December 3, 2022
- Is the classic 60-40 portfolio model dead? 00:30
- Should I convert my traditional IRA to a Roth? 15:10
- Should I cash in my mom’s EE savings bonds? 26:35
- How does FDIC insurance work? 36:20
- Scott and Pat examine the collapse of FTX 43:20
The rumored death of the classic 60-40 model portfolio, the inverted yield curve, converting a traditional IRA to a Roth, and selling a parent’s EE savings bonds.
On this week’s Money Matters, Scott and Pat discuss whether the classic 60-40 portfolio model is actually dead. They then answer a call from a Washington investor who wants advice on the tax implications of converting a traditional IRA into a Roth IRA, before advising a son who has questions about selling his mother’s EE savings bonds.
Join Money Matters: Get your most pressing financial questions answered by Allworth's CEOs 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 firstname.lastname@example.org.
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-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters." I'm Scott Hanson.
Pat: I'm Pat McClain.
Scott: Thanks for joining us. All right. We're kicking off December of '22. Both myself, my co-host, we are both financial advisors, certified financial planners, chartered financial consultants. We spend our weekdays helping people with their finances and broadcast our program on the weekends, being your financial advisors on the air or podcast or whatever the case may be, and glad that you are taking some time to join us today. And I think we've got a pretty good program.
Pat: We'll see.
Scott: And I tell you, I mean, 2022 is going to go down as not a great year for investors by and large.
Pat: Yes. Across... Maybe if you were heavily into oil.
Scott: Yeah. Oil hasn't... I mean...
Pat: For a period of time.
Scott: Yes. If you were a perfect...
Pat: Yeah. I don't know where it started and finished off all that... Yeah. If you were a perfect trader.
Scott: I mean, it just a strange time. When you look at it, it's been a horrible year for the bond. Things have been a little better lately.
Pat: The bond market. There's just...
Scott: And the stock market. The stock market, essentially, entered a new bull market if you look at from bottom to up 20%, if that means anything at all. I don't know what it does, but that's what people... The bond market looks like it had at least longer-term bonds. Interest rates have come down. But where could you've hidden this year? Real estate prices are declining.
Pat: And will probably continue to do so.
Scott: Gold has done nothing. Especially, this big hedge for inflation, it's done nothing.
Pat: The only place you could have been this year is cash.
Scott: But you don't want to be cashing as an investor. You want to be cash for short-term...
Pat: That's right.
Scott: To stash your short-term needs.
Pat: Yeah. But even as an investor, a well-diversified portfolio, obviously, is what we believe in, because we don't believe that people can actually call the ups and downs of the markets in any particular form or fashion that makes sense, including ourselves.
Scott: So, it's Interesting. I've seen a few articles as of late. Is the 60/40 model dead? Now, the 60/40 model, I mean, in its purest form it's just 60% stocks, 40% bonds based upon modern portfolio theory. Frankly, I don't think it is dead. Now, our portfolios aren't exactly 60. We have some other things in there besides just stocks and bonds. But primarily, you're going to... We believe in equities over the long term. We believe stocks do well over long periods of time.
Pat: And why do you own anything else then, Scott?
Scott: Either because you have an income need that's shorter-term that you can't wait that long for the markets to go through the cycles, number one. Or number two, to help balance out a portfolio so the swings aren't as bad. So, your $2 million account doesn't fall to 1.1 million, and then...
Pat: And then go up to 3 million and...
Scott: And you're freaking out. Yeah. And it's too much to take.
Pat: Yes. And so, what happens is the 60/40, if you look at modern portfolio theory, in a return curve is, like, the optimal place where you're going to get the highest rate of return for a given amount of risk. 70/30, your return goes up a little bit, but the risk goes up significantly.
Scott: Yeah. And actually, 80/20 historically has been where you've got the lowest amount of risk.
Pat: For the return.
Scott: Even less... Oh, it's less risk than being 100% in bonds as far as volatility.
Pat: That's correct.
Scott: Assuming that we're diversified. I mean, these are broad assumptions. Assuming you're broadly diversified amongst your equities and your fixed income. So, these articles, is the 60/40 model dead? And I just thought back to financial crisis in 2009. It was the same... We heard the same stuff. And I thought about, in our industry... So, we're an advisory firm. We've got 100 and some advisors, and we've got an investment team that builds portfolios. And our advisors use a variety of different models, and then we do some custom stuff as well. But if we were a small shop, we might outsource this, that investment management part to some third party.
Pat: Many smaller firms do.
Scott: Many smaller firms do. And I remember one of the largest kind of outsources of investment management in 2009 came and started saying, "Oh, the traditional asset management's dead. We need to look at alternatives now." And it was all these different alternative strategies. This was in 2009 when the stock market was at its lows. And then if you look at the subsequent decade since that time, people would've been much better off to stick with the thing that had worked over the last 100 years, instead of trying to say, "Well, maybe it's different this time."
Pat: Scott, we see this in pension plans all the time. Oftentimes, large pension plans, especially in municipality or state government, have political influences over them that aren't good for their returns.
Scott: You think?
Pat: They're not good for their returns over the long term.
Scott: There's a lot of debate right now in ESG.
Pat: Well, I agree with that. I've always... ESG means it's...
Pat: ...social governance. It's a form of, you know, investing for the good of all, or whatever that means. And so, I've agreed with that. ESG, I've always said...
Scott: You agreed with what?
Pat: The fact that no one really can define what ESG means, my environment, or my social, or my governance.
Scott: It is so funny.
Pat: It's so much different...
Scott: You look at the political environment today, the polarization, right, of ideas. And you can get... There's some really strange extremes right now, right? We're not going to even talk about it. But we all know what we're thinking. So, you can have that same mindset as an investment overlay. How in the world do we get people to agree on a pension to... If you're a pensioner, if you're a firefighter's pension, like...
Pat: How are we going to get everyone to agree what's the...
Scott: Right. It's hilarious.
Pat: Yeah, it is. It is. I mean, but that's just human nature.
Scott: But kind of back to... As far as an individual investor right now, it's been a rough year. Where the market's going to go, still volatile. The reality is human nature hasn't changed, number one. Number two, market cycles will continue doing what they've always done, which means there are times of expansion, there are times of contraction.
Pat: There are times of certain asset classes that are in bubbles.
Scott: Those things aren't changing, and furthermore, nobody can predict the timing of these things. If your investment strategy at this point is you're going to somehow time the markets, figure out when's best to get back in...I mean, look at the run-up we've had in the stock market in the last month or so. It's phenomenal.
Pat: Or look at the beginning of COVID, right, or at least the U.S. response to COVID, how quickly the market fell and how quickly it recovered. If you had been on vacation for three weeks, you would've missed the whole thing. It was unbelievable.
Scott: Yeah. So, look, the next... What's 2023 look like? We have no idea. Maybe inflation suddenly is coming down, maybe we totally dodge... Look at the third quarter, we had pretty decent growth. 2.4, 2.6%, something like that. Kind of surprising. GDP growth.
Pat: Well, I most certainly think inflation is absolutely coming down. I don't... Quite frankly, I mean, even our own chief investment officer, Andy Stout, I don't think that they're going to raise interest rates like they said they were. I think that what happens is, it is taking a while for the numbers to work themselves through the system.
Scott: Well, the market's clearly sane. That's why we've seen long-term interest rates come down.
Pat: That's right. And short-term interest rates. So, we're in an inverted yield curve where short-term interest rates...
Scott: Is significant.
Pat: Yeah. With the most inversion...
Scott: Since the early '80s.
Scott: Which means short-term interest rates are higher than long-term interest rates.
Pat: Which tells us that the near-term, things could be rough, the long-term, people think it's going to be fine. The market is still...
Scott: Stagnatory recession.
Pat: Yep. No. Of course. No, that's the near term, that we're entering into a recession.
Scott: Yeah. But, you know, essentially... So I went, the day after Thanksgiving... No, it was... Yeah. The Saturday after Thanksgiving, a week ago, I went to get a Christmas tree. My wife wanted...we usually get it a little later, but my wife wanted to get a Christmas tree. The kids were home, "Let's go get a Christmas tree." So, I went to the local kind of... We've given up on going and trying to cut one down and all of that. I have never had a good experience cutting...
Pat: Well, Scott Hanson, when he was in college, owned a tree-cutting business, a tree-trimming business. So, if anyone should be able to go out into the woods and cut a tree down, it would be you.
Scott: No. Rich people hired us to trim their trees in Santa Paula, Southern California.
Pat: But you're used to cutting trees down, is my point. Not with a handsaw with your family around you though, right? You have more experience cutting trees than most.
Scott: I remember one year we went way out in, like, in the boonies. And we live outside of Sacramento in the foothills of the Sierra, and the further you go up the foothills, the stranger things get. They've got the banjos, you wonder if there's a dentist anywhere in sight. It's just an interesting place.
Pat: We have listeners there, Scott.
Scott: I know. They know too. They know. They see their neighbors. It's not them, of course, we're talking about. Their neighbors.
Pat: We have lots of clients up there.
Scott: I know. They understand the foothills.
Scott: So, we go out there to look for a Christmas tree, and apparently you can come, like, midyear and pick out your tree and put a little ribbon on it to signify it's yours. So...
Pat: Are these in paid lots, or out in the woods?
Scott: No, it's not in the woods. It's out in...
Pat: Someone's got...
Scott: You're not allowed to go out in the woods actually.
Pat: You are in parts of California...
Scott: Maybe you are now. Now you are to help with the fires.
Pat: That's exactly why you are...
Scott: You weren't before, you know, it could put you in prison over there. But... So we go, like, "Oh, you see this tree 30 yards away?" You walk up to it, ribbon on it. "Oh, there's one." You walk up, ribbon on it. We spent 45 minutes, we left, we didn't get any tree. This was years ago. So that was... The last time I said, "We're not ever doing this again."
Pat: Because you need to scout out your trees earlier in the year.
Scott: [crosstalk 00:10:55] inflation, by the way. So, we go to get the Christmas tree, and someone has a little stand by the freeway they do every year. So that's where we bought the trees the last number of years. We went there to get the tree. And I always want the smallest one because I'm the one who's got to lag it in the house, but the rest of the family likes a little bigger one. Anyway. So, I look at the tree, it was like $240 for whatever the size we typically get.
Pat: For 240, it should be able to walk into the house.
Scott: I'm like, "240?" A tree is, like, 150 bucks or something. So, I told my wife, I said, "We're leaving here. We're going to Green Acres Nursery." And we essentially bought the same tree for 150 bucks or whatever.
Scott: But the reason I'm bringing this up is just the whole inflation thing. The reality is, I could have afforded a $240 tree.
Pat: That's right.
Scott: I didn't have to sacrifice anything in my monthly expenditures.
Pat: But it would've bothered you.
Scott: It did bother me. Just, like, at some point, "Hmm." So consumer behavior can change on things.
Pat: Oh, it does. Yeah. Absolutely, which is why the consumer price index is questionable at times because it assumes people don't change behavior when the prices of things go up.
Scott: I changed behavior that day on a Christmas tree that I do purchase once a year.
Pat: And it's a luxury, clearly a luxury. Yes.
Scott: It's a blessing. A luxury, yes.
Pat: But people's behavior actually will change both in a deflationary environment and an inflation, which is... When they talk about the consumer price index, you're like, "I don't think it really kind of works like that." Because people will actually change their behavior based upon cost given an alternative thing to consume.
Scott: Yeah. The supermarket I go to, the salad bar used to be 7.99 a pound, then 8.99 a pound, then 9.99 a pound, but the other day it was 10.99 a pound. And I thought, "Wow, you go from 8 bucks to 11 bucks...
Pat: That's a lot.
Scott: ... in three years."
Pat: That's inflation.
Pat: But we may be through the past. So back to the...
Scott: But we may be through that.
Pat: We may be through this marketplace. We may be through. Don't give up on a... If you have a written investment policy statement, which most individual investors don't. But they should have at least a thesis of what their investments are either written, or they should be able to tell you what it is.
Pat: You should have a thesis about your long-term investments and what you're trying to achieve with that investment.
Scott: And our philosophy, which works well for many and most, is building a portfolio that, A, is designed to weather the storms. Who knows what they're going to look like? No one predicted COVID. Weather the storms and having asset classes that are in line with what your needs are, what the cash flow needs are, when you're going to need the money, and how much ups and downs can you withstand, risk tolerance.
Pat: And how much do you need?
Scott: That's correct. That's correct. Because if you have tons of money, you can be as conservative as you want, or as aggressive as you want.
Pat: And you'll be fine. So, yeah.
Scott: Anyway, I'd love to take your call, answer a question. If you'd like to join the program, 833-99-Worth is our contact, and you could call us and we'll schedule a time to get you on. 833-99-Worth.
Pat: And before... And we're going to take some calls, but we're going to come back and talk about this. Last week we had talked about more of these cryptos going BK, bankrupt. And I think I have stated then...
Scott: This SBF dude was something else.
Pat: I think we just started. But we'll take your calls and then we'll come to this. So it's 833-99-Worth. We're in Washington State talking with Elizabeth.
Scott: Hi, Elizabeth. You're with Allworth's "Money Matters."
Elizabeth: Good morning.
Pat: What can we do for you?
Elizabeth: Okay. I have a question about tax strategy, about conversion. Okay. So, since the current market is down and the tax rate is relatively new, is this a good time to convert my traditional IRA to Roth IRA up to the maximum of my current tax bracket? And hopefully, within the Roth, it will appreciate in the next few years until I need the money, you know, not within five years. And is this strategy maybe good for the next few years until 2025 when the tax law will change, maybe?
Pat: Well, yes. It's always a good time to look to see if it makes sense to do a Roth conversion.
Scott: What's your... So, are you working or retired?
Elizabeth: I am retired.
Scott: Okay. And you're in Washington State where there's no state income taxes?
Pat: And what is your income?
Elizabeth: Well, I don't have any income. And so... I mean, I don't work.
Scott: How do you eat?
Pat: Well, what are you living on? Yeah. Is there money coming out of your IRAs? Are you on social security? Are you receiving a pension? You don't have any wage income, but you do, I assume, live on something more than thin air.
Elizabeth: Right. Right. Right. Right. Correct.
Pat: So, what are your sources of income?
Elizabeth: Social security from our RMD, which we're required to take, both my husband and I, and a rental property. And that's pretty much it.
Scott: And you said... So, the income tax bracket you're in, are you in a 12% tax bracket or a 22% tax bracket? Your marginal income.
Elizabeth: Well, 22 or 24.
Scott: And you are over age 72 at this point?
Pat: And what is your IRA balances? IRAs, 401(k)s, all combined.
Elizabeth: About a million.
Scott: And how old are you?
Scott: And what's your annual income then for the family? Ballpark taxable income, remember?
Elizabeth: Yeah, we're trying to keep under the 22 or 24 depending on the tax. So whatever that is, 340,000. That's why I'm trying to convert up to the maximum so that I don't have to go into the next tax bracket.
Scott: Yeah, that's right.
Scott: The strategy is right.
Elizabeth: Because I went lower by overall IRA, traditional IRA principle so that I would have the option of using more or using less. I don't want to have more RMD, required RMD so that I have to, you know, get more money than I need. I'd rather...
Pat: That's right. That's right. Everything you're saying is correct. So, remember this, is that, we're going to make the assumption that your RMD is going to be lower next year because your account balance will be smaller than it was at the beginning of this year. So January 2023, even though your life expectancy will be shorter, which would cause a higher amount, a drop of your IRA would be lower. So, it would make sense for you to do that calculation for this year and for next year. And I would do one in December, and then I would look in January to see if you should do an RMD...excuse me, a Roth conversion in January while presumably, the account is lower. So, you're taking advantage of what now is relatively low tax rates unknown what's going to happen in the future, and lower account balances to do that.
Scott: And... So, for someone who's married filing joint, a taxable income of roughly 82,000, taxable, this is after either standard deduction or itemized deduction. So, it's really kind of about $105,000. And then social security has its own... It's only half of the social security or 85% of the social security you include for taxable income. But essentially, up to 82,000 or so, you're in a 12% tax bracket. Then it goes from 82,000 to 170,000, 175,000-ish at a 22% tax bracket. So, it sounds like what you're considering is, do we take a larger chunk out, push us right close to that 170,000, give 22% of our balance there to the government in exchange for tax-free income in the future?
Pat: And the answer is...
Elizabeth: Correct. So, are you saying that I'm trying to take advantage of before the end of the year?
Pat: Oh, we understand. We understand
Scott: Yeah, I know. Yeah. Yeah. Yeah. We're just looking at each other, like, what would we do in this situation? If you were my sister, or my mother, like... Who's going to... When you and your husband pass away, who's going to receive these dollars?
Elizabeth: Our children.
Pat: And tell us about your children. Do they make... Are they in the same...
Scott: How many kids do you have?
Elizabeth: I'm sorry.
Scott: How many children?
Pat: Same tax bracket, higher tax bracket, lower tax bracket?
Elizabeth: Much lower.
Pat: Okay. Well, then that's the answer to the question.
Scott: And I don't think I would convert any.
Scott: Odds are you're not going to spend this in your lifetime. And the way this required minimum distributions work, it's based upon a life expectancy. So, it's not like you have to take out... I mean, you take out an increasing percentage, but it's never going to be drained.
Pat: Yeah. It won't ever get too zero, right? So, the idea behind that, and the reason we asked about the beneficiaries is that we have a pretty good understanding that you're not going to spend all this in your lifetime. If your children are in lower marginal tax rate than you are and you expect them to stay that way, you're pulling money out voluntarily and converting it to a Roth to pay a higher tax rate than they would at your death.
Scott: That's correct.
Pat: And the idea behind that is, look, the Roth dollars, basically the only time you would ever expect to actually take money out of Roth is if you needed the income and you were trying to balance between...you were close to a marginal tax rate and you were trying to keep yourself underneath it. That'd be one reason. Or otherwise, it's pretty much the last dollar that comes off the table because of the tax protection on there. So, the assumption that anything that was going to go into the Roth would never be spent, the assumption that we would make...
Elizabeth: Why do you assume that?
Scott: Because you won't spend it.
Pat: Because you won't spend it. Because that's why you're trying to convert it into a Roth, is because if you were going to spend it, you would just take more out of your regular IRA or, you know, not worry about the required minimum distribution.
Scott: What do you have as far as savings and investments outside of retirement plans?
Elizabeth: Well, we have a trust and... So, what I'm saying is that we have enough money to use. This is my thinking. Okay. If I reduce my IRA...
Pat: That's right.
Elizabeth: And so, reduce my RMD, which means that the next years my tax burden will be less.
Pat: That's right. But you prepaid a tax liability that you may never have had to prepay if that IRA is still around the day you die. But continue.
Elizabeth: How do you know how long I will live? I'll live to 100 years.
Scott: Yeah, I understand. That's what we're thinking.
Pat: Oh, I understand. That's what we... That's exactly the... Because the required minimum distribution, if you look at the table, how it does, it never gets to 100% distribution. Never. Right?
Pat: Because... And presumably, your IRA is going to grow faster than your required minimum distribution until you're in the mid-80s.
Scott: I'm also going to throw one thing. If you give anything to charity more than say $200 a year, you should have it come directly from your required minimum distribution, and you avoid taxes on that.
Pat: Now... Well, that goes without saying. But, Elizabeth...
Scott: Well, that's all part of this planning process.
Pat: That's right.
Scott: I would not convert to...
Pat: Elizabeth, if you said to us, "Oh, my children are in a much higher tax bracket than I am."
Scott: Executive at Amazon or something.
Pat: Yeah. You're like, "That makes sense." But these monies are going to be inherited by your children. There will be money left there.
Scott: There will be.
Pat: And why would you take money out and pay a higher tax on it than you actually needed to voluntarily? And we never even got to the question, how much money is outside of the IRA? How much cash do you have in the bank, in another brokerage account?
Scott: The reality is... Here's the reality, Elizabeth, we will only know the right answer in the future because no one knows what tax rates are going to do. No one knows what... But what we focus on are probabilities, right? So, we can look at some probabilities. Obviously, we haven't done a full financial plan with you, which is something that...
Pat: We've done enough. We know the answer.
Scott: Well, we know based on the probabilities that we would not recco-...to you, based on what you told us, we would not recommend that you convert to Roth.
Pat: On the surface, what you said kind of makes sense.
Scott: Yes. And it makes sense to consider it.
Scott: But based on what you've told us, we would not recommend converting to a Roth IRA and paying that tax. So... Anyway, appreciate the call. The majority of Americans are in a 12% tax bracket bumping up to a 22%, even people that have done a great job saving that have a couple million bucks in their IRA, where the greatest opportunity is, is before those required minimum distributions.
Pat: Between the date you retire have non-wage income, right, and your required minimum distribution.
Scott: And maybe even holding off on social security for a while to make those conversions happen. We're going to take a quick break. Stick around for more Allworth's "Money Matters."
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 Hansen.
Pat: Pat McClain.
Scott: We want to talk about crypto. Let's take...
Pat: Our first show in November or December.
Scott: Let's take a call and then we will talk about it.
Pat: Well, if you want to join the show, 833-99-Worth. That's 833-999-6784.
Scott: We're talking to William in California. William, you're with Allworth's "Money Matters."
William: Hi, thanks for taking my call. I had a question about...my mom has about $70,000 in EE bonds, and she's 91, and they're getting to the 30-year point where they stop paying interest. And I just wondered...any suggestion what she should do.
Scott: Yeah. You know what's interesting...
William: She doesn't need the money. She wants to give them to her kids, including me, but we're not desperate for the money either. So, I didn't know if she should cash them all out, or give them out to the kids.
Scott: Yeah. EE bonds, they're terrible when it comes to the taxation of them to pass on to somebody else. Because most other assets, you get a stepped up basis. So, if you paid 50 bucks for a stock and it's worth $100 the day you pass away, your heirs receive it just like they paid $100 for the stock. So that any of that capital gain is just completely forgiven under current law. And with EE bonds, that accrued interest, which has not been taxed over the years will need to be taxed either by your mother if she withdraws them.
Pat: Or her estate or you.
Scott: That's right.
Pat: So, what is the interest rate on these bonds now, on average? I know they're all over the board.
Scott: Well, the 30-year ones are zero. If it's over 30 years, they quit paying every year.
Pat: Right. Four, yeah. At 30 years, that's when they end.
Scott: I understand that.
William: But she got them in the early '90s, so they're getting to the point. It's not a huge rate. I think they were in the three or four.
Scott: So, let's just make the... Let's assume that she put 35 grand in and they're worth 70,000 today, overall. So, let's just... For that assumption, let's assume half of it is going to be taxable.
Pat: And what is your mother's, income?
William: It's just retirement. I'm going to say around 40 or 50.
Pat: Okay. Yeah. You want to cast.
William: It's not a lot, but she's not looking for money.
Pat: I understand that. I understand this. So, we're looking at an alternative investment. So, there's two reasons I would cash it in. One, it's much easier to cash them in while your mother's alive, just easier to deal with the estate. The other is, they should not be gifted to you or your siblings, assuming that the children are in a higher tax rate.
Scott: But you might want to cash them in over a few years.
Pat: As they mature?
Scott: No, Based upon the tax bracket season.
William: Yeah, that's what I was thinking, is maybe this year or next year.
Pat: Oh, got it. Yes.
Scott: Yeah. So...
William: Not to put her in such a high bracket.
Scott: Okay. To do this perfectly, what you do is you perform a tax return for her for 2022 today based on what you know about her income. And you could get close enough by using some last year's software or whatever. And then say, "All right, if I had $1,000 worth of taxable income, what would that do?" It changes my taxes, and you could figure out exactly what the impact's going to be there, and you can play around with that. And then you look and see where the tax bracket jumps from a 12% bracket to a 22% bracket. And if you can keep it all below where it jumps to 22...and it's only those next dollars for tax at that rate.
Pat: It's marginal income.
Scott: Yeah. Keep it below that 22. I would cash in some...obviously, the older ones that aren't paying interest are the ones that are about to. I'd cash in some in 2022, and some in 2023, and some in 2024.
Pat: I would try to have it all done in the next three years though.
William: Okay. Yeah. I didn't think that amount. I mean, it might bump her up into another bracket, but not...
Scott: Well, then you calculate and you say, "What's the impact?" If I do it over three or four years versus some this year and some next year, you might say, "It's going to cost an extra $400, $450 in taxes. What's going to be the easiest thing?" But the difference between 12 and 22% tax...I mean, the planning that's going on here is going to mean the difference between, it's being taxed at, we're only talking federal here too, 12% or 22%.
Pat: So, it's significant.
Scott: It's a 10% differential.
Pat: So, you want to do...
Scott: It is significant.
Pat: Yeah. Yeah. And my guess is you'll do it over two to three years.
Pat: And then you could turn around and buy, heck, one-year treasuries, or even find one-year, 18-month, two-year CDs that are paying almost as good, if not better.
William: Yeah. Especially now the rates seem to go up.
Pat: Yeah. That's right. Oh, absolutely.
William: So, I should not put it into crypto?
Scott: That's cheap. I don't know, buy some crypto.
Pat: Well, yes. I mean, if you want to shrink your mom's estate.
Scott: What? Crypto's been going back up, Pat.
Pat: You obviously listen to our program.
William: Yes. I'm a big fan.
Pat: Well, thank you. Because this crypto thing is a crazy... It is... And I got to tell you, over the Thanksgiving holiday, I still talk to some of my relatives that are the true believers.
Scott: I saw some meme at Thanksgiving time. It said, all the family sitting around and there's one empty table, and everyone's looking, you don't see who's kind of walking in, and it's, "Oh, there's Mr. Investor. How are the little coins doing for you? Are you a millionaire yet?" Just classic because it was fun.
Pat: That's funny. And so, William, great planning on your part with your mom. You do want them out of her estate just because it's easier doing it alive than after, it just makes it easier. And then obviously, I assume since you're that deep in the question, you've gone through and made sure the rest of her assets are titled correctly or put into a brokerage account where the transfer of the assets at death will be easier. I assume you've done all that.
William: Yeah. One of the reasons we got to this is we wanted to put them into her trust. But because they're paper, you can't. You have to make them electric.
Pat: That's right.
William: And when you make them electric, that's when you have to cash them out.
Scott: So, I would...
William: But of course, you're paying the taxes on them.
Scott: I'm just thinking, I'm in your situation, this is my mom, I would probably run the numbers, like, "What if we cashed in?" And it's going to be a bit of a guess because you're not going to know exactly, you'll have to kind of guess it. You might just say, "What if I cashed in half this year and a half in January?"
Pat: And get it behind you.
Scott: And it's behind me, right? What's the additional cost going to be in taxes? Because my guess it's not going to be that significant, and that way you can just deal with it. Once in December, you learn the process. You go back the same bank in January, you do it again, and then...
Pat: And the banks, they love... They make absolutely... Go to a bank...
Scott: Yeah. That young teller is not even going to know what to do with you.
Pat: Yeah. Go into a bank where you actually, you'll bring them Christmas gifts and things to ask them...
Scott: First, yeah...
Pat: ...first because they do not like you. You're like, "Okay." It's like asking someone to mow your lawn and you're walking by, "Hey, I know you're not going to..."
Scott: They have to. The banks have to, but...
Pat: But they don't want to.
Scott: No, they don't want to because it's a pain for them.
Pat: Yeah, and they make no money.
Scott: No, they make no money.
Pat: Yeah. Anyway, we appreciate the call.
Scott: Yeah. Thanks for calling, William.
William: All right.
Scott: So, we'll talk about the crypto, but I tell you, the true believer is still in the crypto. I'm like, "Wait, wait, wait, wait. We gave up on the tulips now? The tulip craze? Well, I hear the railroads are booming. Plastic, son. Plastics." Let's take this next call and then we'll have some more conversation because it's... And I got to tell you, what keeps coming out, this Sam Bankman-Fried, SBF, he was interviewed by George Stephanopoulos this last week. I'm thinking...
Pat: Oh, I know the attorneys are cringing.
Scott: I'm thinking, "Are you out of your mind?"
Pat: He is.
Scott: You're going to jail.
Pat: No, he is out of his mind. You've answered the question. Okay. I mean, no, he is... There was something... He doesn't understand. First of all, I don't think he understood he did anything wrong, in his mind, when he was doing it, and therefore he didn't do anything wrong after the fact that it didn't work, because he wasn't doing anything wrong when he did it.
Scott: It's just a few mistakes.
Pat: No, he's not... Look, you can't tell someone they did something wrong if they morally believe that they didn't do anything wrong. You could say it all day you want, but if in their reality they said they didn't do anything wrong, they didn't do anything wrong. It's an interesting thing. Well, let's take this call, and then we'll come back to it.
Scott: Yeah. He kept saying, "I want..." Like, if I had an account at one of these other firms, there's some big ones that...I'm not going to name them because I don't want to... But that are still advertising, watching the World Cup, you see some advertised. Like, if you had your tokens stored there, what guarantees do you have? Oh, if you have an account at Charles Schwab, or one of those, Fidelity, you've got insurance behind you.
Pat: Against bankruptcy or fraud.
Scott: But if you had coin, like...
Pat: You don't.
Scott: You don't in these.
Pat: Well, of course. I mean, we talked about it last week or the week before. How many banks went bankrupt in the early '30s? Was it thousands? It was thousands.
Scott: Hence the term bankrupt.
Scott: Yeah, which we then applied to companies and individuals. Let's take this call. We're talking with John. John you're with Allworth's "Money Matters."
John: Hi, Scott and Pat. Probably pretty simple question for you guys. It's just regarding a CD. You know, the big banks are finally starting to pay a little bit of interest but, you know, when you inquire about a CD, they offer you the broker product CD. And, you know, they say that that's FDIC and, you know, the interest rates are, you know, based on the bank rate, which is around 3% at this time.
Pat: That's right.
John: And they're offering, like, 4.5% for, like, a broker product.
Pat: That's right.
John: And I just want to really fully understand how the FDIC works, and if there's any additional risk here that I should be aware of.
Scott: So, they're offering 4.5% on what length CD?
John: One year. I think it was like 4.4 or something. It was in the low fours.
Pat: Okay. So here is... There is no difference between the CD I go into the bank and buy and the one I go online and buy if there's FDIC insurance behind them.
Scott: Because if they go bust, the feds step in and make people whole. This happened in the financial crisis. There were some banks... We had some clients that had CDs with the IndyMac Bank, and we used them because they were the highest paid at the time. We knew they were in trouble. They went bankrupt. The treasury just...
Scott: FDIC made people whole immediately.
Pat: So, when you're shopping for treasuries or bank CDs, like, these risk-free assets, you just go for the highest rate. And so, the way the brokers do it, is that certain banks are looking for a deposit, and they can either market and go out and find them themselves, or they can pay a commission to a brokerage firm to bring those clients to them. And that's why they can pay a little bit more, is because their cost acquisition of the dollar, each dollar of deposits could be lower. It's just a different business model.
Some say, "We're just going to pay a lower interest rate and go find the clients ourselves." And the other... Like, the Bank of Biloxi, Mississippi, you know, Edith's Bank, Biloxi, Mississippi, says, "I just need some deposits. I need X amount of deposits. I'm just going to pay a brokerage fee or a commission to a brokerage firm." The difference is some CDs might, if you're going through a brokerage firm, they might charge you 25, 50, or $100 dollars to make the trade. So that you need to be aware of. In terms of FDIC insurance, this is how it covers. And I've had this discussion with firms that we have bought brokered CDs through. It's $250,000 per person on the account, right?
Scott: Single person 250, married couple 500.
Pat: 500. And if it's in a trust, it's $250,000 per person multiplied by the number of beneficiaries in the trust not to exceed four. Which means you can take a trust, and if you have four beneficiaries and two owners of the trust, you can deposit $2 million into a bank CD and get FDIC insurance.
Scott: I thought you said not to exceed a million.
Pat: Not to exceed four trust of beneficiaries. So...
Scott: Got it. Got it. Got it.
Pat: So, you've got 500,000, which is two owners of the trust times four beneficiaries of the trust, is $2 million. If you only had three beneficiaries of the trust, then the maximum FDIC insurance you could have is $1.5 million. Now, that is some esoteric stuff there.
Scott: Now you're showing off with your math skills. And if you had two beneficiaries, it's a million.
Pat: No. No. No. Here's why I'm doing this. I did...
Scott: Yeah. Because you understand this stuff.
Pat: No. Really, because... And I did the research and I got in an argument with a... We were trying to place a trade with a brokerage custodian, they said, "No, no, you can't do that." And I said, "No, we can do that." I had to get them on the... I had to have them call FDIC and actually confirm it. So that is how the coverage works.
John: Okay, great. Thank you, Pat.
Pat: Well, now you're like, "Oh, will you just shut up already." John's like, "I didn't want to know all that."
Scott: Yeah. No, that was good.
John: No, I do. I do. No, I appreciate it. I think more direct to my question is, is there any... I think what you said is, the FDIC is the same for both the bank...
Pat: It doesn't matter.
John: It doesn't matter. Okay.
Pat: It makes no... FDIC is FDIC is FDIC. It's different in credit unions where they use a different form. So, I can't speak to that. So don't take this in your credit union and apply it to FDIC because oftentimes there's different insurance in the different institutions. But it doesn't matter. And it doesn't matter with treasuries either. So, you just buy the highest yield at the lowest cost wherever you can. Now, I have a good friend that only buys his treasuries treasury direct. I buy mine through a brokerage account. It's just easier for me. I'm not going to get as good... I'm paying a little bit more friction in the deal.
Scott: Next to nothing.
Pat: It's next to nothing. So, for you, if you're comfortable doing it online, you're probably going to get a much higher rate.
John: Okay. Great. You know, one thing that the broker did point out that was interesting is that, if the interest rate goes up and you wanted to cash out that CD early, it would be, I guess, similar to a bond in that the value of those are down.
Scott: Yep. Some of them are that way.
Pat: Some. And, by the way, you're not going to get the full value of that if you had... So, you're not going to... Let's say the interest rate is four, and you go six months and you go, "Hey, the interest rate's now five, can I cash out?" They're not going to cash you out at the full 4%. You're going to take a haircut on that.
John: Right. Yep.
Pat: Yeah. But you can cash out.
John: Okay. Great.
Pat: You can cash out in most of them, but not all. All right, John. Wish you will.
Scott: It's an interesting environment we're in though, Pat. We're talking about this cash rates, if you got inflation running at 7 or 8% and you're earning 4 in your cash, and you're paying tax on the cash, we're still going back...
Pat: You feel better about it though.
Scott: Yeah. But it's not a good long-term strategy.
Pat: I know. But you feel better about it than when they were yielding...
Scott: I know. But...
Pat: Zero, zero and they were actually better off.
Scott: Yeah. It's... What a bizarre time.
Pat: Oh, it is... This inflation, based upon where you are in your personal economics, is unbelievably devastating.
Scott: And I was trying to look up current TBL rates and CD rates, but it's just not coming that easy. And it doesn't matter, you can look them up...
Pat: So, let's get back to talking about these cryptos. So, we've been talking about it for weeks. And, you know, like, "Okay, we've heard enough about the cryptos." This is a reminder...
Scott: Hey, Pat, there's over a million people, invest-...well, speculators that had money with FTX.
Pat: And, by the way, once this is all regulated...
Scott: Some of these are... There are already regulations. You're not allowed to co-mingle funds.
Pat: They're not enforced.
Scott: There was no regulatory body...
Pat: To enforce them...
Scott: ...going, coming and inspecting them like we have, or the banks have, or...
Pat: Yes. And actually, what SBF was trying to do was actually lobby Congress to get the least oversight, which was away from the Securities Exchange Commission, which oversees our industry. He was trying to lobby for the least...
Scott: Okay. So, you say he didn't think he was doing anything wrong.
Pat: I know. Good point.
Scott: And he is their lobby. One of the second largest donor to the Democratic Party. By the way, one of his associates was one of the larger donors to the Republican Party. So, they were playing both sides. He was going to the Democrat side, his colleague was going to the Republican side, and then he is testifying before Congress trying to get some laws passed of light regulation, to your point.
Pat: So, he wanted regulation?
Scott: No. He wanted the path of least resistance as far as the regulatory.
Pat: He may not think he did anything wrong, Scott. He may have thought he was the smartest guy in the room and it just didn't work out. And by the way... Or he just might believe, "You're all big boys and girls, you knew the risk, right? You screwed up. You trusted him." He may think that too. Who knows what he thinks? The mere fact that he goes on these interviews and says what he says is just astounding. He's going to go to jail. Prison, not jail. Prison. And he's going to go for a significant amount of time. This is not something that the government is going to gloss over.
Scott: I find it interesting that there are... It's now becoming more mainstream. And for whatever reason, the first week or two when this was going on, like, the New York Times didn't have a lot of coverage on it. It was kind of buried. Now, it's starting to become more mainstream when you have, like, George Stephanopoulos interviewing the guy.
Pat: Well, and we talked about it, I think, last week or the week before that there will be more that go bankrupt. Crypto lender BlockFi follows FTX into bankruptcy. So, this was...it happened on Monday. So that was what November the 28th, was when...
Scott: So, whether or not they... So, one of the big issues with FTX is they used customer funds to prop up their own coin, is what...
Pat: They created their own demand in the marketplace.
Scott: And I read an article somewhere this last week. They talked about one of the challenges with crypto, there's no market for short sellers, which I don't know if that was accurate or not. But that's...
Pat: I mean, think...
Scott: So when you don't have people betting against...whether that T security won't...
Pat: Oh, you won't get that for going long.
Scott: Correct. You don't have the same kind of selling pressure you would have on other types of securities.
Pat: There isn't someone... If you're borrowing and going long and margining up on it...
Scott: There's no one doing the opposite.
Pat: There's no one doing the opposite on a short. So, you could create your own little mini frenzy and it goes unregulated, right?
Scott: That's what's... Yes. That's what this article wrote, and I thought that was an interesting take on it. Well, part of this... Otherwise, typically what ends up happening in the marketplace, you get people start sniffing out like, "I don't think we like this. Yeah. We can make some money by betting against this thing." And they bet against it.
Pat: And then when they have to cover their...
Scott: That's what happens in traded companies all the time.
Pat: Yeah, all the time.
Scott: All companies have... All publicly traded stocks have short...
Pat: So, let this be a learning lesson about how history works. This crypto stuff, it will be around for a while. It won't be around in its current form, but it will be around. This, I wanted to talk about another big craze we saw in the last three years, which is these SPACs.
Scott: But before we move, like, here's what interesting about crypto, right? So, we're in the industry of helping individuals manage their wealth. In our industry, the last couple years there's been a lot of kind of pressure from people, "Oh, you need to start offering this to clients." There's been companies that would approach us and say, "Why don't you partner with us and we're going to help you, so your clients can allocate a portion of their assets to Bitcoin. Why Bitcoin matters in your portfolio. Why you're missing out if you don't have Bitcoin and have crypto." Remember all this stuff?
Scott: Even a very prominent financial advisor, almost a household name, that had sold his business, retired, and then started a business of helping financial advisors get into the crypto with their clients. That's the kind of thing that had been going on the last couple years. It feels like that's dead now.
Pat: Yes. I hope so.
Scott: I'm, you know, grateful that we didn't allocate any of our client's assets there.
Pat: And then we'll talk about two other things. One is...
Scott: I'm not grateful because we would never would've done it.
Pat: Special Purpose Acquisition Companies or SPACs. So, these SPACs, if you've listened to this show, is where a group of investors goes out and raises money, and then says, "After we raise the money, we're going to go acquire a company...
Scott: Yeah. What could go wrong?
Pat: ...and we don't really even know what that company is yet, but we're going to acquire it and we'll see it when we see it." And they have a period of time to actually go out and find a company.
Scott: And the reason these exist is because Congress had come up with some legislation that was signed in the law that makes it very difficult owners, complex, and expensive to be a publicly-traded company,
Pat: Especially, to bring a company public.
Scott: Yes. So, this is like a back door.
Pat: ...where, because we actually don't really have a business model yet...
Scott: We don't have to go through the process.
Pat: ...we don't have to go through the process. We can... And they used to do the same with these reverse mergers too. So, these are just a replacement for a reverse merger, where they don't even pretend to buy anything. They just go, "We're just starting an XYZ company and we're going to manufacture something in the future or service."
Scott: Who knows? SPACs, it's the same thing.
Pat: Same thing. So, in 2022, there have been 48 SPAC liquidations and another 40 are planned for the end of the year. What that means is these will be 88 special purpose acquisition companies that went out and went through the process of raising the money, getting investors to buy in, and then actually not going to market. Just saying, "I can't do it. I couldn't find anything."
Scott: How many?
Pat: Well, 48 so far, and they expect 40 more by the end of the year, where these companies haven't found targets. This isn't bad for an investor, by the way, because you're going to get all your money back and what you've lost is opportunity. But those investors that actually put money into SPACs is where we have told you, if you can't understand a business model, then you should not invest.
Scott: Well, there is no business model.
Pat: That's the point. You can't...
Scott: You're betting on a management team, or an athlete, or an actor. That's who are the sponsors were in some of these, right?
Pat: Many times. Many times.
Pat: So, if we always say, "If you can't understand a business model..."
Scott: Just because someone's an awesome basketball player does not mean they're a great investor. Just throwing that out.
Pat: Okay. Thank you, Scott. But they're a great actor
Scott: Or a great actor.
Pat: Like, George Clooney can make some serious alcohol. He's got that vodka, tequila, or whatever it is. Doesn't he?
Scott: He's so good looking too. I mean, I just want to drink that stuff. Like, maybe I'll be like George Clooney if I only had that in my life.
Pat: Right now, I'll be floating around in Italy on Lake Como.
Scott: If only I had a beautiful wooden boat.
Pat: Anyway. So, this is just a warning that Special Purpose Acquisition Companies too had their day in the sun and it's all over with.
Scott: Yes. And we are over time today too. It's been super fun being with everybody, and glad that you participated in our program. If you'd like to learn more about Allworth Financial, just go to our website, allworthfinancial.com. We got lots of great...actually, we have lots of great tools on there to help you with your financial planning. We'll see you next week. This has been Allworth's "Money Matters."
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.