallied 7% in the fourth quarter. And they're like, "Hey, I lost a bunch of money in 2022. And 2023's been great, but I'm still not back to even." And they're up...

Scott: They fall in love with the high watermark.

Mark: Yeah. And it's 25% from the bottom, bonds finally up a little bit. But I just think there's a lot of kind of explanation risk. So, understanding the behavioral side of that kind of reading through that, and how you frame things, you know, I think that's called anchoring. When you talk about you anchor. Yeah. So, there's all these different concepts that I think are helpful for people to learn as investors.

Pat: To understand themselves.

Mark: Correct.

Pat: Right? Not to understand the markets.

Mark: Yeah. Validate their feelings and kind of understand...

Pat: Like, this is normal.

Scott: Yeah. I mean, I think it's the same thing, if you've got, let's say a weight issue and you're trynna... You might learn something about what's going on physiologically, and emotionally, and those triggers how to be prepared for those, when get certain cravings. And what are some other things you can do so you don't do something foolish?

Mark: Did high watermark trigger that weight thing?

Scott: We're all guilty of that.

Mark: Oh, yeah.

Scott: Right? We're all guilty, I mean, I know, I like... And then when things go back downwards, like well, no one likes things going down in value.

Pat: It's hard. It's hard to be an investor. So, what's...

Mark: It's the price of it.

Pat: It is.

Mark: It's the price of earning returns.

Pat: Of excess returns. It's a price above a risk-free asset.

Mark: If it were 7% every year, every year it would be 2%.

Pat: That's right.

Mark: There's no risk.

Pat: Which would be a risk-free asset?

Mark: That's correct.

Scott: Right? So, what's your prediction for 2024?

Mark: Yeah. Okay. I'm going Warren Buffet on that one. It's great, he's the only guy that gets away with it. He's on CNBC once, you know, every couple years.

Scott: Do you watch CNBC?

Mark: I watch it because I wanna know what my clients are watching. I have it on mute most of the time.

Scott: So it's on...

Mark: It's, I want to...

Scott: Like, on your office, you've got...

Mark: It's in my office, I have it. Then if I see somebody who's interesting who's well-followed, and I'm not on a call, I'll unmute.

Scott: I think more advisors...

Mark: I wanna know what they're saying.

Scott: I think more people in the industry watch CNBC than our clients.

Mark: My favorite time to watch is when you get market downturns because they have the same three guests all the time. And it's the guests that have called 100 outta the last two recessions.

Pat: Yeah, they're all bears.

Mark: Herma bears. And yeah, so.

Pat: I think, you know, the recession, recession, recession, recession. I always think everyone's acting like this is gonna be the first recession we've ever been through. It's like, what? Okay, it's a recession. What does that mean? I mean, is it a big recession? Is it a bad recession? Is it a recession that no one notices. What happens if we do go into recession? What are we gonna do about it?

Mark: Do you know what's crazy about the recession that I just... I looked at this, and so recession definitionally is two consecutive quarters of negative GDP. We had one. We actually had one.

Scott: Oh, no, they changed the definition.

Mark: That's what I'm saying. But it was like, "Yeah..."

Scott: That was the old definition.

Mark: "... you strip out energy prices and you know, the price of milk and you do this, and it wasn't a recession." But if you look, this market has been almost a right-along pattern. So, markets tend to bottom right in the middle of a recession, October 15th. Like it's almost textbook, ironically.

Pat: But the press leans into this recession.

Mark: So, I dunno where the market's going. I'm going Warren about it.

Scott: It's funny. People ask me...

Pat: You're going Warren Buffet on it?

Scott: People ask me and I'll say, "I might have my opinions, but I'm not gonna direct any investment decisions based on what my opinion of what might happen."

Pat: Well, I'm pretty sure it's gonna do one of three things, expand, stay the same, or...

Scott: That's exactly, but we shouldn't worry about that, right? We should not worry about that. What we should worry about is long-term growth of the economy, right? Long-term and a well-diversified portfolio.

Mark: Yeah. And then how it goes into, you know, the next kind of resolution, I'm gonna look, and you should be doing this as you go. But it's to spot-check the allocation and not based on necessarily what you think is gonna happen with the markets because we know you don't know what that's gonna be, but you do it based on cash flows. What are the cash flow needs? So, the way that I look at it is, I say any money you're gonna spend in the next year to maybe even two years has to be in cash, cash equivalent, short-term investments.

Scott: 100%.That's right.

Mark: Right? Anything, three years to six years, five or six years that can be fixed income or bonds. And guess what?

Scott: Still not stocks.

Mark: It's still not stocks. Anything five years or longer, that's to outpace inflation. So, that's what you're spot-checking. You don't worry about the stock part, you know, you're gonna get volatility and excess returns. Fixed income should be a little more stable unless you have the worst bond market in 40 years, like last year, and then the cash is the cash. So, I think that's the spot check on the allocation. There are tilts and things that you should do around the economy and we do that.

Pat: But the idea being is that you shouldn't let your portfolio drift.

Mark: Correct.

Pat: Right? Which is...

Scott: That's what most people do though.

Pat: Well, most people do. They let their portfolio drift.

Scott: And then they don't wanna sell their winner.

Pat: Well, yeah.

Mark: Well, set it and forget it, right? You'll get old Ron Popeil. You're just like, set and forget your portfolio, and then it drifts. And then the other one that comes into behavioral finance, it's recency bias. This ETF's doing great, I want more of that and I want less the one that did poorly. And you're like, actually, it's the opposite.

Scott: It's just like...

Pat: I always anchor myself. I have a client that retired from GE, 15 years ago. At least 15 years ago. And he's like, "Why would I sell GE?"

Scott: Must have been longer than 15 years ago because they were already on the death spiral at that point.

Pat: Yeah. I started working with him 25 years ago but then I was slowly getting rid of the GE until finally, every argument was, "Why should I sell GE, Pat?" Until one day it flipped, which is, "Why do I own GE?" Right? And at that point in time, 25 years ago, you would look at General Electric and think "This is a well-diversified portfolio. It's got healthcare in it, it's got finance in it, it's got real estate in it, it's got heavy industrials and consumer, and look at it."

Scott: Well, as we're moving into next year, taking a good look at your overall allocation, it's a perfect time to do it.

Pat: And especially if you're owning a ton of tech stocks outside of an index. Because the indexes are overweighted tech right now. Well, they're not overweighted, they're accurately weighted.

Mark: They're accurate. Yeah.

Pat: But if you own a bunch of it on the outside, it gets even more dangerous.

Mark: And if you've done your work in previous years, you've probably done a lot of tax-loss harvesting.

Pat: You hope.

Mark: That you've done that, so you have some room to rebalance without taxation. I mean, you don't wanna let the tax tail wag the dog, but you have some room to do that.

Pat: To capture gain.

Mark: That's the other thing I say, like, just with this volatility I will also tell clients, and it's true, I said, the best case scenario is for you have a lot of volatility on a trend up.

Scott: Well, yeah.

Mark: No, but that's, I mean, but you want volatility. So like, don't be afraid of it, this is actually a good thing for your portfolio.

Scott: All right, well, Mark, thanks for taking your time.

Pat: As always thanks for joining the team. Two and a half years ago, I've known you for over 30 years, and we worked together 30 years ago, and now we're back....

Mark: We're putting the band back together.

Scott: So, I appreciate it. Hey, let's take a couple calls here. We're in California talking with Paul. Paul, you're with Allworth's "Money Matters."

Paul: Hey, thank you, gentlemen, for taking my call. Really enjoy your podcast and your advice. So, I had a question for you, and it has to deal with converting dollars from my traditional IRA to a Roth. I believe on some of your past shows I've listened to, you recommend converting dollars now to lessen your potential tax increases in the future.

Pat: Sometimes.

Paul: Okay.Sometimes, all right. So, last year I converted $70,000, which kept me... I wanted to stay in the 24% tax bracket.

Pat: How old are you?

Paul: I'm 71, retired three years, and have RMDs when I'm 73. I've got income from deferred income and will have a pension when I hit 73. And I have taken social security.

Scott: You have not?

Paul: No, I have. At 70, I did. So, my question is, I did that, of course, I had to pay taxes on it, which increased it. And my CPA tax advisor was wondering why in the world I was voluntarily increasing my tax payments. His strategy and recommendation is never pay taxes until basically you have to or need it.

Pat: How big is your IRA?

Paul: About 1.4.

Pat: And you said you had some money coming in outta deferred compensation, I assume that was a non-qualified deferred compensation?

Paul: Correct. And it yields about $180,000 a year.

Pat: And when does that run till?

Paul: Well, it's good for this year and next year. And then it drops down to about $130,000 for a couple years, and then $65K for another four years. So it was a 10-year Deferred.

Pat: And you said you had a pension kicking in, what year does the pension kick in?

Paul: When I'm 73, I deferred it till then.

Pat: And how much would that pension be a month?

Paul: It's, I dunno, $1,200 a month. Not much.

Scott: So, you converted enough to keep you right at the top of that 24% tax bracket before it jumped 24% to 32%?

Paul: Yeah.

Scott: Okay. And then what's your question for us then?

Paul: Well, what's the right way to do this? I mean, not pay taxes until later, which I think you folks have recommended to do it now, because who knows what's gonna happen with taxes in the future?

Scott: No, I mean, for us it's really about what the... We look at some knowns that we have. And so oftentimes we'll recommend it if someone has, let's say $3 million or $4 million in their retirement accounts and the required minimum distributions are gonna be more than they're gonna be converting now anyway, and then like it's kind of a no-brainer.

Pat: I don't know if I would've actually converted in this manner because of that non-qualified deferred compensation.

Scott: That's declining over time.

Pat: The nonqualified deferred compensation that's declining over time. And so...

Scott: I'm kinda like, what's your income gonna be in three years, five years, eight years?

Pat: So, you could map, you could just do this on a spreadsheet, or you could do it by hand. Just map your income. Map year-by-year.

Paul: I've done that.

Pat: Year-by-year?

Paul: By year projection.

Pat: So, like say year 10, what's your income gonna be? Ballpark?

Paul: Ballpark, it's $222,000. That includes what I'm gonna need to take for the RMDs, the social security, and then, yeah, the deferred income.

Pat: And what was your income last year?

Paul: It was $260,000.

Pat: It's a push. You didn't hurt yourself. Yeah. I could argue both sides of it.

Paul: Don't like to pay taxes, so.

Pat: Well, you're gonna pay at some point in time. And I could argue both sides of it. You didn't hurt yourself.

Paul: Okay. Well, that's good.

Scott: This doesn't look like a mistake to me whatsoever, it's a very small portion of your retirement account.

Pat: I could make an argument, I could argue both sides of it.

Scott: Yeah, you're kind of in the middle on it. So, yeah, I mean, I don't see anything wrong with what you've done here whatsoever. I've seen people convert way too much, and I'll tell them that.

Pat: Yeah, you didn't.

Scott: I mean, unless you plan on moving to Florida tomorrow from California, then you paid Gavin Newsom some money you didn't have to pay.

Pat: I don't think he gets it all himself. He only gets part of it.

Scott: I don't know. Look at his hair.

Paul: I dunno, he seems to be doing okay, a lot better than the rest of us.

Pat: No, you know...

Scott: Most politicians, for some reason, seem to be doing okay.

Pat: How much money is in your IRAs versus your Roth IRAs, right now?

Paul: The IRA has about 1.4 and the Roth is only like $90,000.

Scott: I'd be fine with that. I wouldn't even mind if you could convert a little bit more.

Pat: I think it's good that you have a diversified tax strategy.

Scott: I mean, given the fact that your income is gonna be over $200,000 for the rest of your life, what's the chances of tax rates going down on retirees with incomes north of $200,000? What do you think those chances are, Paul?

Paul: Probably greater than 50-50.

Pat: What are the chances they're going to go down, not up?

Paul: Yeah. Well, that's what I'm saying. Probably ought to go down.

Pat: Yes.

Paul: Now probably no.

Scott: Zero. We would agree with you.

Paul: We gotta pay for all these giveaways.

Scott: I know.

Pat: So, if you believe that your tax rates are going to go up for higher income people, I would make the argument that the conversion is not only warranted, it's recommended, and that you should do some more.

Paul: Yeah. But I still wanna just stay in my tax bracket.

Scott: Yep. I get it.

Pat: So, anyway, you're fine.

Paul: All right. Well, I'll do that.

Scott: You're good.

Paul: Taxes are always a fun thing to do.

Scott: By the way, most tax preparers are of the mindset of... They don't do tax planning by and large, so they don't think about multi-year planning, they look at year-to-year. And I've seen enough people with required minimum distributions are pushing them into higher tax brackets. I'm thinking, "Had you converted..." I mean, I remember a client years ago came right in the latter part of March. They wanna make an IRA contribution, a deductible IRA contribution. And I'm like, "What?" Well, yeah, we just saw... And I've been trying to get them to convert to a Roth.

Pat: Which is exactly the opposite.

Scott: Yeah. And because they were in a very low tax bracket and he required minimum distributions, we're gonna kick it in two years. And I said, "Look, I know what your income's gonna be in two years just based on the required minimum distributions and social security." I said, "You're gonna be in a higher tax bracket in two years." I forget what the delta was on it, but like the accountant was wrong. Completely wrong.

Pat: Because they were worried about tomorrow.

Scott: All they were worried about is today's taxes and not... It was so obvious in two years from now. I said, "Look, those same exact dollars you're trying to get me now, I'm gonna have to get back to you, but we're gonna have to pay more taxes than the deduction you're getting today."

Pat: So it's the [crosstalk 00:36:00.064].

Scott: No, we did not open the IRA, I finally convinced him to convert some to an IRA because I made it my personal mission.

Pat: Roth IRA.

Scott: A Roth. I made it my personal mission that year to see that he was gonna do it. Because it was the right thing to do and...

Pat: You made it your personal mission.

Scott: Well, okay, maybe that's a stretch.

Pat: Because here's like, okay, I have a personal mission to deepen my relationship with God, to love my family more, to create...

Scott: It was on the list of missions.

Pat: To create better connections with those people around me.

Scott: Maybe it's down the list of personal missions for the year.

Pat: To show gratitude and to convert the Smiths' money to a Roth IRA.

Paul: Well, pretty good until you got to the Roth.

Pat: That's funny. Hey, thanks, Paul. Appreciate the call.

Scott: All right. That was good, Pat. That was funny.

Pat: It was funny you saying it.

Scott: Okay. Well, maybe I used the wrong phrase, personal mission, that might've been a little deeper than my desire to see them convert. And you know what it's like, I mean, you want to be able to do the right thing with their finances.

Pat: Personal mission.

Scott: Okay, we done?

Pat: An intermediate but not very satisfying goal.

Scott: Okay. Now talk with Charles. Charles, you're with Allworth's "Money Matters."

Charles: Hello, gentlemen. I wanted your opinion on whether you think it's beneficial for a married couple to combine finances, combined bank accounts.

Pat: How long have you been married?

Charles: Just celebrated 10 years back in November.

Scott: All right. Why are you keeping things separate?

Charles: You know, when we met we had already had our own careers, used to paying our own bills, our own separate bank accounts, we were a little bit older, and we just kind of fell into it haphazardly, where very arbitrarily, "Well, you pay these bills and I'll take care of that." In some ways, it's nice because we divide responsibilities of who keeps track of what. But we're kind of at a point now where I've been doing some reading and talking to other couples who've been married longer that it's actually...with the two of you kind of rowing in the same direction and planning now kind of for retirement, there's benefits to just combining and putting it in one bank account.

Scott: Do you file your taxes together?

Charles: Oh, yeah.

Pat: And do you have children from a previous marriage?

Charles: Neither one of us, no.

Pat: And do you have children now?

Charles: Correct. Two.

Pat: Oh, you do? Like you're responsible for one of them and then she's responsible for the other one, and the kids are like, "Why does my brother always dress so nice?"

Scott: Don't ask me, ask your mom. I mean, it's highly unusual, Charles, 10 years of marriage with kids first marriage to keep things separate. And I mean, I guess if it's working for both you and it's not causing any issues and it works, Like, I don't see a real problem with it, as long as you guys do your planning together and stuff.

Pat: And the planning says, how much money's going to the 401(k).

Scott: What do we need for a college education? What do we need for retirement? Do we have any other financial goals?

Pat: Do I have the right amount of term life insurance on myself, right? Are those conversations taking place between the two of you?

Charles: Yes. We're both maxing out our retirement plans putting into 529. I think we could be doing better though if we were, you know, kind of knew exactly, you know, how much cash was coming in. For example, my wife built up a $100,000 just cash savings. I said, "Well, I think we could be doing something better with it in cash." But it is kind of our plan to sit down with a financial advisor.

Scott: I mean, what normally happens, just like other household chores that one spouse ends up doing more than the other, right? It usually happens in finances that one spouse takes on the responsibility of managing the household finances, paying the bills, figuring out where to put the money.

Pat: I'm married an accountant, so.

Scott: We know who does the bills in your family.

Pat: That's right. But I manage the portfolio.

Scott: Well, you are in the industry.

Pat: Well, it made it a lot easier that way. Yeah, it's highly unusual to not see it managed through a single household. It's not unusual to see it before children, that I will give you.

Scott: Or second marriage.

Pat: Or second marriage, but you don't have any of that. And I would...

Scott: And it's not your money and her money because, you're living in California, community property state, 10 years, like you each own half of each other, you know, 50% of it. That $100,000 your wife stated, $50,000 of it is yours.

Pat: Yeah. And it would actually allow you... So, I assume that you're making either non-deductible or deductible IRA contributions and then converting them to Roth?

Charles: Not yet.

Pat: Okay. So this is where I would make the argument that you should be doing it together. Because planning would've told you that there's all this money in cash and it was accumulating up over time. And it would've provided an opportunity to allow some sort of a tax benefit.

Scott: I mean, it's not mine and yours, it's ours.

Pat: And so, I would, you know, if you sat down and said, "Okay, let's look at this quarterly basis. Oh, who's gonna take this responsibility and this responsibility?" It's gonna allow for better financial planning to take place, quite frankly, there's no question about that. Because you noticed that and it wasn't bothering her, correct, the $100 grand in cash?

Charles: Right.

Pat: Right? And so, you know, we all have different views of the world and you're gonna allow two people to look at it and you would've said, "Well, you know, when we got to $40,000, should we be thinking...?" And then like year-end tax planning, like, "Well, should we put more in the 529? Or should we make an after-tax contribution to a non-deductible IRA and then convert it to a Roth IRA?" I Would combine them together, it's gonna get better financial planning outcomes out of it, as long as it doesn't ruin the relationship.

Charles: Right. And she's more hesitant to combine...

Pat: Oh, she's more hesitant?

Charles: ...accounts than I am. Yeah, I'm...

Pat: I'm not a psychologist or a licensed therapist, but I have seen many. Yeah, that's your call. From a financial planning standpoint it will make it easier. But if...

Charles: That's why I was calling to get your opinion to, might maybe play this back saying, well.

Pat: I wouldn't, I gotta tell you.

Scott: You know, look we all do things in our marriages to make accommodations for one another in a variety of ways, right? And if your wife feels strongly about it, maybe what you do is say, "Hey, why don't we once a quarter or every six months, let's have a session where we look at all of our finances, and look at what our goals are, and what things that we need to do to accomplish those goals."

Pat: Our dollars being utilized the most efficient way possible. And that might be a compromise...

Scott: And maybe there's part of fear that you're gonna start controlling her spending.

Charles: At first I thought of that, but that's absolutely, you know, counter to my personality and history. There's you know...

Scott: Yeah. But there's probably something in her background, something that she feels like she's losing some control.

Charles: Yeah. Well.

Scott: And I'm not...

Charles: That's possible.

Scott: I'm not a licensed therapist.

Pat: I'm gonna tell a story. It's a pretty personal story. I've been married for 37 years now. I got married quite young, I thought so anyway. So my wife is an accountant, she has a degree in accounting. She's been in practice, not a CPA, but an accountant. So she...I mean, look, she does it great. Well, about 20 years ago, I would take money out of the ATM and sometimes I would forget to tell her, I just wouldn't give her the receipt. And so she took the ATM card outta my wallet and said, "You cannot have an ATM, you're not responsible enough. You're not responsible enough to tell me when the money out. And telling me isn't the same as giving me a receipt. You need to give me a receipt and you need to give it to me within 24 hours of it." So, as you can imagine, I mean there's control issues going on here, so, she took it away. And anytime I needed money, cash, I would ask her and she would actually have it next to my keys within three days, a couple hundred dollars sitting on the counter. And that went on like that for four or five years. And then one time I asked for money and she said to me, "Do you know how hard it is to get that money outta the machine?" And I said, "I appreciate your plight, but it can't be any harder getting it outta the machine than it is getting it into the machine." And I said, "I spent..."

Scott: Hours getting it in.

Pat: I said, "I spent a good amount of my day trying to get money into that machine. So, if taking it out has become too much of a burden," now you can hear some sarcasm in here, "Then maybe I'm just gonna take over that responsibility myself." So, I ended up having to go back to the bank and getting my own ATM card. But there was a control issue and it exists to this day, which is fine, it works great. Anyway, I don't know why I told that story, but I...

Scott: I think you can accomplish all of your financial objectives and still have your accounts separate if it's that meaningful to your wife.

Pat: That's right, I wouldn't mess with that, but all right, appreciate the call.

Charles: Okay, well thank you.

Pat: All right. And call us for any counseling anytime, Charles.

Scott: Yeah.

Charles: Okay, thank you.

Scott: Yeah, we'll give you parental counseling next.

Pat: Oh, yeah.

Scott: I'm so good at that one.

Pat: What did you tell me years ago? You told me years ago, like, "If I realized that the input didn't matter as much, I wouldn't have tried so hard."

Scott: Yeah. You look at young couples, their first kid, all this stuff, and then to their teenage years and they're crazy anyway, right?

Pat: It didn't matter. That's what you did.

Scott: Well, it may matter some. I must've been having a bad day.

Pat: It does matter.

Scott: Let's head and speak with Deanna. Deanna, you're with Allworth's "Money Matters."

Deanna: Hello, how are you this afternoon?

Pat: We're wonderful. Thank you.

Deanna: Good. Okay. I have a question regarding an annuity that's been there a little over...well, probably about nine and a half years now. And I had put $250,000 in there. And at the time I did it, I rolled over my 401(k), I had left my employer. And the financial advisor who convinced me that I should do this said it would be paying out about $60,000 a year in retirement if I waited till I was 70. It'd be less than that if I started drawing sooner. But now that we're nine years down the road and it's been sold out to another company, and now I'm being told no, it's nothing like that and there's nothing I can do about it. The returns on it are terrible, I mean, after putting in $250,000, it's only sitting at $310,000 now. And I just don't know, should I leave the money there?

Scott: In the last nine years?

Deanna: Yeah.

Scott: Is it in a fixed annuity, or a variable annuity, or equity index annuity, how's it...

Deanna: Oh, my God. You're gonna ask me questions that I don't even know.

Scott: So, does it fluctuate? Could the $310,000 go down?

Deanna: So it can go down, but it'll never go below what the amount is that I put into it in the beginning.

Pat: Okay. So, it's got a floor on it.

Scott: And are there any surrender charges still on this?

Deanna: No surrender charges have all passed.

Pat: Did you buy it from a bank?

Deanna: Yep.

Pat: How'd I know?

Scott: Because the broker got a commission?

Pat: We ran a show a number of weeks ago.

Scott: This is why we complain about annuities. It's not that there's never a place for them. It's just they're misused. The majority of the time.

Pat: So, what other assets are there?

Deanna: For myself?

Pat: Yes.

Deanna: So, when I retire, I'll have my pension from the state of California. I've also got probably another $110,000 in a Roth 457(b), I've got $70,000 in a Roth IRA, I've got another home that is paid in full that's probably worth about $550,000 now. And I have about $35,000 sitting in the bank.

Pat: And how long have you been an employee with the state of California?

Deanna: Ten years.

Pat: Okay.

Scott: I would get the money out. There's no sense having this annuity.

Pat: None at all.

Scott: It's an IRA so it's what called qualified. You can just set up another IRA and have it transferred there and then invest in low-cost investments, ETFs, and...

Pat: You could have actually... For the cost that you paid for that annuity, you could have gotten really good financial advice over the years.

Deanna: I know. No, I realized that, and I mean, I was really angry when I started delving into this thing and realizing that I had been sold, you know, a package that did not even exist. And it's sad because he was selling this to so many people, and telling them how great it was. And when I tried following up, they said he actually left the country.

Pat: Look, the bank isn't the bank...your grandmother's bank anymore. These are for-profit, look at all the fines that the banks get for churning and for overcharging. Actually, the worst part of it is actually the customers that they do it to are the ones that can least afford that to pay it oftentimes. You wanna move it into an IRA low-cost, I'd go somewhere in a moderate portfolio in terms of risk. And then what happens is you retire from the state, your 457 can drop in there. And you have IRAs...

Scott: And if you're gonna work with an advisor, get someone who's a fee-based advisor who's a fiduciary. I mean, they have a legal obligation to put your interest ahead of their own. And don't invest in anything that's gonna tie your money up. So, invest in something you can get in today and you can get out tomorrow if you so choose. And if you wanna fire that advisor next week, you can fire that advisor next week. And you haven't made a bunch of fees and commissions to put the investment portfolio.

Pat: That's right. You can fire the advisor and actually keep the portfolio. So, yes,

Scott: You have no benefit of staying in the annuity.

Pat: You know what I would've done nine and a half years ago with it? I would've have had her buy...

Deanna: I should have left it in the market where I had it. Because it was making good money.

Pat: I would've had you buy airtime from the state of California with it.

Deanna: Well, okay, so I missed that by six weeks.

Pat: Oh, okay. All right. Well, then I wouldn't have.

Deanna: Because I actually had money set aside when I went to work for the state to do that. And I missed it because the cutoff was December 31st, 2012. And even though I had been offered the job, they didn't finalize the paperwork until the middle of February. And so that all went out the window also...

Scott: Oh, well, you know what, Deanna?

Pat: You're doing okay.

Scott: You're in a good spot here.

Pat: Just hire a decent advisor.

Scott: Don't think back to what you could've done.

Pat: Well, I just told her what... I brought it up though, that's what I would've done. But I wouldn't have done it, she didn't have the opportunity.

Scott: Okay. Appreciate the call. Thanks, Deanna.

Deanna: Thank you.

Scott: Well, unfortunately, that is the time of our show. It's been great being here with everybody. I hope everyone is ready for Christmas and all that stuff.

Pat: And as always, if you've enjoyed this show...

Scott: Give us a review.

Pat: ...please give us a review.

Scott: And forward this to somebody you think this could be helpful to.

Pat: Please, please, please. It helps us. And I know you're not particularly interested in helping us, but we do appreciate it, thanks.

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