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 Hansen and Pat McClain would like to help you by answering your call. To join Allworth Money Matters, call now at 833-99-WORTH. That's 833-99 W-O-R-T-H.

Scott: Welcome to Allworth Money Matters. I'm Scott Hanson.

Pat: I'm Pat McClain. Glad you are taking time out of your life to be with us. Hopefully, it's a useful time. We'll do our best to make sure you'll learn something about your finances that can maybe help you. That's our hope. It is our hope. That's why I've been doing this for 28 years.

Scott: On the air.

Pat: Yes. Yeah. Podcast now. We're still on the air, but a lot more podcast listeners than terrestrial radio.

Scott: Yeah. Terrestrial radio's dying, by the way, as is and AM radio. New cars, some don't even include it anymore. Yeah.

Pat: Yeah. I had read an article about, because of electric vehicles, just because of how the AM signal... I'm not a radio technologist in any way, shape, or form, but on many electric cars, the AM signal comes in staticky. So, they've been just leaving them out. So, but we're here, we're here to answer your questions. If you have got a question for us, you're welcome to give us a call at 833-99-WORTH, 833-999-6784. And what happens is you call in and we will schedule a time for us to talk and you can get your answers to your questions, so.

Scott: So, I wanna talk a little bit about social security because if you've been listening to this program for any length of time, you'll know that we as a general rule will state if you're gonna be reliant upon social security for your retirement income or some significant portion of your retirement income delay as long as possible. And for some people wait till age 70, work until age 70...

Pat: Which means you don't have other forms of income such as a 401(k)...

Scott: Or not enough.

Pat: .... or a pension or not enough.

Scott: Or not enough. And like you're gonna be dependent upon... You need that social security. But then on the flip side, say for those that have done a great job saving, that social security's gonna be nice to have, but not necessarily needed in retirement. Take it as early as you can. So, if you retire before age 62, take it at 62. If you keep working, take it as soon as you're...60s, age 66-ish.

Pat: Or as soon as you retire.

Scott: Yeah. So, there was just this week and a half ago there was an opinion piece in the "Wall Street Journal" for Mr. Biggs, I don't say his first name, Mr. Biggs. A senior fellow at the American Enterprise Institute. He's also been nominated to serve on the Social Security Advisory Board. And he says in this, "Lawmakers might consider a simple but meaningful start to deal with social security, capping the maximum retirement benefit." He starts by saying, a cap would put a dent in our funding gap, of more than $20 trillion. It'd send a message that government benefits to high-income retirees can't be unlimited. He says it's all often described as a safety net against poverty and old age. But if every senior simply received a benefit equal to the 2022 poverty threshold, which is $14,000 for a retiree and $17,005 for a couple, social security's $1.3 trillion annual cost for 2023 would be cut nearly in half.

Pat: That makes sense.

Scott: Right. So, he's making the argument, this is designed as a safety net program. We're paying out all kinds of dollars, but he says it's become much more... The average new retiree in 2021 received an annual benefit of $21,000, which is 1.5... And by the way, I have no problem with people receiving these dollars. They've contributed to them.

Pat: They paid in.

Scott: They paid in. And if you're making $100, 000 dollars a year, you pay twice as much in as a person making $50,000.

Pat: But don't receive twice as much benefit.

Scott: But you don't receive twice because it's already quite a bit skewed toward lower people. But it says the highest-earning Americans who take their benefit at age 67, the maximum this year is $42,000 in social security.

Pat: You see a lot of those.

Scott: Yeah. So, that's the maximum benefit. So, his argument is that we freeze the maximum benefit, which means he said in year 2000, the maximum benefit was $28,000. He says because of inflation, it's 42,000 and it's gonna rise to about $50,000 by 2035. And then it's gonna keep going up and up and up.

Pat: So, no cost of living increases...

Scott: For the...

Pat: ... which will actually.

Scott: ...maximum benefit.

Pat: For the maximum benefit.

Scott: His argument is for a high-income retiree, $42,000 should be more than enough to get by in most parts of the country. That's why maximum social security benefits should be capped.

Pat: Well, Scott, when we first started in the industry 30-some-odd years ago, social security was not taxed at that point in time. And then they started taxing joint incomes of over $32,000. If you receive social security, they started taxing 50% of that social security benefit as income. Up until that point in time, social security had never been taxed. It was a tax-free benefit. So, they go, "Hey, these people probably don't need it, $32,000."

Scott: Whatever the number is.

Pat: Whatever the number is, we're gonna start taxing it, which is a form of actually just taking some of that benefit away. You give out a government benefit and then you tax it and it goes back to the government. Different pot. But nonetheless...

Scott: That's right.

Pat: ... it goes back to the government. A few years later, they moved those numbers even higher, which is they started taxing 85% of social security benefits. Not an 85% tax, but 85% of the benefit was included.

Scott: So, of $10,000 of social security income, $8,500, it has to be included in your income tax.

Pat: On incomes of over $44,000 for a couple. That's means testing. That is means testing. You can call it whatever you want, but it's progressive tax. And the next step is to start limiting the amount of income that can go to social security, which is why we have been saying not this year or last year, or the last five years, for 15 years, that if you think that that's going to happen in your lifetime, that they're going to start limiting the amount of social security benefit that you're going to receive based on your income. That's why you should take it as soon as it makes sense economically for you to take it. Which for people that are not working, it's their full retirement age or when they retire at age 62, or for people that are working, it's a full retirement age.

Scott: Yeah. And the argument that I've always heard as well, if you wait, you're gonna get more dollars. That's based on an assumption that that check is going to continue until the day you die with no reduction. Well, we already know that when the Social Security Trust Fund becomes insolvent in 2035, 2034, 2032, like there's different years, but it's around that time. With no other changes, there's an across-the-board roughly 20% reduction on benefits.

Pat: It will never happen.

Scott: So, it'll never happen. But where's the money gonna come from?

Pat: Well, it will never be across the board.

Scott: That's exactly right.

Pat: It will never be across the board.

Scott: They're not gonna take it away from the person in poverty at $14,000 a year.

Pat: No, but the person at $100,000 dollars a year. And so, listen, last time we talked about this, we received a couple of notes from people that are like, "You know, why don't people just pay their fair share, right? They've got enough money." I'm just telling you the notes. In fact, I've read them on the Apple reviews where people write reviews is they like...

Scott: Don't read the negative reviews.

Pat: Okay, I'm going to.

Scott: I don't read the negative reviews.

Pat: I know. But the point being is our job for our clients is to say, "This is the things that are out there in the environment that you should be aware of."

Scott: Well, look, any income stream, if you were to have to make a decision on when to start some income stream, one of the things you would do is you'd look at what's the likelihood of that income stream happening in the future? If you were thinking about buying a bond from a corporation, what's the likelihood that that company's gonna be able to pay me in year 20 and 21, and 22? If you were buying a municipal bond...

Pat: Is that municipality, that water district, school district?

Scott: Airport. Are they gonna be able to continue to fund this? Like, is there any chance of some reduction in the future? And the same thing needs to happen when it comes to your social security planning.

Pat: Fair enough.

Scott: And I think my bet is you'll see more and more of this sort of thing. That's the easiest first step, actually and I hadn't thought about that before. Just simply cap the maximum benefit today.

Pat: So, it doesn't adjust to inflation ever again.

Scott: Yeah. So, the maximum amount today is $42,000. That's someone at age 67. By 2035, that is just based upon inflation it's gonna go to about $50,000. So, the simplest thing to do...

Pat: Yeah. The thing that's the most... The thing that will actually cause the least amount of uproar because it happens slowly.

Scott: You don't see that.

Pat: Yeah. As my grandfather said...

Scott: You can also cap, you can also eliminate cost of living increases on social security checks to a certain amount. Like, there'll be cost of living adjustments if it's under $20,000 a year, but not if it's more or whatever.

Pat: Or half a cost of living increase. Yeah. Well, something's gonna happen.

Scott: We got that going for us.

Pat: Something's going to happen.

Scott: Got that going for us. We better take some calls here. If you wanna be a part of the program, 833 99 worth is our number. We are in Pennsylvania talking with Jim, Jimmy, with Allworth Money Matters.

Jim: Hi guys. Thanks for taking my call.

Scott: Thank you, Jim. You've got the floor.

Jim: Okay. My question is, should I convert my traditional IRA into a Roth? And like I said earlier, I put the cart before the horse by retiring last month and planning now.

Pat: Well, that may or may not have helped you. How old are you?

Jim: I'll be 62 next month.

Pat: And how much money is in your IRAs?

Jim: The IRA has about $600,000.

Pat: And what income do you have coming in retirement?

Jim: I have about $25,000 coming in from a brokerage account. I have about $600,000 in that brokerage account. And it's all tied up in bonds, t-bills that will mature every month for the next six months. And then what I would do is I would take the interest that comes from February's t-bill and just buy a new one for August.

Pat: You're just rolling.

Jim: Just as long as everything...

Pat: You're just rolling treasuries.

Jim: Yeah. I mean, as long as they stay above 4%, that's all I need.

Pat: And what other income do you have coming in other than this brokerage account? Have you started social security?

Jim: No, that's my second question. I have a rental property that throws off about $15,000 a year. I guess you could say...

Scott: And what's it do for taxable from a tax standpoint through depreciation? I'm sure it's not $15,000 something less than that you have to report, you know.

Jim: Yeah. Less than that, with depreciation and expenses and everything.

Pat: And what are you living on now?

Scott: And how is the $600,000 IRA invested?

Jim: It's all tied up in Berkshire.

Pat: All of it?

Jim: All of it.

Scott: I'm sorry not to laugh. You've got 100% of your retirement, IRA with Berkshire Hathaway, and then the rest of your dollar is 100% of it is in treasures.

Jim: That's it.

Scott: That's like the...

Pat: You were like, "Okay, either I'm gonna drive three miles an hour or 85 miles an hour, 90 miles an hour. But there will be no 55. I cannot drive 55." This is what we would like to call a barbell investment strategy. You've gone from zero risk to an unbelievable amount of risk. We'll answer your question, but...

Scott: And Berkshire's probably less so than other types of companies just because it's...

Pat: You've felt the same.

Scott: ... kind of a holding company.

Pat: It acts like a giant mutual fund. But you think that the day Warren Buffett passes away, that thing isn't gonna take a hit? Answer me that.

Scott: Well, depends how he dies.

Jim: Yeah. Well, it also depends how he trained the guys he's been training for 40 years.

Pat: Yes. But he has a mystique around him.

Jim: Certainly does.

Scott: So, your question.

Pat: We're gonna answer your question.

Scott: Yeah, you probably don't wanna hear about our investment advice, because you've heard a lot, and this is the strategy you've chosen. Absolutely makes sense for you to do some Roth conversions.

Pat: Why? Why wouldn't he just start spending money out of the IRA and taking less out of the brokerage?

Scott: Yeah. Because it's essentially it's a way to convert some money in the brokerage account into a Roth.

Pat: I'm with you there. And using some of the money...

Jim: No, the brokerage account...

Pat: You've gotta pay the money on the tax, on the conversion from the IRA or the Roth IRA. Where's that money gonna come from to pay the tax?

Scott: The brokerage account

Jim: Out of my checking account.

Pat: How much do you have in checking?

Jim: I just sold three houses, so I have 100 grand I kept a aside for... Probably have to write a $50,000 check this year, you know, in tax time. And then I'll have 50 laying there. I figured I had to take...

Scott: Which taxable year did you sell the rental properties, 2022 or 2023?

Jim: 2022.

Scott: Okay.

Jim: February of 2022.

Scott: You should be converting some money to a Roth IRA.

Pat: Yeah, you're gonna have to run the numbers.

Scott: Yeah. I couldn't tell you how much to be converting, but you should absolutely convert some money into the Roth IRA.

Jim: Well, it was my plan to do $100,000 a year for 3 years before the Trump tax breaks expire.

Scott: Are you married or single?

Jim: Married.

Pat: That doesn't sound right. It sounds a little much to me.

Scott: Well, it's got no taxable income, right? Does your wife work?

Jim: Yes.

Scott: What does she earn?

Jim: Well, this year she did close to 100 but she's a school nurse and she got a lot of extra work because of COVID and they gave her extra money.

Scott: I can only imagine what it's been like being a student nurse the last couple of years. Goodness.

Jim: No. She'll do $80,000 in 2023 and probably from there on out.

Scott: Okay. So, your best bet is you're gonna have to figure this out near the end of the year, but I would do it just to where the tax brackets move from 12% to 22%. It's a taxable income of about $90,000. That's after your standard deduction. So, standard deduction's $27,000. So, it's really $117,000. I would keep my tax split income under $117,000.

Pat: So, you're not gonna be able to get the whole 100 in there. Depends on...

Scott: On your wife's working.

Pat: ... your wife's work and how much income is actually derived from that brokerage account.

Scott: Yeah. And the interest on the treasury bills.

Pat: Yeah. And the brokerage account. But you most certainly should convert some of that over.

Jim: Well, if she makes 100 and I make 25 on the T-bills and another, I don't know, 8 or 9 on the rental property. I mean, then yeah.

Scott: Then now is not the time to do it. I'm assuming your wife's not gonna work forever.

Jim: Well, she's 8 years younger than me.

Pat: I understand. But what you wanna do is convert it at 22% tax rate and then...

Scott: Let's assume that. All right, the Trump tax rates expire and the 12% bracket goes back to 15%. And the 22 goes back to 25 or whatever what it was. If you structure this right, you will never be pulling the money out of your retirement account at the top bracket. So, if you convert too much this year, you'll be paying a 22% federal rate on it. When even if the Trump tax rates expire in a couple of years, the rate would be 15%.

Pat: So, I wouldn't let the Trump tax expiration be the driver of this.

Jim: Okay.

Pat: That is just flat out. What you want to be the driver is the step up in the marginal rates.

Scott: Yes.

Pat: That's what you want to be the driver in the decision. Not whether you think the Trump tax is gonna expire or not.

Scott: Because the way the federal government's tax rates work, it's just a massive cliff. I mean, from 12% boom, the next dollar is taxed at 22%. So, actually, the first $22,000 is taxed at 10%, and then a big chunk of income is taxed at 12%, then it jumps to 22%. It's not gradual from 12% to 14% to 16% to 18%, it's this massive cliff.

Pat: So, your average tax rate will be much lower, but your marginal tax rate is the amount of tax that you pay on the last dollar earned. And so the reason you shouldn't make a decision today is to see how much money your wife makes throughout the year and how much money you make at that brokerage account. And you should make the decision in December of 2023 on how much money you're going to convert from your IRA into a Roth IRA.

Jim: That makes sense for the timing. But you want me to stay in the 22% tax bracket and try not to break that.

Pat: No. We want you to stay under the 22% tax bracket, the 12% tax bracket.

Jim: 12%.

Pat: 12%.

Scott: I don't know what about Pennsylvania.

Pat: So, you wanna stay in the 12% tax bracket. And quite frankly, I would consider taking social security.

Jim: That's my second question.

Pat: I would...

Scott: Well, what does your wife have saved in her 401(k) or IRA?

Jim: What she has is nothing. She just started it. I persuaded her she should start one. It's a 403 something.

Pat: 403(b).

Jim: And it's a 403(b) Roth.

Scott: I would recommend deferring social security.

Pat: Yeah. It's $1.2 million.

Scott: Yeah. And to be completely transparent, particularly based on your investment strategy.

Pat: You've got a lot more risk in that investment strategy than...

Scott: To Pat's point, a half at 3 miles an hour and a half at 100 miles an hour or 85, whatever the number you threw at.

Pat: 85.

Scott: Okay. 85.

Pat: Sometimes I just drive the speed limit.

Jim: Well, you know, I'm new at this. Like I said, I retired now I'm planning.

Pat: How long have you owned the Berkshire?

Jim: Less than a year.

Scott: You're kidding.

Pat: Yeah.

Scott: Wow.

Pat: Wow.

Scott: I assumed you had owned it for 30 years, yeah I mean.

Pat: Yeah, you should hire someone just flat out, you need to hire someone.

Scott: Yeah. Even if it's just writing a check to do a financial plan and an investment.

Pat: And make an investment allocation.

Scott: We can model these portfolios and look at the standard deviation, the risks involved here.

Pat: I assumed you owned it forever. Because that's where most people that own a lot of Berkshire have owned it forever.

Scott: Yes. When it's done so well for me, why would I make you say no?

Pat: If you bought it the last year. Yes, your portfolio, I know you didn't call to hear about your portfolio. No, but a good financial advisor will tell you in December exactly how much to convert into a Roth IRA.

Scott: That's right.

Pat: And then do the analysis of when you should start social security.

Scott: But you won't know that answer until November, December.

Pat: You won't know that when you should probably start social security...

Scott: And you can model of a variety of different examples...

Pat: And your portfolio...

Scott: ... scenarios. What if I take an hour, what if I wait? You can model all those things.

Pat: Yeah. Let me ask you, if you came to my office and I said, "Here's a portfolio that I want you to build." And let's say it's 1990 and I built a portfolio, and in that portfolio maybe the year 2000, I'm thinking about General Electric stock.

Scott: 2000.

Pat: In the year 2000. And I said, "Here's the portfolio I wanna build." I've got all these super, super safe bonds that are U.S. government-backed for half the portfolio, and the other half of the portfolio I'm going to put in General Electric, which is a multinational corporation in every industry you could possibly imagine.

Scott: And Jack Welch has crushed it.

Pat: And he's in health insurance, they're in aeronautics, they are in mortgages, they're in...

Scott: They bring good things to life.

Pat: ... in electronics. If I built that portfolio, you came into my office and I built a portfolio with one individual stock for half of your liquid net worth, would you hire me as an advisor?

Jim: Probably not.

Pat: You need to fire yourself. That's what you just did. You're not qualified to make these decisions flat out.

Scott: And by the way, I don't think 95% of Americans are qualified to make their financial decisions. Whatever the number, it's a high number. The vast majority of people can benefit from a quality financial advisor.

Pat: The problem is, Scott... Yeah, and the problem is it's hard to determine what's quality and what's not quality.

Scott: I understand that.

Pat: That's the problem in the industry. But you need to go pay a fiduciary either on an ongoing basis or one time to do a financial plan for you at a minimum. And at least build a well-diversified portfolio and then decide whether you wanna pay them to monitor and manage that, or you just wanna stick with it. But the portfolio you have right now is so fraught with danger. It is, in fact, if there is a reason that you would have to return to the workplace, it's because of your portfolio flat out. So, appreciate the call. I know that's not...

Jim: So, which half is more dangerous?

Scott: The Berkshire.

Pat: The Berkshire.

Jim: Okay.

Pat: The Berkshire. The treasuries are fine. You're not gonna hurt yourself. You're not blowing yourself up with that.

Scott: By the way, what's the return been the last 10 years of Berkshire versus the total market? Do you know Jim?

Pat: I don't know.

Jim: I only know that he's outpaced the S&P.

Scott: I don't know for the last 10 years.

Pat: Since its inception.

Scott: Since its inception.

Pat: Since its inception. If that's the way you feel, you're much better off just owning the total market than you are that individual stock.

Jim: Well, you know, I'm not educated like you guys, and like I said, I've only been in this for a couple of months. I've done a lot of reading and studying and online courses and stuff, but the way that my mind worked, I was looking at Berkshire as an index in itself.

Pat: That's what people...

Scott: It's not, it's not.

Pat: It's not but that's how...

Scott: And it's actively managed.

Pat: And that's why I used General Electric as an example back in the 2000s because people thought it was so diversified...

Scott: You said it's just like a mutual fund but better. Look at the return on this versus everything else.

Pat: Yeah. So, anyway, do what you want.

Scott: Yeah. Appreciate.

Pat: Appreciate the call.

Scott: And I must say it will be interesting to see what happens the next 10 or 20 years. I mean, Charlie Munger's still around. He's 90, almost 100, I think, right? And he's still at it, so who knows? But yeah anyway, appreciate the call, Jim. We're gonna take a short break and we'll be right back.

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

Scott: Welcome back to Allworth Money Matters, Scott Hanson.

Pat: And Pat McClain.

Scott: 833-99-WORTH is our contact number. Also, if you're a podcast listener and you think, I wouldn't mind having my question answered, you can send us an email, actually, you don't have to be a podcast listener, you can be a radio listener, but you can send us an email at questions@moneymatters.com, just with what your topic is. Now, we're not gonna send you a detailed email back answering your questions. The point is to schedule a time to have you come on the show here and we'll have a dialogue or a talk. We'll try not to mock any decision you've made.

Pat: We're not going to.

Scott: No.

Pat: That was just the last episode. I felt bad about that, but 50% of...

Scott: There's a lot worse portfolios you've seen Pat.

Pat: That is true. That is true.

Scott: And it did manage to accumulate the dollars, right?

Pat: That is true. But all of a sudden that that is a strategy, it scares me a little bit.

Scott: Yeah. Anyway, let's go to Michigan. We're gonna talk with Neil. Neil, you're with Allworth Money Matters.

Neil: Hey, Scott, Pat. How are you guys doing?

Scott: We're good.

Neil: Good.

Pat: What can we do for you?

Neil: Well, I called into the show about three years ago to just get some general guidance, for retirement planning as I have a long, long horizon, yet I'm about 30 years away from retirement.

Pat: And you called back. Wow. It's a good sign.

Neil: And I called back. Yep.

Scott: How old are you then, if you're 30 years away from retirement?

Neil: I'm gonna be 36 this year.

Pat: Okay.

Scott: Okay.

Neil: So, during that conversation, you guys were asking if I had a 401(k), Roth option through my employer. And it kind of sounded like that's what you guys would've leaned towards if that was available. Which at the time it was not but starting this year, they are offering that to employees. So, I guess my question is that the route I should be going as opposed to just the traditional 401(k)?

Pat: Due to the fact that I do not remember the phone call from three years ago, I'm gonna ask probably the same questions again.

Neil: Okay.

Pat: So, what is your income and what is the family's income?

Neil: So, my income is right around $125,000. And that would be the only income. My wife is a stay-at-home mom.

Pat: And how many children do you have?

Neil: Two.

Scott: How much have you saved into your 401(k)?

Neil: I max it out every year.

Pat: How much money do you have in there now?

Neil: I have about $460,000.

Pat: Holy smokes.

Scott: Are you kidding me? You're 36 years old.

Neil: I started early.

Pat: You're an incredible saver. Do you have money in Iris outside of the 401(k)?

Neil: I actually do have a brokerage account that's all equities and that's at about 40K.

Scott: I would recommend the Roth. And here's why. As a general rule, if we believe that our tax rates in the future are going to be higher than today, we don't wanna take a tax reduction today. If we can get the tax-free income tomorrow when the income rates are gonna be higher. Given your savings at your age, your 401(k) balance, I mean the required minimum distributions alone would be massive. So, if we just took and grew this thing at 8% and went out to age 75. The way you're saving, you're gonna be in a very high tax rate in retirement.

Neil: Okay.

Pat: There's a good chance you're actually saving too much which...

Neil: Really?

Pat: Yes. But we're not gonna discourage that, you're built to save, right? You're a great saver. How old are your kids?

Neil: One just turned one year old and the other just turned three.

Pat: And are you using a 529 plan for either of the children?

Neil: No. So, I started one for the three-year-old...

Pat: Of course, you did.

Neil: ... two or three years ago. I have yet to start one for the one-year-old.

Pat: But he will. Yeah, you will. And I assume you have a big-term life insurance policy on yourself.

Neil: That is one thing I'm lacking. And I think you guys mentioned that last time, so.

Pat: Well, that it's dirt cheap. That is your biggest gap.

Scott: Assuming you have a major medical issue.

Pat: That's your biggest gap.

Scott: It's dirt cheap. Something happens to you today, your wife has no income, so she's a stay-at-home mom. Something happens to you today, there's no income in the house.

Pat: That $460,000 will be gone in a number of years. And your wife will be relying on social security benefits. I'm glad you called back. So, you took...

Scott: Buy a million dollar...

Pat: Just go and buy an inexpensive 10-year level term...

Scott: ... or 20-year level.

Pat: ... or 20-year level term. You got a one-year-old. Buy a 20-year level term for $1.25 million. Easy. Easy. And then I would use the Roth.

Neil: Okay. And then if I start contributing to the Roth 401(k), so I actually, I think it was around the time I called, I started contributing just to a Roth account. So, would I stop contributing to that as well then?

Pat: And how much do you have in your Roth now?

Neil: I've just been contributing the last three years. So, I max that out at 18. I think the value of it down with the market is around $15,000.

Scott: Look, if you find yourself with extra money to save, that's exactly where I would put it.

Pat: I'd put that money into the 529s before I put it into the...

Scott: He's got 40 grand in the brokerage account. What if you just move money from the brokerage account to the Roth IRA every year?

Neil: I could, I guess I have not needed to do that.

Scott: You can't argue against that. Can you?

Pat: I cannot argue against that.

Scott: Pat, I could tell he's looking at me. He's trying to think of some way.

Pat: No, but I'm thinking to myself. But he's not doing that. He's not doing...

Scott: But he's saving.

Pat: He's saving. So, I would save in the 529. And I agree with Scott, you should do both. You should save to the 529 and convert from the brokerage to the Roth IRA.

Neil: Okay.

Pat: And maybe modeling for yourself a financial plan so you have an idea of like, how much do you really need to save? What's the mortgage balance on your house?

Neil: Actually, I own my home. I paid it off in 2020.

Pat: Of course you did.

Scott: I almost said, don't tell me your home is paid for.

Pat: Of course he did, he's 36 now, Scott, you gotta get this stuff out of the way.

Neil: You're right.

Pat: So, look like so spending money you don't get any juices from it, obviously, right? Going out to a nice dinner doesn't do it for you. Material stuff doesn't do it for you, obviously. Is your wife the same way?

Neil: Yes. Very frugal.

Scott: Yeah, and it's funny because I joke like there's the spenders in life and if they marry a spender, they are in big trouble because they're gonna always be in debt and they're gonna not have a dime of retirement. Their lifestyle's gonna dramatically change one day. And then...

Pat: Are you sure you don't wanna be a marriage counselor?

Scott: And then, if you get Neil and his wife, who neither one of you get any sort of satisfaction, then you're gonna find yourself at retirement age with more money than you're gonna know what to do with.

Pat: Yeah. And so here's, Scott, the idea behind the funding, the 529. The mere fact that it can be converted to $35,000 to the kids' Roth IRA now which is just... By the way, if you wanna talk about like giving benefits to the rich, just that was a perfect example. Perfect example. Because who has money in 529 plans?

Scott: Parents.

Pat: With?

Scott: Grandparents.

Pat: With typically?

Scott: Disposable income.

Pat: Excess asset. So, before you do it don't...

Scott: You're not deciding on whether we're gonna eat today or save for college.

Pat: Yeah. But before, due to the fact that your house is paid off, Neil, a million dollars will suffice before you do anything. Before you put more money into the 529 plan, before you...

Scott: I don't even know if he needs a million dollars.

Pat: He needs a million dollars.

Scott: Here's why I think otherwise. His income's $125,000. How much are you putting into your 401(k) each year? What's the maximum?

Neil: Well, I max it out. So, $20,000 or whatever the limit is that we're using.

Scott: So, now we're down to $105,000 plus the money that's going into social security plus the money that's going into brokerage account, plus the money that went down to pay down his mortgage. And social security...

Pat: So, what does he need half a million dollars?

Scott: The difference in the cost between half a million and a million is negligible. So, you get...

Pat: Thank you. That's why you finished my argument for me.

Scott: But I actually think his life insurance need for a 36-year-old father with a stay-home wife of $125,000 income is the... His need is less than any other 36-year-old father that I can think of.

Pat: Yes.

Scott: Even an unemployed 36-year-old father.

Pat: Like the royal family.

Scott: What?

Pat: Like, the kid that wrote the book "Spare." He doesn't need it. He's probably 36. He doesn't need life insurance. What's his name? Prince Charles. What is his name?

Scott: Harry.

Pat: Harry. What? Like, I care, I just know that my...

Scott: You're not addicted to the Harry...

Pat: My daughter and my wife talk about it sometimes.

Scott: Really? I can't. I have zero interest.

Pat: I wouldn't open the door if he was out there handing out dollar bills.

Scott: So, you feel negative about him?

Pat: I do have a feeling about him. I'm just trying to... I was trying to think whether...

Scott: Anyway, hey, Neil, appreciate the call.

Pat: Get yourself a million dollars of term life insurance. Put the money in the 529, convert money from the brokerage into a Roth. Continue saving, you're doing a great job.

Neil: And then just real quick, back to that life insurance. I've heard you kind of talk about this, on previous shows, but since my wife does not work, does it make sense to get a policy on for her as well?

Scott: The social security benefits between... If something happened, to her today, heaven forbid, you'd receive her social security benefits and...

Pat: And for the kids, you'd be fine. So, you don't need one on your wife.

Scott: And receive the kids... You'd receive enough family benefits it would...

Pat: Your wife doesn't need one, just one on yourself.

Neil: Okay. Perfect.

Scott: I appreciate the call.

Neil: Thank you, guys.

Scott: All right, Neil.

Pat: Yeah.

Scott: I can't believe we've talked about, Harry. The whole...

Pat: Megan.

Scott: That's her. That place in Montecito.

Pat: Yes. You don't know how rough it could be. Montecito.

Scott: Sometimes there's certain stories that in modern life that you're like... We are a strange species.

Pat: Are we really talking about this? I just find the whole thing... But my daughter said that she was listening on tape or I don't know. She asked me if I was gonna read the book.

Scott: I can't. Anyway, enough of those two. So, we've got a special guest, that's joining us in the studio. Mark Shaun. Hello, Mark.

Mark: Hey Scott, how are you?

Scott: We're great.

Mark: Good.

Scott: And Mark is one of our partner advisors. And you've been in financial services for how many years?

Mark: 33 is the number.

Pat: All right. 33.

Scott: And we all started at the same company years ago.

Mark: We did.

Scott: Lincoln National Life Insurance Company. How long did you last there?

Mark: I was there for two and a half years, that was the room. Two and a half years.

Scott: Yeah. Hey, we're not saying anything disparaging about Lincoln National.

Mark: They were good people.

Scott: Yeah. Absolutely.

Pat: Good people.

Scott: It's a different model back... Although that model still exists today, doesn't it?

Mark: It's pretty similar. It's pretty similar.

Pat: Yeah. It was a commission-based model. And life insurance centric. I lasted two years. I think I lasted two years, but a lot of good people there. Lots of firms that we've integrated for, people we've known for 30 years.

Scott: Yeah started it.

Pat: Yeah, exactly. Right.

Scott: And so you became part of Allworth?

Mark: May of '21.

Scott: May of '21. And you had your own registered investment advisory, your own practice with some employees, and whatnot.

Mark: Yeah, so the first 16 years I was on the investment side, of the business, so money managers, that type of thing. And then I opened my own practice in '05, registered investment advisory firm, fee-only business, and then joined Allworth in May of '21. So, I went up on two years, time flies.

Scott: Yeah. Well, we love having you.

Pat: Yeah. And you have offices located in the San Francisco Bay Area, Walnut Creek.

Mark: Yep. Walnut Creek.

Pat: So, and as we said, we've known Mark for years and years and years and was glad to have him part of the team. And you speak in the microphone and this is probably old school to you since you're in a band.

Mark: Yeah. But it's a little bit different. I'm hiding behind a drum set, so.

Scott: Really?

Mark: Yeah. It makes a difference. But yeah I do sing when they let me. I can sing really low and I can sing really high. And where all the songs come in, in the middle, that's where I lose it. Yeah.

Pat: So, you're a drummer that sings?

Mark: Correct?

Pat: That's a rare...

Mark: Yeah. Phil Collins.

Pat: Okay.

Scott: All right. Wait, come on guys. He's comparing himself to Phil Collins.

Mark: No. I'm not comparing, I'm just saying a drummer that sings that happens.

Pat: And what's the name of your...

Mark: David [inaudible 00:40:05.671]

Pat: What's the name of your band?

Mark: Stagefright.

Pat: Okay.

Scott: Okay. Yeah, I know, I got it. Stagefright.

Pat: Stagefright.

Scott: Okay. There's a purpose for you joining us today. So, Mark's in the Bay Area, a lot of tech companies have had some layoffs. Tell us about the situation you've encountered in the last month or two on the layoff and what's going on there.

Mark: Yeah, so it's pretty tech-heavy in the layoffs, right? I mean, you just even, you know, tapping every day in tech land and some other places. I mean, you read this morning, FedEx laid off 10%. Tom Brady got laid off today, that too. But there's a couple of different components of what happened. So, I have people who are worried that they're going to get laid off because they see what's going on in their businesses. So, they get worried and they're reaching out, trying to figure out what are some things that they should do. And then there's folks that have, it's actually happened where they have been laid off and then there's some decisions to be made there.

Scott: And it's never a good time to be... I mean, unless somebody is about ready to retire.

Mark: Right.

Scott: And then suddenly they get some severance, like, we'll pay you six months to leave. And they're like, "Great. I was gonna leave next week anyway." Like are there big severance packages happening in the tech world?

Mark: It depends on level, on where you are. So, there's some of it, but there's a little bit of kinda last in first out that you're seeing and there's not a lot of big severance packages that are there.

Pat: So, new people are the ones that are being asked to leave.

Mark: Yeah. But what happens is usually when... People like to reach out to their advisors if they have one with all the good news, you know, how do I invest this bonus that I just received? You know, it's a lot of good news. I mean, so the first kind of advice is if you're feeling anxiety about this or you think it's about to happen, reach out, contact your advisor. I mean, we're not just here for when times are all roses because there's some things you should do in advance.

Scott: Quite contrary.

Mark: Yeah. Absolutely. Absolutely.

Scott: I mean, if you...

Pat: Yeah, life events are where a good advisor becomes involved.

Scott: Yeah. There's external events, the markets. But the bigger things are the life events, the layoffs, the...

Pat: The deaths, disabilities, divorce.

Scott: Yeah. All those other things that sometimes life throws our way.

Mark: Right. Yeah, exactly. Right.

Scott: Yeah. And so what should people be thinking about right now then if there's...

Mark: Yeah, so I think, if they're worried about being laid off, that's becoming top of mind. I mean, one of the things you want to do is, first of all, just take inventory of your liquid assets. Where are you, what does it look like, what's the runway that I have for cash? So, cash, cash equivalents. Do I have a line of credit that I can access if that's necessary?

Scott: And it's a lot easier to get a line of credit when you actually have a job.

Mark: That's exactly right. Yeah. That's why you look at it. Now, that, you know, as far as what's most effective, that's become less effective because of what's happened with rates. I mean, it's pretty expensive money.

Scott: It is.

Mark: It used to be pretty easy. You're like, that's a spot I can go for short term. But it's become pretty expensive. But it's a time where rules of thumb, they come into focus, right? So, you always, how much should I have in liquid assets? She's like three to six months. You know, and now it's like, I think you should have 4.2 months of liquid. And it depends on, you know, if you have a spouse or a partner that has liquid savings. So, it's just really time to fine-tune what's the runway that you have. The other thing that I think is interesting, and this is if you think you're gonna be laid off and you've done things like FSA accounts, flexible spending accounts, you should start getting those things done. You have to use it because that actually is one asset that you lose if you, if you leave, so...

Pat: How much runway do you have on that? How much time?

Mark: Well, if you have, you know, procedures and things that you've used, you can actually expense that up to 90 days after you leave. But you have to have the things done in advance.

Pat: Before your date of termination?

Mark: Yeah.

Pat: I had no idea.

Scott: Yeah, I didn't either. That's why we have Mark on.

Pat: No kidding. That's so smart.

Mark: But the other thing, even around, you know, healthcare, if you're deductibles, if you have things you should be doing, I mean, those are the kind of things you should knock out.

Pat: So, if you've got an inkling that you might be at, you're just like, "We're gonna get this done."

Pat: Go get your annual, physical, get your eyes...

Scott: So, get the facelift before.

Pat: Yeah, exactly. It'll help with a new job interview as well.

Scott: Unless you look too surprised.

Mark: Yeah. And the other thing is just around, start to take inventory of your discretionary spending, right? So, you have the core things that you have to do, but really start to look at and say...

Scott: And most people have...

Mark: ...how do I spend this?

Scott: Most people don't really have a clue, right?

Mark: That's right.

Scott: Because they allocate whatever they're saving for retirement in the 401(k) and if they're saving some money for the kids, they gotta kind of auto deduct typically. And then most people spend kind of what comes through the checkbook. And their lifestyle adjusts to that. So, to your point, they don't know how much do we actually spend then on going out to dinner.

Pat: Yeah. If you asked people to put together a budget of what they actually spend and then show them their take-home pay, they're normally significantly different numbers. Then do you look at Roth deposits and consider that liquid cash?

Mark: Yeah. I think you have a kind of an order of events. So, it used to be cash and cash equivalents. That's pretty obvious. If you have a brokerage account where you can go grab some things that don't have large capital gains or things that were built for shorter term. That's a spot. It used to be line of credit. It's like, "I can just tap into that and that's pretty good." You know, when it was at 2%, you're like, cool. Now you're you're at six and a half, you're like, "No, you know, that's no longer a thing." So, it's kind of just order of events

Pat: And will you margin brokerage accounts at points in time if you think that it's gonna be short term?

Mark: I mean, towards last resort because even those margin rates have gone quite a bit higher...

Pat: Yeah, they're quite as well high.

Mark: So, you can negotiate them a little bit if you're with a firm that has scale and you know, you can kind of lean on the people and negotiate.

Scott: Yeah, and you have enough money there.

Mark: Yeah. Yeah. Which means you have a longer runaway and [crosstalk 00:46:35.321]. Yeah. These things tend to solve themselves a little bit.

Scott: And what about some planning opportunities people have, like if they find themselves without a job for a period of time?

Mark: Yeah. So, the thing's kind of the lemonade out of lemons, that you can have there is one of them, we just touched on it. So, you may have the ability to actually not just go get the contributions from Roth, but if your income's gonna be down, it might give you some Roth conversion opportunities, that you have in that year. So, you've gotta look at, you know, all the different components, but you may be able to cap your tax rate and do some Roth conversions, which is one. And the other part is it may be an opportunity to take some gains up to a certain level at lower tax brackets than in your current position. So, you might be at 23.8 FED, you know, in California, 10 California.

Scott: For capital gains.

Mark: For capital gains. And if your income drops and you can cap that potentially...

Pat: That makes sense.

Scott: ... a little bit lower. That makes sense.

Scott: Yeah. And essentially if you're married, your first $90,000. If your income is roughly $90,000 or less, that capital gained amount is 0 from 90 to 550, it's 15%, 550 in higher it's 20%. And those numbers are roughly half if you are, [inaudible 00:47:49.241]

Pat: Yeah. And so Mark, you live in the San Francisco Bay Area and most of your clients, I presume are there? So, one of the highest cost of living places in the United States. Do you find people will make just wholesale life changes, and leave that area and take a less paying job and a lower cost?

Mark: Yeah. You've seen a lot of it, but the other thing you've seen is people can work remote. So, they go up and buy places in Tahoe and work remote and... So, you've been able to move and kinda keep your role. I think...

Scott: There's not a big migration to fresh now, I guess Pat, that's what you're...

Mark: Yeah, no, but look in that tech role, I mean it's been very, very lucrative. So, there's not a lot of attention being paid to where it goes. I mean, you're not budgeting out how much you spend at Starbucks.

Scott: Yeah. Is there starting to be some concern in the tech field of your clients and your neighbors I mean?

Mark: Yeah, I mean it's happening. It's becoming more and more regular. So, it's starting conversations on being a little bit more conservative and starting to look at some of the things that they just candidly haven't looked at in a long time. So, there is a buzz around that.

Scott: Well, look, I think it makes sense. Anytime there's a potential change in one's life, it makes sense to check in with their financial advisor, right? And that's like...

Pat: Do a couple what ifs.

Mark: Yeah. What if I...

Pat: And especially if you're getting close to retirement age, if you thought you were gonna retire in the next two or three years, you may decide that this is the time that you're gonna actually retire.

Scott: I think the bigger challenge, Pat, if you are 57, you plan on working another 6, 7 years and you're concerned about losing your job.

Pat: It's difficult.

Scott: Yeah. It's not always that easy to get the same kind of income level at that age.

Mark: I think the other thing that happens is if you just, a lot of people extrapolate their current tech experience from here to eternity. So, if you look at it, those plans always work. It's like they grant me X amount of RSUs each year and I've got options and I've got that. You know, so just assume that that happens for the next 10 years and your financial plan works pretty well, and then all of a sudden...

Scott: Until it doesn't.

Mark: ... until it doesn't, then that disappears. So, a lot of that work is in advance on how much are you really gonna factor in?

Pat: Like the other stuff's been great, but we're glad it happened. [crosstalk 00:50:27.420] It may happen but let's not count on it, right?

Mark: Correct. The other thing that...

Scott: I found it surprising how quick... I remember it was about a year ago having a conversation with somebody talking about the tech industry. And he said, "Look, when the next tech recession happens," I said "Whenever that is because it's no end in sight." "It's gonna be really painful in the State of California for the way the tax structure is." And here we are, it's a pretty significant...

Mark: Well, just take a look at a lot of the revenue in California is from capital gains. How many people do you know, first of, all of our clients that booked losses last year? When's the next time you're gonna play capital gains?

Pat: That's a good point.

Mark: If you had somebody that did their job.

Pat: Yeah. If you had an advisor that actually worried about how the money would manage in a tax-efficient portfolio.

Mark: And that takes away one of the things, you know, the opportunities that take gains. Well, you don't wanna just take gains if you have you know, carry forward losses forever, you don't wanna just go burn through those, so...

Scott: I guess they're kind of planning that.

Mark: Yeah. But the other one actually it, and I think this is the most difficult part is let's say, you know, that day you get laid off and what's happening. Unfortunately, the clock is ticking on a few things that you have to be aware of, particularly around executive compensation. So, you're not feeling too good about yourself. It's a tough day, but you have to make a decision on exercising those options if they're earning money within 30 days or they're gone. So, if you have options that are in the money and you don't take that action, they go away. Companies are pretty good at letting you know that but that's a real thing that you've gotta do.

Pat: If you're a longstanding employee, do they negotiate this? Can you negotiate severances? You help clients negotiate severance?

Mark: Yeah, they get it and you get them involved with, you know, employer attorneys and that kind of thing. And they usually make some funds available to be able to exercise options. They have funds to be able to do that. But as you know, I would say when people are like, "How does an option work?" I said "Somebody comes to you every day and says, do you wanna buy Apple stock at, you know, $300 today?" And then you say yes or no, and then tomorrow they come and ask you the same thing. Well, after 30 days after you leave, they stop asking you.

Scott: Okay, exactly. So, that's no longer an option for you. The option is left the room.

Mark: Yeah. Yeah. And then you've gotta look at he Healthcare and Cobra and you know, so there's some things to do.

Scott: Hey, Mark, I appreciate you taking some time and coming in and chatting with us for...

Mark: And thanks for taking care of your clients.

Pat: Yeah, we do appreciate it.

Scott: Yeah, and glad you're part of Allworth. I often say if we could just clone, have more Mark Shauns, like...be part of the firm.

Pat: And other advisors.

Scott: Phenomenal group of advisors.

Mark: Okay. Yeah, it's a spectacular team. And I lean on...

Scott: I'm saying that because Mark's here. I'm trying to be nice.

Pat: Sometimes our advisors listen to our show and they're like, "Well, why are they treating Mark so special?"

Scott: Where's the list of advisors? We gotta go through. Jim is doing a great job and Keith, we love Keith. [crosstalk 00:53:32.398] Kimberly is the best, Lauren we love her.

Pat: We have a special podcast just for the advisors. [crosstalk 00:53:39.854] It's only released internally.

Scott: Wait a second. And if you listen closely, you can tell the names have been inserted. We're using Cap GT whatever they...

Mark: Yeah. Chat GPT [crosstalk 00:53:51.423] Yeah. It's a great advisor. Yeah, John Jones

Pat: It's spectacular.

Scott: Hey Mark, though. So, thanks. Hey, by the way, if you missed our in-person now to next complete financial planning workshops, we've decided to hold some virtual events for you. So, on Tuesday, February 14th at noon Pacific, we'll have that virtual event that deals with all these kind of questions that you may be considering when it comes to your own finances. Like do you have the right kind investment strategies set up? Do you have enough money saved for retirement? How to save some money on some taxes, some social security tips, etc. So, again, Tuesday, February 14th at noon Pacific, Thursday, February 16th at noon Pacific and Saturday, February 18th at 10:00 a.m. Pacific.

Pat: So, go to allworthfinancial.com.

Scott: Yeah. And if you'd like the program, please give us a review on wherever you get your podcast. This has been Allworth 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.