- 401(k) catch-up contributions 0:00
- Annuity marketing concerns 11:26
- Caregiving and inheritance 30:13
- Tax-efficient planning 39:30
401(k) catch-up contributions, inherited IRAs, annuity tricks, and a Roth conversion strategy.
On this week’s Money Matters, Scott and Pat examine the implications of new rules for 401(k) catch-up contributions and discuss whether they really benefit the average person. Plus, they help callers navigate the complexities of fixed index annuities and inherited IRAs and explain why understanding these financial products is crucial. Allworth advisor Laurie Ingwersen joins the show to explain how a Roth conversion strategy can lessen a big tax burden. Finally, Scott and Pat share real-life stories and offer insights into maximizing your retirement savings while steering clear of potential pitfalls.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah. Glad you're here as we're talking about financial matters. Myself and my co-host are both financial advisors, and we've been doing this program about...we've been advisors for over 3 decades, doing this program for almost 30 years. And I certainly enjoy coming and sharing a bit of our, I don't know if it's wisdom. I don't know if it's 30 years of experience or 1 year of experience times 30, but I'm hoping it's 30 years of experience.
Pat: Our musings. You know, Scott, we're going to take some calls. But just a reminder, we talked about this in December. People between the ages of 60 and 63 are able to supersize their catch-up contributions for their 401(k)s. There you are. So I went into mine because I'm 62.
Scott: And how much actually? This is just the 401(k)?
Pat: Yes, 401(k)s. As I said in December, it made no sense to me why they chose these ages, and there's no... I think it's for the next couple of years that the limits for...
Scott: Which bill was that buried in? Do you know?
Pat: I don't know.
Scott: Buried in some bill.
Pat: But it's essentially 150% of what the normal is between the ages of 60 and 63.
Scott: So someone between age 60 and 63 can contribute almost 35 grand to their 401(k).
Pat: That's right.
Scott: Thirty-four thousand seven fifty.
Pat: I went...
Scott: If you're age 50 and over, or over 64, 64 and over, it's 31,000. And if you're under age 50, it's 23,500.
Pat: But the point being is you're between ages 60 and 63. Go in and adjust your withholdings on your 401(k).
Scott: Well, you should probably adjust them anyway because it's a higher contribution amount. I adjusted mine.
Pat: I adjusted mine. I adjusted mine a lot more than yours. Because I'm 62.
Scott: Now you're bragging about being 60.
Pat: Oh, yes. Look, some benefits here. Not only...
Scott: Yeah. So you can put an extra $3,750.
Pat: Told my wife, I said...
Scott: That could be a game changer for your retirement.
Pat: I mentioned it to her the other day. So my wife is an accountant, and I said, "Oh, yeah, I meant to tell you, our paychecks are going to be a lot smaller because I increased this..."
Scott: It's a lot smaller.
Pat: I increased this contribution.
Scott: The irony, I mean, here's the thing about it. Who does this really benefit?
Pat: Rich people.
Scott: I mean, you might be the odd person. I mean, not that many people can save $34,750 into their retirement.
Pat: That's right.
Scott: When the median household income is about, what, $100,000 or less than that?
Pat: That's right. That's right. How could I argue with you, right? It's the same thing with these states setting up these savings programs where poor people get to save money. You know, like, what are you doing? Like, how out of touch are you with reality to think that poor people are going to be funding retirement plans? And the states say, "Well, the marketplace isn't meeting that demand, so we're going to do it." And you're like, look...
Scott: When you're trying to figure out which bills to pay, what you're going to have for dinner...
Pat: We're going to come across as elitist, and call me whatever you want, but I wasn't always able to put the maximum into the 401(k).
Scott: I remember going to Taco Bell because they had 59-, 79-, and 99-cent menu. And I had Taco Bell a couple of times a week for dinner because it was really inexpensive.
Pat: I do today. Yeah. So remember that. And then the other big thing this year is out-of-pocket costs for prescription drugs covered by Part D of Medicare are limited to $2,000. We would expect to see quite some changes in Medicare in the next coming years, I would think.
Scott: Medicare and Social Security. We have no choice.
Pat: That's right.
Scott: I mean, at some point in time, you know, they got the whole Doge thing and all that. At some point in time, our government, we're going to have no choice. If we don't make some changes, we will be forced to because we have to make our interest payments. We have to. And at some point in time, the bond market is going to say...
Pat: We're not going to rate this, you know, as credible debt.
Scott: We're not, yeah. There's no more money for it.
Pat: Yes. One last thing before we go on to the call, Scott, the new withdrawal rules for inherited IRAs.
Scott: These are so dang complicated.
Pat: They are. They are. I read this and I thought, "I know this."
Scott: Unless you have an inherited IRA that is a substantial amount, and maybe that's relative to what your finances are, I would just drain the thing in 10 years. You got to drain it in 10 years anyway, but there's...
Pat: But it has to be drained in that 10-year period unless...
Scott: Oh, there's a couple of exemptions on it.
Pat: Right? If the original owner had to take distributions every year, the person who inherits the account must do so starting the year after the original owner's death.
Scott: So if someone's already required minimum distribution...
Pat: You have to continue that and drain it in 10 years.
Scott: You have to start it the year after their death.
Pat: Correct. And if they hadn't...
Scott: I remember, we had a call, someone a while ago that their RMD wasn't satisfied the previous year. I'm like, "I'd just take it because..."
Pat: And every time I read stuff like this, I think, "I've been doing this a long time. I don't ever once remember an audit on an RMD."
Scott: I had this...I had a client years ago.
Pat: I remember this. I know the story.
Scott: So he had a retirement account. I've had a couple of strange situations, and then we'll go back to the call. He had a retirement account. It must have been before he knew me.
Pat: It was.
Scott: Or it was one that...I think was before he knew me. And he hadn't taken...he missed, like, three or four years of required minimum distributions.
Pat: And at that time, it was age 70.5.
Scott: And it was a 50% penalty.
Pat: Plus taxes.
Scott: Plus taxes. So you end up 85% gone, like, 15 cents on the dollar. And he's like, "What do I do?" I said, "Well, you got to take those." I said, "That's what the tax law says." You could volunteer and tell them what you did, or you can just take the distribution now.
Pat: And hope for the best.
Scott: And hope for the best. I said, "I can't give you professional advice stating to do that. But it was an honest error. You're not trying to cheat anybody. Take the distribution now."
Pat: And it was prior to when the custodians would actually report.
Scott: That's right, report on it. And that's what he did, and he was never audited. I had another person, client that had a...they had a Keogh pension plan.
Pat: Do they still have Keoghs? In a different form.
Scott: I think Keoghs is...
Pat: It was a tax law.
Scott: It was some sort of...
Pat: Yeah, profit-sharing plan.
Scott: Yeah. And so a client for many years, and I said something about their tax. "Well, we do our own taxes." I said, "Well, who files your 5500?" And they said, "What?" I said, "Who files your 5500?" They said, "What's a 5500?" And I said, "That's the annual return you have to file for your pension plan." They said, "What are you talking about?" They had had this thing for, like, 15 years. It was a single proprietor with no employees, been funding it for years, and...
Pat: Just never knew.
Scott: They never knew.
Pat: And they were doing their own taxes.
Scott: Doing their own taxes. And I'm like, "Well, you..." Like, they said, "What should I do?" And I said, "Well, do you want my answer as a financial professional, or do you want my answer as a friend? Because let me take my professional hat off, and I'll say, if it were me, you thought you were living in compliance with...you followed the letter of the law, the spirit of the law. You missed the letter of the law. If it were me, I would transfer this into an IRA, do a direct transfer, and..."
Pat: Pretend it never happened.
Scott: "...pretend it never happened and set up...just do..."
Pat: A new profit-sharing plan. A new Keogh.
Scott: Yeah, a solo-K going forward. And I said, "I can't give you that professional advice."
Pat: And at that point forward, they hired an accountant going forward?
Scott: Yes. And they didn't have the pension plan any longer because they didn't need it. They can do a solo-K.
Pat: Look, a good accountant...
Scott: Now, I don't know if that was unethical or immoral for me to do that.
Pat: You obviously didn't think so?
Scott: I still don't think so. They followed the spirit of the law.
Pat: Yeah. It's complicated. So my...
Scott: Some little technicality.
Pat: By the way...
Scott: I wouldn't recommend somebody do that. This is when people have made mistakes. Honest mistakes.
Pat: They weren't trying to dodge the law.
Scott: No.
Pat: But there is a big lack of accountants in the industry right now for people to file tax compliance.
Scott: CPAs, in general, like, and all of that. But also, yeah.
Pat: And especially in tax returns and tax compliance. So it's hard to get a good accountant now. I mean, you have to actually kind of... My youngest son started his business, and he said...not my youngest, the second to the youngest son, started a business, and he said, "I think I'm going to do my own taxes." And I said, "Well, it's really kind of important. You bought all this. You bought a truck last year."
Scott: Yeah, you're not doing your taxes.
Pat: And I said, "Are you going to take the 179?" And he said, "Well, what's the 179?"
Scott: Yeah, hire an accountant if you don't know the answer to that question.
Pat: And he said, "Well, what's the 179?" I said, "Hire an accountant because you didn't know that it existed. So you wouldn't know unless you actually did it."
Scott: Which there's a downside to that. I mean, if you buy equipment and you finance it, which, my guess...is that what he did?
Pat: I think he may have.
Scott: Okay. And then let's just assume that's how most...
Pat: He had cash flow.
Scott: And then, if you take the deduction in one year, it can certainly help you that one year, but it hurts your later years. Yeah, yeah, yeah.
Pat: Yeah, yes. Yeah. So it's like...
Scott: Because then you're going to have to recapture them.
Pat: Accelerate depreciation. But then he's like, "Well, I had this 401(k) for my own job, and I wanted to convert it to a Roth IRA. So maybe we do it this year." I'm like, "This is what a good accountant would do for you, not your father. Never call me again."
Scott: Well, I know it's always what a dad knows. All right, let's take some calls here. And to join us, 833-99-WORTH. You could email us at questions@moneymatters.com. And I still have a couple of things I want to talk about later in the program, but right now, we will talk with Fred. Fred, you're with Allworth's "Money Matters."
Fred: Hey, Scott and Pat. Long-time listener of your podcast. How are you doing?
Scott: Good.
Fred: Happy New Year.
Scott: Thank you.
Fred: Good. I had a question speaking of 401(k). We were updating, my wife and I were updating our estate plan, and the advisor mentioned...I was telling him my assets and I want to convert my traditional 401(k) to Roth, you know, to pay the taxes now so it can grow tax-free. So I have about, like, 1.1 million, traditional 401(k) of about $734,000 but spread across 3 companies.
Pat: Wait, wait, I'm sorry. I'm sorry, Fred. Say that again. You have 1.1 million and then you mentioned 740.
Scott: Is that in addition, or are you giving us a breakdown of the 1.1 million?
Fred: It's a breakdown.
Pat: Okay, thank you. So you have $1.1 million in 401(k)s across 3 previous employers.
Scott: Seven thirty-four in 401(k)s across 3 employers.
Fred: Yes.
Pat: Okay.
Fred: I have a rollover of $277,000, individual TOD of $40,000, and a Roth of about $1k. And I also have a brokerage account of $550,000.
Pat: Okay.
Fred: So representative, the advisor mentioned about...
Scott: So that adds...I'm confused. So the 1.1 is retirement assets. In addition to the retirement assets, you have 550 in a brokerage account.
Fred: Yes, that's correct.
Pat: Okay.
Scott: And the brokerage account is invested, how? And the reason why we're asking this now, because retirement accounts, it doesn't really matter how you invest it. It's all taxes, ordinary income when you pull the money out. Brokerage account, you can have dividends, you can have qualified dividends at a lower tax rate. You've got capital gain implications. So, how are you invested in the brokerage account?
Fred: So I have stocks. I do options, calls and puts. I have dividends and stuff like that. So kind of like investing.
Pat: Okay. What's your question for us?
Fred: My question is...
Scott: Do you have much in the way of gains that you have to report each year from that account?
Fred: Yes, significantly.
Scott: Okay. Why don't you do the trading in a retirement account?
Fred: Oh, I never thought about that. One of my retirement accounts is with Fidelity, and the brokerage account is with E*TRADE.
Pat: It doesn't matter. E*TRADE has...
Fred: It doesn't matter? Okay.
Pat: Yeah. It doesn't matter what the platform is. So, what's your question for us?
Fred: My question is the advisor is offering an Athene Agility 10, which is an FIA, which is a fixed index annuity, with principal guaranteed growth from the S&P 500 and NASDAQ 100. And then they said that index returns per year doubled on both the IRA and then the Roth IRA side. And then, also, it has a 50% signing bonus, which is given immediately but can't be accessed until the 10th year after the original principal amount is converted from IRA to Roth.
Scott: So you put 100 grand in. They treat it like you have 150,000.
Fred: Yes, that's right.
Scott: It's like manna from heaven.
Pat: So, how old are you?
Fred: Fifty-one.
Pat: And are you still employed?
Fred: Am I still what?
Pat: Are you still employed?
Fred: Yes.
Pat: And what do you make a year? What's the family income? What's the family income?
Fred: Three hundred thousand dollars.
Pat: And how did you meet this advisor?
Scott: Why is it...?
Pat: Wait, let me guess. Let me guess. You said you were updating your estate plan.
Fred: Yes.
Pat: So you went to someone that was doing your trust for you, and they were going to charge you, like, $1,500. And at the same time, you had to disclose all your assets to them. And once they saw your assets, they made this recommendation?
Fred: Yes, that's correct.
Pat: Oh, how did I know? How did I know? How did I know? And did you go to a workshop at an IHOP to actually watch the trust?
Scott: IHOP.
Fred: Yes, exactly. It's not IHOP, but yes.
Pat: You went to a Mimi's Cafe.
Fred: Yes, pretty much.
Pat: Right? It's amazing. I'm kind of psychic. I couldn't think of a less appropriate recommendation for you, Fred.
Scott: I totally agree.
Pat: I couldn't. If you said, "Pat, you met this guy that actually does stock options, puts and calls, and brokerage account? He's 51 years of age. His family income is $300,000. Seems pretty financially..."
Scott: He invests in...he knows covered calls, option stocks. He enjoys the trade, and he reports a lot of capital gains each year.
Pat: You could actually create that same index internally in your brokerage account without actually...
Scott: Yes, much less expensive.
Pat: This would have been...
Scott: You understand the mechanics behind it. You actually could.
Pat: You could. You could create...
Scott: And you wouldn't want it.
Pat: Yeah. All you're doing is creating callers around that, and you're taking the money and putting it in fixed accounts, and you're taking the proceeds from the fixed account.
Scott: There are so many restrictions of what your return is. You're not going to get anything close to the S&P 500.
Pat: And by the way, you don't get the S&P 500. If you read the contract itself, you get a participation rate in an underlying index, and typically, it is capped at a number of 10%, 12%, 14%. Oh, and by the way, you only get 70% of that participation.
Scott: And you don't get the dividends. And they can change the participation rate in the future.
Pat: If you said, "Pat..."
Scott: I bet you, I bet the commission to the agent...you said 10 years. It's a 10-year surrender charge?
Pat: God bless him. He went for the whole thing though.
Scott: You're going to scare me.
Pat: The sales guy went for all of it. He didn't even...he was not ashamed.
Scott: I bet it's 10 %.
Pat: Oh, yeah, yeah, yeah, yeah. Yeah. So...
Scott: If not higher.
Pat: So look, that is... And by the way, that's probably not the trust.
Scott: Here's what's so frustrating. They offer you a 50% signing bonus, right?
Fred: Yes.
Scott: Whatever that means. It's made-up numbers. You can't touch it. It's made up. There's no free lunch, right? There's no free... The only money is coming from you. There is no signing bonus.
Pat: So, Fred...
Scott: I don't understand why the regulators allow it. And in all seriousness, why do they allow this crap?
Pat: Understand, this is...we're talking about Fred here for a second. You take your little screed somewhere else. For now, it's a joke. We will have a bonus.
Scott: Our industry has a poor reputation, and it's well-earned.
Pat: We're going to have a bonus podcast where Scott Hanson just goes off on these indexed annuities. So look, Fred, so...
Scott: They're not all horrible and not all inappropriate. This is a horrible one and inappropriate.
Pat: So, Fred, all they're using is...you have same access to the financial instruments the insurance company does, where you can do callers. None of it is appropriate for you.
Scott: They're just using options.
Pat: That's all they're doing.
Scott: And the majority of the money is invested in treasuries.
Pat: But in saying that, let me ask you a couple of questions. Children at home?
Fred: No, they're all adults. Well, one, a senior in high school, so going to college later this year.
Pat: Okay. Home paid for?
Fred: Not yet. No.
Scott: I like the way you said all adults. I have a senior in high school, and I would not at all think she's an adult.
Pat: Okay. So, Fred, you have no need for this, and I would actually go and read the living trust that they produced before. How much did they charge you for the living trust, by the way?
Fred: About $1,500.
Pat: All right. And by the way, what restaurant did you actually go to this workshop at?
Fred: Yeah, I think it was a Hilton-sponsored...
Pat: Garden Inn?
Fred: ...restaurant or something like that. Yeah. Something like that, yeah.
Pat: Okay. Got it. Got it. So the whole idea behind this marketing thing is to put these trusts out there at a low, low cost.
Scott: Trust mills.
Pat: Low, low cost. So they get a...
Scott: I didn't know they're still doing this.
Pat: So they get a look at the assets, and then, once they get visibility of the assets, then it's to pitch you these high-commission products.
Scott: And I bet you that this "advisor" is not registered as an investment advisor, so can't charge you a fee for your service.
Pat: And they were not an attorney.
Scott: And I bet they're also not securities licensed, so they couldn't recommend an ETF to you, for example.
Fred: Right.
Scott: They're an insurance agent.
Pat: So in your situation, I think that, if you and I were sitting at the same Hilton Garden Inn, I would have actually focused on the placement of your assets, whether the things that you were doing in your brokerage account would be more appropriate to do in your IRA.
Scott: Yeah. And you've got three 401(k)s at three different companies. I assume one is your current employer. The two that aren't, I would just move those assets to your rollover IRA so you don't have so many different accounts.
Fred: Got you.
Scott: Easier to manage.
Pat: So you have a placement, and then go through and check the placement of the assets, which is once the money's in the rollover IRA, right, you can do all those stock options and you can do a lot of the trading. You may not do all of it. There may be some restrictions against the instruments you're using, but a large portion of them you could actually be doing in the IRA and avoiding any of the taxes.
Scott: Yeah, any of the speculative stuff.
Pat: And then, in the brokerage account, what you want to do is things that generate very, very little income, so really tax-efficient investing. This would be a perfect situation for direct indexing.
Fred: Okay.
Pat: Yep, for direct indexing.
Scott: Or even just the total stock market index.
Pat: Or total market, absolutely. But the direct indexing, Scott, I mean, the numbers that you could do it with have come down significantly in the last year.
Scott: That's right. And essentially, you understand the concept of an index, I'm assuming, based upon the transaction. And so rather than just buying, say, some mutual fund company's index, you use technology that creates an index for you personally. So you end up with a few hundred different stocks. It's only managed to mirror the index. So it's not like there's a big team of people that are trying to pick the best. So it's really low cost, but they do great tax-loss harvesting.
Pat: And so a good example of that is to represent the aircraft industry. They might just own United and Southwest. And if United actually falls in value, they may actually harvest that loss and buy Delta for 31 days and then trade back out again so that you're actually mimicking an underlying index, but you're doing it very, very tax-efficiently. This brokerage account would be perfect for that, and you would understand it. And then, so...
Scott: And then they're trading in your retirement account.
Pat: And they're trading in your retirement account. And they have them both available at E*TRADE. And you mentioned either Fidelity or Schwab. It's available almost everywhere. The platforms, the availability of products is almost identical across all platforms now. So that's what...if I was sitting down with you, Fred, I would say, "Look, we should spend a couple of minutes on the placement of the product." And then, I don't know if I would put a whole lot of trust in the trust that was created by the trust mill. I'm trying to use the word trust as many times in one sentence as I can.
Scott: Untrusted. It might be fine.
Pat: It may be fine. I'd go back...
Scott: It probably is.
Pat: I'd go back and read it to make sure that it was achieving all your objectives. But you absolutely run away from that fixed index annuity. Just run, run away. They talked about all the highlights in it, right? It sounded great.
Scott: My guess is the guy selling it doesn't even understand all the negatives in it.
Pat: But if you read...
Scott: They're so complicated.
Pat: If you read the contract yourself and actually made a list of the pros and the cons against it, Fred...
Scott: You would not have bought it.
Pat: You would not buy it.
Fred: Okay. Thank you.
Pat: But God bless him. He asked for $1 million.
Scott: God bless him?
Pat: He asked for $1 million, didn't he? How much money did he ask you to invest in it?
Fred: Yeah, about the whole amount.
Scott: God bless him? God damn him. I mean, sorry, excuse my language, but for crying out loud.
Pat: Well, Scott, he didn't know any better. He was told by him.
Scott: You put yourself as a professional in an industry? What about medical? What if someone said they're a medical doctor? Yeah, I'm a...
Pat: Well, that is... The bar isn't this. You're comparing a life insurance salesman to a medical doctor? Did you just do that?
Scott: There are financial professionals that I would say are just as much...
Pat: He wasn't.
Scott: I understand that.
Pat: That's why Fred called us.
Scott: I understand that as well.
Scott: Right? Fred said, "No, I don't know," right? Is that what you said, Fred?
Fred: Yes, exactly. I sure did.
Pat: Yeah.
Scott: Well, I'm glad you called because I think it helps that people highlight a number of factors.
Pat: Yes. But how was the meal?
Fred: Okay.
Scott: Chicken. Dry chicken. Green string beans.
Pat: All right. Well, listen, you're doing a great job. The only thing I also would check with you, even though the kids are out of the house, is to make sure you had a significant amount of term life insurance on yourself, so.
Scott: Make sure the wife's good, yeah.
Fred: All right, will do.
Pat: Make sure the wife's good.
Scott: Or assuming that maybe the wife's the breadwinner here. We don't know.
Pat: Either one, but make sure that you have plenty of term life insurance on yourself, so.
Scott: Appreciate the call.
Pat: Thanks, Fred.
Fred: All right. Thank you so much.
Pat: I've seen these ads again.
Scott: I didn't know they still did it like that. That was 30 years ago. I remember that also.
Pat: I saw one on my Facebook feed the other day. And so I clicked through the Facebook feed to see if I could actually find who the distributing company is.
Scott: Because if you are selling insurance, you have to... Well, every state's different. So Fred was calling from California. In California, you have to list your license, your insurance license number.
Pat: And then I'd chase it backwards to see actually who's doing. But there's third-party marketing organizations that actually put these workshops on, and then...
Scott: So you don't know until you show up.
Pat: And then fill a room. The person selling the stuff may not even be given the workshop. It could be a complete professional out of Chattanooga, Tennessee, that runs a marketing company.
Scott: Well, shame on them too.
Pat: Okay. Well, the world is...
Scott: I mean, if someone's selling health supplements that are detrimental to your body...
Pat: Well, Scott...
Scott: ...then I would say shame on those people.
Pat: My assumption is the people that listen to our podcast on a regular basis are pretty...
Scott: I'm preaching to the choir.
Pat: ...cynical of investment products that come from our industry, as they should be.
Scott: As they should be.
Pat: As they should be.
Scott: And look, this is the reason why. Frankly, this is the reason why there's a lot of people who could truly benefit from good financial advice that don't seek it out. Because, like, how do I really know?
Pat: Fair enough.
Scott: It's maddening.
Pat: All right. We're not going to do the bonus podcast.
Scott: Just as a general rule, don't do business with someone who lives off commissions in this industry. If you're going to want an investment advisor, either pay someone a flat fee, an hourly fee, or a fee to manage the money, or some combination of. Don't have someone that just relies on their commissions.
Pat: Correct.
Scott: Because it's a conflict of interest.
Pat: But there's RIAs that sell commission products.
Scott: And by the way, there's fixed index annuities that are non-commissioned fixed index annuities.
Pat: That your advisor can offer it to you, if it's appropriate.
Scott: Correct. Your fee-based advisor can offer it to you, if it's appropriate. And you're not locking your money up for 10-plus years.
Pat: There's no surrender to it.
Scott: And I guarantee, there's no sign-on bonus.
Pat: Fifty percent.
Scott: How could you go wrong?
Pat: How could you go wrong? Like, when I go to the grocery store...
Scott: Because you put in 100 grand, and they put in 100, you have to leave it there 10 years. They're going to invest it somewhere very conservative so they know that the 100,000 is going to go to 150,000.
Pat: I understand. But, like, when I go to the grocery store and it says 20% free, I always think, I'd just take the 20%. I just want the 20...I want the free part.
Scott: I don't like the buy-one-get-one-half-off garbage.
Pat: No.
Scott: If you go into CVS, like, I buy this medicine every eight years. I don't...
Pat: All right, Scott, I'm going to share a story from my childhood. We grew up in a family of five kids.
Scott: Is this a long life story?
Pat: We'd start at the very beginning. We'd start at the very beginning. Occasionally, my dad would go grocery shopping on the weekends, and he'd bring all five of us, kids. And back in the day, if they had coupons in the cereal, it would be in the bag itself.
Scott: I remember that, yeah.
Pat: So he would actually have us open the cereal box in the store, dig in, and pull the coupon out to use for that box of cereal.
Scott: I thought that was so classy.
Pat: You're like, "What are you doing, Dad?" He's like, "Open that Cheerios right now, dig your hand in there, pull the coupon."
Scott: I'm assuming that you went through a lot of cereal as a family.
Pat: Yes, yes.
Scott: You would only need to, like, do the honest thing once, right? And then you've got the coupon.
Pat: We buy three or four boxes at the same time.
Scott: I understand. Okay. So the first four, you don't get the 50% or whatever, the 50 cents off. And then, from the rest of your life, you've got the coupons. That's pretty funny.
Pat: Well, listen, if he was alive today, I'd point that out to him. I doubt he'd remember.
Scott: One more thing, dad, you fell short.
Pat: I don't think it was...I said to him, "Is this right?" He said, "Look, yes, it's right because we're going to buy that. I'm just using it early." I'm like, "Okay."
Scott: I mean, there's probably no restriction around that.
Pat: Well, I don't think that the grocery stores encourage you to open packages.
Scott: It's kind of funny. Jason, John, Pat, you go to aisle six.
Pat: Dig stuff out of it. It's one of the things we learned from our childhood.
Scott: Oh, yeah.
Pat: There wasn't a lot of money splashing around the household. I mean, that was important.
Scott: Bring the kids because he wasn't going to do it himself.
Pat: Maybe.
Scott: I'll have my kids do it. Oh, life is quite wonderful, I mean, just all the kind of experience.
Pat: It's a journey.
Scott: It is. All right, let's continue on. Let's talk to Curtis. Curtis, you're with Allworth's "Money Matters."
Curtis: Hey. How are you doing?
Scott: Great. Great.
Curtis: Good. Good. Thanks for taking my call. I was listening to that last call and your commentary. I was having some bad flashbacks myself with annuity experiences.
Pat: Did you own one at one point in time?
Curtis: I still own one, unfortunately.
Scott: Actually, there are times when they make sense, and some of the old products, they were mispriced and they're great deals.
Pat: And we'll talk about an annuity. So we just railed on an annuity, but we'll talk about an annuity later on the show that they were mispriced. And so you may have an old annuity that actually is very, very valuable.
Curtis: Are you trying to make me feel better?
Scott: No.
Pat: No, no, no, truly, truly, because at one point in time, they had guarantees on them. This was before the advent of the fixed index annuity where they had guaranteed returns, but you could invest the money whatever way you wanted in an underlying index. Anyway, what's your question for us?
Curtis: Right, right. Yeah. Well, yeah, that's another time, another story, I guess. I won't bother with my annuity issue, but my question is fairly simple, or it may be, in a way, simple. I'm a caretaker/friend for an elderly person, and they've put me in their will. They want to leave their estate to me, which is minimal, but their biggest asset is their home. But they were in financial straits, pretty much living on Social Security, this woman, this widow. And so she's gotten a reverse mortgage on her home.
Pat: Okay.
Curtis: So she has...I guess the house might be worth 250,000, something like that, and the reverse mortgage is about 90,000 on there right now.
Pat: Is that the outstanding...I'm sorry, the outstanding balance is 90k?
Curtis: On the mortgage, yeah. So if she were to pass away...she's in reasonably good health, I don't expect her to pass anytime soon, and hope she doesn't. But I'm just trying to think ahead wisely, and she wants me to inherit the house. But if she were to end up in a situation where she had to go into a nursing home or something, from what I'm told, Medicare, whatever, would pretty much take everything she has, including the house.
Pat: That's correct.
Scott: Well, another way to look at it is the government's not set up to pay for elder care when people have their own assets to pay for elder care.
Curtis: Yeah, that makes sense. That makes sense. Right, yeah.
Pat: And by the way, according to the reverse mortgage itself, once she no longer occupies that house for 12 months or more, it is supposed to be sold.
Curtis: Right.
Scott: The reverse mortgage needs to be repaid.
Curtis: Right, right.
Pat: That's right. It doesn't have to be sold. The reverse mortgage needs to be repaid. Okay.
Curtis: I see. I see what you're saying. Okay. So somebody...I don't know where I heard this, if it was Mr. Google or a friend, but someone suggested that I have my name added to the deed on the house.
Pat: No. No.
Scott: Well, you can't.
Curtis: No? Just can't do that?
Pat: Well, even if you could, it would make no sense, because it wouldn't receive a step-up in basis at death.
Scott: Yeah. Considering the fact, I mean, the reverse mortgage company would have to agree to that.
Pat: That's correct. But even if there was no...it was owned free and clear, you could be named as a transfer on death depending upon where the property, what state it's located in, there's different forms of that, but you wouldn't actually be on the deed itself. And the benefit of not being on the deed is that when we die, we all receive a step-up in basis, right, one of the benefits of death.
Curtis: What does that mean?
Pat: So what it means is that the government pretends as if you just acquired that property today, that you could sell it tomorrow and you would pay no taxes on any of the gain. So as an example, let's say she had paid $50,000 for this house 20 years ago, and now it's worth $250,000. If you get on the deed, the government can't see like, "Oh, when did he get on the deed?" The basis transfers to you, which means that you're on the deed, she dies. Okay. The government says, "How much did you pay for this house?" And you're like, "Fifty grand." "Okay, there's $200,000 of gain here. Curtis, you owe us taxes, capital gains, and state income taxes..."
Scott: On your half.
Pat: ...on your half of the gain, right?
Curtis: Okay.
Pat: But if you are named as a beneficiary or transfer on death, then...
Scott: So if what you're trying to do is preserve assets so that you get an inheritance and she's artificially impoverished to get Medicare...
Pat: I don't think that was his... That wasn't his intent. I don't think so. Was that your intent?
Curtis: Well, yeah, it sort of sounds greedy, but I guess, yeah, in a sense, it is.
Pat: It doesn't work.
Scott: I mean, she could technically write him a check for...I forget what the dollar amount is, on a daily basis that goes underneath the limit. And if she lives longer than three years or whatever the timeframe is, there's not a look back. But I certainly wouldn't recommend that.
Pat: That's right.
Scott: I mean, she might not even sign, like, why would she...
Pat: Yeah. So, does she have any living relatives?
Curtis: No.
Pat: I wouldn't recommend getting on the deed.
Curtis: What about...
Scott: We can't.
Curtis: I think we should maybe touch on it. What about setting up some kind of...I don't know if it'll be a contract or whatever where, on paper, she is paying me a certain amount of money per month for care, you know?
Scott: Well, there's nothing wrong with that.
Pat: You can do that.
Curtis: Would she have to actually pay me, or is it like...?
Pat: I don't know the answer to that.
Scott: Yeah, she'd have to pay you.
Pat: Well, she'd have to pay, but I guess that...I think what I heard Curtis say was, can this be so that...
Scott: Lien the house?
Pat: ...I can put a lien on the property or file a claim at death that supersedes that of the U.S. government? I'm not qualified to answer the question.
Scott: Yeah. So I think if you're providing services, you can charge for the services today. My guess is there is a line of credit still in the reverse mortgage where she has access to cash, where she can pay you for your services today, rendered services.
Pat: Is there a line of credit available on the reverse mortgage?
Curtis: Fifty or 60,000.
Pat: Okay. Then, yes. Yes. If you're truly providing services...
Scott: That's what I would do.
Pat: ...then, sure, she can tap that line of credit.
Scott: And if you're concern is, "I'm providing these services for nothing, and I'm hoping to get something for my time, and no, I might not," that would be the way to do it.
Pat: Absolutely. That's very good, Scott, that you actually went to the line of credit. It never even crossed my mind. But there's a line of credit that's available on that. You could absolutely use that to have her pay you.
Curtis: Okay. You know.
Scott: I understand that you spend a lot of your time caring for somebody, and I get it.
Curtis: Yeah. Well, I don't want to look at it like I'm trying to rob the widow here. She is under this assumption, and she truthfully wants me to inherit it, but I'm looking at it realistically and saying, "Well, all right, if I get a couple of bucks out of it, sure, that's nice."
Pat: That's right.
Curtis: But is there anything I should be doing here to be wise about the situation? If there's not, that's fine.
Scott: No.
Curtis: I'll just roll the dice and see what happens.
Pat: No, but don't just say, hey...you know.
Scott: I mean, if you want to charge her.
Pat: Yeah, if you want to charge her.
Scott: If not, you discharge her. Yeah.
Curtis: If not, what?
Scott: You just wait and see what happens.
Curtis: Yeah, yeah, yeah. Okay. Well, the big question was about the deed. So you've answered that.
Scott: Yeah, the reverse mortgage company is not going to allow you.
Pat: They're not going to allow you to add yourself.
Scott: First of all, you have to be 62. Is it 62?
Pat: Yeah. How old are you?
Curtis: Yeah, I am 62.
Scott: Okay.
Pat: Yeah. Anyway, appreciate the call.
Scott: Yeah.
Curtis: All right. Thank you very much.
Scott: Wish you well. All right, Curtis.
Pat: Lots of rules around artificial impoverishment to qualify for government programs.
Scott: Yeah. I remember getting in an argument on that. I did a debate with somebody who their career was helping people. And he says, "Well, Scott, don't you do everything in your power to make sure that people pay as little in taxes as possible?" "Yeah, I do." But I said, "It just feels different when you're talking about having the other taxpayers kicking the money for someone who has the assets so they can take their assets and transfer it to somebody else. It just doesn't sit right with me."
Pat: Yes.
Scott: Hence, why I still have that opinion. All right. Hey, let's...we're just going to chat now with... Where's my little note here? It's our "Money Matters" interview with Laurie Ingwersen. Laurie is one of our advisor partners, and she's in the Boston area. She's a phenomenal advisor and been an advisor for a few decades.
Pat: She's been on our program at least once, maybe twice.
Scott: Once or twice, yeah. Laurie, thanks for joining us.
Laurie: Thanks for having me again. I appreciate it.
Scott: Yeah. And you've been a CFP for how long?
Laurie: A CFP for over 20 years now, but in the industry for 25. So not quite three decades, but it's creeping up on me.
Scott: I know. It happens. But Laurie's dad is still a practicing advisor. And he's, how old?
Laurie: He's 82.
Pat: Awesome.
Laurie: He'll be 83 in a couple of months. But I have said this before and I'll say it again, he is the youngest 82-year-old I've ever met.
Pat: No kidding.
Scott: That's cool. All right. So you were going to talk about a story about someone who did a Roth conversion and how you...where kind of planning made a difference.
Laurie: Yeah, absolutely. These clients of mine, they're a wonderful, wonderful couple. They retired from a couple of big companies in the Boston area in their late 50s, and they had a few million dollars each in their IRA accounts or their 401(k)s that we rolled over into an IRA. And when we were projecting out their required minimum distributions in the future, we could see that they would be in a higher tax bracket in retirement or in their 70s and 80s than they were while they were working. So the strategy that we implemented with them was the Roth conversion, and the goal of that was to reduce the taxes that they pay during their lifetime and also pass more tax-free assets onto their beneficiaries.
Scott: And how did you figure out what's going to be best for them? Was that a big motivating factor for them, what they left behind as well?
Laurie: It wasn't as big a motivator as it was to pay less taxes while they were living. I think that was certainly the main motivator for them.
Pat: So for the listeners, the best way to think about Roth conversion is you voluntarily pay taxes early on an asset, money in an IRA. You voluntarily pay taxes early so that, at the end of my life, if I looked at how much I paid in taxes, because I voluntarily paid some early, I will have paid less tax.
Scott: That's the idea.
Laurie: That's right. Yeah.
Pat: That's the idea, which is, because...
Scott: Because you're paying the tax now, the money's coming from somewhere, right? So you're taking it from either the same account or another savings pool.
Pat: And I'll take it one step further, which is assuming your children or the people that inherit the IRA are in the same tax rate, because of the changes that they have made in the distribution of IRAs at death, where it has to be drained in a 10-year period...
Laurie: That's right. That's right, absolutely.
Pat: ...that the Roth conversion becomes even...
Scott: More vital.
Pat: ...more important than it was two or three years ago.
Scott: That's correct, because you can't stretch it out.
Laurie: Oh, for sure. That's why we're seeing this strategy implemented so much more now after the SECURE Act 2.0, because that's what gave us the rule that now the beneficiaries have to deplete that IRA within a 10-year period of time, and most likely, they'll be at their highest earning years if it's for a younger generation. So this strategy...
Scott: And how much did you have them convert on an annual basis?
Laurie: So we calculated that for them. It made sense to do a couple hundred thousand a year. And their estimated tax savings over their lifetime was over $1 million. We're not converting the entire amount, but we are converting a large chunk of both of their IRAs.
Pat: And where did the money come from? Laurie, where did the money come from to pay the taxes on the conversion?
Laurie: So they fortunately had taxable assets because the strategy doesn't always make as much sense if you don't have the after-tax dollars to pay.
Scott: That's right. That's right. So if all your savings is 100% in your retirement account, it's not quite as appealing.
Laurie: That's right. The advantages decline pretty significantly if you have to pay the taxes from the IRA. But I look at it as short-term paying for long-term gain because you have to pay the taxes now, but you will pay less taxes over your lifetime if you're not having to take out $0.5 million or $800,000 a year when you're in your 80s.
Scott: Yeah. I mean, it's funny, you start a career maximizing your 401(k), maximizing your 401(k), maximizing, and then suddenly, you get to a point, they're in their 50s and they already have a problem.
Pat: So this is a...
Laurie: That's right.
Pat: Laurie, this is just us talking shop here for a second.
Laurie: Sure.
Pat: Would it ever make sense to take a distribution from a Roth IRA to pay the taxes on the conversion of a Roth IRA? So let's say I had a hundred...
Scott: No, because you can take money from the retirement account to pay the taxes.
Pat: We'd get to the same place.
Laurie: I think that you would because...
Pat: We'd end up in the same place.
Laurie: Yes. And when you make the contribution to the Roth IRA, you do start that five-year cost.
Pat: Understand, understand. Understand. I was just thinking, "Well, what if I had a $200,000 Roth IRA that's 10 years old?"
Scott: Laurie, how did you run the numbers?
Pat: Sorry, Scott. Can we change this a little bit?
Scott: No, it was hypothetical. No. How did you do the calculations, and who did you collaborate with?
Laurie: So we always collaborate with the CPA because we want to make sure that we're understanding or we have the whole understanding of the return and how it's going to affect any other tax implications for them. But we use MoneyGuidePro, and when we develop the financial goal analysis, we're inputting all of their current resources so we know what all of their income sources are going to be in retirement, what their assets are. And that can project out what the required minimum distributions are going to be, and within reason, of course. And so, from there, we can illustrate what a Roth conversion, how that will impact their taxes approximately during their lifetime, and then how much they would end up passing on to their beneficiaries in tax-free assets versus qualified.
Scott: And you run what-if scenarios, right? If we did this, here's what it would look like 10 or 15 years out. If we did this, here's what it would look like.
Laurie: Correct. That's right.
Pat: Or even...and you don't actually have to use their life expectancy on this particular situation, assuming you could actually bring it down one generation to see what it would look like tax-wise to the second generation that inherited the money.
Laurie: That's right. That's right. So we can see the assumptions on what they would potentially save in taxes over their lifetime and then what they would be passing on to their beneficiaries. And we can alter the life expectancy. We can alter the assumptions in the plan. But if we were to...and then, in some cases, if they've got longevity in their family, maybe we want to increase the life expectancy to 100.
Pat: Perfect.
Laurie: Or whatever it may be. So we can really play around with it, and we can do it calculated. So, what is the maximum benefit to them? And a lot of people might not be comfortable what the maximum amount is. So maybe they want to hedge it. And so they potentially just do 100,000 a year, or based on the conversations with the CPA, we can get really specific for the amounts that we're going to convert on an annual basis. And the nice thing is you don't have to do it all at once. You can spread this tax liability out over many years.
Pat: And, Laurie, the problem I've always had with clients is the reluctance to voluntarily write a check to the IRS.
Scott: That's right.
Pat: Right?
Scott: Yes. I've run numbers and they're like, "I'm not doing it."
Pat: Yeah. It makes sense. It makes sense. The numbers all line up, but they couldn't get themselves to scratch the check to the IRS. Problems with these clients?
Laurie: Yes. And we were in the same boat. We were in the same boat, and I think that two things changed it. And the first one was the SECURE Act and the 10-year rule now with the inherited IRAs. And the second thing that changed was just us being able to illustrate it to them. So using the software that we have, it's really very helpful. And I think, initially, CPAs were a little wary of it, because I can remember back when this was first started, these discussions were started, the CPAs would say, "Oh, you don't want to do that. You don't want to pay taxes now." Because when the CPA has to tell them what they're writing a check for...
Scott: That's exactly right.
Laurie: They're the ones that are getting that.
Scott: They want to say you get a refund. Yeah.
Pat: But the reality is that if they're taking money from a brokerage account or savings account, you're using that money to pay the taxes, and it's overall making the whole portfolio much more tax efficient.
Laurie: That's right. It's brilliant.
Pat: Because that prepaid tax liability now sits in a Roth IRA.
Laurie: That's right.
Pat: It's brilliant.
Laurie: Yeah, the more tax-free assets that you have at your disposal, the better.
Pat: Yeah. It's brilliant.
Scott: And the higher income tax your kids are, assuming they're going to inherit the assets, the more the Roth conversion makes sense.
Pat: Well, Laurie, thank you, as always, being a great advisor and a member of the Allworth team.
Scott: Yeah. An example of one of our Allworth advisors. So thank you, Laurie.
Laurie: Well, thank you for having me. I love coming on with both of you, and I love listening to "Money Matters." This is fantastic.
Scott: Thank you.
Pat: All right. Well, stay warm back there.
Laurie: Stay warm. I was just about to say, enjoy your warm weather.
Scott: Boston.
Laurie: We're pretty icy cold here in Boston.
Scott: Yeah. My son went to college at BC, Boston College, and he would tell me about some polar vortex and all that stuff.
Laurie: He knows. Well, tell him it's a warm 20 degrees here today.
Scott: Beautiful.
Laurie: We'll be in the 30s on Friday, so that's like tropical.
Scott: Oh, wow. What about the bathing suit? A little sun tanning.
Pat: All right. Thanks, Laurie.
Scott: Thanks, Laurie. Appreciate it. Yeah.
Laurie: All right. Take care, guys. Okay. Bye.
Scott: It's always good talking to her. She's a...
Pat: So, Scott, earlier, we talked about the gentleman and annuities, and we made the comment that some of these old annuities and some of the fee-based annuities are still good. The problem is the way they're constructed and sold.
Scott: So I want to give you an example, a real-life example. I'm going to change the name of the people because...and we've talked about this, behavioral finance, like, our own emotions play a big factor in our investment returns. They just do. Now, if the market's down one day and back up the next day, no big deal. These prolonged bear markets where, month after month, we continue to have declines are the toughest. And in the last 25 years, we had, from 2000 to 2002, we had 3 calendar years of negative returns on the stock market. And then, of course, we had the financial great recession in '07, '08, '09. That was actually a shorter period of time but a deeper turnaround, so.
Pat: All painful.
Scott: Yeah. So this was a client who had been a client in maybe late '90s. When the market started turning south in 2000, they became nervous to the point they're like, "We got to do something different." And our approach in the investment management had been having some fixed income, having a well-diversified portfolio. But when the market fell, it was 45% decline over those 3 years, they got to the point like, "We need to do something different." And so as members of the firm, we're looking for solutions. And at the time, there were some variable annuities that were structured in such a way we're thinking, "How in the world can insurance companies make money on these?" They feel mispriced. There's way too many benefits to the consumer, policyholders, not enough for the insurance companies.
Pat: I remember getting on these conference calls with actuaries and asking them questions like, how did you price this? How does it make sense for you to take this risk?
Scott: Yes. So we ended up taking an IRA, and at the time, we rolled $439,000, moved $439,000 into this variable annuity.
Pat: Scott, disclaimer, this is an example for an individual client that is not representative of all our clients and may not apply to you.
Scott: That's correct. Yes, most have lost money and hate us. But this one, actually...
Pat: Oh, don't say that.
Scott: Whatever. Yeah.
Pat: Disclaimer.
Scott: Clearly. Not everyone has had this experience. Beautiful thing about this contract, Pat, is there was about 30 different stock funds to choose from, including index, managed funds, whatever. And as an advisor, we were allowed to allocate however we wanted. We could make changes however we wanted. So if he...
Pat: But the guarantees still apply.
Scott: They provided a guarantee of 6% income. So worst case scenario, you'll get 6% income off this, okay? And what it did is it kept people invested in the stock market when they wanted to get out.
Pat: Because they knew that this thing was going to grow...
Scott: Insurance companies could be on the hook.
Pat: ...for the 6%. And so what we did with these naturally is, because you had those guardrails around it, we went as aggressive as you possibly could.
Scott: Aggressive as possible. And told people, "Look, you don't need to worry about having a fixed income or buffer in the portfolio because you got the insurance company on the hook.
Pat: By the way, these products are not available today.
Scott: That's correct. You can't go and buy 100% equity, and it doesn't work anymore.
Pat: Yeah, it doesn't. They were obviously mispriced.
Scott: Okay.
Pat: So they put in 439.
Scott: Four thirty-nine. They've taken out 650.
Pat: Okay.
Scott: The account balance at the end of December was $1,686,000.
Pat: That is amazing.
Scott: Okay? And there's a minimum income base of almost $2 million, $1,971,000.
Pat: Which means that they could turn it into a stream of income.
Scott: They're guaranteed 6% a year. And actually, there's...
Pat: Holy smokes.
Scott: This individual had the opportunity to annuitize. They could tell the insurance company, "I want my $1.9 million to be annuitized using the annuity tables at the higher rates that came out 25 years ago." Okay? Here's where the story gets more interesting. This is pretty interesting. And like, to your point, Pat, these contracts do not exist in this format. If they did, we'd use more of them. And the main reason is because we could be more aggressive, because behavioral finance is real and people's emotions are real. And I can't tell you how many people we've sat across the table from or had a phone conversation, whatever. They're freaked out, and they're like, "I got to get out. You don't understand. Like, I got to get out. If it continues like this, I'm going to be broke." That's just reality. That happens. That's why markets go down.
Pat: That's right.
Scott: If no one would sell them, they wouldn't go down. But people continue to sell and sell, and they push them down. But here's the interesting thing, this person called me a week ago and said, "Scott, I think we should get out of that insurance contract because of the fees. The fees are more expensive than that. Why don't we just have this managed in another one of the accounts that you guys manage?"
Pat: They'd be better off annuitizing this thing.
Scott: Or doing nothing.
Pat: Or doing nothing.
Scott: But here's the irony.
Pat: They were looking at the fees. Of course, they're going to be more expensive.
Scott: It's an insurance.
Pat: They got a guarantee in there.
Scott: It's a mispriced insurance. So it's like having fire insurance in California for 100 bucks a year.
Pat: But the insurance company will actually pay above par for this to buy it back.
Scott: They aren't at this time, but they had been over the years.
Pat: Okay.
Scott: Offering people money to get out of the contracts, like a 10%, 15% addition to their account. Please, get out of this contract because we've screwed up.
Pat: Yeah. They carry it on their books as a liability.
Scott: Yes, correct. It is a liability for them. But the irony is, I said to this individual, I said, "There's no way this account would be worth roughly $2 million had we had it in a traditional type of an account."
Pat: Because you'd have bond in there. You wouldn't be nearly as aggressive.
Scott: Right. And I've known this person almost 30 years. When the markets go down, they panic. And I said, "Look, you know, we're having this conversation after two back-to-back years of a bull market."
Pat: Oh, like risk doesn't seem to exist anymore.
Scott: That's my point. And the reason I brought this up, because I think there's two lessons here. One, not all products...like, there are times when certain products make sense.
Pat: If you have an old life insurance policy or an old annuity...
Scott: Don't just cash it out.
Pat: Just don't. Have someone that understands them, not a salesperson, take a look at it.
Scott: The second thing is just, like, the market's been on fire. We're at the peak and like...
Pat: We don't know whether they're at the peak.
Scott: Fair. Correct.
Pat: We know that the market's valuations on a historical basis are relatively high.
Scott: And the markets have done extremely well.
Pat: Unbelievably.
Scott: And things tend to revert back to their mean over time.
Pat: We do know that.
Scott: Averages, yes.
Pat: We do know that. We do know that.
Scott: But I just found that the irony that...I mean, this has done so well, and the individual is now thinking, "Oh, let's just take this and just put it." And I said, "There's no way this account balance would be worth the value it is today because we were 100% in stocks the entire time...
Pat: The 439.
Scott: ...even while she was taking income.
Pat: That's amazing. So the whole total value, and obviously, we're ignoring the time value of money...
Scott: That's right. You can calculate the real returns.
Pat: Yeah.
Scott: And this would be worth more if it was 100% in the S&P 500 or total stock market index.
Pat: Of course, they would, but they wouldn't have been able to weather it.
Scott: My whole point.
Pat: Right? They wouldn't have been able to weather it. But, look, if you can remove the psychology from your investing, hard to do. Really, really difficult to do.
Scott: And when the markets go up...
Pat: Don't get too excited.
Scott: ...my opinion, there's more risk. When the market goes down, there's less risk.
Pat: Yes.
Scott: Anyway, there's our little ending lesson for today.
Pat: All right. So once again, a promotion for the podcast. If you like this at all, please go and rate and/or share a review. Yes, if you don't like it, you can do that as well. But if you don't like it, I don't know why you're listening to the podcast.
Scott: That's right.
Pat: And then the second thing is if you could share it with a friend, your friend, the friend.
Scott: The friend. Yeah, it's been...
Pat: Or even a family member.
Scott: ...nice being here with you. Scott Hanson and Pat McClain, Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah. Glad you're here as we're talking about financial matters. Myself and my co-host are both financial advisors, and we've been doing this program about...we've been advisors for over 3 decades, doing this program for almost 30 years. And I certainly enjoy coming and sharing a bit of our, I don't know if it's wisdom. I don't know if it's 30 years of experience or 1 year of experience times 30, but I'm hoping it's 30 years of experience.
Pat: Our musings. You know, Scott, we're going to take some calls. But just a reminder, we talked about this in December. People between the ages of 60 and 63 are able to supersize their catch-up contributions for their 401(k)s. There you are. So I went into mine because I'm 62.
Scott: And how much actually? This is just the 401(k)?
Pat: Yes, 401(k)s. As I said in December, it made no sense to me why they chose these ages, and there's no... I think it's for the next couple of years that the limits for...
Scott: Which bill was that buried in? Do you know?
Pat: I don't know.
Scott: Buried in some bill.
Pat: But it's essentially 150% of what the normal is between the ages of 60 and 63.
Scott: So someone between age 60 and 63 can contribute almost 35 grand to their 401(k).
Pat: That's right.
Scott: Thirty-four thousand seven fifty.
Pat: I went...
Scott: If you're age 50 and over, or over 64, 64 and over, it's 31,000. And if you're under age 50, it's 23,500.
Pat: But the point being is you're between ages 60 and 63. Go in and adjust your withholdings on your 401(k).
Scott: Well, you should probably adjust them anyway because it's a higher contribution amount. I adjusted mine.
Pat: I adjusted mine. I adjusted mine a lot more than yours. Because I'm 62.
Scott: Now you're bragging about being 60.
Pat: Oh, yes. Look, some benefits here. Not only...
Scott: Yeah. So you can put an extra $3,750.
Pat: Told my wife, I said...
Scott: That could be a game changer for your retirement.
Pat: I mentioned it to her the other day. So my wife is an accountant, and I said, "Oh, yeah, I meant to tell you, our paychecks are going to be a lot smaller because I increased this..."
Scott: It's a lot smaller.
Pat: I increased this contribution.
Scott: The irony, I mean, here's the thing about it. Who does this really benefit?
Pat: Rich people.
Scott: I mean, you might be the odd person. I mean, not that many people can save $34,750 into their retirement.
Pat: That's right.
Scott: When the median household income is about, what, $100,000 or less than that?
Pat: That's right. That's right. How could I argue with you, right? It's the same thing with these states setting up these savings programs where poor people get to save money. You know, like, what are you doing? Like, how out of touch are you with reality to think that poor people are going to be funding retirement plans? And the states say, "Well, the marketplace isn't meeting that demand, so we're going to do it." And you're like, look...
Scott: When you're trying to figure out which bills to pay, what you're going to have for dinner...
Pat: We're going to come across as elitist, and call me whatever you want, but I wasn't always able to put the maximum into the 401(k).
Scott: I remember going to Taco Bell because they had 59-, 79-, and 99-cent menu. And I had Taco Bell a couple of times a week for dinner because it was really inexpensive.
Pat: I do today. Yeah. So remember that. And then the other big thing this year is out-of-pocket costs for prescription drugs covered by Part D of Medicare are limited to $2,000. We would expect to see quite some changes in Medicare in the next coming years, I would think.
Scott: Medicare and Social Security. We have no choice.
Pat: That's right.
Scott: I mean, at some point in time, you know, they got the whole Doge thing and all that. At some point in time, our government, we're going to have no choice. If we don't make some changes, we will be forced to because we have to make our interest payments. We have to. And at some point in time, the bond market is going to say...
Pat: We're not going to rate this, you know, as credible debt.
Scott: We're not, yeah. There's no more money for it.
Pat: Yes. One last thing before we go on to the call, Scott, the new withdrawal rules for inherited IRAs.
Scott: These are so dang complicated.
Pat: They are. They are. I read this and I thought, "I know this."
Scott: Unless you have an inherited IRA that is a substantial amount, and maybe that's relative to what your finances are, I would just drain the thing in 10 years. You got to drain it in 10 years anyway, but there's...
Pat: But it has to be drained in that 10-year period unless...
Scott: Oh, there's a couple of exemptions on it.
Pat: Right? If the original owner had to take distributions every year, the person who inherits the account must do so starting the year after the original owner's death.
Scott: So if someone's already required minimum distribution...
Pat: You have to continue that and drain it in 10 years.
Scott: You have to start it the year after their death.
Pat: Correct. And if they hadn't...
Scott: I remember, we had a call, someone a while ago that their RMD wasn't satisfied the previous year. I'm like, "I'd just take it because..."
Pat: And every time I read stuff like this, I think, "I've been doing this a long time. I don't ever once remember an audit on an RMD."
Scott: I had this...I had a client years ago.
Pat: I remember this. I know the story.
Scott: So he had a retirement account. I've had a couple of strange situations, and then we'll go back to the call. He had a retirement account. It must have been before he knew me.
Pat: It was.
Scott: Or it was one that...I think was before he knew me. And he hadn't taken...he missed, like, three or four years of required minimum distributions.
Pat: And at that time, it was age 70.5.
Scott: And it was a 50% penalty.
Pat: Plus taxes.
Scott: Plus taxes. So you end up 85% gone, like, 15 cents on the dollar. And he's like, "What do I do?" I said, "Well, you got to take those." I said, "That's what the tax law says." You could volunteer and tell them what you did, or you can just take the distribution now.
Pat: And hope for the best.
Scott: And hope for the best. I said, "I can't give you professional advice stating to do that. But it was an honest error. You're not trying to cheat anybody. Take the distribution now."
Pat: And it was prior to when the custodians would actually report.
Scott: That's right, report on it. And that's what he did, and he was never audited. I had another person, client that had a...they had a Keogh pension plan.
Pat: Do they still have Keoghs? In a different form.
Scott: I think Keoghs is...
Pat: It was a tax law.
Scott: It was some sort of...
Pat: Yeah, profit-sharing plan.
Scott: Yeah. And so a client for many years, and I said something about their tax. "Well, we do our own taxes." I said, "Well, who files your 5500?" And they said, "What?" I said, "Who files your 5500?" They said, "What's a 5500?" And I said, "That's the annual return you have to file for your pension plan." They said, "What are you talking about?" They had had this thing for, like, 15 years. It was a single proprietor with no employees, been funding it for years, and...
Pat: Just never knew.
Scott: They never knew.
Pat: And they were doing their own taxes.
Scott: Doing their own taxes. And I'm like, "Well, you..." Like, they said, "What should I do?" And I said, "Well, do you want my answer as a financial professional, or do you want my answer as a friend? Because let me take my professional hat off, and I'll say, if it were me, you thought you were living in compliance with...you followed the letter of the law, the spirit of the law. You missed the letter of the law. If it were me, I would transfer this into an IRA, do a direct transfer, and..."
Pat: Pretend it never happened.
Scott: "...pretend it never happened and set up...just do..."
Pat: A new profit-sharing plan. A new Keogh.
Scott: Yeah, a solo-K going forward. And I said, "I can't give you that professional advice."
Pat: And at that point forward, they hired an accountant going forward?
Scott: Yes. And they didn't have the pension plan any longer because they didn't need it. They can do a solo-K.
Pat: Look, a good accountant...
Scott: Now, I don't know if that was unethical or immoral for me to do that.
Pat: You obviously didn't think so?
Scott: I still don't think so. They followed the spirit of the law.
Pat: Yeah. It's complicated. So my...
Scott: Some little technicality.
Pat: By the way...
Scott: I wouldn't recommend somebody do that. This is when people have made mistakes. Honest mistakes.
Pat: They weren't trying to dodge the law.
Scott: No.
Pat: But there is a big lack of accountants in the industry right now for people to file tax compliance.
Scott: CPAs, in general, like, and all of that. But also, yeah.
Pat: And especially in tax returns and tax compliance. So it's hard to get a good accountant now. I mean, you have to actually kind of... My youngest son started his business, and he said...not my youngest, the second to the youngest son, started a business, and he said, "I think I'm going to do my own taxes." And I said, "Well, it's really kind of important. You bought all this. You bought a truck last year."
Scott: Yeah, you're not doing your taxes.
Pat: And I said, "Are you going to take the 179?" And he said, "Well, what's the 179?"
Scott: Yeah, hire an accountant if you don't know the answer to that question.
Pat: And he said, "Well, what's the 179?" I said, "Hire an accountant because you didn't know that it existed. So you wouldn't know unless you actually did it."
Scott: Which there's a downside to that. I mean, if you buy equipment and you finance it, which, my guess...is that what he did?
Pat: I think he may have.
Scott: Okay. And then let's just assume that's how most...
Pat: He had cash flow.
Scott: And then, if you take the deduction in one year, it can certainly help you that one year, but it hurts your later years. Yeah, yeah, yeah.
Pat: Yeah, yes. Yeah. So it's like...
Scott: Because then you're going to have to recapture them.
Pat: Accelerate depreciation. But then he's like, "Well, I had this 401(k) for my own job, and I wanted to convert it to a Roth IRA. So maybe we do it this year." I'm like, "This is what a good accountant would do for you, not your father. Never call me again."
Scott: Well, I know it's always what a dad knows. All right, let's take some calls here. And to join us, 833-99-WORTH. You could email us at questions@moneymatters.com. And I still have a couple of things I want to talk about later in the program, but right now, we will talk with Fred. Fred, you're with Allworth's "Money Matters."
Fred: Hey, Scott and Pat. Long-time listener of your podcast. How are you doing?
Scott: Good.
Fred: Happy New Year.
Scott: Thank you.
Fred: Good. I had a question speaking of 401(k). We were updating, my wife and I were updating our estate plan, and the advisor mentioned...I was telling him my assets and I want to convert my traditional 401(k) to Roth, you know, to pay the taxes now so it can grow tax-free. So I have about, like, 1.1 million, traditional 401(k) of about $734,000 but spread across 3 companies.
Pat: Wait, wait, I'm sorry. I'm sorry, Fred. Say that again. You have 1.1 million and then you mentioned 740.
Scott: Is that in addition, or are you giving us a breakdown of the 1.1 million?
Fred: It's a breakdown.
Pat: Okay, thank you. So you have $1.1 million in 401(k)s across 3 previous employers.
Scott: Seven thirty-four in 401(k)s across 3 employers.
Fred: Yes.
Pat: Okay.
Fred: I have a rollover of $277,000, individual TOD of $40,000, and a Roth of about $1k. And I also have a brokerage account of $550,000.
Pat: Okay.
Fred: So representative, the advisor mentioned about...
Scott: So that adds...I'm confused. So the 1.1 is retirement assets. In addition to the retirement assets, you have 550 in a brokerage account.
Fred: Yes, that's correct.
Pat: Okay.
Scott: And the brokerage account is invested, how? And the reason why we're asking this now, because retirement accounts, it doesn't really matter how you invest it. It's all taxes, ordinary income when you pull the money out. Brokerage account, you can have dividends, you can have qualified dividends at a lower tax rate. You've got capital gain implications. So, how are you invested in the brokerage account?
Fred: So I have stocks. I do options, calls and puts. I have dividends and stuff like that. So kind of like investing.
Pat: Okay. What's your question for us?
Fred: My question is...
Scott: Do you have much in the way of gains that you have to report each year from that account?
Fred: Yes, significantly.
Scott: Okay. Why don't you do the trading in a retirement account?
Fred: Oh, I never thought about that. One of my retirement accounts is with Fidelity, and the brokerage account is with E*TRADE.
Pat: It doesn't matter. E*TRADE has...
Fred: It doesn't matter? Okay.
Pat: Yeah. It doesn't matter what the platform is. So, what's your question for us?
Fred: My question is the advisor is offering an Athene Agility 10, which is an FIA, which is a fixed index annuity, with principal guaranteed growth from the S&P 500 and NASDAQ 100. And then they said that index returns per year doubled on both the IRA and then the Roth IRA side. And then, also, it has a 50% signing bonus, which is given immediately but can't be accessed until the 10th year after the original principal amount is converted from IRA to Roth.
Scott: So you put 100 grand in. They treat it like you have 150,000.
Fred: Yes, that's right.
Scott: It's like manna from heaven.
Pat: So, how old are you?
Fred: Fifty-one.
Pat: And are you still employed?
Fred: Am I still what?
Pat: Are you still employed?
Fred: Yes.
Pat: And what do you make a year? What's the family income? What's the family income?
Fred: Three hundred thousand dollars.
Pat: And how did you meet this advisor?
Scott: Why is it...?
Pat: Wait, let me guess. Let me guess. You said you were updating your estate plan.
Fred: Yes.
Pat: So you went to someone that was doing your trust for you, and they were going to charge you, like, $1,500. And at the same time, you had to disclose all your assets to them. And once they saw your assets, they made this recommendation?
Fred: Yes, that's correct.
Pat: Oh, how did I know? How did I know? How did I know? And did you go to a workshop at an IHOP to actually watch the trust?
Scott: IHOP.
Fred: Yes, exactly. It's not IHOP, but yes.
Pat: You went to a Mimi's Cafe.
Fred: Yes, pretty much.
Pat: Right? It's amazing. I'm kind of psychic. I couldn't think of a less appropriate recommendation for you, Fred.
Scott: I totally agree.
Pat: I couldn't. If you said, "Pat, you met this guy that actually does stock options, puts and calls, and brokerage account? He's 51 years of age. His family income is $300,000. Seems pretty financially..."
Scott: He invests in...he knows covered calls, option stocks. He enjoys the trade, and he reports a lot of capital gains each year.
Pat: You could actually create that same index internally in your brokerage account without actually...
Scott: Yes, much less expensive.
Pat: This would have been...
Scott: You understand the mechanics behind it. You actually could.
Pat: You could. You could create...
Scott: And you wouldn't want it.
Pat: Yeah. All you're doing is creating callers around that, and you're taking the money and putting it in fixed accounts, and you're taking the proceeds from the fixed account.
Scott: There are so many restrictions of what your return is. You're not going to get anything close to the S&P 500.
Pat: And by the way, you don't get the S&P 500. If you read the contract itself, you get a participation rate in an underlying index, and typically, it is capped at a number of 10%, 12%, 14%. Oh, and by the way, you only get 70% of that participation.
Scott: And you don't get the dividends. And they can change the participation rate in the future.
Pat: If you said, "Pat..."
Scott: I bet you, I bet the commission to the agent...you said 10 years. It's a 10-year surrender charge?
Pat: God bless him. He went for the whole thing though.
Scott: You're going to scare me.
Pat: The sales guy went for all of it. He didn't even...he was not ashamed.
Scott: I bet it's 10 %.
Pat: Oh, yeah, yeah, yeah, yeah. Yeah. So...
Scott: If not higher.
Pat: So look, that is... And by the way, that's probably not the trust.
Scott: Here's what's so frustrating. They offer you a 50% signing bonus, right?
Fred: Yes.
Scott: Whatever that means. It's made-up numbers. You can't touch it. It's made up. There's no free lunch, right? There's no free... The only money is coming from you. There is no signing bonus.
Pat: So, Fred...
Scott: I don't understand why the regulators allow it. And in all seriousness, why do they allow this crap?
Pat: Understand, this is...we're talking about Fred here for a second. You take your little screed somewhere else. For now, it's a joke. We will have a bonus.
Scott: Our industry has a poor reputation, and it's well-earned.
Pat: We're going to have a bonus podcast where Scott Hanson just goes off on these indexed annuities. So look, Fred, so...
Scott: They're not all horrible and not all inappropriate. This is a horrible one and inappropriate.
Pat: So, Fred, all they're using is...you have same access to the financial instruments the insurance company does, where you can do callers. None of it is appropriate for you.
Scott: They're just using options.
Pat: That's all they're doing.
Scott: And the majority of the money is invested in treasuries.
Pat: But in saying that, let me ask you a couple of questions. Children at home?
Fred: No, they're all adults. Well, one, a senior in high school, so going to college later this year.
Pat: Okay. Home paid for?
Fred: Not yet. No.
Scott: I like the way you said all adults. I have a senior in high school, and I would not at all think she's an adult.
Pat: Okay. So, Fred, you have no need for this, and I would actually go and read the living trust that they produced before. How much did they charge you for the living trust, by the way?
Fred: About $1,500.
Pat: All right. And by the way, what restaurant did you actually go to this workshop at?
Fred: Yeah, I think it was a Hilton-sponsored...
Pat: Garden Inn?
Fred: ...restaurant or something like that. Yeah. Something like that, yeah.
Pat: Okay. Got it. Got it. So the whole idea behind this marketing thing is to put these trusts out there at a low, low cost.
Scott: Trust mills.
Pat: Low, low cost. So they get a...
Scott: I didn't know they're still doing this.
Pat: So they get a look at the assets, and then, once they get visibility of the assets, then it's to pitch you these high-commission products.
Scott: And I bet you that this "advisor" is not registered as an investment advisor, so can't charge you a fee for your service.
Pat: And they were not an attorney.
Scott: And I bet they're also not securities licensed, so they couldn't recommend an ETF to you, for example.
Fred: Right.
Scott: They're an insurance agent.
Pat: So in your situation, I think that, if you and I were sitting at the same Hilton Garden Inn, I would have actually focused on the placement of your assets, whether the things that you were doing in your brokerage account would be more appropriate to do in your IRA.
Scott: Yeah. And you've got three 401(k)s at three different companies. I assume one is your current employer. The two that aren't, I would just move those assets to your rollover IRA so you don't have so many different accounts.
Fred: Got you.
Scott: Easier to manage.
Pat: So you have a placement, and then go through and check the placement of the assets, which is once the money's in the rollover IRA, right, you can do all those stock options and you can do a lot of the trading. You may not do all of it. There may be some restrictions against the instruments you're using, but a large portion of them you could actually be doing in the IRA and avoiding any of the taxes.
Scott: Yeah, any of the speculative stuff.
Pat: And then, in the brokerage account, what you want to do is things that generate very, very little income, so really tax-efficient investing. This would be a perfect situation for direct indexing.
Fred: Okay.
Pat: Yep, for direct indexing.
Scott: Or even just the total stock market index.
Pat: Or total market, absolutely. But the direct indexing, Scott, I mean, the numbers that you could do it with have come down significantly in the last year.
Scott: That's right. And essentially, you understand the concept of an index, I'm assuming, based upon the transaction. And so rather than just buying, say, some mutual fund company's index, you use technology that creates an index for you personally. So you end up with a few hundred different stocks. It's only managed to mirror the index. So it's not like there's a big team of people that are trying to pick the best. So it's really low cost, but they do great tax-loss harvesting.
Pat: And so a good example of that is to represent the aircraft industry. They might just own United and Southwest. And if United actually falls in value, they may actually harvest that loss and buy Delta for 31 days and then trade back out again so that you're actually mimicking an underlying index, but you're doing it very, very tax-efficiently. This brokerage account would be perfect for that, and you would understand it. And then, so...
Scott: And then they're trading in your retirement account.
Pat: And they're trading in your retirement account. And they have them both available at E*TRADE. And you mentioned either Fidelity or Schwab. It's available almost everywhere. The platforms, the availability of products is almost identical across all platforms now. So that's what...if I was sitting down with you, Fred, I would say, "Look, we should spend a couple of minutes on the placement of the product." And then, I don't know if I would put a whole lot of trust in the trust that was created by the trust mill. I'm trying to use the word trust as many times in one sentence as I can.
Scott: Untrusted. It might be fine.
Pat: It may be fine. I'd go back...
Scott: It probably is.
Pat: I'd go back and read it to make sure that it was achieving all your objectives. But you absolutely run away from that fixed index annuity. Just run, run away. They talked about all the highlights in it, right? It sounded great.
Scott: My guess is the guy selling it doesn't even understand all the negatives in it.
Pat: But if you read...
Scott: They're so complicated.
Pat: If you read the contract yourself and actually made a list of the pros and the cons against it, Fred...
Scott: You would not have bought it.
Pat: You would not buy it.
Fred: Okay. Thank you.
Pat: But God bless him. He asked for $1 million.
Scott: God bless him?
Pat: He asked for $1 million, didn't he? How much money did he ask you to invest in it?
Fred: Yeah, about the whole amount.
Scott: God bless him? God damn him. I mean, sorry, excuse my language, but for crying out loud.
Pat: Well, Scott, he didn't know any better. He was told by him.
Scott: You put yourself as a professional in an industry? What about medical? What if someone said they're a medical doctor? Yeah, I'm a...
Pat: Well, that is... The bar isn't this. You're comparing a life insurance salesman to a medical doctor? Did you just do that?
Scott: There are financial professionals that I would say are just as much...
Pat: He wasn't.
Scott: I understand that.
Pat: That's why Fred called us.
Scott: I understand that as well.
Scott: Right? Fred said, "No, I don't know," right? Is that what you said, Fred?
Fred: Yes, exactly. I sure did.
Pat: Yeah.
Scott: Well, I'm glad you called because I think it helps that people highlight a number of factors.
Pat: Yes. But how was the meal?
Fred: Okay.
Scott: Chicken. Dry chicken. Green string beans.
Pat: All right. Well, listen, you're doing a great job. The only thing I also would check with you, even though the kids are out of the house, is to make sure you had a significant amount of term life insurance on yourself, so.
Scott: Make sure the wife's good, yeah.
Fred: All right, will do.
Pat: Make sure the wife's good.
Scott: Or assuming that maybe the wife's the breadwinner here. We don't know.
Pat: Either one, but make sure that you have plenty of term life insurance on yourself, so.
Scott: Appreciate the call.
Pat: Thanks, Fred.
Fred: All right. Thank you so much.
Pat: I've seen these ads again.
Scott: I didn't know they still did it like that. That was 30 years ago. I remember that also.
Pat: I saw one on my Facebook feed the other day. And so I clicked through the Facebook feed to see if I could actually find who the distributing company is.
Scott: Because if you are selling insurance, you have to... Well, every state's different. So Fred was calling from California. In California, you have to list your license, your insurance license number.
Pat: And then I'd chase it backwards to see actually who's doing. But there's third-party marketing organizations that actually put these workshops on, and then...
Scott: So you don't know until you show up.
Pat: And then fill a room. The person selling the stuff may not even be given the workshop. It could be a complete professional out of Chattanooga, Tennessee, that runs a marketing company.
Scott: Well, shame on them too.
Pat: Okay. Well, the world is...
Scott: I mean, if someone's selling health supplements that are detrimental to your body...
Pat: Well, Scott...
Scott: ...then I would say shame on those people.
Pat: My assumption is the people that listen to our podcast on a regular basis are pretty...
Scott: I'm preaching to the choir.
Pat: ...cynical of investment products that come from our industry, as they should be.
Scott: As they should be.
Pat: As they should be.
Scott: And look, this is the reason why. Frankly, this is the reason why there's a lot of people who could truly benefit from good financial advice that don't seek it out. Because, like, how do I really know?
Pat: Fair enough.
Scott: It's maddening.
Pat: All right. We're not going to do the bonus podcast.
Scott: Just as a general rule, don't do business with someone who lives off commissions in this industry. If you're going to want an investment advisor, either pay someone a flat fee, an hourly fee, or a fee to manage the money, or some combination of. Don't have someone that just relies on their commissions.
Pat: Correct.
Scott: Because it's a conflict of interest.
Pat: But there's RIAs that sell commission products.
Scott: And by the way, there's fixed index annuities that are non-commissioned fixed index annuities.
Pat: That your advisor can offer it to you, if it's appropriate.
Scott: Correct. Your fee-based advisor can offer it to you, if it's appropriate. And you're not locking your money up for 10-plus years.
Pat: There's no surrender to it.
Scott: And I guarantee, there's no sign-on bonus.
Pat: Fifty percent.
Scott: How could you go wrong?
Pat: How could you go wrong? Like, when I go to the grocery store...
Scott: Because you put in 100 grand, and they put in 100, you have to leave it there 10 years. They're going to invest it somewhere very conservative so they know that the 100,000 is going to go to 150,000.
Pat: I understand. But, like, when I go to the grocery store and it says 20% free, I always think, I'd just take the 20%. I just want the 20...I want the free part.
Scott: I don't like the buy-one-get-one-half-off garbage.
Pat: No.
Scott: If you go into CVS, like, I buy this medicine every eight years. I don't...
Pat: All right, Scott, I'm going to share a story from my childhood. We grew up in a family of five kids.
Scott: Is this a long life story?
Pat: We'd start at the very beginning. We'd start at the very beginning. Occasionally, my dad would go grocery shopping on the weekends, and he'd bring all five of us, kids. And back in the day, if they had coupons in the cereal, it would be in the bag itself.
Scott: I remember that, yeah.
Pat: So he would actually have us open the cereal box in the store, dig in, and pull the coupon out to use for that box of cereal.
Scott: I thought that was so classy.
Pat: You're like, "What are you doing, Dad?" He's like, "Open that Cheerios right now, dig your hand in there, pull the coupon."
Scott: I'm assuming that you went through a lot of cereal as a family.
Pat: Yes, yes.
Scott: You would only need to, like, do the honest thing once, right? And then you've got the coupon.
Pat: We buy three or four boxes at the same time.
Scott: I understand. Okay. So the first four, you don't get the 50% or whatever, the 50 cents off. And then, from the rest of your life, you've got the coupons. That's pretty funny.
Pat: Well, listen, if he was alive today, I'd point that out to him. I doubt he'd remember.
Scott: One more thing, dad, you fell short.
Pat: I don't think it was...I said to him, "Is this right?" He said, "Look, yes, it's right because we're going to buy that. I'm just using it early." I'm like, "Okay."
Scott: I mean, there's probably no restriction around that.
Pat: Well, I don't think that the grocery stores encourage you to open packages.
Scott: It's kind of funny. Jason, John, Pat, you go to aisle six.
Pat: Dig stuff out of it. It's one of the things we learned from our childhood.
Scott: Oh, yeah.
Pat: There wasn't a lot of money splashing around the household. I mean, that was important.
Scott: Bring the kids because he wasn't going to do it himself.
Pat: Maybe.
Scott: I'll have my kids do it. Oh, life is quite wonderful, I mean, just all the kind of experience.
Pat: It's a journey.
Scott: It is. All right, let's continue on. Let's talk to Curtis. Curtis, you're with Allworth's "Money Matters."
Curtis: Hey. How are you doing?
Scott: Great. Great.
Curtis: Good. Good. Thanks for taking my call. I was listening to that last call and your commentary. I was having some bad flashbacks myself with annuity experiences.
Pat: Did you own one at one point in time?
Curtis: I still own one, unfortunately.
Scott: Actually, there are times when they make sense, and some of the old products, they were mispriced and they're great deals.
Pat: And we'll talk about an annuity. So we just railed on an annuity, but we'll talk about an annuity later on the show that they were mispriced. And so you may have an old annuity that actually is very, very valuable.
Curtis: Are you trying to make me feel better?
Scott: No.
Pat: No, no, no, truly, truly, because at one point in time, they had guarantees on them. This was before the advent of the fixed index annuity where they had guaranteed returns, but you could invest the money whatever way you wanted in an underlying index. Anyway, what's your question for us?
Curtis: Right, right. Yeah. Well, yeah, that's another time, another story, I guess. I won't bother with my annuity issue, but my question is fairly simple, or it may be, in a way, simple. I'm a caretaker/friend for an elderly person, and they've put me in their will. They want to leave their estate to me, which is minimal, but their biggest asset is their home. But they were in financial straits, pretty much living on Social Security, this woman, this widow. And so she's gotten a reverse mortgage on her home.
Pat: Okay.
Curtis: So she has...I guess the house might be worth 250,000, something like that, and the reverse mortgage is about 90,000 on there right now.
Pat: Is that the outstanding...I'm sorry, the outstanding balance is 90k?
Curtis: On the mortgage, yeah. So if she were to pass away...she's in reasonably good health, I don't expect her to pass anytime soon, and hope she doesn't. But I'm just trying to think ahead wisely, and she wants me to inherit the house. But if she were to end up in a situation where she had to go into a nursing home or something, from what I'm told, Medicare, whatever, would pretty much take everything she has, including the house.
Pat: That's correct.
Scott: Well, another way to look at it is the government's not set up to pay for elder care when people have their own assets to pay for elder care.
Curtis: Yeah, that makes sense. That makes sense. Right, yeah.
Pat: And by the way, according to the reverse mortgage itself, once she no longer occupies that house for 12 months or more, it is supposed to be sold.
Curtis: Right.
Scott: The reverse mortgage needs to be repaid.
Curtis: Right, right.
Pat: That's right. It doesn't have to be sold. The reverse mortgage needs to be repaid. Okay.
Curtis: I see. I see what you're saying. Okay. So somebody...I don't know where I heard this, if it was Mr. Google or a friend, but someone suggested that I have my name added to the deed on the house.
Pat: No. No.
Scott: Well, you can't.
Curtis: No? Just can't do that?
Pat: Well, even if you could, it would make no sense, because it wouldn't receive a step-up in basis at death.
Scott: Yeah. Considering the fact, I mean, the reverse mortgage company would have to agree to that.
Pat: That's correct. But even if there was no...it was owned free and clear, you could be named as a transfer on death depending upon where the property, what state it's located in, there's different forms of that, but you wouldn't actually be on the deed itself. And the benefit of not being on the deed is that when we die, we all receive a step-up in basis, right, one of the benefits of death.
Curtis: What does that mean?
Pat: So what it means is that the government pretends as if you just acquired that property today, that you could sell it tomorrow and you would pay no taxes on any of the gain. So as an example, let's say she had paid $50,000 for this house 20 years ago, and now it's worth $250,000. If you get on the deed, the government can't see like, "Oh, when did he get on the deed?" The basis transfers to you, which means that you're on the deed, she dies. Okay. The government says, "How much did you pay for this house?" And you're like, "Fifty grand." "Okay, there's $200,000 of gain here. Curtis, you owe us taxes, capital gains, and state income taxes..."
Scott: On your half.
Pat: ...on your half of the gain, right?
Curtis: Okay.
Pat: But if you are named as a beneficiary or transfer on death, then...
Scott: So if what you're trying to do is preserve assets so that you get an inheritance and she's artificially impoverished to get Medicare...
Pat: I don't think that was his... That wasn't his intent. I don't think so. Was that your intent?
Curtis: Well, yeah, it sort of sounds greedy, but I guess, yeah, in a sense, it is.
Pat: It doesn't work.
Scott: I mean, she could technically write him a check for...I forget what the dollar amount is, on a daily basis that goes underneath the limit. And if she lives longer than three years or whatever the timeframe is, there's not a look back. But I certainly wouldn't recommend that.
Pat: That's right.
Scott: I mean, she might not even sign, like, why would she...
Pat: Yeah. So, does she have any living relatives?
Curtis: No.
Pat: I wouldn't recommend getting on the deed.
Curtis: What about...
Scott: We can't.
Curtis: I think we should maybe touch on it. What about setting up some kind of...I don't know if it'll be a contract or whatever where, on paper, she is paying me a certain amount of money per month for care, you know?
Scott: Well, there's nothing wrong with that.
Pat: You can do that.
Curtis: Would she have to actually pay me, or is it like...?
Pat: I don't know the answer to that.
Scott: Yeah, she'd have to pay you.
Pat: Well, she'd have to pay, but I guess that...I think what I heard Curtis say was, can this be so that...
Scott: Lien the house?
Pat: ...I can put a lien on the property or file a claim at death that supersedes that of the U.S. government? I'm not qualified to answer the question.
Scott: Yeah. So I think if you're providing services, you can charge for the services today. My guess is there is a line of credit still in the reverse mortgage where she has access to cash, where she can pay you for your services today, rendered services.
Pat: Is there a line of credit available on the reverse mortgage?
Curtis: Fifty or 60,000.
Pat: Okay. Then, yes. Yes. If you're truly providing services...
Scott: That's what I would do.
Pat: ...then, sure, she can tap that line of credit.
Scott: And if you're concern is, "I'm providing these services for nothing, and I'm hoping to get something for my time, and no, I might not," that would be the way to do it.
Pat: Absolutely. That's very good, Scott, that you actually went to the line of credit. It never even crossed my mind. But there's a line of credit that's available on that. You could absolutely use that to have her pay you.
Curtis: Okay. You know.
Scott: I understand that you spend a lot of your time caring for somebody, and I get it.
Curtis: Yeah. Well, I don't want to look at it like I'm trying to rob the widow here. She is under this assumption, and she truthfully wants me to inherit it, but I'm looking at it realistically and saying, "Well, all right, if I get a couple of bucks out of it, sure, that's nice."
Pat: That's right.
Curtis: But is there anything I should be doing here to be wise about the situation? If there's not, that's fine.
Scott: No.
Curtis: I'll just roll the dice and see what happens.
Pat: No, but don't just say, hey...you know.
Scott: I mean, if you want to charge her.
Pat: Yeah, if you want to charge her.
Scott: If not, you discharge her. Yeah.
Curtis: If not, what?
Scott: You just wait and see what happens.
Curtis: Yeah, yeah, yeah. Okay. Well, the big question was about the deed. So you've answered that.
Scott: Yeah, the reverse mortgage company is not going to allow you.
Pat: They're not going to allow you to add yourself.
Scott: First of all, you have to be 62. Is it 62?
Pat: Yeah. How old are you?
Curtis: Yeah, I am 62.
Scott: Okay.
Pat: Yeah. Anyway, appreciate the call.
Scott: Yeah.
Curtis: All right. Thank you very much.
Scott: Wish you well. All right, Curtis.
Pat: Lots of rules around artificial impoverishment to qualify for government programs.
Scott: Yeah. I remember getting in an argument on that. I did a debate with somebody who their career was helping people. And he says, "Well, Scott, don't you do everything in your power to make sure that people pay as little in taxes as possible?" "Yeah, I do." But I said, "It just feels different when you're talking about having the other taxpayers kicking the money for someone who has the assets so they can take their assets and transfer it to somebody else. It just doesn't sit right with me."
Pat: Yes.
Scott: Hence, why I still have that opinion. All right. Hey, let's...we're just going to chat now with... Where's my little note here? It's our "Money Matters" interview with Laurie Ingwersen. Laurie is one of our advisor partners, and she's in the Boston area. She's a phenomenal advisor and been an advisor for a few decades.
Pat: She's been on our program at least once, maybe twice.
Scott: Once or twice, yeah. Laurie, thanks for joining us.
Laurie: Thanks for having me again. I appreciate it.
Scott: Yeah. And you've been a CFP for how long?
Laurie: A CFP for over 20 years now, but in the industry for 25. So not quite three decades, but it's creeping up on me.
Scott: I know. It happens. But Laurie's dad is still a practicing advisor. And he's, how old?
Laurie: He's 82.
Pat: Awesome.
Laurie: He'll be 83 in a couple of months. But I have said this before and I'll say it again, he is the youngest 82-year-old I've ever met.
Pat: No kidding.
Scott: That's cool. All right. So you were going to talk about a story about someone who did a Roth conversion and how you...where kind of planning made a difference.
Laurie: Yeah, absolutely. These clients of mine, they're a wonderful, wonderful couple. They retired from a couple of big companies in the Boston area in their late 50s, and they had a few million dollars each in their IRA accounts or their 401(k)s that we rolled over into an IRA. And when we were projecting out their required minimum distributions in the future, we could see that they would be in a higher tax bracket in retirement or in their 70s and 80s than they were while they were working. So the strategy that we implemented with them was the Roth conversion, and the goal of that was to reduce the taxes that they pay during their lifetime and also pass more tax-free assets onto their beneficiaries.
Scott: And how did you figure out what's going to be best for them? Was that a big motivating factor for them, what they left behind as well?
Laurie: It wasn't as big a motivator as it was to pay less taxes while they were living. I think that was certainly the main motivator for them.
Pat: So for the listeners, the best way to think about Roth conversion is you voluntarily pay taxes early on an asset, money in an IRA. You voluntarily pay taxes early so that, at the end of my life, if I looked at how much I paid in taxes, because I voluntarily paid some early, I will have paid less tax.
Scott: That's the idea.
Laurie: That's right. Yeah.
Pat: That's the idea, which is, because...
Scott: Because you're paying the tax now, the money's coming from somewhere, right? So you're taking it from either the same account or another savings pool.
Pat: And I'll take it one step further, which is assuming your children or the people that inherit the IRA are in the same tax rate, because of the changes that they have made in the distribution of IRAs at death, where it has to be drained in a 10-year period...
Laurie: That's right. That's right, absolutely.
Pat: ...that the Roth conversion becomes even...
Scott: More vital.
Pat: ...more important than it was two or three years ago.
Scott: That's correct, because you can't stretch it out.
Laurie: Oh, for sure. That's why we're seeing this strategy implemented so much more now after the SECURE Act 2.0, because that's what gave us the rule that now the beneficiaries have to deplete that IRA within a 10-year period of time, and most likely, they'll be at their highest earning years if it's for a younger generation. So this strategy...
Scott: And how much did you have them convert on an annual basis?
Laurie: So we calculated that for them. It made sense to do a couple hundred thousand a year. And their estimated tax savings over their lifetime was over $1 million. We're not converting the entire amount, but we are converting a large chunk of both of their IRAs.
Pat: And where did the money come from? Laurie, where did the money come from to pay the taxes on the conversion?
Laurie: So they fortunately had taxable assets because the strategy doesn't always make as much sense if you don't have the after-tax dollars to pay.
Scott: That's right. That's right. So if all your savings is 100% in your retirement account, it's not quite as appealing.
Laurie: That's right. The advantages decline pretty significantly if you have to pay the taxes from the IRA. But I look at it as short-term paying for long-term gain because you have to pay the taxes now, but you will pay less taxes over your lifetime if you're not having to take out $0.5 million or $800,000 a year when you're in your 80s.
Scott: Yeah. I mean, it's funny, you start a career maximizing your 401(k), maximizing your 401(k), maximizing, and then suddenly, you get to a point, they're in their 50s and they already have a problem.
Pat: So this is a...
Laurie: That's right.
Pat: Laurie, this is just us talking shop here for a second.
Laurie: Sure.
Pat: Would it ever make sense to take a distribution from a Roth IRA to pay the taxes on the conversion of a Roth IRA? So let's say I had a hundred...
Scott: No, because you can take money from the retirement account to pay the taxes.
Pat: We'd get to the same place.
Laurie: I think that you would because...
Pat: We'd end up in the same place.
Laurie: Yes. And when you make the contribution to the Roth IRA, you do start that five-year cost.
Pat: Understand, understand. Understand. I was just thinking, "Well, what if I had a $200,000 Roth IRA that's 10 years old?"
Scott: Laurie, how did you run the numbers?
Pat: Sorry, Scott. Can we change this a little bit?
Scott: No, it was hypothetical. No. How did you do the calculations, and who did you collaborate with?
Laurie: So we always collaborate with the CPA because we want to make sure that we're understanding or we have the whole understanding of the return and how it's going to affect any other tax implications for them. But we use MoneyGuidePro, and when we develop the financial goal analysis, we're inputting all of their current resources so we know what all of their income sources are going to be in retirement, what their assets are. And that can project out what the required minimum distributions are going to be, and within reason, of course. And so, from there, we can illustrate what a Roth conversion, how that will impact their taxes approximately during their lifetime, and then how much they would end up passing on to their beneficiaries in tax-free assets versus qualified.
Scott: And you run what-if scenarios, right? If we did this, here's what it would look like 10 or 15 years out. If we did this, here's what it would look like.
Laurie: Correct. That's right.
Pat: Or even...and you don't actually have to use their life expectancy on this particular situation, assuming you could actually bring it down one generation to see what it would look like tax-wise to the second generation that inherited the money.
Laurie: That's right. That's right. So we can see the assumptions on what they would potentially save in taxes over their lifetime and then what they would be passing on to their beneficiaries. And we can alter the life expectancy. We can alter the assumptions in the plan. But if we were to...and then, in some cases, if they've got longevity in their family, maybe we want to increase the life expectancy to 100.
Pat: Perfect.
Laurie: Or whatever it may be. So we can really play around with it, and we can do it calculated. So, what is the maximum benefit to them? And a lot of people might not be comfortable what the maximum amount is. So maybe they want to hedge it. And so they potentially just do 100,000 a year, or based on the conversations with the CPA, we can get really specific for the amounts that we're going to convert on an annual basis. And the nice thing is you don't have to do it all at once. You can spread this tax liability out over many years.
Pat: And, Laurie, the problem I've always had with clients is the reluctance to voluntarily write a check to the IRS.
Scott: That's right.
Pat: Right?
Scott: Yes. I've run numbers and they're like, "I'm not doing it."
Pat: Yeah. It makes sense. It makes sense. The numbers all line up, but they couldn't get themselves to scratch the check to the IRS. Problems with these clients?
Laurie: Yes. And we were in the same boat. We were in the same boat, and I think that two things changed it. And the first one was the SECURE Act and the 10-year rule now with the inherited IRAs. And the second thing that changed was just us being able to illustrate it to them. So using the software that we have, it's really very helpful. And I think, initially, CPAs were a little wary of it, because I can remember back when this was first started, these discussions were started, the CPAs would say, "Oh, you don't want to do that. You don't want to pay taxes now." Because when the CPA has to tell them what they're writing a check for...
Scott: That's exactly right.
Laurie: They're the ones that are getting that.
Scott: They want to say you get a refund. Yeah.
Pat: But the reality is that if they're taking money from a brokerage account or savings account, you're using that money to pay the taxes, and it's overall making the whole portfolio much more tax efficient.
Laurie: That's right. It's brilliant.
Pat: Because that prepaid tax liability now sits in a Roth IRA.
Laurie: That's right.
Pat: It's brilliant.
Laurie: Yeah, the more tax-free assets that you have at your disposal, the better.
Pat: Yeah. It's brilliant.
Scott: And the higher income tax your kids are, assuming they're going to inherit the assets, the more the Roth conversion makes sense.
Pat: Well, Laurie, thank you, as always, being a great advisor and a member of the Allworth team.
Scott: Yeah. An example of one of our Allworth advisors. So thank you, Laurie.
Laurie: Well, thank you for having me. I love coming on with both of you, and I love listening to "Money Matters." This is fantastic.
Scott: Thank you.
Pat: All right. Well, stay warm back there.
Laurie: Stay warm. I was just about to say, enjoy your warm weather.
Scott: Boston.
Laurie: We're pretty icy cold here in Boston.
Scott: Yeah. My son went to college at BC, Boston College, and he would tell me about some polar vortex and all that stuff.
Laurie: He knows. Well, tell him it's a warm 20 degrees here today.
Scott: Beautiful.
Laurie: We'll be in the 30s on Friday, so that's like tropical.
Scott: Oh, wow. What about the bathing suit? A little sun tanning.
Pat: All right. Thanks, Laurie.
Scott: Thanks, Laurie. Appreciate it. Yeah.
Laurie: All right. Take care, guys. Okay. Bye.
Scott: It's always good talking to her. She's a...
Pat: So, Scott, earlier, we talked about the gentleman and annuities, and we made the comment that some of these old annuities and some of the fee-based annuities are still good. The problem is the way they're constructed and sold.
Scott: So I want to give you an example, a real-life example. I'm going to change the name of the people because...and we've talked about this, behavioral finance, like, our own emotions play a big factor in our investment returns. They just do. Now, if the market's down one day and back up the next day, no big deal. These prolonged bear markets where, month after month, we continue to have declines are the toughest. And in the last 25 years, we had, from 2000 to 2002, we had 3 calendar years of negative returns on the stock market. And then, of course, we had the financial great recession in '07, '08, '09. That was actually a shorter period of time but a deeper turnaround, so.
Pat: All painful.
Scott: Yeah. So this was a client who had been a client in maybe late '90s. When the market started turning south in 2000, they became nervous to the point they're like, "We got to do something different." And our approach in the investment management had been having some fixed income, having a well-diversified portfolio. But when the market fell, it was 45% decline over those 3 years, they got to the point like, "We need to do something different." And so as members of the firm, we're looking for solutions. And at the time, there were some variable annuities that were structured in such a way we're thinking, "How in the world can insurance companies make money on these?" They feel mispriced. There's way too many benefits to the consumer, policyholders, not enough for the insurance companies.
Pat: I remember getting on these conference calls with actuaries and asking them questions like, how did you price this? How does it make sense for you to take this risk?
Scott: Yes. So we ended up taking an IRA, and at the time, we rolled $439,000, moved $439,000 into this variable annuity.
Pat: Scott, disclaimer, this is an example for an individual client that is not representative of all our clients and may not apply to you.
Scott: That's correct. Yes, most have lost money and hate us. But this one, actually...
Pat: Oh, don't say that.
Scott: Whatever. Yeah.
Pat: Disclaimer.
Scott: Clearly. Not everyone has had this experience. Beautiful thing about this contract, Pat, is there was about 30 different stock funds to choose from, including index, managed funds, whatever. And as an advisor, we were allowed to allocate however we wanted. We could make changes however we wanted. So if he...
Pat: But the guarantees still apply.
Scott: They provided a guarantee of 6% income. So worst case scenario, you'll get 6% income off this, okay? And what it did is it kept people invested in the stock market when they wanted to get out.
Pat: Because they knew that this thing was going to grow...
Scott: Insurance companies could be on the hook.
Pat: ...for the 6%. And so what we did with these naturally is, because you had those guardrails around it, we went as aggressive as you possibly could.
Scott: Aggressive as possible. And told people, "Look, you don't need to worry about having a fixed income or buffer in the portfolio because you got the insurance company on the hook.
Pat: By the way, these products are not available today.
Scott: That's correct. You can't go and buy 100% equity, and it doesn't work anymore.
Pat: Yeah, it doesn't. They were obviously mispriced.
Scott: Okay.
Pat: So they put in 439.
Scott: Four thirty-nine. They've taken out 650.
Pat: Okay.
Scott: The account balance at the end of December was $1,686,000.
Pat: That is amazing.
Scott: Okay? And there's a minimum income base of almost $2 million, $1,971,000.
Pat: Which means that they could turn it into a stream of income.
Scott: They're guaranteed 6% a year. And actually, there's...
Pat: Holy smokes.
Scott: This individual had the opportunity to annuitize. They could tell the insurance company, "I want my $1.9 million to be annuitized using the annuity tables at the higher rates that came out 25 years ago." Okay? Here's where the story gets more interesting. This is pretty interesting. And like, to your point, Pat, these contracts do not exist in this format. If they did, we'd use more of them. And the main reason is because we could be more aggressive, because behavioral finance is real and people's emotions are real. And I can't tell you how many people we've sat across the table from or had a phone conversation, whatever. They're freaked out, and they're like, "I got to get out. You don't understand. Like, I got to get out. If it continues like this, I'm going to be broke." That's just reality. That happens. That's why markets go down.
Pat: That's right.
Scott: If no one would sell them, they wouldn't go down. But people continue to sell and sell, and they push them down. But here's the interesting thing, this person called me a week ago and said, "Scott, I think we should get out of that insurance contract because of the fees. The fees are more expensive than that. Why don't we just have this managed in another one of the accounts that you guys manage?"
Pat: They'd be better off annuitizing this thing.
Scott: Or doing nothing.
Pat: Or doing nothing.
Scott: But here's the irony.
Pat: They were looking at the fees. Of course, they're going to be more expensive.
Scott: It's an insurance.
Pat: They got a guarantee in there.
Scott: It's a mispriced insurance. So it's like having fire insurance in California for 100 bucks a year.
Pat: But the insurance company will actually pay above par for this to buy it back.
Scott: They aren't at this time, but they had been over the years.
Pat: Okay.
Scott: Offering people money to get out of the contracts, like a 10%, 15% addition to their account. Please, get out of this contract because we've screwed up.
Pat: Yeah. They carry it on their books as a liability.
Scott: Yes, correct. It is a liability for them. But the irony is, I said to this individual, I said, "There's no way this account would be worth roughly $2 million had we had it in a traditional type of an account."
Pat: Because you'd have bond in there. You wouldn't be nearly as aggressive.
Scott: Right. And I've known this person almost 30 years. When the markets go down, they panic. And I said, "Look, you know, we're having this conversation after two back-to-back years of a bull market."
Pat: Oh, like risk doesn't seem to exist anymore.
Scott: That's my point. And the reason I brought this up, because I think there's two lessons here. One, not all products...like, there are times when certain products make sense.
Pat: If you have an old life insurance policy or an old annuity...
Scott: Don't just cash it out.
Pat: Just don't. Have someone that understands them, not a salesperson, take a look at it.
Scott: The second thing is just, like, the market's been on fire. We're at the peak and like...
Pat: We don't know whether they're at the peak.
Scott: Fair. Correct.
Pat: We know that the market's valuations on a historical basis are relatively high.
Scott: And the markets have done extremely well.
Pat: Unbelievably.
Scott: And things tend to revert back to their mean over time.
Pat: We do know that.
Scott: Averages, yes.
Pat: We do know that. We do know that.
Scott: But I just found that the irony that...I mean, this has done so well, and the individual is now thinking, "Oh, let's just take this and just put it." And I said, "There's no way this account balance would be worth the value it is today because we were 100% in stocks the entire time...
Pat: The 439.
Scott: ...even while she was taking income.
Pat: That's amazing. So the whole total value, and obviously, we're ignoring the time value of money...
Scott: That's right. You can calculate the real returns.
Pat: Yeah.
Scott: And this would be worth more if it was 100% in the S&P 500 or total stock market index.
Pat: Of course, they would, but they wouldn't have been able to weather it.
Scott: My whole point.
Pat: Right? They wouldn't have been able to weather it. But, look, if you can remove the psychology from your investing, hard to do. Really, really difficult to do.
Scott: And when the markets go up...
Pat: Don't get too excited.
Scott: ...my opinion, there's more risk. When the market goes down, there's less risk.
Pat: Yes.
Scott: Anyway, there's our little ending lesson for today.
Pat: All right. So once again, a promotion for the podcast. If you like this at all, please go and rate and/or share a review. Yes, if you don't like it, you can do that as well. But if you don't like it, I don't know why you're listening to the podcast.
Scott: That's right.
Pat: And then the second thing is if you could share it with a friend, your friend, the friend.
Scott: The friend. Yeah, it's been...
Pat: Or even a family member.
Scott: ...nice being here with you. Scott Hanson and Pat McClain, Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
