December 21, 2024 - Money Matters Podcast
Roth conversions, tariff talk, portfolio diversification strategies, and Scott and Pat’s favorite call of the year.
On this week’s Money Matters, Scott and Pat explore the intricacies of Roth conversions, especially beneficial for those retired with lower spendable taxable income in current years. They provide insights into when and how to make these conversions work in your favor.
They also answer listener questions about portfolio diversification in light of market uncertainties and potential tariff implications from political changes, providing practical advice on securing your financial future amid varying economic conditions.
Finally, they check back in with a listener who wanted to know back in April whether she had too much stock in a single company. Hear whether she took their advice and listen to why Scott and Pat said it was their favorite call of the year.
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.
Transcript
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters," Scott Hanson.
Pat: Pat McClain.
Scott: Glad you are with us. Both myself, my co-host, we are both financial advisors. By the way, if this is the first time you're listening to this program, please continue to listen for a few more minutes. Like, oh, a couple of financial planners. Oh no, that's what the world needs more of, right? Anyway, we've been practicing advisors for 30-plus years, doing this program for almost 30 years, take calls, talk about what's going on, and we're glad you're part of the program today.
Pat: And I don't know, do we need to pitch?
Scott: Times have kind of changed a little.
Pat: Do we need to pitch what?
Scott: Even what our show is. You listen to some podcasts, they just start right in.
Pat: Oh, all right. Let's start right in. So, my wife and I are very, very transparent with our children about our finances. And this came about when... I have four children, ages, oh, my daughter asked me this the other day, when her birthday was, and I'm terrible with dates.
Scott: She doesn't know her own birthday?
Pat: That's funny, Scott. That's funny. And she said, "Just remember the most important number in mathematics," which, according to her, was pi.
Scott: I was going to say, is that pi?
Pat: Yeah, pi. So anyway, but when my youngest...
Scott: It's kind of a cool birthday, actually, when you think about it.
Pat: Fine. Yeah. So, when my youngest was probably a junior in college... So, I have 3 children between the ages of 23 and approximately...4 children between the ages of 23 and 28.
Scott: That's amazing.
Pat: What's that?
Scott: Actually, I was talking about you this morning at the gym to my friend, Bob Beyer [SP] about...
Pat: Oh, I know, Bob.
Scott: I know you do. But you and your wife are traveling quite a bit now because your empty nesters. I said, "Well, he had four kids in five years raising." It was really hard for them to go do anything.
Pat: Yeah. And even before then, we had three late-term miscarriages and my first daughter died. So my poor wife's been pregnant eight times.
Scott: Oh, my goodness.
Pat: Eight times. Anyway, life is life, right? So, we're very transparent with our kids and they're all in their careers and two of them have purchased homes. I'm like, "Why don't you have a financial advisor?" They're like, "Well, why do I need one?" I said, "Well, you come to me with questions and I think you would be better served with a professional financial advisor that's not me." So have I talked about this?
Scott: You have.
Pat: But they have all started meeting with the financial advisors now. So we talked about wanting them to, and they have all started reporting back to me. My oldest comes back, "You know, dad, I should have been doing this thing about a year ago."
Scott: Funny thing is it's kids. Because you're a parent, they don't really take your advice. When you think about how often with our clients, that's right. "Hey, can you talk to my kid? Can you talk to Susie?" Because the dad or the mom could say, hey, you need to be putting the maximum in your 401(k). You should be doing an after-tax basis. And oftentimes the kid is like, it's just my parents. [vocalization]
Pat: Yeah. But not only that, it's just the value of financial advice, period.
Scott: Yeah. Anyway, there we go. I thought you were going to talk about this other story that you were all excited about.
Pat: Oh, no, no. We'll talk about that later. Can I talk about that later?
Scott: Yes, we can talk about that later.
Pat: Okay, thank you.
Scott: It's a podcast. We can run as long as we want. We want to keep listeners. There's that.
Pat: There that.
Scott: Instead of just whatever we feel like talking about at the moment.
Pat: All right.
Scott: And we'll get to the calls here in a minute. My son, because he's a pilot, low man on the totem pole, he had to work Thanksgiving, he has to work Christmas. So he'll be home for 24 hours, but we have to take him to the airport on Christmas Eve.
Pat: I was thinking about him this morning. How does he like the job?
Scott: Here's what's funny.
Pat: So, who does he fly for?
Scott: We're going to take calls here shortly.
Pat: Are you allowed to talk about who he flies for?
Scott: I think I've already mentioned it, JSX.
Pat: Which is a quasi-private...
Scott: It's not really private. It's a regional.
Pat: But you fly out of what they call a FBO fixed base...
Scott: I don't know.
Pat: ...operations, something like that, where people that get on there don't necessarily have [crosstalk 00:04:57].
Scott: He flies out of Scottsdale. If he lived in Scottsdale and you flew to one of the markets that they could fly to, it'd be fantastic. You pull up 20 minutes before, they valet your car. There's 30 seats, they're all business seats. And I think the fares may be 50% to 100% more than you'd pay, I'd say Southwest.
Pat: But if your time's super-valuable, you don't have to go through the same security, the whole bit. It's much...
Scott: Or you just say, I'm going to budget an extra $1,500 for the next year on all my flights and whatever.
Pat: So how's he like it?
Scott: He loves the flying. But last week, he says, "I need to find another side job." He says, "I have too many hours on my hands because you can only fly a certain amount of days a month, FAA regulations." And I'm thinking, you've been a pilot for four weeks. All that education you've done. And so, he was thinking about what to do. His friend's a mortgage broker, "Maybe I'll look into that." He's really good with math.
Pat: He should be a financial advisor.
Scott: And this week I said to him, "Have you thought about being a financial advisor?" He says, "I've never thought about it because always that's your thing." I'm like, well...
Pat: We bought a firm that had nothing but pine.
Scott: I know.
Pat: Is he going to do it?
Scott: I don't know.
Pat: I think he'd be great at it.
Scott: He would be great at it.
Pat: He'd be great at it. Yeah.
Scott: I just think it's pretty ironic that he's...go through all the school. You get a job and you're four weeks in thinking... And he's like, "When I find myself in these hotel rooms with time on my hands..."
Pat: Good for him. You should be proud of that. I mean, he could be playing video games in the hotel.
Scott: He plays a lot of poker. He was in Vegas last week.
Pat: Was he?
Scott: Tournaments and stuff. Yeah. A lot of poker.
Pat: But you say he's net positive.
Scott: Oh, and then some. Yeah.
Pat: Oh, nice. The whole idea kind of...
Scott: It's win/lose. It's not like someone starts a company where they get investors, raise capital, create a product or service to sell to the customers and they're successful. Everybody wins.
Pat: It's less than win/lose because the dealer takes a cut.
Scott: That's right. Well, if you play poker, but you're playing against others.
Pat: You're playing against others, but even then...
Scott: Yeah. And it's no different than, by the way, options.
Pat: A 100%.
Scott: If you're buying options, it's the same thing as a zero sum game and a little bit less because there's the transaction costs.
Pat: Yes. The friction.
Scott: All right. Let's take some calls.
Pat: So he's coming home for Christmas.
Scott: For 24 hours or something like that.
Pat: That'd be nice, though.
Scott: Yeah. We're having dinner a family dinner down in Paragary's.
Pat: Very nice.
Scott: Midtown Sacramento.
Pat: Very nice.
Scott: So that's our Christmas [inaudible 00:07:47] a couple days early.
Pat: Nice.
Scott: And I asked my wife this morning about shopping because I really don't shop at all. She's got it all covered.
Pat: Very nice.
Scott: All right. If you want to be part of the program, talk about something other than Scott and Pat's family. 833-99-WORTH is the number or you can send us an email, questions@moneymatters.com. We're starting off here with William. William, you're with Allworth's "Money Matters."
William: Hey, how's it going?
Scott: We're good. Thanks for putting up with our discussions, sitting on hold.
William: Yeah. I think it's a simple question. I'm not sure. So I recently retired. I think I finished a year kind of with some lower reportable income and I was considering a Roth rollover...
Pat: Conversion?
William: Conversion, yeah. I wondered if that's a hard process or if it's just a matter of moving the money and then reporting it on your taxes.
Pat: Thank you for calling. Thank you. Thank you. Thank you for calling.
Scott: And there's still time in the year, but not a lot.
Pat: So, I went through the whole story about my kids, right? So last year, my daughter started law school. She had a job as a teacher. In law school, she's not making any money. We converted all her 401(k)s into an IRA or 403(b)s into an IRA. And then we converted it to a Roth.
Scott: Because she saved when she was a teacher.
Pat: When she was a teacher. So, my third child opened his own company, high-end portable toilets that you use at weddings and events. And he will have no income for the foreseeable future to speak of. Fortunately, he saved up a lot of money. He worked in private equities and analyst. He saved up a lot of money. And he said to me...
Scott: You know, you're just bragging. One kid's an attorney. The other one's a private equity guy. Your kids are all doing fine.
Pat: So he said to me, "Should I do a Roth conversion?" And I said, "Well, this is something you should bring up with your financial advisor. But yes, most likely." So tell us what is your income for 2024?
William: It'll be mostly interest and gains. I think it's going to be around 40. And so, I don't have a big gap there. But I didn't know if I need to do this all before the end of year or is it like a regular IRA contribution [crosstalk 00:10:09]?
Scott: No.
Pat: No. It's calendar year. And did you lose employment? Did you quit or are you in a life transition?
William: I retired.
Scott: You retired. And how old are you?
William: Fifty-nine.
Pat: And when do you go back to work?
Scott: He's retired.
Pat: Oh, do you ever plan on going back to work?
Scott: He's retired.
William: I'm hoping. Yeah. I thought retirement was no more working.
Pat: Are you married?
William: Yeah. No.
Pat: You know, what are you going to live on the next couple years?
William: Savings and a small pension I have from my company I work for.
Pat: You know, let's forget the Roth IRA. Well, we'll talk about the Roth IRAs. You should be looking into the Obamacare for healthcare.
William: Oh, I have that. That's why I was able to retire.
Pat: Have you heard us talk about this previously on the show?
William: Obamacare or...?
Scott: Yeah, the Obamacare.
William: No. I heard that before. I mean, I knew I would have some money. But then I was like, well, if I retire, I need medical insurance. And that's over $1,000 a month.
Scott: And it only looks at your income. They don't look at your assets. You could have 10 million bucks saved up, and if your income...
Pat: It doesn't matter. And what was your income...
William: But the other thing with the IRA, I mean, with the Roth rollover is it does affect what you'll have to pay [crosstalk 00:11:37].
Scott: That's right.
William: You get that adjustment at the end of the year. So that's why I was thinking that after the year was over, I could do some math and say, well, what if I did this much in a Roth rollover, how much more am I going to have to pay for Covered California or Obamacare [crosstalk 00:11:51] company can't do that?
Pat: That's right. That is 100% correct, right? Which is does it make sense to do the Roth? And I don't know what the qualifying income level is for single individual for Obamacare. Do you?
William: It's not like you get it or you don't. You have to make a larger co-pay or you have to pay more for it [crosstalk 00:12:15] more money.
Scott: The way the tax brackets work, right, it's very progressive. So we have some income, we don't pay any tax on at all. A little bit at 10%. Then we have a 12% bracket. Then it bumps from 12% to 22%. And what you don't want to do is have your withdrawals from retirement accounts in a 22% tax bracket when you had an opportunity to pay tax at only 12% rate. For the vast majority of Americans, that is the planning opportunity. And then it goes from 22% all the way up to 37%.
Pat: What's your pension, monthly pension going to be or is?
William: That part will be about $1,800 a month.
Pat: And how much money do you have in IRAs?
Scott: 401(k)s, all that?
Pat: A million?
William: Yeah.
Scott: And how about brokerage accounts or...?
Pat: Savings?
William: Oh, I'm sorry, a million's everything.
Pat: And do you own a home?
William: Part of that is a regular IRA, part of that's a Roth IRA, and part of that's just a broker account [crosstalk 00:13:22].
Pat: Do you own a home outright?
William: Yeah.
Pat: How much do you have in regular IRAs?
William: Probably 400 and another 200 in Roth and the other 4 in brokerage. That's roughly.
Pat: And how much are you going to live on a month?
William: Probably 2,500 to 3,000.
Pat: Well, I don't know if it matters that much.
Scott: So the tax bracket, we have a standard deduction of roughly 15,000, let's call it 15,000. And then we jump from a 12% to a 22% bracket at 47,000 for singles. So let's call that $62,000 of income and still be in that lower tax bracket. So everything else being equal based on what you told us, might make sense to convert about $20,000. What that does to your co-pay, I don't know.
Pat: That's where you look at this and you say if there was...
Scott: And further, there's also opportunity for capital gains because right now you're not paying any capital gains tax, you can pay capital gains at a very low rate. So, there could be some securities that you've held for a long time that would make sense for you to diversify. So you got to analyze that as well.
Pat: So it does make sense for you to do Roth IRA with the exception of the fact that your co-pay on your insurance may go up. And your 401(k) balance, your IRA balance as a percentage of your portfolio, is only 40%. And when you look at what your monthly distribution will be on top of that $1,800 a month in pension, you need another $700, but you're going to top that up for taxes. So, you figure you're going to be living on about $1,200 a month out of there. If you said all million dollars was in an IRA, it would be much, I'd be really, really pushing on this. I'd be pushing on it, but $400,000 of it is in an IRA and you're 59 years of age. I would worry more about the co-pay on the insurance than I would on the tax savings in the future.
Scott: Because you're probably going to be in always low tax bracket.
Pat: It looks like unless something happens, it would make...
William: Right. I didn't know what was going to happen when I start taking Social Security at whatever age I feel I need it. So that's why it's like, well, I got at least help.
Scott: You're still going to be in a relatively low tax bracket. But you have roughly $20,000 of income of room for 2024 and still be in the lower tax bracket, which is still the tax bracket where you would pay 0 in capital gain tax. So, there's two opportunities and one negative, right? The negative is the Obamacare that you need to look at what the co-payment is gonna be. But the opportunity, it's either Roth conversion or you own some stock that is at a higher percentage of your portfolio would makes sense particularly at retirement age.
Pat: And then you recognize that gain.
Scott: Maybe it would make some sense this would be the year to sell off some of those shares to recognize the gain. It'd be more important, frankly.
William: Okay. But for the Roth, you're saying I have to do that all by the end of the year?
Pat: That's correct.
William: It's not like a regular [crosstalk 00:17:01]?
Scott: That is correct.
Pat: Any Roth conversion...
William: Before, I was saying, I'll just wait till the end of the year. I'll figure it out.
Scott: We're there.
William: And then I can just do some modeling like, well, if I put this in, how much do I have to pay back Obamacare and the Fed.
Pat: That's correct.
William: So, it sounds like I need to do that sooner than later.
Pat: That's right. Remember the contributions can be made up until April 15th, but the conversions have to take place in the calendar year.
William: Right. Okay. [crosstalk 00:17:31]
Pat: Right. But I got to tell you, if you didn't do it, like, if you're like, yeah, go through the math. But the one thing I would be focusing on is what it did to my co-pay rather than what it did to my marginal tax rate. Scott?
Scott: Yes. I would look at... Given your situation, odds are you will be in a lower tax bracket...
Pat: Forever.
Scott: First of all, half Americans don't pay any taxes. And then the vast majority are in that lower bracket, very small percentage of taxpayers are in the higher brackets.
William: Okay. So it doesn't even sound like it's the end of the world if I didn't do it. Or, I could do it next year if I did the math this year.
Scott: Yeah. If I were you though, I would certainly look at it all.
Pat: I'd go through the exercise and figure out maybe it's only 10,000. But the thing to pay attention to is what it does to the co-pay.
Scott: And do you have in your brokerage account any stocks that are making up more than 10% or 15% of your portfolio?
William: I had a mutual fund that I'd had for a super-long time. That was one of the things I sold this year because it had so much gain on it.
Pat: Okay. So you've already done that.
William: So that was one of the ways to... Yeah. A lot of the income is money out of my regular brokerage account that's already had taxes.
Pat: That's right.
William: You know what I mean? So even though you're living off it, you're not paying a lot of taxes.
Scott: That's right.
William: So I had this big mutual fund that had, you know, tens of thousands in gains for the last...
Pat: Was that part of that $40,000 that you started the conversation with income?
William: Yeah. Yeah.
Pat: Yeah. You did it. You did parts of it. Just figure out if there's any more room in there before it affects your co-pay.
William: All right. I'll look at those.
Pat: Appreciate the call. Yep.
Scott: Good luck on retirement.
William: All right. Thanks a lot.
Pat: Congrats on the retirement. Unintended consequences of legislation. We use this technique with clients all the time that have millions of dollars.
Scott: I had a conversation with somebody two days ago on this very thing, literally millions of dollars...
Pat: Millions of dollars.
Scott: ...all kinds of assets. And he's structuring things to have his income as low as possible for insurance purposes, because he's not 65.
Pat: And how do we feel about this?
Scott: They give us the rules, we follow them. Same thing with taxes. I don't know anyone who doesn't try to at least pay as little as possible. You can pay more. There's always a space on the tax return. If you want to send the government more money, you can.
Pat: Unintended consequences.
Scott: Yeah. So if anyone's thinking why are you guys helping him...? That's just Congress sets the rules.
Pat: [crosstalk 00:20:16] job.
Scott: That's a big piece, the whole tax piece. But look, we've got another, what, two weeks before the year's out? So we can have whatever. There's still time to do Roth conversions. But also look, if you are overweighted in any particular security, it might make sense to reduce that either today or early January.
Pat: And if you have any losses in your portfolio, harvest them. Harvest your losses. In the benefit of a harvest loss, I had a friend call me the other day. He doesn't use our firm, he uses another firm. But he said, "Pat, I have 15% of my portfolio in Apple stock." He said, "It seems like a little much to me as a percentage of my portfolio." And he says, "I have $330,000 loss carry forward that I've been carrying forward for years that I lost some money on and I keep carrying..." You're staring at me like, you just look at Scott's eyes, like, well, why isn't the advisor...?
Scott: Even if the guy was hell bent on keeping 15% in Apple, I would still say, let's sell it and repurchase some in your retirement account or something.
Pat: And the question I said to him, I said, "Look, you come to me, you've never met me before. I'm your new financial advisor. You give me a million dollars and I tell you, we're going to take 15% and buy one single company. Forget what company it is. We're going to buy one single company. What do you say to me as an advisor?" He said, "I wouldn't hire you. I wouldn't hire you if you told me to put 15% in a single company stock," much different than a mutual fund or an index. I said, "Well, there's your answer. So take that loss, carry forward and take that gain on your Apple, bring it down to less than 10% of the portfolio." But the point being is the reason you take losses in a portfolio is so that you have them banked for days like that.
Scott: That's right.
Pat: There's no reason not to.
Scott: And financial advisors like us, we always talk about diversification, right? And then I'm sure for some people it gets a little like, why you guys always... Because the [inaudible 00:22:37] for wealth is to not diversify and hope you work for the right company. I mean, let's hope you work for the right company.
Pat: Yes. Enron, they were all rich for a while. Intel?
Scott: Our headquarters are here in Folsom. Folsom, in late '80s, they built a big campus in Folsom when Folsom was a tiny little horse town, essentially. I mean, it was not much going on in Folsom. Very small town.
Pat: We had the prison.
Scott: Yeah, the prison. Folsom prison, which everyone's heard of. And their stock, the last 25 years, 25 years has gone in half. From the year 2000 to today, it's 50% less than what it was worth. This is when the Dow was at 10,000. So had you just had the broad market, you would have had a 4x growth on your overall stocks, give or take, right? And I just yesterday talked to a guy who retired because they had all these buyouts because they're laying people off. So, he had a big severance package to go retire early and which he was talking about a stock. I mean, he says, "Fortunately, I've sold off over the years."
Pat: Remember back prior to 2000, we worked with Intel employees and we'd say, "Well, you should diversify this portfolio." And they would look at you like you grew a second head. Like, why would I ever sell Intel?
Scott: They were the hot for a long time.
Pat: But you don't know.
Scott: Moore's law.
Pat: Yeah. And my friend that called me with the 15% in Apple, he said, "Look, I've done phenomenally well on this, but it doesn't mean I'm going to do well tomorrow."
Scott: Yeah. He realizes that.
Pat: He realizes that. But back to the...
Scott: And I'm about to get rid of my regular laptop and just get a Mac at home because I'm about to go even deeper in the Apple [inaudible 00:24:33].
Pat: It's a big change, Scott. You discuss it with the family?
Scott: No. I have my own computer. My wife has her own computer.
Pat: Never the two shall meet.
Scott: All right. Let's continue on with calls here. We are in Indiana talking with Dan. Dan, you're with Allworth's "Money Matters."
Dan: Good afternoon.
Scott: Hi, Dan.
Dan: Hi, can you hear me?
Scott: Yes, sir. How can we help?
Dan: Okay. Well, you know, in the 2024 presidential election, inflation was a major issue and president-elect Trump made a central campaign promise to place tariffs on virtually all goods coming into the U.S. And I'm a historian by background. And if you look at our history, tariffs have not done well. I could cite so many issues, but, you know, I'm sure your listeners are not interested in specifics on that [crosstalk 00:25:43].
Pat: Are you referring to the Smoot-Hawley Act?
Dan: That's one of them. That was maybe the most disastrous of 1930.
Pat: There is no question.
Dan: Well, you know, deep in the Depression, certainly.
Pat: There is no question.
Dan: So I guess my question for both of you is, should I be speaking to my financial advisor about adjusting before the 20th of January on my brokerage, you know, and maybe getting more conservative, putting more money into, I don't know, healthcare or something that might be not as volatile in the foreseeable future? I'm just, you know, I guess I'm what Agnew used to call a nervous Nellie.
Pat: How old are you, Dan?
Dan: Well, I'm 77. I'm retired. And I live in Bloomington, Indiana. I retired from CalSTRS in 2010. I was an academician and an academic at a community college.
Pat: And what percentage of your portfolio is in equities versus fixed income or other assets right now?
Dan: About 40%.
Pat: Is in equities?
Dan: Yeah.
Scott: And are you married or single?
Dan: I'm single.
Pat: And you're receiving a CalSTRS pension?
Dan: Yes.
Pat: Are you spending any of the money in your investable assets? [crosstalk 00:27:24]
Dan: You know, that's interesting. I had a Prudential Series B retirement account. And, you know, I've been told by both my advisors in California and then when I moved to Indiana, that's Golden. You can't even get those anymore. But because of the extremely high rates on real estate and other things, they shifted me or recommended that I move to a different product. So, I actually get money in addition to my pension every month from that.
Pat: Got it.
Dan: So, I no longer have that asset, but that was...now considering something else.
Scott: So, yeah. I mean, let's talk about what drives prices of assets, right? It's essentially the collective wisdom or foolishness of all investors.
Dan: Right.
Scott: So, you know, every day the market's up, the market's down. It's really based upon when there's some new information that comes to light, how's that going to impact what our future outlook is and do we need to adjust the outlook? People become more bullish, they become more bearish based upon, really, a lot of it's based upon feelings. And then people build models based upon what they think people's feelings are going to be essentially over a shorter period of time. So much of the market prices are based upon what people's perception of the future is going to be. So the question is like, on January 20th, is anyone's perception of the future going to be any different than today?
Dan: Yeah. I realize in my case, I'm probably projecting or maybe ruminating a little too much. But yeah, on that day, it may not shift. I'm just one of those semper paratus people, you know, want to be ready.
Pat: And you're not overweighted in equities to begin with.
Dan: Right.
Pat: You're not 80% equity.
Scott: I mean, and I'm not a big fan of tariffs either. But for someone, regardless of their age, should have a portfolio designed to weather whatever storms come. And they're always short term, at least if you believe that this country is going to continue on. They're always short term. We've had some experts on this program talk about just what's happened over historical times on who's in the White House, who's in the Congress. And essentially over a long period of time, doesn't make any bit of difference.
Pat: There's no statistical difference.
Scott: We will have a pullback in the markets. There will be a 20%, 25% pullback in the markets in the future. I don't know if it's in the next six months or six years. I would make a bet to somebody that in the next 6 years, we will have a 25% pullback in the market.
Pat: I'd be surprised if we didn't.
Scott: Historically, we have a 20% correction every 3-and-a-half years. If you go back 100 years, 20% pullback every 3-and-a-half years.
Pat: It would bother me if we didn't have a 20% pullback in the next...
Scott: I'm a little bothered by how much the market's been going up the last two years.
Pat: And the reason that's good is because it reminds people that there's risk in the market. And the longer it goes without a correction in the market, the crazier the markets have a tendency to get because there's no reminder. It's like people build their house on an earthquake fault and they go, well, there hasn't been an earthquake here in 20 years. I'm like, well, okay. Good for you. But we could point to why we think it's going to happen. We don't know. And we don't even know if this tariff thing, quite frankly, is true or not. Look, if you want to get... I'm going to go to a dangerous place here. Trump uses a lot of bluster.
Scott: No.
Pat: You got to remember his background. He's a New York real estate guy where you come in strong and then you negotiate the deal after, right?
Dan: Right. Oh, yeah.
Scott: My friend is a contractor. He told me how he walked out of a meeting last week, stood up, walked out, stormed out, and he got a phone call the next day. Okay, we'll do the price or whatever. Like that kind of negotiation.
Pat: Yeah. That's just the background he comes from, which is, there's no way I'm going to do this, blah, blah, blah. But he's a pragmatist at the end of the day as well. So we could look to political reasons.
Scott: There's always a hundred reasons why you should get out of the market. We can list them now. All the turmoil that's going on, there's lots of reasons to get out. And if you have anything that are tied up in equities, it should be money that you're not going to touch for five-plus years. Five-plus years. So it's longer term. And if you plan on spending it like, I'm going to need a new car or whatever, you should not have those dollars in the market because it's a guess what the market's going to be worth a year or two from now. Over a long period of time, we have a pretty high probability of the market going up because if you go back the last couple hundred years, that's how the markets work. So if you've got some concern, it might not be a bad idea to talk with your advisor and figure out exactly what you own, right? What percentage do I have in equities? What kind of companies are they? Are they big companies? How much do I have overseas? What do I have in real estate? And I think by doing that, you might actually come away feeling more comfortable. Our experience has been with people, particularly when markets are going down, they get spooked and they go, oh, my gosh, this is going to go to zero. I need to get out. And then when you remind them how much money they have that's not tied up in the stock market whatsoever, they get a little more confident and comfortable and are able to withstand the down so they can profit when things go back up.
Pat: Forty percent of your portfolio is in equities. You're fine. You are absolutely fine.
Dan: Yeah. I appreciate your input. That's what I need, the calming inputs. But I've been involved in California and still is a very strong labor state and we had the American Federation. And it's like you say, people go in with outrageous on both sides. And if you react to that, you know, you lose your mind.
Pat: Dan, if you were my father, I would say to you, "First of all, why did you have me at 15 years of age? Second of all, I would say why are we talking about this?" That's what I would tell my father. So, you're good.
Scott: Yeah, I wouldn't worry. And the markets will go down, Dan. You'll have some nasty days ahead. Just ignore it.
Dan: Musk has already said the working class needs to prepare for a short-term downturn [crosstalk 00:34:27].
Pat: All right. Well, what hasn't Musk said though? He's a non-stop...
Dan: You know, you're absolutely right about just not President Trump, but any campaign, there's a huge difference between campaign rhetoric and what's going to happen.
Pat: No kidding. I mean, at the end of this last campaign, it looked like an Oprah Winfrey show where everyone got a car, no taxes on tips, none of this, everything's free.
Scott: We're gonna give you this, we're gonna give you that.
Pat: It didn't matter whatever the audience, he was talking about [crosstalk 00:34:55].
Scott: We appreciate the call, Dan. Thanks, Dan. By the way, Pat, did you see the, I believe it was the House? Yes. The House just passed a bill to eliminate the windfall elimination provision...
Pat: Yes, I saw that.
Scott: ...for Social Security?
Pat: Yes, I saw that.
Scott: You don't want to give your opinion because there's a lot of people that it would benefit, but it's...
Pat: Oh, my opinion is that it...
Scott: ...essentially Social Security. If you work for a government agency that does not participate in Social Security, you have years of your career, you're not paying into Social Security, you're paying into a private pension instead, and your employer is also setting money aside for your pension...
Pat: You're not paying into Social Security.
Scott: You're not paying into Social Security and your employer's not paying into Social Security.
Pat: So you have no benefit there. You're not accruing any benefit.
Scott: And then let's say you go work in the private sector for 40 quarters or before this job, you qualify for some Social Security, but there's an offset because you have this pension. And this law's been around...
Pat: It's called the Windfall Elimination Provision.
Scott: Fifty years?
Pat: This is disappointing, but it is absolutely consistent with how Social Security has been treated since its beginning.
Scott: Like an unlimited piggy bank?
Pat: Exactly that, right? Who's eligible?
Scott: This is going to cost about $200 billion over the next decade if the Social Security trust fund's already on its way of...
Pat: Yeah, I looked at that.
Scott: Anyway. Well, at some point in time, the government needs to stop spending, spending, spending.
Pat: Correct.
Scott: And this latest stop gap bill as well, all kinds of pork.
Pat: Yeah. What was it $100 billion, $110 billion...
Scott: My gosh.
Pat: ...$15 billion to Pacific Gas & Electric is a loan. That'll be well used. Let's go.
Scott: Why is the government loaning money to private companies?
Pat: Ask the people with the Chips Bill.
Scott: The people with the Chips.
Pat: The Chips Bill.
Scott: Oh, yeah, the chips bill. That was kind of [crosstalk 00:37:06].
Pat: Anyway, we're going to do one of my favorite segments called House Calls. And this is where we actually visit with someone that we apparently gave some excellent advice to previously.
Scott: I don't know if we did or not, but...
Pat: And we just follow up with them to see whether the advice was good, bad, taken, not taken, how it turned out.
Scott: Yeah. So just this past April, we spoke to a woman named Tina, podcast listener. She's not an Allworth client. I think we have to say that for disclosure purpose, because if she is, then it could be considered a testimonial and then all the kinds of regulations stuff. Anyway, she wanted to know how much of her net worth should be in company stock, her employer stock. So here's a clip for that call. And then we're going to talk to Tina.
[00:37:56]
Tina: My husband and I are later career. And we've been pretty focused and intentional savers leveraging our company 401(k)s and other savings opportunities etc. So, we can retire we think. You know, our financial advisor says live to well beyond a hundred and not worry about it. And, you know...
Scott: You're at that point today?
Tina: [crosstalk 00:38:26]. She says, "yes." We're prepared to work for another year or two before we go.
Pat: And what's the dollar amount?
Tina: The amount in the...
Pat: Yeah. In the 401(k)s, IRAs, the overall, yeah.
Tina: [crosstalk 00:38:47]
Pat: If you put it all in a suitcase, how big would the suitcase be?
Tina: Yeah. It's about 3 million in qualified funds. Another, you know, 2 million in non-qualified after tax. And then I'd say another 25% of our total in this stock. And it's a private company. And it's done exceptionally well. It has a great trajectory, but it makes me very nervous.
Scott: Do you have any liquidity option in the company? I mean, private companies, you don't always have an opportunity to sell it.
Tina: Yeah. About twice a year, they make an offer to buy back.
Scott: What industry is that in?
Tina: Aerospace.
Pat: Okay. So of the $5 million, $1.25 million is in your company stock. Is that correct?
Tina: No. It's an additional 25 [crosstalk 00:39:48].
Pat: Okay. Thank you. Thank you.
Tina: Yes. So it's a [crosstalk 00:39:52].
Scott: So, is any of it held in an ESOP or is it all individually held?
Tina: The majority of it is in just individually held. It's not in any like, tax favored status.
Pat: And how close are you to retirement?
Tina: Let's just say a year-and-a-half.
Scott: Let me ask you this question. If the stock went to zero, would you still be able to retire in a year or two?
Tina: I think we might put it out for another couple of years.
Pat: Do you want to?
Tina: I think we could. No.
Scott: See, the concept behind diversification is it's not designed to get wealthier. It's designed to protect where you're at, right? So when we're young, working for a growing company, like, yeah, maybe I've got more in there than I was prudent, but I'm taking a chance on it. If it works out, great. If it doesn't work out, that's all right. I'm still young. When we get to retirement age, particularly when retirement's right around the corner for most people, they're more concerned about maintaining their lifestyle than they are about becoming wealthier. They don't want to go be poor, right?
Tina: Right.
Scott: That's when diversification comes into play.
Pat: What's the family income?
Tina: Right now with both of us working, let's just say $400k or $500k a year.
Pat: So all of this is gain in this. So how old are you guys?
Tina: I just had my 59-and-a-half birthday, my husband's about 6 months older than me.
Pat: So, here's the thing that I look at too is the tax ramifications.
Scott: Of course.
Pat: So, if you wait until after you retire and you start liquidating these, right, dollars.
Scott: Is there any pension income anywhere?
Tina: No. We have IRAs and 401(k)s, but not [crosstalk 00:42:05].
Scott: In your non-qualified, are there any stocks that you could sell at a loss? Anything that can trigger a loss there?
Tina: We do that when there is opportunity. We don't have anything right now. [crosstalk 00:42:17]
Scott: And you don't have any lost carry forward from that.
Tina: [crosstalk 00:42:24]
Pat: Oftentimes if you don't know what to do, you just split the difference and then you're right either way. But this one, because of the tax and retirement so close...
Scott: If you were retiring in December of this year, we'd say, okay. The next couple years, we're going to have a strategy of reducing your exposure to this stock. And we're not going to take any income from your 401(k)s or IRAs. We're going to make sure your non-qualified tax is managed in a tax efficient manner so we can pay a very low capital gain tax.
Pat: Yeah. And if your income wasn't as high as it was today, I'd be inclined to...
Scott: What's your family income today?
Pat: Four to five. So I'd be inclined to hold it. So when you said it's 25% more, right?
Tina: Mm-hmm. Right.
Pat: So you've got almost a million-and-a-half. Yeah. You got a million-and-a-half in it.
Tina: Times two.
Pat: Oh.
Tina: Yeah, it's a lot.
Pat: Oh, I'd start paring it down.
Scott: And how's the value today versus six months ago, a year ago, three years ago, eight years ago?
Tina: Like a rocket ship.
Pat: I'd start paring it down.
Tina: Just keeps on going up.
Pat: I would start pairing it down.
Scott: Because nothing goes straight up forever.
Pat: Either that or I would actually pick a similarly publicly-traded stock and do put options on it to give myself some downside protection.
Scott: Which is essentially, yeah, put options, you're paying a premium that...
Pat: That if it goes down in price, you get paid. And what you're doing there is you're trying to identify companies that are in the same industry that do the same thing that actually will help you. So, you're getting a sibling stock, if you will. So, you're using financial instruments that give you some downside protection and you're paying that premium so that you can take advantage of the tax ramifications a year from now. And your advisor may or may not...
Scott: Is this aerospace company affiliated with a billionaire who has other companies?
Tina: Yes.
Pat: Oh, I'd pare it down. And I most certainly would consider paring down and doing some put options on at least half of the portfolio.
Scott: Put option using what?
Tina: Okay. That...
Pat: A similar stock.
Scott: That's no, there's no similarity to that company.
Pat: Just because of the guy that runs it?
Scott: Yes. Who's brilliant.
Pat: Which is, listen, what makes you good, makes you bad. Yes, I would pare it down.
Scott: Pat, I must say, that was interesting.
Pat: I had forgotten about it, Scott. That was... Yes.
Scott: And I can imagine the value is up dramatically from where it was with those chopsticks catching the rocket.
Pat: Yep. Which was an amazing thing to watch. So Tina, thank you for joining us again.
Tina: Bye.
[00:45:46]
Scott: As you listen to the call, it's like, there's no...
Pat: There's no equal.
Scott: So this was last April. It's now December. You're less than a year from retirement. What steps did you or did you not make this last several months?
Tina: Well, this is a story of the value of financial advice. So this is a plug for what you guys do and I'm appreciative of the help. But here's basically, I think I mentioned that probably twice a year, the company makes an offer to buy employee stock and reevaluates the stock every time they do that. So, just the timing. And I think it was around August we put in to sell a portion, about 30%. We got about 25% of it liquidated and that was kind of in the mid-high 6 figures, all of it basically taxable because the basis was so low. So, we worked with a team of financial advisor, accountant, lawyer, to determine a tax strategy. And ultimately we set up a CRUT and there was no transfer in kind. We actually had to liquidate it and take that whole hit. So, we decided to take a couple other stock holdings that we've had for 15-plus years, similarly situated from the tax buildup, do a transfer in kind to the CRUT as well as the proceeds from the company stock to set up our legacy giving and to create a little additional source of income and retirement.
Pat: Beautiful, beautiful, beautiful.
Scott: And CRUT a charitable remainder unitrust. And did you have a particular cause or charity already in mind ahead of time, something that was near and dear to your heart and this was an easy one or did you kind of have to think like, where do we want to have these dollars go ultimately?
Tina: Yeah. Well, we've been on a, I'll say a journey of generosity, which is really wanting to share, you know. We feel super-blessed by what we've been able to do in our careers and [crosstalk 00:48:18].
Scott: Are you part of Generous Giving, is that where you get the terminology?
Tina: Mm-hmm.
Scott: Oh, yeah, I've been to their conferences and...
Tina: Yeah. So, it was our financial advisor who said, you know, you should think about giving from your wealth, not just from your income. And that kind of blew my mind and here we are. So it's been a journey.
Pat: So let's walk through the mechanics, Scott, of what Tina did for the rest of the listeners. Because you couldn't take this SpaceX stock and actually move that into the trust because of how it was actually positioned.
Scott: A publicly-traded company.
Pat: What you did is you took something that you had a lot of appreciation and you did the same. Therefore, you've got a tax write-off to offset some of the gain that you actually recognize in the SpaceX stocks.
Scott: That's not maybe all the way she's structured this.
Pat: Yes, and in the same calendar year. And then in doing that, you also provided a little bit of a stream of income. You still have to have a charitable intent. Don't think that [crosstalk 00:49:20].
Scott: It doesn't work.
Pat: So, people come in all the time like, oh, my friend did this and they get all this money and they avoided all this taxes. I'm like, if you don't have a charitable intent, it doesn't work.
Scott: And not everyone has charitable intents. Yes.
Pat: But what you did is you used the tax code to your advantage and fulfilled... You and your husband had to feel great about this. I've got to believe, right?
Tina: Yes. Yes. It's like I wouldn't ever imagine that this would be something that we could do. And we're so excited about it.
Pat: I'm so happy for you.
Tina: So are our kids. Our kids are, you know, completely on board. So that's the good news.
Pat: Have you involved your children in the giving at all in selecting the charities?
Tina: Yeah. So ultimately, they will have some say in, after we're gone in terms of where it goes. We have it kind of categorized, but there's some flexibility in terms of specific charities that they may want to give to. But we raised them with the idea, the concept of a tithe that, you know, you've been blessed with much, you bless others by giving back. So that's something that we kind of [crosstalk 00:50:32].
Scott: This is a perfect call to finish the show before leading into the Christmas.
Pat: That's what I was thinking. I was thinking exactly the same thing, Scott.
Scott: I had no idea what the call was gonna say.
Pat: Our industry is...
Scott: You know, I said to Pat, "I wonder if it's one of these stories where she sold the stock and it went way up and then she was disappointed about that?" And I said, "That'd be an interesting call to have" because that happens sometimes.
Tina: Well, it kind of did. We evaluated the stock this last week and it went up. But we still own stock, so we benefited from that. So almost like from a top cash-value perspective, it looks like the stock is worth the same as it was before we made the transaction.
Pat: You know, so I'm going to share something with you, Tina. Scott and I have been doing this for quite some time. What you just did, 20 years ago, that was for the wealthy, wealthy, like really rich to have access to attorneys and accountants and a financial advisor that would have structured that. You're wealthy, but you're not super-wealthy, right?
Tina: Right.
Scott: Well, there's always some with more. You're talking to someone with a hundred million, they don't feel wealthy.
Pat: Well, it's like driving on the freeway. There's always someone in front of you. But what you said is you brought the accountant together, the financial advisor together and the estate planning attorney together in order to structure this, right?
Tina: Mm-hmm.
Pat: And I'm guessing that the financial advisor was probably the quarterback of this?
Tina: Yes.
Scott: They've got a good advisor.
Pat: And you've got a great advisor, right?
Tina: Yes.
Pat: And firms like ours, that's why we bring tax and estate planning when appropriate, in house. [crosstalk 00:52:20]
Scott: A good advisor is someone who helps somebody get clarity on what's important to them and design the finances around that, which is different for everybody, right? For Tina and her husband, they wanted to be as generous as possible with this more assets than they ever thought they were going to have or need. And so, a perfect solution for it.
Pat: And what is the Generosity Project, Scott? You both mentioned it, Tina and yourself.
Scott: It's really fascinating. A foundation funded this organization, Generous Giving, to help people give essentially, both to understand the philosophical reasons behind it, the spiritual reasons behind it and the economic reasons behind it. So, this organization is completely funded through this foundation. So, all the tools they put out in conferences and stuff, they want people to give more, but not to them. Okay. So, it's really different because usually someone's talking about here's how you give and they've got their own intent. Why don't you talk to our estate attorneys, right, because they want to raise their own money. This organization, they don't want to raise anything from anybody. They just want people to grow in their generosity.
Pat: And Tina, had you attended one of these conferences?
Tina: I attended a small group, Journey of Generosity.
Scott: Yeah. They do it over a 24-hour period.
Pat: Very nice.
Tina: Yeah. It's two 4-hour segments over like, Friday night, Saturday morning. Actually, we're going to be hosting one after the first of the year, which is another part of it, which is to help promote this message of giving generously.
Pat: Very nice.
Scott: generousgiving.org by the way.
Pat: This was the best call of the year for me. I haven't finished the year. Truly the best call of the year because it... You know, we didn't solve the problem, right? We just talked around it, right? But this is one of the things that a good advisor would recognize. If you were sitting in any of our offices across the U.S., this conversation would have taken... First of all, it's hard to ask someone if they are generous.
Scott: You can look at the tax return.
Pat: You can look at the tax return.
Scott: But someone's making 250 year and they've nothing listed on their tax return... It's a little more complicated now because most people have a standard deduction, so it's not...
Pat: But it's hard to ask someone if they're generous because I've never had anyone say no.
Scott: They might feel they're generous in other areas of their life, but [crosstalk 00:54:56] finances.
Pat: Finances, yeah. People ask me if I'm nice and I always tell them "yes."
Scott: We appreciate the call.
Tina: Have a good day. Thanks for your help.
Pat: Have a great Christmas.
Scott: Have a great Christmas.
Tina: You, too.
Scott: All right.
Tina: Bye-bye.
Pat: Actually, I read an article this morning. Warren Buffett and Bill Gates have the, what did they call it, the list where they...the donation list?
Scott: Yeah. You give away half of your assets.
Pat: Yeah. Not Generosity.
Scott: You sign a pledge for billionaires.
Pat: It's called Pledge. It's called Giving Pledge. Giving Pledge is what it's called. And they talked about the three people that have been removed from The Giving Pledge.
Scott: Removed?
Pat: Yeah. They were asked to take their name off The Giving Pledge.
Scott: Why?
Pat: Well, one was Sam Bankman-Fried. And since he was in prison, he had no more money.
Scott: FTX founder.
Pat: Yeah. He didn't see it.
Scott: He didn't have any money to begin with.
Pat: He was going to give two cartons of cigarettes...
Scott: At a prison.
Pat: In prison.
Scott: And a roll of toilet paper.
Pat: And then the other one was a guy that, some child molestation, was accused of, and they asked him to take his name off. And the third guy took his name off because he embezzled a bunch of money.
Scott: But here's what I think...
Pat: [crosstalk 00:56:11] when they're dying, though.
Scott: We're all going to give it away. We give away all of it. You can't take it with you. So it's all given to somebody at some time.
Pat: Oh, I'm having a massive party.
Scott: Either you spend it or you're going to give it away. But I was thinking the other day... And we'll wrap the program up. The way my trust is set up, if my wife and I died, the money that we've got going to charity, actually is a donor advised fund that distributes it out to a handful of charities. I listed over, I think it's a 10-year period. And for me, you look at some of these foundations that are a hundred, 150 years old, the causes that they support have nothing aligned to the values of the founders of those things, the people who created those foundations...
Pat: Over time.
Scott: Over time.
Pat: Because things change in the foundation. Then, you know, it exists for its own purpose, which had nothing to do with the founder.
Scott: I do like the concept of saying... I think part of that is like, I'm not going to have it all go to my kids. By the way, it's really hard to have it all go to your kids because the estate taxes, and whatever you give to charity, there's no estate taxes.
Pat: And by the way, and this is it. You might think, oh, this is big old fat cat stuff.
Scott: No, no, no.
Pat: I mean, we have clients...
Scott: Very modest.
Pat: ...that will have a portion go to charities while they're living or dead.
Scott: So anyway, it's been a great program. I believe we have a best of... When is this airing anyway? Oh, this is [crosstalk 00:57:55].
Pat: Oh, Scott, you know, we teased at the beginning of the show I was going to talk about... No, we didn't tease it. I'm going to talk about it in our next live show, this $200 million Ponzi scheme in Florida and my own experience being approached by someone who was trying to get me to put monies or clients monies into a Ponzi scheme.
Scott: And if you ever have the gift of giving and you're feeling generous this Christmas, you want to help others, if you found this podcast helpful, send it off to somebody and say, "Hey, give this thing a listen and [inaudible 00:58:27] help you with your finances." Anyway, it's been great being here with you. It's been a great 2024. We feel quite privileged and blessed to be able to have a few people listen to us as we do this program. So, this has been Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters," Scott Hanson.
Pat: Pat McClain.
Scott: Glad you are with us. Both myself, my co-host, we are both financial advisors. By the way, if this is the first time you're listening to this program, please continue to listen for a few more minutes. Like, oh, a couple of financial planners. Oh no, that's what the world needs more of, right? Anyway, we've been practicing advisors for 30-plus years, doing this program for almost 30 years, take calls, talk about what's going on, and we're glad you're part of the program today.
Pat: And I don't know, do we need to pitch?
Scott: Times have kind of changed a little.
Pat: Do we need to pitch what?
Scott: Even what our show is. You listen to some podcasts, they just start right in.
Pat: Oh, all right. Let's start right in. So, my wife and I are very, very transparent with our children about our finances. And this came about when... I have four children, ages, oh, my daughter asked me this the other day, when her birthday was, and I'm terrible with dates.
Scott: She doesn't know her own birthday?
Pat: That's funny, Scott. That's funny. And she said, "Just remember the most important number in mathematics," which, according to her, was pi.
Scott: I was going to say, is that pi?
Pat: Yeah, pi. So anyway, but when my youngest...
Scott: It's kind of a cool birthday, actually, when you think about it.
Pat: Fine. Yeah. So, when my youngest was probably a junior in college... So, I have 3 children between the ages of 23 and approximately...4 children between the ages of 23 and 28.
Scott: That's amazing.
Pat: What's that?
Scott: Actually, I was talking about you this morning at the gym to my friend, Bob Beyer [SP] about...
Pat: Oh, I know, Bob.
Scott: I know you do. But you and your wife are traveling quite a bit now because your empty nesters. I said, "Well, he had four kids in five years raising." It was really hard for them to go do anything.
Pat: Yeah. And even before then, we had three late-term miscarriages and my first daughter died. So my poor wife's been pregnant eight times.
Scott: Oh, my goodness.
Pat: Eight times. Anyway, life is life, right? So, we're very transparent with our kids and they're all in their careers and two of them have purchased homes. I'm like, "Why don't you have a financial advisor?" They're like, "Well, why do I need one?" I said, "Well, you come to me with questions and I think you would be better served with a professional financial advisor that's not me." So have I talked about this?
Scott: You have.
Pat: But they have all started meeting with the financial advisors now. So we talked about wanting them to, and they have all started reporting back to me. My oldest comes back, "You know, dad, I should have been doing this thing about a year ago."
Scott: Funny thing is it's kids. Because you're a parent, they don't really take your advice. When you think about how often with our clients, that's right. "Hey, can you talk to my kid? Can you talk to Susie?" Because the dad or the mom could say, hey, you need to be putting the maximum in your 401(k). You should be doing an after-tax basis. And oftentimes the kid is like, it's just my parents. [vocalization]
Pat: Yeah. But not only that, it's just the value of financial advice, period.
Scott: Yeah. Anyway, there we go. I thought you were going to talk about this other story that you were all excited about.
Pat: Oh, no, no. We'll talk about that later. Can I talk about that later?
Scott: Yes, we can talk about that later.
Pat: Okay, thank you.
Scott: It's a podcast. We can run as long as we want. We want to keep listeners. There's that.
Pat: There that.
Scott: Instead of just whatever we feel like talking about at the moment.
Pat: All right.
Scott: And we'll get to the calls here in a minute. My son, because he's a pilot, low man on the totem pole, he had to work Thanksgiving, he has to work Christmas. So he'll be home for 24 hours, but we have to take him to the airport on Christmas Eve.
Pat: I was thinking about him this morning. How does he like the job?
Scott: Here's what's funny.
Pat: So, who does he fly for?
Scott: We're going to take calls here shortly.
Pat: Are you allowed to talk about who he flies for?
Scott: I think I've already mentioned it, JSX.
Pat: Which is a quasi-private...
Scott: It's not really private. It's a regional.
Pat: But you fly out of what they call a FBO fixed base...
Scott: I don't know.
Pat: ...operations, something like that, where people that get on there don't necessarily have [crosstalk 00:04:57].
Scott: He flies out of Scottsdale. If he lived in Scottsdale and you flew to one of the markets that they could fly to, it'd be fantastic. You pull up 20 minutes before, they valet your car. There's 30 seats, they're all business seats. And I think the fares may be 50% to 100% more than you'd pay, I'd say Southwest.
Pat: But if your time's super-valuable, you don't have to go through the same security, the whole bit. It's much...
Scott: Or you just say, I'm going to budget an extra $1,500 for the next year on all my flights and whatever.
Pat: So how's he like it?
Scott: He loves the flying. But last week, he says, "I need to find another side job." He says, "I have too many hours on my hands because you can only fly a certain amount of days a month, FAA regulations." And I'm thinking, you've been a pilot for four weeks. All that education you've done. And so, he was thinking about what to do. His friend's a mortgage broker, "Maybe I'll look into that." He's really good with math.
Pat: He should be a financial advisor.
Scott: And this week I said to him, "Have you thought about being a financial advisor?" He says, "I've never thought about it because always that's your thing." I'm like, well...
Pat: We bought a firm that had nothing but pine.
Scott: I know.
Pat: Is he going to do it?
Scott: I don't know.
Pat: I think he'd be great at it.
Scott: He would be great at it.
Pat: He'd be great at it. Yeah.
Scott: I just think it's pretty ironic that he's...go through all the school. You get a job and you're four weeks in thinking... And he's like, "When I find myself in these hotel rooms with time on my hands..."
Pat: Good for him. You should be proud of that. I mean, he could be playing video games in the hotel.
Scott: He plays a lot of poker. He was in Vegas last week.
Pat: Was he?
Scott: Tournaments and stuff. Yeah. A lot of poker.
Pat: But you say he's net positive.
Scott: Oh, and then some. Yeah.
Pat: Oh, nice. The whole idea kind of...
Scott: It's win/lose. It's not like someone starts a company where they get investors, raise capital, create a product or service to sell to the customers and they're successful. Everybody wins.
Pat: It's less than win/lose because the dealer takes a cut.
Scott: That's right. Well, if you play poker, but you're playing against others.
Pat: You're playing against others, but even then...
Scott: Yeah. And it's no different than, by the way, options.
Pat: A 100%.
Scott: If you're buying options, it's the same thing as a zero sum game and a little bit less because there's the transaction costs.
Pat: Yes. The friction.
Scott: All right. Let's take some calls.
Pat: So he's coming home for Christmas.
Scott: For 24 hours or something like that.
Pat: That'd be nice, though.
Scott: Yeah. We're having dinner a family dinner down in Paragary's.
Pat: Very nice.
Scott: Midtown Sacramento.
Pat: Very nice.
Scott: So that's our Christmas [inaudible 00:07:47] a couple days early.
Pat: Nice.
Scott: And I asked my wife this morning about shopping because I really don't shop at all. She's got it all covered.
Pat: Very nice.
Scott: All right. If you want to be part of the program, talk about something other than Scott and Pat's family. 833-99-WORTH is the number or you can send us an email, questions@moneymatters.com. We're starting off here with William. William, you're with Allworth's "Money Matters."
William: Hey, how's it going?
Scott: We're good. Thanks for putting up with our discussions, sitting on hold.
William: Yeah. I think it's a simple question. I'm not sure. So I recently retired. I think I finished a year kind of with some lower reportable income and I was considering a Roth rollover...
Pat: Conversion?
William: Conversion, yeah. I wondered if that's a hard process or if it's just a matter of moving the money and then reporting it on your taxes.
Pat: Thank you for calling. Thank you. Thank you. Thank you for calling.
Scott: And there's still time in the year, but not a lot.
Pat: So, I went through the whole story about my kids, right? So last year, my daughter started law school. She had a job as a teacher. In law school, she's not making any money. We converted all her 401(k)s into an IRA or 403(b)s into an IRA. And then we converted it to a Roth.
Scott: Because she saved when she was a teacher.
Pat: When she was a teacher. So, my third child opened his own company, high-end portable toilets that you use at weddings and events. And he will have no income for the foreseeable future to speak of. Fortunately, he saved up a lot of money. He worked in private equities and analyst. He saved up a lot of money. And he said to me...
Scott: You know, you're just bragging. One kid's an attorney. The other one's a private equity guy. Your kids are all doing fine.
Pat: So he said to me, "Should I do a Roth conversion?" And I said, "Well, this is something you should bring up with your financial advisor. But yes, most likely." So tell us what is your income for 2024?
William: It'll be mostly interest and gains. I think it's going to be around 40. And so, I don't have a big gap there. But I didn't know if I need to do this all before the end of year or is it like a regular IRA contribution [crosstalk 00:10:09]?
Scott: No.
Pat: No. It's calendar year. And did you lose employment? Did you quit or are you in a life transition?
William: I retired.
Scott: You retired. And how old are you?
William: Fifty-nine.
Pat: And when do you go back to work?
Scott: He's retired.
Pat: Oh, do you ever plan on going back to work?
Scott: He's retired.
William: I'm hoping. Yeah. I thought retirement was no more working.
Pat: Are you married?
William: Yeah. No.
Pat: You know, what are you going to live on the next couple years?
William: Savings and a small pension I have from my company I work for.
Pat: You know, let's forget the Roth IRA. Well, we'll talk about the Roth IRAs. You should be looking into the Obamacare for healthcare.
William: Oh, I have that. That's why I was able to retire.
Pat: Have you heard us talk about this previously on the show?
William: Obamacare or...?
Scott: Yeah, the Obamacare.
William: No. I heard that before. I mean, I knew I would have some money. But then I was like, well, if I retire, I need medical insurance. And that's over $1,000 a month.
Scott: And it only looks at your income. They don't look at your assets. You could have 10 million bucks saved up, and if your income...
Pat: It doesn't matter. And what was your income...
William: But the other thing with the IRA, I mean, with the Roth rollover is it does affect what you'll have to pay [crosstalk 00:11:37].
Scott: That's right.
William: You get that adjustment at the end of the year. So that's why I was thinking that after the year was over, I could do some math and say, well, what if I did this much in a Roth rollover, how much more am I going to have to pay for Covered California or Obamacare [crosstalk 00:11:51] company can't do that?
Pat: That's right. That is 100% correct, right? Which is does it make sense to do the Roth? And I don't know what the qualifying income level is for single individual for Obamacare. Do you?
William: It's not like you get it or you don't. You have to make a larger co-pay or you have to pay more for it [crosstalk 00:12:15] more money.
Scott: The way the tax brackets work, right, it's very progressive. So we have some income, we don't pay any tax on at all. A little bit at 10%. Then we have a 12% bracket. Then it bumps from 12% to 22%. And what you don't want to do is have your withdrawals from retirement accounts in a 22% tax bracket when you had an opportunity to pay tax at only 12% rate. For the vast majority of Americans, that is the planning opportunity. And then it goes from 22% all the way up to 37%.
Pat: What's your pension, monthly pension going to be or is?
William: That part will be about $1,800 a month.
Pat: And how much money do you have in IRAs?
Scott: 401(k)s, all that?
Pat: A million?
William: Yeah.
Scott: And how about brokerage accounts or...?
Pat: Savings?
William: Oh, I'm sorry, a million's everything.
Pat: And do you own a home?
William: Part of that is a regular IRA, part of that's a Roth IRA, and part of that's just a broker account [crosstalk 00:13:22].
Pat: Do you own a home outright?
William: Yeah.
Pat: How much do you have in regular IRAs?
William: Probably 400 and another 200 in Roth and the other 4 in brokerage. That's roughly.
Pat: And how much are you going to live on a month?
William: Probably 2,500 to 3,000.
Pat: Well, I don't know if it matters that much.
Scott: So the tax bracket, we have a standard deduction of roughly 15,000, let's call it 15,000. And then we jump from a 12% to a 22% bracket at 47,000 for singles. So let's call that $62,000 of income and still be in that lower tax bracket. So everything else being equal based on what you told us, might make sense to convert about $20,000. What that does to your co-pay, I don't know.
Pat: That's where you look at this and you say if there was...
Scott: And further, there's also opportunity for capital gains because right now you're not paying any capital gains tax, you can pay capital gains at a very low rate. So, there could be some securities that you've held for a long time that would make sense for you to diversify. So you got to analyze that as well.
Pat: So it does make sense for you to do Roth IRA with the exception of the fact that your co-pay on your insurance may go up. And your 401(k) balance, your IRA balance as a percentage of your portfolio, is only 40%. And when you look at what your monthly distribution will be on top of that $1,800 a month in pension, you need another $700, but you're going to top that up for taxes. So, you figure you're going to be living on about $1,200 a month out of there. If you said all million dollars was in an IRA, it would be much, I'd be really, really pushing on this. I'd be pushing on it, but $400,000 of it is in an IRA and you're 59 years of age. I would worry more about the co-pay on the insurance than I would on the tax savings in the future.
Scott: Because you're probably going to be in always low tax bracket.
Pat: It looks like unless something happens, it would make...
William: Right. I didn't know what was going to happen when I start taking Social Security at whatever age I feel I need it. So that's why it's like, well, I got at least help.
Scott: You're still going to be in a relatively low tax bracket. But you have roughly $20,000 of income of room for 2024 and still be in the lower tax bracket, which is still the tax bracket where you would pay 0 in capital gain tax. So, there's two opportunities and one negative, right? The negative is the Obamacare that you need to look at what the co-payment is gonna be. But the opportunity, it's either Roth conversion or you own some stock that is at a higher percentage of your portfolio would makes sense particularly at retirement age.
Pat: And then you recognize that gain.
Scott: Maybe it would make some sense this would be the year to sell off some of those shares to recognize the gain. It'd be more important, frankly.
William: Okay. But for the Roth, you're saying I have to do that all by the end of the year?
Pat: That's correct.
William: It's not like a regular [crosstalk 00:17:01]?
Scott: That is correct.
Pat: Any Roth conversion...
William: Before, I was saying, I'll just wait till the end of the year. I'll figure it out.
Scott: We're there.
William: And then I can just do some modeling like, well, if I put this in, how much do I have to pay back Obamacare and the Fed.
Pat: That's correct.
William: So, it sounds like I need to do that sooner than later.
Pat: That's right. Remember the contributions can be made up until April 15th, but the conversions have to take place in the calendar year.
William: Right. Okay. [crosstalk 00:17:31]
Pat: Right. But I got to tell you, if you didn't do it, like, if you're like, yeah, go through the math. But the one thing I would be focusing on is what it did to my co-pay rather than what it did to my marginal tax rate. Scott?
Scott: Yes. I would look at... Given your situation, odds are you will be in a lower tax bracket...
Pat: Forever.
Scott: First of all, half Americans don't pay any taxes. And then the vast majority are in that lower bracket, very small percentage of taxpayers are in the higher brackets.
William: Okay. So it doesn't even sound like it's the end of the world if I didn't do it. Or, I could do it next year if I did the math this year.
Scott: Yeah. If I were you though, I would certainly look at it all.
Pat: I'd go through the exercise and figure out maybe it's only 10,000. But the thing to pay attention to is what it does to the co-pay.
Scott: And do you have in your brokerage account any stocks that are making up more than 10% or 15% of your portfolio?
William: I had a mutual fund that I'd had for a super-long time. That was one of the things I sold this year because it had so much gain on it.
Pat: Okay. So you've already done that.
William: So that was one of the ways to... Yeah. A lot of the income is money out of my regular brokerage account that's already had taxes.
Pat: That's right.
William: You know what I mean? So even though you're living off it, you're not paying a lot of taxes.
Scott: That's right.
William: So I had this big mutual fund that had, you know, tens of thousands in gains for the last...
Pat: Was that part of that $40,000 that you started the conversation with income?
William: Yeah. Yeah.
Pat: Yeah. You did it. You did parts of it. Just figure out if there's any more room in there before it affects your co-pay.
William: All right. I'll look at those.
Pat: Appreciate the call. Yep.
Scott: Good luck on retirement.
William: All right. Thanks a lot.
Pat: Congrats on the retirement. Unintended consequences of legislation. We use this technique with clients all the time that have millions of dollars.
Scott: I had a conversation with somebody two days ago on this very thing, literally millions of dollars...
Pat: Millions of dollars.
Scott: ...all kinds of assets. And he's structuring things to have his income as low as possible for insurance purposes, because he's not 65.
Pat: And how do we feel about this?
Scott: They give us the rules, we follow them. Same thing with taxes. I don't know anyone who doesn't try to at least pay as little as possible. You can pay more. There's always a space on the tax return. If you want to send the government more money, you can.
Pat: Unintended consequences.
Scott: Yeah. So if anyone's thinking why are you guys helping him...? That's just Congress sets the rules.
Pat: [crosstalk 00:20:16] job.
Scott: That's a big piece, the whole tax piece. But look, we've got another, what, two weeks before the year's out? So we can have whatever. There's still time to do Roth conversions. But also look, if you are overweighted in any particular security, it might make sense to reduce that either today or early January.
Pat: And if you have any losses in your portfolio, harvest them. Harvest your losses. In the benefit of a harvest loss, I had a friend call me the other day. He doesn't use our firm, he uses another firm. But he said, "Pat, I have 15% of my portfolio in Apple stock." He said, "It seems like a little much to me as a percentage of my portfolio." And he says, "I have $330,000 loss carry forward that I've been carrying forward for years that I lost some money on and I keep carrying..." You're staring at me like, you just look at Scott's eyes, like, well, why isn't the advisor...?
Scott: Even if the guy was hell bent on keeping 15% in Apple, I would still say, let's sell it and repurchase some in your retirement account or something.
Pat: And the question I said to him, I said, "Look, you come to me, you've never met me before. I'm your new financial advisor. You give me a million dollars and I tell you, we're going to take 15% and buy one single company. Forget what company it is. We're going to buy one single company. What do you say to me as an advisor?" He said, "I wouldn't hire you. I wouldn't hire you if you told me to put 15% in a single company stock," much different than a mutual fund or an index. I said, "Well, there's your answer. So take that loss, carry forward and take that gain on your Apple, bring it down to less than 10% of the portfolio." But the point being is the reason you take losses in a portfolio is so that you have them banked for days like that.
Scott: That's right.
Pat: There's no reason not to.
Scott: And financial advisors like us, we always talk about diversification, right? And then I'm sure for some people it gets a little like, why you guys always... Because the [inaudible 00:22:37] for wealth is to not diversify and hope you work for the right company. I mean, let's hope you work for the right company.
Pat: Yes. Enron, they were all rich for a while. Intel?
Scott: Our headquarters are here in Folsom. Folsom, in late '80s, they built a big campus in Folsom when Folsom was a tiny little horse town, essentially. I mean, it was not much going on in Folsom. Very small town.
Pat: We had the prison.
Scott: Yeah, the prison. Folsom prison, which everyone's heard of. And their stock, the last 25 years, 25 years has gone in half. From the year 2000 to today, it's 50% less than what it was worth. This is when the Dow was at 10,000. So had you just had the broad market, you would have had a 4x growth on your overall stocks, give or take, right? And I just yesterday talked to a guy who retired because they had all these buyouts because they're laying people off. So, he had a big severance package to go retire early and which he was talking about a stock. I mean, he says, "Fortunately, I've sold off over the years."
Pat: Remember back prior to 2000, we worked with Intel employees and we'd say, "Well, you should diversify this portfolio." And they would look at you like you grew a second head. Like, why would I ever sell Intel?
Scott: They were the hot for a long time.
Pat: But you don't know.
Scott: Moore's law.
Pat: Yeah. And my friend that called me with the 15% in Apple, he said, "Look, I've done phenomenally well on this, but it doesn't mean I'm going to do well tomorrow."
Scott: Yeah. He realizes that.
Pat: He realizes that. But back to the...
Scott: And I'm about to get rid of my regular laptop and just get a Mac at home because I'm about to go even deeper in the Apple [inaudible 00:24:33].
Pat: It's a big change, Scott. You discuss it with the family?
Scott: No. I have my own computer. My wife has her own computer.
Pat: Never the two shall meet.
Scott: All right. Let's continue on with calls here. We are in Indiana talking with Dan. Dan, you're with Allworth's "Money Matters."
Dan: Good afternoon.
Scott: Hi, Dan.
Dan: Hi, can you hear me?
Scott: Yes, sir. How can we help?
Dan: Okay. Well, you know, in the 2024 presidential election, inflation was a major issue and president-elect Trump made a central campaign promise to place tariffs on virtually all goods coming into the U.S. And I'm a historian by background. And if you look at our history, tariffs have not done well. I could cite so many issues, but, you know, I'm sure your listeners are not interested in specifics on that [crosstalk 00:25:43].
Pat: Are you referring to the Smoot-Hawley Act?
Dan: That's one of them. That was maybe the most disastrous of 1930.
Pat: There is no question.
Dan: Well, you know, deep in the Depression, certainly.
Pat: There is no question.
Dan: So I guess my question for both of you is, should I be speaking to my financial advisor about adjusting before the 20th of January on my brokerage, you know, and maybe getting more conservative, putting more money into, I don't know, healthcare or something that might be not as volatile in the foreseeable future? I'm just, you know, I guess I'm what Agnew used to call a nervous Nellie.
Pat: How old are you, Dan?
Dan: Well, I'm 77. I'm retired. And I live in Bloomington, Indiana. I retired from CalSTRS in 2010. I was an academician and an academic at a community college.
Pat: And what percentage of your portfolio is in equities versus fixed income or other assets right now?
Dan: About 40%.
Pat: Is in equities?
Dan: Yeah.
Scott: And are you married or single?
Dan: I'm single.
Pat: And you're receiving a CalSTRS pension?
Dan: Yes.
Pat: Are you spending any of the money in your investable assets? [crosstalk 00:27:24]
Dan: You know, that's interesting. I had a Prudential Series B retirement account. And, you know, I've been told by both my advisors in California and then when I moved to Indiana, that's Golden. You can't even get those anymore. But because of the extremely high rates on real estate and other things, they shifted me or recommended that I move to a different product. So, I actually get money in addition to my pension every month from that.
Pat: Got it.
Dan: So, I no longer have that asset, but that was...now considering something else.
Scott: So, yeah. I mean, let's talk about what drives prices of assets, right? It's essentially the collective wisdom or foolishness of all investors.
Dan: Right.
Scott: So, you know, every day the market's up, the market's down. It's really based upon when there's some new information that comes to light, how's that going to impact what our future outlook is and do we need to adjust the outlook? People become more bullish, they become more bearish based upon, really, a lot of it's based upon feelings. And then people build models based upon what they think people's feelings are going to be essentially over a shorter period of time. So much of the market prices are based upon what people's perception of the future is going to be. So the question is like, on January 20th, is anyone's perception of the future going to be any different than today?
Dan: Yeah. I realize in my case, I'm probably projecting or maybe ruminating a little too much. But yeah, on that day, it may not shift. I'm just one of those semper paratus people, you know, want to be ready.
Pat: And you're not overweighted in equities to begin with.
Dan: Right.
Pat: You're not 80% equity.
Scott: I mean, and I'm not a big fan of tariffs either. But for someone, regardless of their age, should have a portfolio designed to weather whatever storms come. And they're always short term, at least if you believe that this country is going to continue on. They're always short term. We've had some experts on this program talk about just what's happened over historical times on who's in the White House, who's in the Congress. And essentially over a long period of time, doesn't make any bit of difference.
Pat: There's no statistical difference.
Scott: We will have a pullback in the markets. There will be a 20%, 25% pullback in the markets in the future. I don't know if it's in the next six months or six years. I would make a bet to somebody that in the next 6 years, we will have a 25% pullback in the market.
Pat: I'd be surprised if we didn't.
Scott: Historically, we have a 20% correction every 3-and-a-half years. If you go back 100 years, 20% pullback every 3-and-a-half years.
Pat: It would bother me if we didn't have a 20% pullback in the next...
Scott: I'm a little bothered by how much the market's been going up the last two years.
Pat: And the reason that's good is because it reminds people that there's risk in the market. And the longer it goes without a correction in the market, the crazier the markets have a tendency to get because there's no reminder. It's like people build their house on an earthquake fault and they go, well, there hasn't been an earthquake here in 20 years. I'm like, well, okay. Good for you. But we could point to why we think it's going to happen. We don't know. And we don't even know if this tariff thing, quite frankly, is true or not. Look, if you want to get... I'm going to go to a dangerous place here. Trump uses a lot of bluster.
Scott: No.
Pat: You got to remember his background. He's a New York real estate guy where you come in strong and then you negotiate the deal after, right?
Dan: Right. Oh, yeah.
Scott: My friend is a contractor. He told me how he walked out of a meeting last week, stood up, walked out, stormed out, and he got a phone call the next day. Okay, we'll do the price or whatever. Like that kind of negotiation.
Pat: Yeah. That's just the background he comes from, which is, there's no way I'm going to do this, blah, blah, blah. But he's a pragmatist at the end of the day as well. So we could look to political reasons.
Scott: There's always a hundred reasons why you should get out of the market. We can list them now. All the turmoil that's going on, there's lots of reasons to get out. And if you have anything that are tied up in equities, it should be money that you're not going to touch for five-plus years. Five-plus years. So it's longer term. And if you plan on spending it like, I'm going to need a new car or whatever, you should not have those dollars in the market because it's a guess what the market's going to be worth a year or two from now. Over a long period of time, we have a pretty high probability of the market going up because if you go back the last couple hundred years, that's how the markets work. So if you've got some concern, it might not be a bad idea to talk with your advisor and figure out exactly what you own, right? What percentage do I have in equities? What kind of companies are they? Are they big companies? How much do I have overseas? What do I have in real estate? And I think by doing that, you might actually come away feeling more comfortable. Our experience has been with people, particularly when markets are going down, they get spooked and they go, oh, my gosh, this is going to go to zero. I need to get out. And then when you remind them how much money they have that's not tied up in the stock market whatsoever, they get a little more confident and comfortable and are able to withstand the down so they can profit when things go back up.
Pat: Forty percent of your portfolio is in equities. You're fine. You are absolutely fine.
Dan: Yeah. I appreciate your input. That's what I need, the calming inputs. But I've been involved in California and still is a very strong labor state and we had the American Federation. And it's like you say, people go in with outrageous on both sides. And if you react to that, you know, you lose your mind.
Pat: Dan, if you were my father, I would say to you, "First of all, why did you have me at 15 years of age? Second of all, I would say why are we talking about this?" That's what I would tell my father. So, you're good.
Scott: Yeah, I wouldn't worry. And the markets will go down, Dan. You'll have some nasty days ahead. Just ignore it.
Dan: Musk has already said the working class needs to prepare for a short-term downturn [crosstalk 00:34:27].
Pat: All right. Well, what hasn't Musk said though? He's a non-stop...
Dan: You know, you're absolutely right about just not President Trump, but any campaign, there's a huge difference between campaign rhetoric and what's going to happen.
Pat: No kidding. I mean, at the end of this last campaign, it looked like an Oprah Winfrey show where everyone got a car, no taxes on tips, none of this, everything's free.
Scott: We're gonna give you this, we're gonna give you that.
Pat: It didn't matter whatever the audience, he was talking about [crosstalk 00:34:55].
Scott: We appreciate the call, Dan. Thanks, Dan. By the way, Pat, did you see the, I believe it was the House? Yes. The House just passed a bill to eliminate the windfall elimination provision...
Pat: Yes, I saw that.
Scott: ...for Social Security?
Pat: Yes, I saw that.
Scott: You don't want to give your opinion because there's a lot of people that it would benefit, but it's...
Pat: Oh, my opinion is that it...
Scott: ...essentially Social Security. If you work for a government agency that does not participate in Social Security, you have years of your career, you're not paying into Social Security, you're paying into a private pension instead, and your employer is also setting money aside for your pension...
Pat: You're not paying into Social Security.
Scott: You're not paying into Social Security and your employer's not paying into Social Security.
Pat: So you have no benefit there. You're not accruing any benefit.
Scott: And then let's say you go work in the private sector for 40 quarters or before this job, you qualify for some Social Security, but there's an offset because you have this pension. And this law's been around...
Pat: It's called the Windfall Elimination Provision.
Scott: Fifty years?
Pat: This is disappointing, but it is absolutely consistent with how Social Security has been treated since its beginning.
Scott: Like an unlimited piggy bank?
Pat: Exactly that, right? Who's eligible?
Scott: This is going to cost about $200 billion over the next decade if the Social Security trust fund's already on its way of...
Pat: Yeah, I looked at that.
Scott: Anyway. Well, at some point in time, the government needs to stop spending, spending, spending.
Pat: Correct.
Scott: And this latest stop gap bill as well, all kinds of pork.
Pat: Yeah. What was it $100 billion, $110 billion...
Scott: My gosh.
Pat: ...$15 billion to Pacific Gas & Electric is a loan. That'll be well used. Let's go.
Scott: Why is the government loaning money to private companies?
Pat: Ask the people with the Chips Bill.
Scott: The people with the Chips.
Pat: The Chips Bill.
Scott: Oh, yeah, the chips bill. That was kind of [crosstalk 00:37:06].
Pat: Anyway, we're going to do one of my favorite segments called House Calls. And this is where we actually visit with someone that we apparently gave some excellent advice to previously.
Scott: I don't know if we did or not, but...
Pat: And we just follow up with them to see whether the advice was good, bad, taken, not taken, how it turned out.
Scott: Yeah. So just this past April, we spoke to a woman named Tina, podcast listener. She's not an Allworth client. I think we have to say that for disclosure purpose, because if she is, then it could be considered a testimonial and then all the kinds of regulations stuff. Anyway, she wanted to know how much of her net worth should be in company stock, her employer stock. So here's a clip for that call. And then we're going to talk to Tina.
[00:37:56]
Tina: My husband and I are later career. And we've been pretty focused and intentional savers leveraging our company 401(k)s and other savings opportunities etc. So, we can retire we think. You know, our financial advisor says live to well beyond a hundred and not worry about it. And, you know...
Scott: You're at that point today?
Tina: [crosstalk 00:38:26]. She says, "yes." We're prepared to work for another year or two before we go.
Pat: And what's the dollar amount?
Tina: The amount in the...
Pat: Yeah. In the 401(k)s, IRAs, the overall, yeah.
Tina: [crosstalk 00:38:47]
Pat: If you put it all in a suitcase, how big would the suitcase be?
Tina: Yeah. It's about 3 million in qualified funds. Another, you know, 2 million in non-qualified after tax. And then I'd say another 25% of our total in this stock. And it's a private company. And it's done exceptionally well. It has a great trajectory, but it makes me very nervous.
Scott: Do you have any liquidity option in the company? I mean, private companies, you don't always have an opportunity to sell it.
Tina: Yeah. About twice a year, they make an offer to buy back.
Scott: What industry is that in?
Tina: Aerospace.
Pat: Okay. So of the $5 million, $1.25 million is in your company stock. Is that correct?
Tina: No. It's an additional 25 [crosstalk 00:39:48].
Pat: Okay. Thank you. Thank you.
Tina: Yes. So it's a [crosstalk 00:39:52].
Scott: So, is any of it held in an ESOP or is it all individually held?
Tina: The majority of it is in just individually held. It's not in any like, tax favored status.
Pat: And how close are you to retirement?
Tina: Let's just say a year-and-a-half.
Scott: Let me ask you this question. If the stock went to zero, would you still be able to retire in a year or two?
Tina: I think we might put it out for another couple of years.
Pat: Do you want to?
Tina: I think we could. No.
Scott: See, the concept behind diversification is it's not designed to get wealthier. It's designed to protect where you're at, right? So when we're young, working for a growing company, like, yeah, maybe I've got more in there than I was prudent, but I'm taking a chance on it. If it works out, great. If it doesn't work out, that's all right. I'm still young. When we get to retirement age, particularly when retirement's right around the corner for most people, they're more concerned about maintaining their lifestyle than they are about becoming wealthier. They don't want to go be poor, right?
Tina: Right.
Scott: That's when diversification comes into play.
Pat: What's the family income?
Tina: Right now with both of us working, let's just say $400k or $500k a year.
Pat: So all of this is gain in this. So how old are you guys?
Tina: I just had my 59-and-a-half birthday, my husband's about 6 months older than me.
Pat: So, here's the thing that I look at too is the tax ramifications.
Scott: Of course.
Pat: So, if you wait until after you retire and you start liquidating these, right, dollars.
Scott: Is there any pension income anywhere?
Tina: No. We have IRAs and 401(k)s, but not [crosstalk 00:42:05].
Scott: In your non-qualified, are there any stocks that you could sell at a loss? Anything that can trigger a loss there?
Tina: We do that when there is opportunity. We don't have anything right now. [crosstalk 00:42:17]
Scott: And you don't have any lost carry forward from that.
Tina: [crosstalk 00:42:24]
Pat: Oftentimes if you don't know what to do, you just split the difference and then you're right either way. But this one, because of the tax and retirement so close...
Scott: If you were retiring in December of this year, we'd say, okay. The next couple years, we're going to have a strategy of reducing your exposure to this stock. And we're not going to take any income from your 401(k)s or IRAs. We're going to make sure your non-qualified tax is managed in a tax efficient manner so we can pay a very low capital gain tax.
Pat: Yeah. And if your income wasn't as high as it was today, I'd be inclined to...
Scott: What's your family income today?
Pat: Four to five. So I'd be inclined to hold it. So when you said it's 25% more, right?
Tina: Mm-hmm. Right.
Pat: So you've got almost a million-and-a-half. Yeah. You got a million-and-a-half in it.
Tina: Times two.
Pat: Oh.
Tina: Yeah, it's a lot.
Pat: Oh, I'd start paring it down.
Scott: And how's the value today versus six months ago, a year ago, three years ago, eight years ago?
Tina: Like a rocket ship.
Pat: I'd start paring it down.
Tina: Just keeps on going up.
Pat: I would start pairing it down.
Scott: Because nothing goes straight up forever.
Pat: Either that or I would actually pick a similarly publicly-traded stock and do put options on it to give myself some downside protection.
Scott: Which is essentially, yeah, put options, you're paying a premium that...
Pat: That if it goes down in price, you get paid. And what you're doing there is you're trying to identify companies that are in the same industry that do the same thing that actually will help you. So, you're getting a sibling stock, if you will. So, you're using financial instruments that give you some downside protection and you're paying that premium so that you can take advantage of the tax ramifications a year from now. And your advisor may or may not...
Scott: Is this aerospace company affiliated with a billionaire who has other companies?
Tina: Yes.
Pat: Oh, I'd pare it down. And I most certainly would consider paring down and doing some put options on at least half of the portfolio.
Scott: Put option using what?
Tina: Okay. That...
Pat: A similar stock.
Scott: That's no, there's no similarity to that company.
Pat: Just because of the guy that runs it?
Scott: Yes. Who's brilliant.
Pat: Which is, listen, what makes you good, makes you bad. Yes, I would pare it down.
Scott: Pat, I must say, that was interesting.
Pat: I had forgotten about it, Scott. That was... Yes.
Scott: And I can imagine the value is up dramatically from where it was with those chopsticks catching the rocket.
Pat: Yep. Which was an amazing thing to watch. So Tina, thank you for joining us again.
Tina: Bye.
[00:45:46]
Scott: As you listen to the call, it's like, there's no...
Pat: There's no equal.
Scott: So this was last April. It's now December. You're less than a year from retirement. What steps did you or did you not make this last several months?
Tina: Well, this is a story of the value of financial advice. So this is a plug for what you guys do and I'm appreciative of the help. But here's basically, I think I mentioned that probably twice a year, the company makes an offer to buy employee stock and reevaluates the stock every time they do that. So, just the timing. And I think it was around August we put in to sell a portion, about 30%. We got about 25% of it liquidated and that was kind of in the mid-high 6 figures, all of it basically taxable because the basis was so low. So, we worked with a team of financial advisor, accountant, lawyer, to determine a tax strategy. And ultimately we set up a CRUT and there was no transfer in kind. We actually had to liquidate it and take that whole hit. So, we decided to take a couple other stock holdings that we've had for 15-plus years, similarly situated from the tax buildup, do a transfer in kind to the CRUT as well as the proceeds from the company stock to set up our legacy giving and to create a little additional source of income and retirement.
Pat: Beautiful, beautiful, beautiful.
Scott: And CRUT a charitable remainder unitrust. And did you have a particular cause or charity already in mind ahead of time, something that was near and dear to your heart and this was an easy one or did you kind of have to think like, where do we want to have these dollars go ultimately?
Tina: Yeah. Well, we've been on a, I'll say a journey of generosity, which is really wanting to share, you know. We feel super-blessed by what we've been able to do in our careers and [crosstalk 00:48:18].
Scott: Are you part of Generous Giving, is that where you get the terminology?
Tina: Mm-hmm.
Scott: Oh, yeah, I've been to their conferences and...
Tina: Yeah. So, it was our financial advisor who said, you know, you should think about giving from your wealth, not just from your income. And that kind of blew my mind and here we are. So it's been a journey.
Pat: So let's walk through the mechanics, Scott, of what Tina did for the rest of the listeners. Because you couldn't take this SpaceX stock and actually move that into the trust because of how it was actually positioned.
Scott: A publicly-traded company.
Pat: What you did is you took something that you had a lot of appreciation and you did the same. Therefore, you've got a tax write-off to offset some of the gain that you actually recognize in the SpaceX stocks.
Scott: That's not maybe all the way she's structured this.
Pat: Yes, and in the same calendar year. And then in doing that, you also provided a little bit of a stream of income. You still have to have a charitable intent. Don't think that [crosstalk 00:49:20].
Scott: It doesn't work.
Pat: So, people come in all the time like, oh, my friend did this and they get all this money and they avoided all this taxes. I'm like, if you don't have a charitable intent, it doesn't work.
Scott: And not everyone has charitable intents. Yes.
Pat: But what you did is you used the tax code to your advantage and fulfilled... You and your husband had to feel great about this. I've got to believe, right?
Tina: Yes. Yes. It's like I wouldn't ever imagine that this would be something that we could do. And we're so excited about it.
Pat: I'm so happy for you.
Tina: So are our kids. Our kids are, you know, completely on board. So that's the good news.
Pat: Have you involved your children in the giving at all in selecting the charities?
Tina: Yeah. So ultimately, they will have some say in, after we're gone in terms of where it goes. We have it kind of categorized, but there's some flexibility in terms of specific charities that they may want to give to. But we raised them with the idea, the concept of a tithe that, you know, you've been blessed with much, you bless others by giving back. So that's something that we kind of [crosstalk 00:50:32].
Scott: This is a perfect call to finish the show before leading into the Christmas.
Pat: That's what I was thinking. I was thinking exactly the same thing, Scott.
Scott: I had no idea what the call was gonna say.
Pat: Our industry is...
Scott: You know, I said to Pat, "I wonder if it's one of these stories where she sold the stock and it went way up and then she was disappointed about that?" And I said, "That'd be an interesting call to have" because that happens sometimes.
Tina: Well, it kind of did. We evaluated the stock this last week and it went up. But we still own stock, so we benefited from that. So almost like from a top cash-value perspective, it looks like the stock is worth the same as it was before we made the transaction.
Pat: You know, so I'm going to share something with you, Tina. Scott and I have been doing this for quite some time. What you just did, 20 years ago, that was for the wealthy, wealthy, like really rich to have access to attorneys and accountants and a financial advisor that would have structured that. You're wealthy, but you're not super-wealthy, right?
Tina: Right.
Scott: Well, there's always some with more. You're talking to someone with a hundred million, they don't feel wealthy.
Pat: Well, it's like driving on the freeway. There's always someone in front of you. But what you said is you brought the accountant together, the financial advisor together and the estate planning attorney together in order to structure this, right?
Tina: Mm-hmm.
Pat: And I'm guessing that the financial advisor was probably the quarterback of this?
Tina: Yes.
Scott: They've got a good advisor.
Pat: And you've got a great advisor, right?
Tina: Yes.
Pat: And firms like ours, that's why we bring tax and estate planning when appropriate, in house. [crosstalk 00:52:20]
Scott: A good advisor is someone who helps somebody get clarity on what's important to them and design the finances around that, which is different for everybody, right? For Tina and her husband, they wanted to be as generous as possible with this more assets than they ever thought they were going to have or need. And so, a perfect solution for it.
Pat: And what is the Generosity Project, Scott? You both mentioned it, Tina and yourself.
Scott: It's really fascinating. A foundation funded this organization, Generous Giving, to help people give essentially, both to understand the philosophical reasons behind it, the spiritual reasons behind it and the economic reasons behind it. So, this organization is completely funded through this foundation. So, all the tools they put out in conferences and stuff, they want people to give more, but not to them. Okay. So, it's really different because usually someone's talking about here's how you give and they've got their own intent. Why don't you talk to our estate attorneys, right, because they want to raise their own money. This organization, they don't want to raise anything from anybody. They just want people to grow in their generosity.
Pat: And Tina, had you attended one of these conferences?
Tina: I attended a small group, Journey of Generosity.
Scott: Yeah. They do it over a 24-hour period.
Pat: Very nice.
Tina: Yeah. It's two 4-hour segments over like, Friday night, Saturday morning. Actually, we're going to be hosting one after the first of the year, which is another part of it, which is to help promote this message of giving generously.
Pat: Very nice.
Scott: generousgiving.org by the way.
Pat: This was the best call of the year for me. I haven't finished the year. Truly the best call of the year because it... You know, we didn't solve the problem, right? We just talked around it, right? But this is one of the things that a good advisor would recognize. If you were sitting in any of our offices across the U.S., this conversation would have taken... First of all, it's hard to ask someone if they are generous.
Scott: You can look at the tax return.
Pat: You can look at the tax return.
Scott: But someone's making 250 year and they've nothing listed on their tax return... It's a little more complicated now because most people have a standard deduction, so it's not...
Pat: But it's hard to ask someone if they're generous because I've never had anyone say no.
Scott: They might feel they're generous in other areas of their life, but [crosstalk 00:54:56] finances.
Pat: Finances, yeah. People ask me if I'm nice and I always tell them "yes."
Scott: We appreciate the call.
Tina: Have a good day. Thanks for your help.
Pat: Have a great Christmas.
Scott: Have a great Christmas.
Tina: You, too.
Scott: All right.
Tina: Bye-bye.
Pat: Actually, I read an article this morning. Warren Buffett and Bill Gates have the, what did they call it, the list where they...the donation list?
Scott: Yeah. You give away half of your assets.
Pat: Yeah. Not Generosity.
Scott: You sign a pledge for billionaires.
Pat: It's called Pledge. It's called Giving Pledge. Giving Pledge is what it's called. And they talked about the three people that have been removed from The Giving Pledge.
Scott: Removed?
Pat: Yeah. They were asked to take their name off The Giving Pledge.
Scott: Why?
Pat: Well, one was Sam Bankman-Fried. And since he was in prison, he had no more money.
Scott: FTX founder.
Pat: Yeah. He didn't see it.
Scott: He didn't have any money to begin with.
Pat: He was going to give two cartons of cigarettes...
Scott: At a prison.
Pat: In prison.
Scott: And a roll of toilet paper.
Pat: And then the other one was a guy that, some child molestation, was accused of, and they asked him to take his name off. And the third guy took his name off because he embezzled a bunch of money.
Scott: But here's what I think...
Pat: [crosstalk 00:56:11] when they're dying, though.
Scott: We're all going to give it away. We give away all of it. You can't take it with you. So it's all given to somebody at some time.
Pat: Oh, I'm having a massive party.
Scott: Either you spend it or you're going to give it away. But I was thinking the other day... And we'll wrap the program up. The way my trust is set up, if my wife and I died, the money that we've got going to charity, actually is a donor advised fund that distributes it out to a handful of charities. I listed over, I think it's a 10-year period. And for me, you look at some of these foundations that are a hundred, 150 years old, the causes that they support have nothing aligned to the values of the founders of those things, the people who created those foundations...
Pat: Over time.
Scott: Over time.
Pat: Because things change in the foundation. Then, you know, it exists for its own purpose, which had nothing to do with the founder.
Scott: I do like the concept of saying... I think part of that is like, I'm not going to have it all go to my kids. By the way, it's really hard to have it all go to your kids because the estate taxes, and whatever you give to charity, there's no estate taxes.
Pat: And by the way, and this is it. You might think, oh, this is big old fat cat stuff.
Scott: No, no, no.
Pat: I mean, we have clients...
Scott: Very modest.
Pat: ...that will have a portion go to charities while they're living or dead.
Scott: So anyway, it's been a great program. I believe we have a best of... When is this airing anyway? Oh, this is [crosstalk 00:57:55].
Pat: Oh, Scott, you know, we teased at the beginning of the show I was going to talk about... No, we didn't tease it. I'm going to talk about it in our next live show, this $200 million Ponzi scheme in Florida and my own experience being approached by someone who was trying to get me to put monies or clients monies into a Ponzi scheme.
Scott: And if you ever have the gift of giving and you're feeling generous this Christmas, you want to help others, if you found this podcast helpful, send it off to somebody and say, "Hey, give this thing a listen and [inaudible 00:58:27] help you with your finances." Anyway, it's been great being here with you. It's been a great 2024. We feel quite privileged and blessed to be able to have a few people listen to us as we do this program. So, this has been Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state planning attorney to conduct your own due diligence.
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