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

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

Pat: And Pat McClain, thanks for being with us.

Scott: That's right. This program is being broadcast on Christmas Eve. So rather than doing our normal program, we decided that we were gonna run a Best of.

Pat: And we recorded this a couple days in advance of Christmas Eve. So this is...

Scott: Yes. Here's some of our best of calls, which I think will be quite entertaining.

Pat: Yeah. And what are you doing for Christmas Eve and Christmas?

Scott: Christmas, the kids will all be home. I've got two still in the house and two older ones that are out and they'll both be home. And Christmas Eve, we are all going to a 49ers game. NFL.

Pat: On Christmas Eve?

Scott: On Christmas Eve.

Pat: Huh?

Scott: It's my first time being to a Pro Football game.

Pat: I'm shocked.

Scott: That I haven't been to one?

Pat: No, no, no. I 100% understand why you haven't been to one, because I've known you for a long time. I'll watch football if it's on, but I don't seek it out. I have been to an NFL game, but it just surprises me that you're doing it on Christmas Eve. What...?

Scott: It's my daughter's birthday. Christmas Eve is her birthday. And I don't know, I thought it'd be an interesting experience as a family.

Pat: All right.

Scott: My oldest, she's turning 27 that day. My youngest is 12. So something we can all do as a family.

Pat: That's right. Have a good time.

Scott: We'll see how the game goes. I'm sure it'll be a great time. Anyway, so we've got some best of calls here and we're starting out in Seattle with JR. And JR wanna know how to fold a rental property into her retirement plan. So I think it was one of the most interesting calls of this year.

JR: If any of your listeners, Scott and Pat, want a mediocre trophy spouse, I'm available. I give myself up.

Pat: Mediocre.

Scott: My wife might have an issue with that, but I appreciate that.

Pat: Well, you know what, when we start talking about your finances, just stay away from the guy that's looking for a nurse and a purse.

JR: Well, that's it. I want someone who won't be around, ideally.

Scott: Someone that's got a relatively short life expectancy.

JR: You know, [crosstalk 00:02:36.867] together. I'll be on the arm. I'll talk artificial intelligence, you know, that's why I said mediocre, you know?

Scott: Okay. All right. JR, what can we do for you?

JR: Well, I am the big six one today, as a matter of fact.

Scott: Happy birthday.

JR: Thank you. Thank you. And I'm not one of these people comfortable investing in the stock market, so I took my stock and I put it into real estate. I live in the Pacific Northwest, so it tends to retain its value pretty well. So I have I have a lake house that's paid off. I have a rental house that's paid off.

Scott: Awesome.

JR: I have another rental house that still has about a quarter million mortgage on it that needs to be updated a little bit before it can be rented again, but I'm looking at that now. And then I have a mortgage on the primary house that I live in. I also have a...

Scott: Is the primary the lake house?

JR: No, the primary is about 20 minutes from the lake house. It's lovely. I just bought and moved into it last October.

Pat: Okay.

JR: And then I also have a strip of land, three quarters of an acre, that's to the side of the lake house to keep it private.

Pat: Okay.

Scott: And the lake house, is that a vacation rental or is that a full-time rental?

JR: I bought it with cash. It is just...I go there in the afternoon.

Pat: Okay. But it's not an investment. You consume this.

JR: It's not generating any money. Yeah.

Pat: Okay. Okay. All righty.

Scott: What's the lake house and the lot, those combined, what is that worth, you think?

JR: So the lake house right now is 1.65, and was the primary the other one you were asking about?

Pat: No, no. The lot.

Scott: What's the lot worth?

Pat: The lot worth?

JR: Oh, the lot. I just bought it for 235.

Pat: Okay. So what's your question for us?

JR: So to manage these properties, do I start, like, an S corp or LLC? Is that kind of the way to go for tax purposes?

Pat: It doesn't matter.

JR: I've never run rental properties before.

Pat: Yeah. It really doesn't matter.

Scott: It's not gonna change anything for tax purposes.

Pat: It's not gonna change anything for tax purposes.

Scott: And Washington might have, if you set up an LLC, they might have an annual tax that you gotta pay regardless of what's happening inside it.

Pat: Yeah. So, excuse me, for taxes, it makes no difference.

Scott: From a liability standpoint, you can ensure your way around that.

Pat: Yeah. So what you want to do is have a big umbrella liability policy, like, $5 million or $10 million. In fact, this weekend, I was actually spent some time with a judge who was a...he, obviously, was an attorney before, well, maybe not obvious, but he was an attorney before he was a judge. And we got on the interesting subject of liability. And he said, "Oh, Pat, look, first thing you do before you sue anyone is you do an asset search and you go deep." And he said, "Because everyone thinks the liability policy is the only thing that matters." He said, "It is not." He said, "Because you can pierce, go above a liability policy on, and then you actually go after real assets for that person." So in your situation, I would have a $5 million or $10 million liability policy on this.

Scott: On yourself, an umbrella policy?

Pat: On yourself, an umbrella to make sure that the rentals are recovered.

JR: Gotcha. I like that.

Pat: Yeah. And I mean, I personally carry a $10 million liab, which is a terrible thing to say on the radio, if someone's gonna run in front of my car, [inaudible 00:06:45.268]. They'll slip and fall at my house, the Amazon guy. You want that, but for tax purposes, the LLC or the S corp...

Scott: It's not gonna make any difference.

Pat: It doesn't make any difference.

JR: So there's nothing I can write off really well as part of managing the property?

Pat: Well, it all flows through to your... You write that off anyway, but it all flows through to your individual tax return. Yeah.

JR: It doesn't need a corporation or anything behind it?

Pat: Yeah. It doesn't mean you shouldn't have one.

Scott: I don't know.

Pat: How many rentals do you have? Two?

JR: Two.

Pat: Yeah. I don't know if I'd bother.

Scott: I have a residential rental that's not in a...it's just in my family trust, it's not in an... I didn't create a separate entity.

Pat: You just didn't bother. Yeah. It's, like, what's the point?

Scott: Yeah. I didn't... There's no point.

JR: Well, I have a friend who I was thinking about appointing as a property manager who's a former MMA fighter, and people look at him and they're either attracted or scared of him immediately.

Scott: Okay. Well, I don't know...

JR: You know, I...

Scott: I don't know if that's a quality, I don't know if that's a qualifier for a property manager.

JR: He looks like one of the Seahawks and his wife, who's my real estate agent, looks like a Kardashian. So when I go out with them, they ignore me, people ignore me and pay attention to them every time. So what I was gonna do...

Scott: You're killing me, JR. You need to get your own podcast.

JR: I don't deal well with problems, and I like, you know, to push someone that people won't mess with.

Pat: Well, JR, are you still working then?

JR: Yes. Yes, I work for a tech startup.

Pat: Okay. And by the way, JR, you said that you don't do stock, but...

JR: I'm just not experienced in the stock market. I have a 401(k), kind of a basic nest egg and the company that's managing it, you know, went from a...it's already 50% of what it was a year ago to, like...

Scott: Fifty?

Pat: That's 50, there's 50%?

Scott: There's something going on there.

JR: Yeah.

Pat: No. There's something wrong there.

Scott: Fifty percent? The markets aren't down 50%.

Pat: Yeah. There's something wrong there. But my point being is, look, every asset class lives in, you know, its own little timeframe. So people say, "What do you think about real estate?" I'm like, "What real estate?" Or, "What do you think about stocks?" I'm like, "What stocks?" Or, "Bonds?" You know, there's nothing...

Scott: And what's the objective and how long you plan on holding it.

Pat: Inherently. And so, I own all of those.

Scott: Like, even real estate, if someone says they're gonna buy a house, they're gonna sell it in two years, I'd be like, "Hmm."

Pat: Yeah. But you should spend a little bit more time on your 401(k) and you should be putting the maximum in to the 401(k) and you should have it allocated correctly because it should not be down 50%. That is crazy.

JR: I agree with your advice, 100%. I just have to find a better manager for it.

Pat: All right. Well, there's plenty around.

Scott: Yeah. Thanks...

JR: Okay.

Scott: Thanks for calling, JR.

Pat: Thank you, JR.

Scott: I hope that was helpful.

JR: Thank you. Bye.

Pat: Yeah. And enjoy, enjoy, enjoy.

Scott: Enjoy what?

Pat: Just enjoy life, I guess. Because we need to tell JR to enjoy life.

Scott: No, it sounds like JR enjoys life.

Pat: And her 61st birthday.

Scott: Look, what was she saying? She's looking for a part-time husband or something?

Pat: Someone that's gonna die soon. It's kind of what I got out of it.

Scott: Someone who's not around very much.

Pat: Someone that travels.

Scott: Next, we have Diane in California. Diane and her husband were, you know, questioning what to do with $215,000 that's sitting in a money market. And this is a question that we get from lots and lots of people that are interacting with our advisors.

Diane: Hi, how are you?

Scott: We're great.

Diane: Thank you for taking my call.

Scott: Thank you.

Diane: I have a question that my husband and I have been going back and forth with, and I need to get some decision on what to do with some money.

Pat: Okay.

Diane: Do you need to know my background a little?

Pat: Sure.

Diane: Like, how old we are or how much money we have and what's, you know, our Roth and what we have in the bank?

Scott: You know the drill.

Diane: Oh, okay. Okay. I'm 75, my husband's 74. We have a Roth that's worth about $20,000 between us. We have a Vanguard that's about $250,000 and it's about half and half, half in stock and about half in treasuries and bonds and so forth they've got it in that we've been investing in. So we're sitting in a...oh, and my husband and I together make about $84,000 a year and we have about $7,000 in income and we spend probably about $4,000 of it with expenses and so forth. So we have $215,577 in a money market account we've been sitting there for over two years at 0.200. So my husband has been saying to me forever, "What are we doing here? We're losing money. You know, inflation's eating it up and we gotta do something with this" and blah, blah, blah. So anyway...

Pat: All right. Do the imitation of your husband again.

JR: [vocalization] So anyway, what would you guys do?

Pat: Okay. Do you owe anyone in the world any money?

Scott: Mortgage?

Diane: No. Have a new car paid for, we have a house that we just bought recently that's paid for and that's it.

Scott: So the challenge here, Diane, there is no such thing as a free lunch. So as soon as we move this out of the money market and into just about anything else, we are going to take on some degree of risk. And risk might just mean a fluctuating account value, but you're also at a point where your income is more than your expenses excluding your portfolio, right?

Diane: Right. Mm-hmm.

Scott: You still got quite a few years ahead of you. You have enough time...

Diane: Well, I'm not sure about that. My husband, both of us have had cancer. I lost my both parents in their 60s, so I've outlived them a little. And my sister, when she was in her 50s. We have a lot of background of unhealthy things going on. And so, I don't know, I figure if I make it another 10 years, I'm doing well.

Pat: And are you supporting children in any way, shape, or form?

Diane: No.

Scott: Or grandchildren?

Diane: But we have a son that we really would like to help him get a house or help him do something even though he is working and he's got a pretty good job.

Scott: How many kids, how many children do you have?

Diane: Just one.

Scott: Oh.

Pat: Oh. All right.

Diane: And he's 41.

Pat: And he tries? A hard worker? Not...

Scott: I like the idea of helping him buy a house, do some sort of joint shared ownership. I mean, you could have it entitled to his name, but I would, you can kind of structure it in some way that if you need the money down the road, you can get it back, but you're looking at him strangely.

Pat: I don't know your 41-year-old son. Married? Kids?

Diane: Okay. No, he's single. He's in biochemistry and he came up here to San Francisco. We all were enjoying ourselves in LA, Southern California, weather and all. And he got up here a job that offered him a lot of money. Well, pretty good money, about $150,000 compared to what he was making. He was only making $80,000 at USC. And then he was only making $120,000 when he came up here too, another biotech. So another one he just moved into about a few months ago.

Scott: And does he wanna buy a house?

Diane: He would love to get a house and he needs a car. And I said to him, "When are you gonna do this?"

Scott: Well, if it was me, I wouldn't buy my kid a car.

Diane: No.

Scott: Because it's a depreciating... But what you could do is, for some portion of these dollars, obviously not all of it, but let's say it was even $100,000 or $150,000, have a little side agreement that you own, let's say the house is $1 million... I'm just throwing a number out. The house is $1 million, you put in $150,000 you own 15% of the home. He's responsible for all of the maintenance and expenses and property taxes and everything else on it. And then as time goes up by, you can always...

Pat: If he can refinance out of it or if he trades or whatever happens, you own that. I like that idea. So here's what I would do. I'd take $50,000, I'd buy a one-year treasury, I'd take the other $150 grand and I'd see if I could help my son out. And I wouldn't give it to him, but I...

Scott: I would structure it just like I had suggested.

Pat: That's right. And that's...

Scott: It's kind of a side agreement that...

Pat: And you're owning part of an equity position, which you...makes perfect sense.

Scott: I've done that before and have had good experience with that.

Diane: Well, would you do that then instead of putting it back into the Vanguard and into the other stuff that's there?

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

Scott: If you wanna help your son buy a house, you're in a financial position, you could do so, and then you can participate in any equity appreciation. If then later you choose to just forgive it, then you can forgive it.

Pat: Yeah. So I would take $50,000 and buy a one-year treasury, which is equivalent to a money market, and then the other $150 grand, and I'd leave $50 grand into that.

Scott: Or if you don't wanna go that route, then I would simply add to some of the positions you've got.

Pat: That's right.

Scott: But I appreciate the call. And then we've got Tony, which we call a house call. We took a call in 2021 from Tony who wanted our advice on whether he should pay off his mortgage. At the time, he was skittish about it, but... So this year, we paid him a house call to see whether or not he took our advice. And you'll get to hear a portion of both calls. So hopefully, you'll find these is entertaining as we find them.

Pat: What's the interest rate on the mortgage?

Tony: 2.9.

Pat: And how much do you have in your 401(k) and 457s?

Tony: My 401... Today, that's $680,000 in my 457 and 401 has $397,000.

Pat: And your wife, how much does she have?

Tony: That's combined.

Pat: Okay. So you've got approximately $1,080,000?

Tony: Yeah.

Pat: Approximately?

Scott: What if you did this? What if you took $148,000, or maybe even a tad bit more than that, from your 401(k) and moved it into a separate IRA, invest it a little more conservatively, then have that IRA, whatever that mortgage amount is, have it just send you that check for that amount each month to make the mortgage payments?

Pat: Or, you...

Tony: So take $150,000 and move it into an IRA and have it pay me back that amount of the mortgage is what you're saying?

Pat: That's a psychological game that we're playing here.

Scott: Yes.

Pat: How much money do you have in the bank?

Tony: You guys are, again, like the last gentleman said, you're gonna get mad at me. I have about $157,000.

Pat: Oh, this is easy. You're killing me. Tony. Tony. You answered the question for us. What do you do?

Tony: But I don't wanna deplete that. That's...

Pat: No one cares. Stop, stop, stop. You have almost $1.1 million in liquid cash. It sits in a 403(b) and 457. Don't worry about depleting that. Absolutely. Don't worry about it. If you're worried about liquidity, you've got plenty. How much are your pensions between the two of you?

Tony: You mean what's our, like, monthly or yearly?

Pat: Monthly, yes.

Tony: Monthly? Oh, $16,000.

Pat: Okay. And have you touched any of the 457 or 401(k) since you or your wife retired?

Tony: No.

Pat: Okay. Okay. Look, you go down to the bank where you bank and there's a picture of you and your wife back there, and every day they walk by and they give you a little nod and say, "Thank you," because you let them at 0.5% and then you borrowed it back at almost 3%.

Tony: Yeah. Yeah.

Pat: I don't want you to talk about it. I don't want you to think about it. I don't have a dog in this fight. You gotta go down, pay that thing off immediately, write the check.

Tony: Okay. But you know, I'm...

Scott: And you know what's interesting? Tony, you started this call and you said, "I wish I had the problems of the previous caller with his $4.1 million." And we said maybe it's realistic to take $160,000 a year out. You've got a pension, you and your wife's pensions are $192,000 and you have guaranteed cost of living, you're much wealthier than the previous caller.

Pat: You have much, much more money than the previous caller. If I did what's called a net present value...

Scott: If someone said door one is the previous caller and door two is you, I would take door two.

Pat: That's right. But yours is viewed differently because you don't view it as a lump sum, but if I did what's called a net present value calculation based on your life expectancy and your wife's life expectancy, and put a cost of living adjustment in there...

Scott: You can do whatever you want.

Pat: Yeah. But he called me...

Tony: Yeah. Well, you guys are making me feel good now, but I still feel...you know, it just makes me nervous.

Pat: Oh, cookie, no one cares how you feel. You're gonna do the right thing. This isn't a hard decision. How about this? How about I pay off your mortgage and you write me a check every month, that pays 2.9% interest for someone that has stellar credit and will never default on this thing. How do you feel about that?

Tony: Well, let me the check.

Pat: All right. I would do it. I would do it. I would do it.

Scott: You wanna loan him the money?

Pat: I'm gonna [inaudible 00:21:08.713] his home. The home's worth more than $148,000.

Scott: I'm pretty confident he's gonna make the payments.

Pat: I'm pretty confident.

Scott: He's got pensions of almost $200 grand a year.

Pat: Yeah, there's plenty to go after there. So Tony, thank you. That was what? How many months ago was that? Eight months?

Scott: Last July.

Pat: Last July.

Tony: Eight months ago, yeah.

Pat: Eight months ago.

Tony: Last July.

Pat: So Tony, tell us what you did.

Tony: Well, I took your advice to a degree. And I'd like to say that you pushed me in the right direction. You know, it was sound advice and I really...what I said then is what held true even through the process. I paid off my mortgage, but I did it in increments so that it wouldn't seem so daunting at one time. So I ended up taking some cash. I mean, I took about half cash and then did what you suggested as far as 401(k). But I started thinking, "Well, why not just, you know, just do it all at once?" And so eventually that's what I did, and just paid off my mortgage. So I had to take a little hit on the taxes, but it was worthwhile not to have...

Scott: Taxes? Wait a minute, you took...?

Pat: Because you took some money out of the IRA, so you can keep some money in the bank. Correct?

Tony: Exactly.

Pat: Yeah. And my guess is you took $30,000 or $40,000 out of the IRA, so you can keep some money in the bank. Am I close?

Tony: Thirty thousand, yeah.

Pat: Okay. So you know what's interesting about this? Is this is where behavioral finances actually comes in.

Scott: I love the situation just because we're all human and we all have our own biases, and fears, and dreams, and it drives all of our decisions, right?

Tony: Yeah, yeah.

Scott: In every area of life, and particularly our finances.

Tony: You're exactly right. I mean, you know, when... You know, there's a comfort zone that everybody has, I guess...

Pat: Not everybody.

Tony: ...and mine was not to see...

Pat: That you have.

Tony: I guess... Yeah.

Pat: You talk to someone who's 65 and never saved a dime, I'll tell you, very different comfort zone level.

Scott: So you went through this process, at the end of it, you feel all right?

Tony: It feels strange. You know, of course, I still have to pay taxes. That's unavoidable, you know, property taxes. But nonetheless, I mean, it just feels... I mean, not having a house payment is just, I don't know, it feels good not to have a mortgage, first time ever. I don't know if you... I live in Wilton, California. So, I don't know if you know that area.

Pat: I do. I do. So, Tony, the interesting thing about this, right, the interesting thing about...your net spendable income every month has gone up because of the fact that that money's not going out to the mortgage. And, you know, we see it all the time where people, there's this psychological that you have to have a mortgage. You don't have to have a mortgage. And by the way, you should make sure that your portfolio, that $1,080,000 that you have in your IRA is well diversified so that you can get some peace of mind as that goes through these markets ups and downs.

Tony: Yeah. It hasn't been... I mean, yeah, obviously. I mean, a little bit of a hit in the last few months, but it hasn't been... I mean, I've been through... You know, having it so long, I've had this happen in the past, but, you know, it's all, you know, it's not about panicking or doing anything crazy. I'm not doing too bad.

Pat: Yeah, I think you're doing great. I think you're doing great.

Tony: Yeah. I mean, as far as my investments. So, you know, I'm not too nervous about that. You know, I've been listening to both of you for a long time and I've always wanted to call in and, you know, sometimes you need that little push to say, "Well, if they say it's okay, and they live it every day, you know, maybe I'm being too conservative."

Pat: You know, Tony, with that advice that you just said, I'm gonna have my wife actually start listening to this show because we talk about behavioral finance, today, my wife and I had a discussion about something around finances, and we both had different views of it, right? And so, I could anchor my views 100% in logic because this is what I do and I try to remove the emotion from it, but it doesn't moot my point. So we appreciate you listening to the show and congrats on having the paid off mortgage.

Scott: Yeah. Thanks for calling.

Tony: Yeah. Well, thanks both of you. Thank you.

Scott: We're gonna actually take a quick break and when we come back, we will continue on with some more of our best of calls for 2022.

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

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

Pat: Pat McClain, and we're continuing with our best of calls on this Christmas Eve.

Scott: Yep. We're in Texas with Pam. She wanted to know how to invest $400,000 from the sale of her house.

Pam: Hi guys.

Scott: Hi Pam.

Pam: How are y'all?

Scott: We're doing great. How are you doing?

Pam: We're doing good. Okay. Here's my question. My husband's two years from retirement. We have two homes totally paid for. We're gonna be selling one home and moving into our lake house when that happens. I work full-time. I'm a real estate broker. He's an engineer. In two years, we'll both be 70. So we'll take our max Social Security. I have probably $300,000 in Edward Jones, and the house we'll sell will be about $400,000 cash. We haven't had any mortgages for over 10 years.

Scott: Okay. You're a conservative real estate agent? Most of your peers don't live that way.

Pat: I knew there was one left. There had to be one.

Pam: There's one of us that pay our taxes early and have money in the bank. Yeah.

Pat: All right. So much for those real estate clients we were going to get, Scott, but thank you. I'm sure...

Scott: Well, come on. Oftentimes, it seems like, particularly at the end of a market cycle, they're...

Pat: They load up.

Scott: ...loaded up. Yeah.

Pat: Yeah.

Scott: Big mortgages.

Pam: Yeah. Well, right now, for the next two years, we'll be shaking out all those realtors that don't need to be in this business. This is my 48th year, so it's not my first rodeo.

Scott: And she can actually use that term, coming from Texas. Not my first rodeo.

Pat: Not my first rodeo.

Pam: Yes. Exactly.

Pat: That means nothing to...

Scott: [Crosstalk 00:28:09.045] me living in the suburbs of Northern California.

Pat: Yeah. That means nothing to us people out here. So anyway, so you've got $400,000 in cash from the sale of the house?

Pam: Yes. And I want to invest that somehow that it'll throw off enough to pay my property taxes here, and insurance, and a trip to Hawaii every year.

Pat: Got it. But you're talking in two years.

Pam: Yeah.

Scott: So how much on an annual basis is that?

Pam: Will we get?

Pat: No, no, no.

Scott: No, no.

Pat: How much money do you need?

Scott: How much money do you need to do what you just said?

Pam: Oh, I'll probably need about $25,000, $30,000 for that.

Pat: Okay. So $400,000, at $25,000, that's a 6.25% rate of return. So you're not gonna get there without risk.

Scott: Or...

Pam: Okay.

Scott: We don't talk about it. I mean, one way to do this, if this is truly the one thing you're trying to accomplish with those dollars, you could buy an immediate lifetime annuity, joint and survivor annuity on you and your husband. When you do something like that, you give up control of your principal, it's gone, you don't have the $400 grand. It's kinda like buying a pension.

Pam: Right.

Scott: You'll get a higher equivalent yield because you don't have the principal anymore.

Pat: What other assets are there?

Scott: I'm just throwing it out there.

Pat: Listen, Scott, I know. I hear you.

Scott: I don't think that's exactly what it would end up coming down to, but...

Pat: That's right. So...

Scott: What are you taking out of the $300,000 in your brokerage account?

Pam: Well, we plan to, like, take $2,000 a month.

Pat: Okay. That's 24, so that's 8%. And are there any other assets anywhere? 401(k)? IRAs?

Pam: Well, we have a building that... No. That investment account has all those and we probably have $100,000 liquid in our savings all the time.

Pat: Okay. And what's the value of the building you own?

Scott: And are either one of you on Social Security now?

Pam: No.

Scott: Okay.

Pam: No. We wanna wait and take the [crosstalk 00:30:16.320].

Scott: That's wise.

Pat: And what's the...?

Pam: So we should make about $7,500 a month on that.

Pat: And what's the value of the building that you own?

Pam: It's worth about $100,000 and it has an apartment in it that will probably throw off about $12,000 to $15,000 a year.

Pat: Well, you know, we don't...

Scott: If you can get 12% to 15% gross rent on it, I'd go buy more of those things.

Pat: That is really good.

Pam: I would like to.

Pat: That's really good. That's really, really good.

Scott: It's probably worth more than that.

Pam: Yeah. It's a lake property, so...

Pat: Okay. So the answer to the question is to achieve that objective right there, and Scott is right, an immediate annuity is an answer. The reason I would probably stay away from it is because one of the things that you said you wanted to do with the money is to go to Hawaii every year. You're in your 70s, the idea of you going to...and it happens. I have clients that are in their 90s that go to Hawaii, but...

Pam: No, I only think we'll go for 10 years of travel. And I figure about 80, we'll just stay home.

Pat: Pam, you are the perfect candidate for a financial plan. I mean, like, meeting with an advisor, you put all these inputs in, you can do lots of different what if scenarios and you can say, "Okay, 10 years of Hawaii," and you can plug all those in. Because I think my concern anyway is if you were retiring today and you said, "I'm gonna take $2 grand a month out of my brokerage account, and I went $25 to $30 grand a year out my 400,000 from the sale of the house," my concern is that you're gonna watch your savings dollars start to decline.

Pam: Right.

Pat: And it's not that you'll run out of money, but you will use that up because of those...the numbers you gave as percentages that you were taking out are high numbers.

Pam: Yeah.

Pat: Right?

Scott: In today's world.

Pat: In today's world. So they may not be...if interest rates in 2 years are, you know, the 10-year treasury is at 5%, holy smokes, there'll be a lot of damage between now and then, if it gets to 5%, I'm just telling you.

Scott: On a 30-year mortgage.

Pat: On a 30-year mortgage. So what happens is that in today's environment, now you're asking me about something in two years from now, but today's environment, those types of withdrawals that you wanna take from those two accounts are high as a percentage.

Scott: So we need to find some other creative ways to make this happen.

Pat: Or take less money, or realize you're using up some principal over time and that you know how long you're using that principal up over time. But what you just said to me is, "I wanna take..."

Scott: Back to my point on...I mean, if the plan is to use up some principal over time, you could actually say, "We're gonna earmark 10 years' worth of Hawaii." My challenge there is what happens at year 11 and you still feel good and you want to go again, and you can't?

Pat: Yeah. Right. But the numbers you share...

Pam: "You have to drive to Galveston. This year, Hawaii's in Galveston."

Pat: Oh, God. [Inaudible 00:33:35.945]. That is, okay, we were, like...

Scott: In August.

Pat: "Galveston's cheaper. Just pretend. Look, we're going to a luau." "Well, that's not a luau."

Scott: Maybe your eyesight will be so poor at the time, you can't tell the difference.

Pat: We were like, "Well, this isn't a luau. That's not a roast pig. That's a chicken." Anyway.

Scott: You're two years...

Pat: We have beat this joke up.

Scott: You're two years away from retirement, go get a financial plan.

Pam: Yeah.

Scott: We're in Florida with Rose. Rose wanted to know whether she should pay off her mortgage or not.

Rose: Hello. Thank you for taking my call, guys.

Pat: Oh, thanks Rose.

Scott: Thanks for calling.

Pat: What can we do for you?

Rose: Oh, my. Well, I have a couple questions that I need to run by you and see if you guys can help me.

Scott: Great.

Rose: I have a mortgage, a small mortgage of about $130,000, and I have a 3.25 interest rate. I have the money to pay. It is set up aside on a high-yield savings account because I didn't wanna take chances.

Pat: Got it.

Rose: But I am always afraid to pay off this mortgage and run out of money, basically.

Pat: So, Rose, if I may. I like where you're going with this. How much money do you have in this high-yield savings account? Let's not talk about the mortgage, but how much money do you have in the high-yield savings account right now?

Rose: I have about between... I call it the house account, which is the mortgage and our emergency fund, so it's about $280,000.

Pat: Okay. And then do you have any money in brokerage accounts or IRAs or anything like that? Stocks? Bonds?

Rose: Yes.

Pat: Tell us about that.

Rose: We do have a total, well, with this money, with the high-yield saving accounts, we have about $2 million.

Pat: Okay. So you have, in addition to this $280,000, you have $1.72 million in other investments. How old are you?

Rose: Yes. Sixty-three.

Pat: And are you married?

Rose: I'm married. My husband is 64.

Pat: And are you receiving...?

Rose: Oh, 65. I'm sorry.

Pat: Are you taking any money out of this $2 million a year to live on?

Rose: No, we are not taking any money.

Pat: You gotta pay this mortgage off.

Rose: My husband has a... Well, my husband has a pension. It's not big, but he has a pension and we're not taking Social Security yet. We are waiting until at least his full retirement age. My problem with paying the mortgage is that...

Scott: Yeah. What's the concern here? What's the risk?

Rose: I'm concerned that if we decided to sell the house and move to where the kids are, closer to the kids, then I won't have money to for down payments.

Pat: No, you would have the money for down payments. That isn't even an issue. The thing is, you know what I love about this, Rose? You took your money and you put it in a high-yield savings account. You didn't say a savings account, you said it's a high-yield savings account. And that high-yield savings account is yielding what? A half a percent?

Rose: Yeah, 0.5%.

Pat: Half a percent? How about...?

Rose: It's ridiculous.

Pat: How about we put it in a super high-yield savings account where we can yield 3.25%?

Rose: That would be great, but, you know, my concern is that we are sort of running... We have this emergency fund, and because I'm not on Medicare yet, my husband is, so I get all the benefits of my health insurance, so I pay zero for health insurance. If I pay, and I'm thinking that we're gonna need to use this money for this year until next April when I am on Social Security or on Medicare.

Pat: No. No.

Rose: Instead of taking money out of our retirement accounts, because if I take money, then it becomes...that is income and then I might not [crosstalk 00:37:58.187] supposed to be.

Scott: Rose, here's how I look at it. So, like, I don't like wasting money on electricity, my electricity bills. And if I'm not in the room, the lights are off. And I've always yelled at the kids because they don't turn the lights off, but I like the lights off. And I thought that's, like, a normal behavior. Most people I know, that's kind of the same thing, but then I met this one woman. She said she grew up, her parents told her that that was a sign of poverty to have a dark house, so she always liked all the lights on in her house.

Pat: Really?

Scott: Correct. I'd never met anyone like that. I'm looking at her going...

Pat: Wow.

Scott: Right. So she says, like, "This is what I was brought up, do you want a nice bright house all the time, all the lights on?" So if you're the type of person that likes all the lights on, you don't mind just spending extra money for nothing, then keep the mortgage.

Pat: But there is no, there is none, you can not make an economic argument to me about why you should have that mortgage. There's none. There's none. You've got $280,000, you owe $130,000 on the house. Take $150 grand out, you still have... Right? You take $130,000, pay off the house, you still have $150,000 in a high-yield account and then we have...

Scott: And your house money, your emergency money.

Pat: And your emergency... And then you have another $1.7 million that you are not spending now.

Scott: And you've got a pension coming in and it meets your needs.

Pat: And you've got a pension. You can't make an argument. So you called, you wanna argue with us and we'll tell you to do whatever you want, right? Makes you comfortable, but you called and ask for our opinion and our opinion is absolutely pay this off. Unless, unless, what's 2.75? So the difference to you is $3,000 a year in interest payments by keeping this mortgage.

Scott: That's right, 250 bucks a month.

Pat: That's 250 bucks a month. So if it makes you feel better, if you wanna waste 250 bucks a month, waste the 250.

Scott: You can turn the lights on too.

Pat: Yeah. You can do anything you want.

Rose: I just got to worry that if I take money from our...

Pat: Okay. I can't help you there.

Scott: Well, Rose, do not worry.

Rose: Okay.

Pat: You are fine.

Scott: Look, here's the reality. Part of the reason you have these dollars is because you've worried since you were a young girl about money.

Pat: That's right. You show me someone that doesn't care about money...

Rose: Oh, yeah.

Pat: You show me someone that doesn't care about money, I'll show you someone that doesn't have it.

Scott: And I bet when you were a young bride, you would take some dollars, and kind of hide 'em away from your husband or to a separate account and save and... Right?

Rose: Jeez. You guys a financial guys and also psychic?

Pat: No, no. We've been doing this for 30 years. You're not the first Rose we ever met.

Scott: Psychic. This is an emotional issue here, Rose. This is not a financial one. The financial one's easy. You know what the right thing to do.

Pat: You know what to do, is you're trying to get us to talk you into it, but we're not gonna get...

Rose: I am afraid to do it. That's right. You guys are psychic.

Pat: Then don't do it. It's just gonna cost you... You're giving up $250...

Scott: Oh, we're psychic.

Pat: You're giving up $250 a month opportunity cost by not paying off the mortgage, but it's not gonna make a difference in your life at all.

Scott: It's not gonna make a difference.

Pat: It's not gonna make difference.

Scott: Just like my friend who keeps the lights on in the house.

Pat: It's not. So if it makes you feel better, you're gonna have to quit talking about it though if you don't do it. You can't ask anyone else. You can't call any of the shows. You certainly can't call us.

Scott: She can do whatever she wants.

Pat: I guess she can. Keep this thing on the burner forever.

Scott: You just can't ask us again.

Pat: All right. So our answer is financially, you should pay this mortgage off tomorrow. Emotionally, eh, you're on your own.

Rose: Okay. I got it.

Pat: If you were my older sister, I'd say to you, "What are you? Out of your mind?"

Scott: Because you're Irish and you yell at each other?

Pat: Yeah. And we scream and then I tell her to never come to my house for holidays anymore. If you were my oldest sister, my...

Rose: All right, you guys.

Scott: All right, Rose.

Pat: There you go. Appreciate the call.

Scott: Thanks. And finally, for our best of call is Rob and Peyton. Rob had his daughter on the phone to get some sound advice from, I think, it was just from Pat, but...

Rob: Thank you, and thank you for your service to financial planning.

Scott: Thanks.

Rob: I have both myself... I'm the dad and then I have my daughter, Peyton, on the line with us.

Scott: Oh, wonderful.

Rob: And we're trying to guide her in the right financial direction. Our questions today are kind of on the other side of the spectrum of financial planning and retirement, more of the beginning side. So you know, this is one of these things that, you know, I wish I knew then what I know now, is what I'm trying to help her with.

Pat: Got it.

Rob: So Peyton is, she's 22. She's a recent graduate from college and has just started her career two weeks ago.

Pat: Congratulations, Peyton. Peyton, where did you go to school?

Peyton: Thank you. I just graduated from Cal Poly, San Luis Obispo.

Pat: Oh, good for you. And what'd you study?

Peyton: I studied agricultural communications and now I'm doing Ag marketing.

Pat: Oh, good for you. So...

Scott: Wow. You're using your degree, agricultural communication that let us speak into the...

Pat: Yeah. Dancing raisins.

Scott: Yeah. Yeah. Right. Oh, good for you.

Rob: Perfect.

Scott: Good for you.

Pat: By the way, for the rest of the listeners across the United States, this is a college that is a few hundred miles away from where we broadcast, from Sacramento, and it is a very difficult school to get into.

Scott: Yeah. It's very prestigious.

Pat: Very, very prestigious, in a beautiful location. So Visit California.

Scott: And you work for...? Peyton, so is your job with a large employer or an association or who do you work for?

Peyton: I'm working for a large employer now.

Scott: Okay. And I imagine they offer a 401(k)?

Peyton: They do. They do. And I'm trying to navigate everything that comes with that.

Rob: Yeah. So that's kind of our question. So walking into this, she has no debt. So we saved via a 529 plan for the last 18 years, so go ahead and put me down for a hard no on forgiving student debt, as a side note. And she also has approximately $30,000 now from savings over her life from various things, jobs and 4-H animals and...

Scott: Oh, good job.

Pat: Wow.

Rob: And actually dad harvesting some birthday money over the years.

Pat: Good job, Peyton.

Rob: Yeah. So she's kind of on the other side where she doesn't have debt. She actually has some money hopefully to invest.

Pat: Well, the first thing Peyton wants to do is put the maximum into the 401(k).

Scott: I wouldn't say the maximum. She's not gonna be putting in six...

Pat: The maximum is a percentage of pay that the plan allows.

Scott: Well, some of 'em allow 30% of pay.

Rob: Right. Right.

Pat: I would think 10 to 15% into the 401(k).

Rob: Yeah, so this is what I'm proposing for her. Before the 401(k) question, is, you know, so you're always trying to save, you're trying to save for houses probably down the road. You know, that seems like a long ways down the road, but in the next 5 to 10 years, that's gonna be something that she's gonna be interested in. And to give her a good financial base, I'm recommending that she lives at home for a year or two. Understanding that comes with some sacrifice because you're back living with mom and dad, right? And it's, "I was in college, you know, kind of free and, you know, I'm back with mom and dad, so I realize there's some sacrifice there." But I think that would give her a great financial base going forward. And we can get to that. So as a...

Scott: So I gotta tell you, Pat and I are both looking at each other like...

Pat: I wouldn't...

Scott: So here's kind of my thought about this. Obviously, she knows how to save, she's got money saved. And it's always this balance between enjoying some life today and saving for tomorrow. Someone at 22 years old, if they're saving, let's call it, 15%, what was that book that was written 100 years ago? The...

Pat: The wealthiest barber.

Scott: Something about the... What is the wealthiest...?

Pat: The wealthiest barber.

Scott: It's all about saving 10% of your income. If you save 10% of your income from the day one, you don't have to worry about it. Save 10% of your income, stay out of debt, you don't really have to worry about anything else. So from a typical new college grad, it's, like, if you can be saving 10% to 15% in your 401(k), I'd use the Roth option at this income level. Then, like, if you choose to go to the weekend with some friends for their bachelorette party or go out to dinner with some friends, like, you can feel good about those sort of things.

Pat: And living at home is, you know, we shouldn't confuse the money thing with the social thing and a 22 year old, right? So you called... Look, my daughter lives with us. I have four children. My daughter lives with us, but it may be economics for her, but it wasn't for me. I didn't encourage it one way or the other.

Scott: Well, she moved in, she graduated in COVID time, right?

Pat: She graduated during COVID. That's right. That's right. Yes.

Scott: Probably sent home in the middle of COVID.

Pat: She...

Scott: Never went back.

Pat: No, we went to her graduation.

Scott: Okay. Whatever. I don't know what I'm talking about, but...

Pat: Anyway.

Scott: Continue on.

Pat: She decided... So she teaches at a low-income school and doesn't make a ton of money, but teaches in a low-income public school and will be attending law school next year. And will probably be moving out again. So for that was just easy. It had nothing to do with what I want her to do or not want her to do. And quite frankly, I don't mind. In fact, I like her living there. It's finally nice to have an adult in the room.

Rob, don't confuse her living...

Scott: My oldest daughter, I love dearly. We have a great relationship and she was home for a couple months during COVID. She didn't last... And it's just our relationship is much better when she's not at home.

Pat: So Rob, if that's what Peyton decides, then Peyton decides, right? I don't know.

Rob: No, I agree. I mean obviously, 100%, her choice. I'm just trying to, you know, show her the...as you're building this income, at least in the first year, then, you know, she's able to see things grow. You know, compounding interest. She'll see that...

Scott: You know what's more powerful for her? I'm gonna challenge you here. If she really focused on her career, right? So she worked hard to... She, obviously, worked hard in high school to get into Cal Poly. I don't know how she graduated, but she graduated at Cal Poly. So I don't know where she fit in the class, but it doesn't matter. She's got a job now. Once you get your first job, your GPA...all that stuff kind of is irrelevant, but the better you can do in your career to become more and more valuable, first to your employer, and then to wherever that leads, that's gonna yield the greatest economic benefit over your lifetime. If you can get to the point where you're suddenly in the top 2% or 3% of income earners because you're so good at what you do, that's gonna...you'll have much more financial independence. You can't really bank on that.

Pat: So, we're getting a way offline, and we have lots of young people that start with us right off college and they ask me, "What should I do?" And I always tell them to go join Toastmasters to learn public speaking, because you can articulate your ideas, it makes you much more valuable in the marketplace. So in saying all that, Rob, yes, if she lives at home and she saves... If she's saving for a house, I would buy one-year treasuries or put the money in a high-yield bank account.

Scott: She's probably not gonna buy a house for a few years.

Pat: Yeah, but I still wouldn't invest it in equities if I thought I was gonna buy a house in the next five years. Scott?

Scott: I don't know. It's a good time to be investing. I would recommend taking some of that, maybe make a Roth IRA contribution for this year.

Pat: No, no. After you do the Roth, you know, 15% of pay...

Scott: Into the 401(k).

Pat: Into the 401(k), do it Roth. I'm assuming you're making less than, you know, a ton of money. And then maybe a Roth IRA because you could draw the money out of the Roth IRA for the purchase of a first-time home.

Scott: Yeah, but for the $30,000 she has to invest, I wouldn't...

Pat: Oh.

Scott: I wouldn't leave it all in cash.

Pat: I forgot about the $30 grand.

Scott: Yeah. I wouldn't leave it all in cash.

Pat: I'd invest half of it.

Scott: Yeah. I'd invest some.

Pat: Yeah. And then the money she saves on a monthly basis. That's what I was talking about, putting it into a high-yield money market.

Rob: Right.

Scott: Oh, to save for a house?

Pat: To save for a house.

Scott: Yeah, I would agree with that.

Rob: Right. Yeah, I was thinking that she would contribute to the 401(k) to the amount that's going to be matching, which is gonna be 4%. And then the balance some sort of investing you all are suggesting a Roth where she can borrow against it, if I'm hearing that correctly?

Pat: That's right, but she can...

Scott: She can withdraw from it, not borrow, but I would recommend contributing more to the 401(k). And for one simple reason, if you listen to the show for a period of time, where's the majority of people's assets? It's in their company retirement plan. Why is that? Because the money gets yanked out of the paycheck before someone has a chance to spend it.

Pat: And by the way...

Scott: It's the best forced savings there is.

Pat: Rob, She'll have a 401(k) Roth option on her 401(k). So we're saying do both, the Roth option on the 401(k) and the Roth, and then invest half of that $30,000, I'd take $15 grand and I'd put it in the total market. That's what I would buy with it. I'd leave the other $15,000, I'd probably buy two-year treasuries with it.

Scott: Oh, you put it in a high-yield savings...

Pat: Or a high...

Scott: High-yield savings account.

Pat: Slow down here, buddy. Or I would put it in a two-year treasury or I would put it in a high-yield savings account.

Scott: Or two-year CD.

Pat: Yeah.

Scott: It's kind of hard to buy a treasury with $15,000.

Pat: Okay.

Scott: It'd be a lot of work for her.

Pat: All right.

Pat: Hey, Rob and Peyton, appreciate the call. I hope that was helpful.

Pat: Yes, appreciate that.

Scott: Yeah. And have a wonderful Christmas, Happy holidays, and we'll see you next week.

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