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

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

Pat: Pat McClain, thanks for joining us.

Scott: Glad you are with us as myself and my co-host here both talk about financial matters, help you make some wise choices with your finances. Our goal is to help people become financially independent, not just so that they can be hedonistic and self-centered the rest of their lives, but so they can have more options in their life, have less stress.

Pat: Yeah, financial security, if you will.

Scott: Right. It's pretty tough to have. security when you are struggling to figure out how to make your mortgage or your rent or the grocery bill.

Pat: I've been there.

Scott: So anyway, we've got a good program. We've got some calls we'll take and love to hear from you as well. If you want to join us, you can always send us an email at questions@moneymatters.com. We'll get you scheduled to take one of your calls. This last week pat I noticed Bitcoin hit $50,000 for the first time in a couple years.

Pat: Yes.

Scott: And I think in large part because there's some ETFs that have been created.

Pat: Yes.

Scott: Where people can now own Bitcoin through an ETF. So you can just buy it on a brokerage account. Not all brokerages are allowing it, or providing it, I should say.

Pat: I read an article last week, which I found fascinating, which was this gentleman in Germany had been running this illegal website, posting other people's movies and televisions. And this was back in 2012, '13, '14. And he had taken the proceeds and bought Bitcoin.

Scott: Money laundering. He didn't know what else to do with it.

Pat: I mean, that was original for the Silk Road was, you know, these digital currencies. So you can move it around without government interference, or so he thought. So he took his proceeds and he put it in this Bitcoin and the government, Germany, comes back and says, "Hey, by the way, you need to disgorge all that money you made." And he said, "Okay, but it's worth hundreds of millions of dollars now," because he bought Bitcoin with it. And the government said, "We don't care. We're just taking it."

Scott: They took his Bitcoin or they took...

Pat: They took his Bitcoin. So much for hiding it from the government.

Scott: Well, my son's a big poker player. I'm not saying that's a good thing or bad thing. He makes money, he views it as a second job. Whatever, like it's, yeah. I love my son.

Pat: How old is he?

Scott: He's 26, he gets really into something for a year or two and then he moves on to something else. So this is what he's into right now. My guess is five years, either he'll be a professional poker player or he'll barely play anymore. But he goes to the card houses and stuff and plays, but he also plays online, and I guess online he gets paid in Bitcoin often, so he's got an account of Bitcoin. And I don't know if it's because where he's doing it is not legal in the U.S.

Pat: And probably best not to ask.

Scott: Whether it's legal for him or not?

Pat: Yeah, he's 26.

Scott: Oh, I'm not gonna... He's on his own. My guess is that's not the first thing that was questionable whether it was legal since he's been a teenager. I'm just thinking because I was a teenage boy, young man, once. Not speaking of anything, like, serious.

Pat: So it gets the Bitcoin gets to 50,000 you

Scott: And you're starting to hear people kind of squawk about it again. And look, if someone wants to invest a tiny bit...speculate, I shouldn't call it invest, speculate a tiny bit in it, I guess go for it. You can speculate on anything.

Pat: You can.

Scott: Yeah. Corn futures if you'd like, soybeans, whatever you want. You can speculate on just about anything.

Pat: Pork bellies.

Scott: I mean, in Vegas, you can get gambling...you can speculate on who's going to be performing the halftime show at Super Bowl next year.

Pat: Speaking of Vegas. I went this weekend. It's been on the calendar for, gosh, nine months.

Scott: This past weekend?

Pat: This past weekend.

Scott: When Super Bowl Sunday was there.

Pat: We were probably the only people leaving Vegas before the Super Bowl game. So we came in on Friday and we left Sunday morning.

Scott: I find it absolutely fascinating how much people will spend to go to Super Bowl game. Look, and if you've got the financial resources and it's not going to have any bearing on other parts of your life, whatever. Spend your money however you choose to spend your money. But I often wonder how many people are there that, one, just people who really shouldn't be spending that kind of money, or two, the kind of corporate influence...like, are there people breaching their fiduciary responsibilities because they're getting wined and dined by some other company to steer business a certain way. Why else would corporations...

Pat: Yes. You know the answer to that.

Scott: Yes, of course, I know the answer to that.

Pat: So, it's been on the calendar...a friend of ours said, let's go to the Sphere and watch U2.

Scott: That's that new...

Pat: It's the round building that's...

Scott: By the way, we'll take some calls soon.

Pat: And I've got to say, I watch football occasionally, but not a huge football fan. But that place, I've been to Vegas, I don't know, a dozen times, never more than two days. That's way too many. And I like the shows and I like the restaurants, but the gambling, I didn't wager one penny while it was there. I find gambling actually quite boring and too risky, by the way. But the Sphere, U2 in the Sphere, Scott, I got to tell you, probably one of the top 10 just, you know, experiences that I've ever...

Scott: I've heard it's amazing.

Pat: It is amazing.

Scott: And what's a typical ticket cost to go to see U2 at the Sphere?

Pat: Actually, I'm embarassed to say I had nothing to do with it.

Scott: Your wife bought them, you don't know.

Pat: It was some sort of package deal. Two nights in a hotel. And then we went and watched Absinthe, which was kind of a...anyway.

Scott: That's disgusting.

Pat: We left early.

Scott: Your wife sat through even 10 minutes of it?

Pat: Absinthe?

Scott: Yeah.

Pat: Yeah, it was okay.

Scott: That's where it's super crass humor in the midst of these beautiful performers on the silks and stuff. So it's kind of where Cirque du Soleil meets...

Pat: Ron.

Scott: Yeah, total trash.

Pat: Yeah, we weren't aware of that.

Scott: I went with some friends and my son a couple years ago and I would have left. It was just with my son and myself with some other guy and I just remember thinking this is the most disgusting crass humor.

Pat: It was. I thought the venue was pretty cool.

Scott: And I don't think my wife would have lasted eight seconds.

Pat: I thought the venue was pretty neat, but we did leave early. But I gotta tell you, U2 in the Sphere, the guy spent $2.3 billion to build this thing. They're going to have to fill it up for a long, long time to recoup that investment.

Scott: Yeah, that's a lot of money.

Pat: It was a marvel.

Scott: Anyway, we should take some calls.

Pat: Yes, it is a financial show, but nice catching up. Sorry, that everyone else had to listen to it.

Scott: All right, let's talk to Allan in California. Allan, you're with Allworth's "Money Matters."

Allan: Yeah. Hi, guys. How are you? I love your show.

Scott: Hi, Allan. Thank you.

Allan: So, my question, I want to try to ask it in a little bit more of a direct way because I know it's such a broad question. I know you guys get it asked a lot, but that is, you know, ultimately, how much is... How much do you need to retire at the end of the day? You know, I remember when my dad retired, he's still with us, the $1 million was the so-called magic amount. But he retired, and he retired with maybe $600,000. He's still with us, and he's doing fine and goes to Hawaii every year and lives well, this, that, and the other. But there are some other influences, right? He's got insurance through his wife, health insurance through his wife. So my question ultimately is, A, is there a magic number that is supposedly there for retirement? And do we need...you know, should I be, should I be investing in insurance for, you know, Alzheimer's or, you know, how do you insure or how do you, how do you get to that level? You know what I'm saying? I think a lot of people ask these questions.

Pat: Which is like, what risks do I insure against, and what risks are not insurable?

Scott: So let's start with the first one. So I'm going to tell you a story. This was 20-some years ago as a financial advisor. And we did a lot of work with the retirees from the phone company. They would have these downsizing and use the pension plans to try to get people to leave the employment, essentially. So we helped people kind of navigate it. And a lot of people, they took advantage of this to take a pension lump sum and go and get another career. And they really set themselves up for retirement extremely well. But there's a gentleman came in and he says, "Yeah, I want to come in to see if I can retire." And I'm going through his numbers, his pension, and his 401(k). He owned no home. He owned nothing. And his total retirement savings was like $240,000. And I said...

Pat: How old?

Scott: He was 58 probably. He did have medical through his employment in retirement.

Allan: That's my age. I'm 58.

Scott: I said to him, "I hate to say it, but there's no way you're going to be retire. This is maybe going to provide 1000 bucks a month of income." He says, "A thousand bucks. That's fantastic. I'm definitely retiring." And I said, "How in the world are you going to survive on $1000 a month?" And he says, "Well, my brother's got a bunch of property on this river. And there's a trailer." He says, "I can live in the trailer for free. Frankly, I don't like being around people very much. So just kind of living in a trailer all by myself sounds like the perfect life for me."

Pat: And we never saw Ted Kaczynski again.

Scott: But, so that's one extreme, right?

Pat: But the point be there, the money going out is what actually determines the point of retirement.

Scott: His lifestyle needs, he was an odd duck, obviously. There are people like that in the world, and you've probably driven around somewhere where you're like, you can live really inexpensively in that trailer in the middle of nowhere. And so there's others that they have a very high lifestyle wants and desires, and they need multiple millions in order to be able to afford to retire.

Allan: Right.

Pat: So I'm going to direct you to a couple of resources. One is our website, allworthfinancial.com. And we actually have the seven-step program that we use all kinds of software...

Scott: And you could go through, you could either do a little assessment thing or you can do...watch a 30-minute video or something.

Pat: the video. And the idea being is what we try to do with people is continue the same standard of living that they were with working. So the first thing you do in the seven-step process, and we power this with a number of different pieces of software, but we found that the easiest way for people to understand their situation is in these seven steps, right? And the first step is, what are my requirements for income now, right? What am I living on now?

Scott: Yeah, what's actually coming through the checkbook and being spent?

Pat: And so how you do that is you take a look at your income, then you subtract what you're paying into Social Security, what you're paying into Medicare, what you're actually paying into your 401(k), maybe some unemployment insurance, so all those. And then that gets to a number, right? And then you look at it and you say, well, what expenses will continue in retirement? What will go away? So if your home mortgage goes away, then you need less for retirement. If you're paying $3,000 a month, so the expenses. And the other is taxes. What happens to my taxes in retirement? The other is investments. How should my portfolio be invested? Should it be more conservative, more aggressive? Do I have a pension? How close am I to Social Security? The other is risk management, which is what you brought up, which is, do I buy a long-term care policy or do I not? Do I buy longevity insurance? The next one is the state. And the third one is distribution. So what you're doing in the seven steps is you're starting with what I'm living on today. And on step number seven, you get to the final number that says, yes, I can maintain my same standard of living. And if you can't, then you've got a couple choices. Either change your standard of living...

Scott: Or work longer.

Allan: Work longer, right? Which more people are doing. So my company has something similar on our 401(k), which says, okay, how much money are you going to need or you think you need when you retire? And then based off of that, then I...

Scott: Yeah, that's just your 401(k). Mine does the same thing. I go online and it says your X percentage towards your goal, right?

Allan: 94% likelihood that I'm going to be able to, given where I'm at, I'm going to be able to retire. But my concern more is the unknowns. And my question then would tie into, so what...you know, the health thing to me is the biggest fear.

Scott: As it should be.

Allan: When you get older. Yeah, that's what I would think, right? How do you plan for that? Do you guys recommend those types of insurances?

Scott: Yeah, so 20 years ago, long-term care insurance was very popular, 20 to 30 years ago. Maybe the peak of people buying long-term care was about 20 years ago. It was quite common. The insurance industry misunderwrote the policies. So they did not factor in for increased longevity, all these different memory cares that were coming into play. A low-interest rate environment. So they realized that, like, holy crap, we're losing a ton of money on these policies. So number one, many companies quit writing long-term care insurance, and the ones that continued writing them jacked their premiums up dramatically. So the amount of long-term care insurance purchased today is less than 10% of what it was 20 years ago. And what ends up happening, a lot of people go to look at it, by the time they start pricing it, they're like, "Oh, it's going to have such a dramatic impact on my lifestyle today that I can't really afford it." And those that can easily afford it, can self-insure, frankly. So if you have 10 million bucks, you're like, you can self-insure for long-term care. If you have nothing, you don't need it because the state's going to step up. But if you're a typical middle-class retiree, that's where it can get kind of...

Pat: And you could buy different forms of it. You could buy a long waiting period, which means it's not going to kick in for a year. And then you could buy a limited benefit for like a five-year benefit.

Scott: Or three years or two years. My opinion on it though is like most people can afford... First of all, most days in long... Most long-term care is not that long-term. Couple of years on average. Most people... That's not the problem, right? Most houses don't burn down. But the challenge is if you're one of those, you've got a spouse that is requiring long-term care for 5, 7, 10-plus years, that's where it can be really dramatic. So if someone is going to buy long-term care insurance, our recommendation is typically get a long waiting period because if it's a year or whatever, you can self-insure that, but get as long as benefit as you can absolutely afford.

Pat: And or purchase what's called an asset-based long-term care insurance policy, which is a life insurance policy, which actually returns, you buy them in lump sums normally. And they actually say, okay, basically, if you put $100,000 in here, we're going to give you $100,000 worth of life insurance. And if you use that up, you will get nothing at your death. And they use the proceeds from that investment to help fund that long-term care pool. It's probably not as good as a clean long-term care policy in many situations. It doesn't have as many bells and whistles, if you will.

Scott: Yeah, but the thing that works for insurance companies is the money that you pay into them, that's essentially if...

Pat: They are earning money on it.

Scott: They're earning money on it. And then if you need care, they use your money first.

Pat: Which is a waiting period, if you will. It's a deductible.

Scott: Spending your money first.

Pat: You spend your money first.

Allan: I got you.

Pat: And so that's a popular alternative today.

Allan: Okay. Because I know, in listening to you guys's shows, so many people, I think are asking you to be fortune tellers, right? Almost say, okay, here's what I have. Am I going to be fine in X amount of years? Well, yeah, I guess. Right. And it goes back to your guys's point, which is certainly your debt. All those other issues are associated with it. But like I said, my bigger fear is a we're living longer. I don't want to...not that there's anything wrong with it. I don't necessarily want to be a greeter at Walmart I want to retire and be able to live and travel and do those things. And that's the big fear, which is, you know, insurance-wise and from a cost standpoint, am I going to be able to? You just never know.

Scott: Essentially you're saying, we're asked to be fortune tellers. I think really, for us, it's about probabilities of outcome, right? There's no 100% guarantee. Who knows what our government's gonna look like 20 years from now, or what the dollar's gonna be, or the world for that matter, right? And so there's certain unknowns that are gonna be kind of impossible to plan for.

Allan: Right, right.

Scott: But we can get to a point where we've got 95% confidence or 91% confidence or 83% confidence just through statistical analysis and through running a variety of different scenarios, including things like your longevity, what happens if you lived to 110, right? It happens.

Allan: Right. Right. And I just want to, and you know, on the point then, I think a lot of us that are at least my age and that are of the older age, we want to pass something on to our kids. There's all these different factors. And I just want to like do the best I can to ensure that I'm leaving something to my kids, that I've got enough money, that at the end of the day, if I got to be put in an old folks home, my kids don't have to worry about me. I've got enough money to do that. But like I said, I guess you just never know. Ultimately, for me, I'll have...at 68, I should have $1.7 in my 401(k), but I've got two properties that I'll own out flat, right, which I'll have income from. Based off of my 401(k) and my number, which I said was $9,000 a month, they said 94% sure that I'll be there.

Pat: It sounds right. And what's your debt look like when you retire?

Allan: When I retire, I should be debt-free. Should be.

Pat: Okay. That goes a long, long way, by the way.

Allan: Okay.

Scott: For two reasons, two reasons. One is you let... Here's why we're a big fan of getting your home paid off. And look, I've read articles and I can run financial calculators to state why it makes sense why you should always have a mortgage. And if you have a mortgage today with 3%, frankly, don't pay it off. But there's two reasons why it's helpful to have a mortgage paid off in retirement. Number one, that's less money you need coming in.

Pat: Money not going out is the same as money coming in.

Scott: But there's a second factor, and don't discount this either. One's risk tolerance is different when the home is paid for. So if we look back to the financial crisis, we've been doing this a long time, so the financial crisis, those who are retired that had their homes paid off and their outflow is relatively small and, frankly, almost all variable and discretionary, they were able to ride the financial crisis much better. And they weren't the ones that said, "Oh, my gosh. Sell all my stocks because the stock market's going to zero. I watched this on Fox Business last night, said the stock market's going to..." Right? Because they knew that they can withstand things a little different. And those that had large mortgage balances, even if they had the right kind of financial plan, like we typically plan so people can go multiple years of expenditures without having to touch any things that fluctuate in value so they're not forced to sell when things are low. But even those people, many of them, they were just too spooked because they knew like, "I've got to come up with three grand a month to make that mortgage payment," or whatever the number.

Pat: So the psychology of debt can be overbearing in a volatile market.

Scott: When you're not working.

Pat: When you're not working.

Allan: Gotcha. Right. Guys, thanks so much, man. You guys and I'll check out the website. But yeah, I think at the end of the day, it's it's still I don't know that...you know, if I've gathered anything, it's not a perfect science. Do the very best you can. And then, you know.

Scott: Look, so years ago we used to... And we appreciate the call, Allan. Years ago we used to do financial plans, we'd print these things out, these big binders, and some of you listening might have had that either from us or from some other financial, like a printed financial plan. But you knew at the moment it was coming off the printer it was going to be slightly inaccurate because you make these assumptions about the future and about life and everything else and it never quite comes out. The stock market doesn't go up a certain percent every day, right? It fluctuates. And so today, financial planning has evolved to...it's much more ongoing. And now we use software programs. It gets updated frequently in what-if scenarios. And the reality is as we move from today to the future, whether we're still working or retired, we have to make adjustments with what is thrown at us. That's just, that's the way it works. Things will change and we have to be ready to adapt and adopt.

Pat: So I was reading an article a couple weeks ago About Ecuador and it made me think, "Wow, what a change for the Americans that moved to Ecuador."

Scott: And five years ago this was a hot spot for Americans to go to retire. You can buy a place really cheap, near the beach, medical care, low cost of living. Safe.

Pat: Fruits and vegetables, being on the equator. My son, my oldest son studied there for six months in Quito in a small town outside. I went to visit him there. He brought me to...they called it Gringo Ville. And it was...

Scott: Like an American community.

Pat: You couldn't tell the difference

Scott: Just like the tract homes that they roll out on the...

Pat: You couldn't tell the difference. But they're moving now because of the crime. So these people had all this great retirement based upon this particular place and the standard of living.

Scott: Well, I'm sure you wouldn't send your son to Ecuador today.

Pat: No.

Scott: Yeah, things change.

Pat: Things change.

Scott: All right, let's continue on with some calls here. You're listening to Allworth's "Money Matters." We're talking with Cecil. Cecil, you're with Allworth's "Money Matters."

Cecile: Hi, Scott. Hi, Pat. Thank you for taking my call.

Scott: Yes, thanks for calling. Did I pronounce your name correctly?

Cecile: It's Cecile.

Scott: Cecile. I'm trying to read the phonics of our producer. I'm like, what is that? Cecile. Easy enough.

Cecile: I'm used to it. It's okay.

Pat: It was made famous by that song in the in the '70s.

Cecile: Cecilia?

Scott: Cecilia.

Pat: Cecilia.

Cecile: Breaking my heart.

Pat: Yes. Taking my heart. Okay. Thank you. Please.

Cecile: That's been sung to me at Girl Scout camp. Throwback. I've got a two-part question for you all. And this is a scenario where I've actually been hearing it asked pretty recently a couple times. It's about the in-plan Roth conversion. So two-part, who is it right for? And then selfishly, is it right for me?

Scott: Well, I shouldn't think selfishly. You are responsible for your own life, so you're...

Cecile: Exactly. So we got a presentation about a week or two ago at my employer, and I listened to it. They didn't articulate it that well. So I thought, "Hey, let me reach out to Scott and Pat. They could help me with this." So this kind of plan, who is it right for?

Scott: Yeah, let's step back and kind of explain for someone else listening that might not know what we're talking about. 401(k) contributions, we have contribution limits. So as an employee, we can only contribute 20... Do you remember the numbers, man?

Pat: Yeah, it's 26, is it? Twenty-three, is that right?

Scott: $23,000. If you're over 50, it's $30,500. That's how much you can contribute to your 401(k) in 2024. So somewhere between 23 and 50 grand, depending upon your age. But the retirement plans as a whole, you can contribute a much higher amount. You can contribute actually about $70,000 a year in a, let's say, a profit sharing plan. So, what these kind of super Roth conversions, after-tax conversions do...

Pat: By the way, this is typically only available in large companies at this point.

Scott: And a minority, but it's becoming more popular.

Pat: Yes, at this point in time.

Scott: It'll probably shut down at some point in the future because it's a pretty nice loophole. So what this enables people to do is to contribute beyond those limits, beyond the $23,000, but rather than getting the tax deduction, it goes into what's called an after-tax 401(k). Now, in and of itself, we're not big fans of after-tax 401(k)s or after-tax Roth contributions because you don't get a tax deduction, gross tax deferred, but you're taxed on all the money, all the earnings that you pull out. It's not like a Roth. However, a lot of companies now are enabling people to do one of two things. One, is on an annual basis, they yank out those after-tax contributions they made and then put it into a Roth somewhere, convert it to a Roth, and because you didn't take a tax deduction, you're able to contribute to a Roth...convert it to a Roth without any tax implications.

Pat: And it grows tax-free, and it comes out tax-free as a Roth.

Scott: And now some employers are saying, hey, rather than having to go to the hassle of taking the money out and going and investing somewhere, we'll enable you just to put it into the Roth 401(k) here at your employer.

Pat: And sometimes I saw them do the sweep the day it hits the aftertax so that it's almost...which is why you expect that this thing's going to get shut down.

Scott: This wasn't the intention of people to contribute $69,000 a year.

Pat: So the assumption is that you're doing the maximum pre-tax or Roth 401(k) contributions at this point in time.

Cecile: Oh, yeah. I max out everything.

Pat: Then this is perfect for you.

Scott: What's your income?

Cecile: It's about 170.

Scott: And do you have... Right now you're maxing out. Do you spend everything that comes home in your paycheck or are you still saving elsewhere?

Cecile: No, I'm still saving elsewhere.

Scott: This is perfect.

Cecile: Okay. Okay.

Pat: It's beyond perfect.

Scott: Do you have much in the way of after-tax savings, a brokerage account, or that sort of thing, or cash in the bank?

Cecile: Yeah. So what I do... So I'm no longer able to intially contribute to the Roth IRA, right?

Scott: Yeah.

Cecile: So I max out my 401(k), I max out a traditional IRA, I've maxed out my HSA, and then I'm frugal. I haven't let lifestyle creep up on me. So also every month I throw some in a brokerage.

Pat: How old are you?

Cecile: 35.

Pat: You're how old?

Cecile: 35.

Pat: 35.

Scott: How much do you have saved?

Cecile: I've got about 220 in investments, and that's between the various retirement accounts and brokerage.

Pat: And do you find that you're living the standard of living you want to live?

Cecile: Oh, yeah.

Scott: Then absolutely. This is the perfect thing for you.

Cecile: Yeah, okay.

Pat: I'm sorry, so you do everything you want to do?

Cecile: Yeah, I do everything I want to do. Like I said, I haven't let lifestyle creep come affect me. So I'm used to living on less, and I just, when I've made...

Scott: So right now you're contributing to an IRA but not receiving a tax deduction. Is that correct?

Pat: But you're converting it to a Roth, correct?

Cecile: I haven't started Roth conversions yet. This will be my first year that I haven't been eligible for the Roth IRA. So I will probably start this year.

Scott: Okay. And what do you have in as far as other IRAs? How much do you have? Do you have other IRAs that you've contributed in the past? Not Roth, but just regular IRAs?

Cecile: Yes, I do have about 62,000 in a rollover IRA.

Pat: Okay, so that brings up something that...when you do the conversion, it's on a pro-rata basis. So what you want to do is take that $62,000 in an IRA...

Scott: And transfer it to your current 401(k).

Pat: ...and transfer it into your 401(k).

Scott: To maximize this.

Pat: Yeah.

Scott: Which I would consider if I were in your shoes here. Assuming you had a good 401(k).

Pat: And see, because what happens if you put money in a non-qualified IRA...

Scott: A non-deductible IRA.

Pat: A non-deductible IRA, and then convert it to a Roth IRA, that portion, it's pro rata, which means you might put $5,000 in and go to do it, but you're going to end up paying a lot in taxes.

Scott: Because they can look at the other 62,000 you've got

Pat: ...in the IRA and they say, right. So this is, you know, it's so crazy that we have this system...

Scott: But it is the system we have.

Pat: It's just crazy. It's like we've complicated this... I'm going through this right now with my daughter who's in law school. She's 20...how old is Coline, 26, I should know this. And we tried to convert her 401(k) to a Roth IRA and they said you absolutely cannot do that it has to go into an IRA. And I said don't worry about it we'll just convert it to a Roth IRA once it gets there. And then they sent it over to a Roth IRA after they did it all. So what you want to do is...

Scott: And you're in the business.

Pat: Oh, yeah, I thought to myself I'm glad...

Scott: In all fairness, you're not an administrative type in the business, so you personally haven't completed a form or whatever that mechanics personally probably in three decades.

Pat: That's probably a good...that's probably a fair statement. So you want to do two things. One is you want to do the after-tax conversion to a Roth IRA. And that non-deductible IRA now, you want to take that $62,000 that you actually have in your IRA from the rollover and move it back in your company's 401(k) plan.

Cecile: You can do that?

Pat: Yes.

Scott: Yeah.

Cecile: I didn't know it was an awesome option.

Pat: Oh, yeah, yeah, yeah.

Scott: Yes.

Pat: Then you have no IRA. So when you make a non-deductible contribution to an IRA and you, the very next day, convert it to a Roth IRA, there's no tax implications on it.

Scott: I did this last... So I sent a note to a person within our organization and said, "Hey, I would like to make a contribution for 2023 and a contribution for 2024 into an IRA. And as soon as that happens, I want to convert that to a Roth IRA." I did that for myself, I did it three weeks ago

Cecile: Let me complicate this then because I do have a traditional IRA that I started contributing to at the beginning of the year for the 2024 tax year. And I'm the kind of person, I don't want it to sit in the IRA. The moment I put it in there, I'll invest it. So how does that affect it?

Pat: It doesn't. You haven't converted that to a Roth IRA yet for 2024, correct?

Cecile: I haven't.

Scott: So assuming you like the concepts we're going here, I wouldn't convert that until I took that $62,000 of the other IRA and transferred it to my employer.

Pat: Right. The minute that 62,000 is in, the only IRA you want is that non-deductible IRA that you contributed to. Take the 62 grand, move it to your employer, that non-deductible IRA, the very next day, the very next day, convert it to a Roth IRA so that...

Scott: So she contributes on a...you contribute on a monthly basis?

Cecile: Pretty much. Yeah. I'll split it evenly throughout the year. Yeah.

Pat: You've got money in my brokerage account, do you not?

Cecile: I do.

Pat: You're making life harder on yourself than it really is.

Scott: So here's how I do it, I wait until spring and I do it every other year. So come springtime between January 1st and April 15th, I guess it's still winter, January 1st and April 15th, I'll make a contribution for the prior year and the current year.

Pat: Exactly.

Cecile: Okay.

Scott: Because look, one can make an argument, "Well, Scott, if you can start on January 1st of the prior year, you'd have those dollars..."

Pat: One could make the argument that if I exercised for an hour a day, I'd be in better health too.

Scott: It's so negligible the increase you have compared to the additional work.

Cecile: I know. So I guess then it doesn't complicate it, the fact that I've already invested like the $1,200 I already invested?

Scott: No, not at all.

Pat: No, not at all, not at all. And just do it once, just do it once. Or like us, we do it every other year.

Cecile: Okay.

Pat: And that way I'm making two contributions. I made my contribution for '23 and '24 like six weeks ago.

Scott: Oh, you did. Same thing.

Pat: Yes.

Cecile: Okay. you

Pat: Okay, but in all fairness, I am married to an accountant, so that helps.

Scott: So on January 2nd, she put a little thing.

Pat: We did.

Cecile: Yeah. So I guess I'll get that rollover IRA put back in the 401(k). And then you said wait a day or so and then I can convert the traditional IRA over to a Roth.

Pat: That's right. That's right. Make the full year's contribution then convert it to Roth.

Scott: Because what's going to happen at the end of the year, because retirement accounts report both to you and to the IRS how much you have in retirement accounts. So last year, maybe you haven't had the form yet, or you will be receiving it soon, it says for your IRA at such and such financial institution, here's the value, here's what was contributed throughout the year, here's what was withdrawn. And then if you've made non-deductible contributions, frankly, it's up to you to keep track of those. So for 2024, if you move this to the 401(k), you're not going to...you're going to finish the year with zero dollars in traditional IRAs, which is going to enable you to make that after-tax contribution and subsequently convert to Roth without any tax implications.

Cecile: So the one that I will convert to the Roth, let's say the $1,200, should I liquidate that first?

Pat: No. No.

Cecile: ...or just call and say, I'm converting all the money?

Pat: It doesn't matter. It makes no difference.

Scott: If it's grown, it's going to be a few...

Pat: Yeah, yeah, and it doesn't matter because there's no friction. It used to matter when there was $50 a trade, you'd want to go in kind.

Scott: Just go in kind anyway, it doesn't matter. If it grows to 100,000, it's just not gonna matter.

Pat: Yeah.

Scott: If it falls to $2, it's not going to have any impact on your taxes, assuming you do it after you transfer those other dollars.

Cecile: Oh, yeah, that's going to be my first thing after this call.

Pat: All right. Perfect.

Scott: But then I got to... At some point, like, if you're making 170 and you're already now you're talking about saving about seventy-some thousand a year...

Cecile: Right?

Pat: That's a lot of savings relative to your income.

Scott: Yes. But if that's what you want to do, it makes you feel good, yeah. And maybe, look, maybe you're at a point in your career where things are going great and no one knows what happens tomorrow and you're thinking, "Hey, while I've got it coming in, let's store some up for the future."

Scott: Are you one of these FIRE people, you know, financial independence retire early?

Cecile: I don't think so. I don't know. Well, my story is like within the past three years, my income has doubled. I think it's doubled. Yeah. And when I bought my home, I was making like my old salary. So everything else is just, you know, gravy, icing on the cake or whatever you want to call it. And I'm used to making less, I guess. I'm not a person that goes out and spends a lot.

Pat: Yeah. And you have no desire to go spend it. Yeah. Whatever makes you happy. Yeah. Whatever makes you happy.

Cecile: All right, guys. Thank you so much. This was really helpful.

Pat: Oh, good.

Scott: Glad you called. She was a...

Pat: She used that term icing on the cake and gravy. I was in the South on this bicycle ride...

Scott: I have a feeling she's worked hard in her career and it wasn't just icing on the cake, the extra pay.

Pat: That's right. That's right. So I was on this bicycle ride and we were somewhere in Tennessee or Mississippi or whatever. We were at this cafe and they had chocolate gravy. So when she said icing on the cake and gravy, I thought it reminded me of eating this chocolate gravy on biscuits.

Scott: Are you implying that the South, their eating habits aren't quite that healthy?

Pat: It was disgusting. It was terrible.

Scott: Chocolate on biscuits.

Pat: Yeah, and they called it chocolate gravy and they were serving it for breakfast. I thought, "I've got..."

Scott: For breakfast.

Pat: "I've got to try this."

Scott: It wasn't just like natural cocoa that wasn't all pumped up with sugar, my guess.

Pat: It was terrible.

Scott: All right. So well, let's...actually we're going to Tennessee now and talking to Wendy, who you just offended greatly. Wendy, welcome to Allworth's "Money Matters."

Wendy: Hello.

Scott: Hi, Wendy.

Wendy: Hi. I guess you want me to jump in on that?

Scott: Yeah, well, either that or we can talk about chocolate gravy.

Pat: Have you ever had the chocolate gravy?

Wendy: No, I've never had chocolate gravy. Just had some chocolate-covered fruits.

Scott: Okay. How about hash browns at dinner? Okay, Tennessee seems like a lot of hash-brown-type potatoes.

Pat: All righty, what can we do for you?

Wendy: I'm an only child and received some funds with the passing of my parents.

Scott: Sorry about that.

Wendy: Thank you. You have to talk to me like I know zero because I know zero. We've always lived thrift store shopping, that kind of thing, stay-at-home mom, one income, and now I've got all these things and I'm too scared to do anything with them. So the rundown is my dad's retirement, which will be coming out of an annuity, and I've been told that I have to take payments over the next 10 years.

Pat: That's correct.

Wendy: And then I have...

Scott: What was your parents' total assets?

Wendy: Oh, it's...

Scott: Five hundred thousand, 1 million, 2 million, 100 million?

Wendy: Real estate, land, and money and returns?

Scott: Yeah, everything.

Pat: Everything.

Wendy: About 1 million.

Scott: Okay.

Pat: Okay.

Wendy: Which makes me very emotional and kind of turns my stomach. That's a lot. But anyway, so I've got to take...I've got to do something with his retirement. And then liquid cash of, I can pull together $105,000. I've got a house that probably would sell just under $400,000. And then, well, the land, I'm not getting rid of it. I want to keep the land. And then I have no debt.

Pat: You have no debt.

Wendy: None.

Pat: And how old are you and your spouse?

Wendy: I'm 49, he's 47.

Pat: And children?

Wendy: Yes, my oldest just received his associates. He's 20. He's moved out. Actually, I'm actually renting the house to him. So that will cover the property taxes and insurance and stuff. And then I have a younger son who will be in his senior year of high school in the fall. And we've never been one to have an account for college or anything. We always told them they are on their own. We'll help however we can. So we expect our younger son will have a combination of a sports and academic scholarship.

Scott: Oh, wow.

Pat: And what's the family income?

Wendy: It is solely from me now. And I'm self-employed, so that can vary very largely, but last year's gross was around 80,000.

Scott: And did you have much in business expenses?

Wendy: Yeah, I can pretty much count, you know, my income would have been like 160,000 and then half of that is expenses.

Pat: Got it. Okay. Okay. And that's your income. What's your spouse's income?

Wendy: Under 20,000.

Pat: Okay. So 100,000. If you do this right, this will set you up for a very, very comfortable retirement.

Wendy: Yeah, I'm just scared to make decisions.

Pat: I understand that.

Scott: That's prudent. That's smart.

Wendy: And I want to be a good steward, number one, and two, I want to see it grow. I don't want to just go spend.

Pat: That's right.

Wendy: Have some borderline needs, wants, especially with my business. I'm having to see clients in my small home. I would much rather own my own office and have that separate. So that's one thing that...that's probably the only big thing that I would that would like to change. But other than that.

Pat: But you can rent a place that you can meet with your clients, correct?

Wendy: I could. I don't like the idea of renting. Okay.

Pat: Okay, well, whether you like it or not, it just comes down to an economic reality of whether it is good to either rent or own.

Scott: Yeah, I mean if you bought an office building odds are you'd have more space than you needed and then you'd be looking to sublet part of the space would be my guess

Wendy: Yeah, but I could also buy a small home. I'm a midwife, so it doesn't have to be like that commercial image of an office.

Pat: Got it

Scott: I mean, right now you have so many different options. You could go through the list. I'm thinking of...

Wendy: I know. I need somebody to hold my hand.

Pat: Yeah. Yeah, you absolutely need someone to hold your hand. You could go through...you could set up a defined benefit pension plan, you could do a simplified employee pension plan, you could do a self-employed 401(k).

Scott: The biggest thing though is for you to get some clarity on what you would like these dollars to do for you. So you mentioned one thing is having a...and that might be a brilliant move, might be the best move, the number one move or may not, depending on what those other goals and objectives are. And I know there's also part of it, you feel a little weird about it, like this is mom and dad's money and I know how hard they worked and how much they scrimped and saved.

Pat: How long has it been since your parents passed?

Wendy: My dad, this is, you know, really all my dad's and he passed away in 2018. And my mom was confined to a wheelchair and we took care of her and she just passed away in October.

Pat: Okay. And the reason, the reason I asked those questions is because oftentimes there's a mourning period where we suggest clients just don't do anything for a while.

Scott: Don't do anything for a while.

Wendy: Oh, yeah. There's a whole back story to that with my dad's retirement. That's exactly what we said. Everybody said don't make any decisions. I was trying to coach my mom not to make any decisions. And the people who actually had my dad's money in an annuity went to her in the hospital and had her reput it into another annuity without my permission.

Scott: Oh, my gosh. So when people hear us talk about there are places for annuities, the world would probably be a better place if they were never invented because of stuff just like that.

Pat: What comes to mind there is cockroaches when you said that.

Wendy: Yeah, it makes me really sick.

Pat: Let's just visit this house for a minute. You said that this $400,000 home, you are renting to your child.

Wendy: Yeah, my son and his and his friends, they are paying diligently and taking care of it diligently. So I'm good there. At least it's, you know, generating a little bit of income because the biggest thing was I had nowhere to put all the stuff in it. A lot of the stuff in it was actually mine and I had nowhere to put it.

Pat: Okay. It's not enough that this is just covering its expenses. It's just not enough. This is...

Scott: For a season, it might be fine.

Pat: That's right, but that is not a financial decision that you're making there. It's an emotional one.

Wendy: [inaudible 00:45:59.948].

Scott: Or, one, do you want to help your child?

Pat: You just need to understand the cost. Fair enough, Scott. Fair enough. So if you're sitting down with a financial advisor, if you were sitting down with me or any of our advisors from our firm, we would say, okay, these are the six things you can do. And by the way, you know...

Scott: Here's all the impact.

Pat: Yeah. And let's look at it 10 years from now. Let's say you want to retire at 60. This is where the probability of outcome is high that it's going to be at this level and we'll provide this kind of income for you. And then I'd focus on that house because there's a million dollars there and $400,000, 40% of it is tied up in an asset that quite frankly, you've received a step up in basis. So there's no tax implications in selling it. But if you're going to keep it, then you've got to decide whether you want it to produce income or you want your son and his friends... It's equivalent of you giving one of your child, children more money than the other, quite frankly.

Scott: Which I personally don't have any problem with, but some people do.

Pat: Right.

Scott: Some people, it's to the penny, man.

Wendy: Yes, no, I know. That's not a big deal. It's just really helpful for me that something's happening with it right now and it's kind of off my shoulders. That's where it's helpful, but I do want to sell it. I do know that.

Pat: Oh, thank you.

Wendy: Because we've talked around it being my office or fixing up and living there since it's a larger space.

Scott: Do you wanna do that?

Wendy: No, I don't have a lot of good memories there. It is my childhood home. And so the emotional aspect is I'm happy to sell it.

Scott: Yep. Best for it.

Pat: Yes, I understand. I drive by my childhood home occasionally. I don't want to move into it though.

Wendy: Exactly.

Pat: You need to sit down with a qualified advisor.

Scott: A good advisor, and not someone who's an annuity salesman. A certified financial planner, someone who can take the time with you and maybe you and your husband and like, what is it...because this can really set you up financially. I might guess as your entire marriage...you said you've been going to thrift stores. You guys have been scrimping and saving, being really careful with the dollars, go raising these kids, figuring out how to get their clothes and get their sports and all that other stuff, right? And now they're just about launched and now you've got a pretty good-sized financial windfall that can really set you guys up well.

Pat: And the mere fact that you have no debt tells us that you've got great discipline.

Wendy: Mm-hmm. That's number one our whole life is I wanted to be debt... And I did that from a teenager. I was given a credit card. So I went into the marriage with a lot of debt and then kids come and it's like, okay, no, I don't want this. This is not happening anymore.

Scott: Much better to learn at a young age than at this age.

Wendy: Yes, so we paid, paid off, paid off, paid off. We're debt-free for a few years and then we bought our house. An amazing godsend deal. I mean, equity as soon as we moved in. And so I've really chipped away at that. And then when my mom passed away, I did use a small chunk of that and paid off the house.

Pat: Perfect. Beautiful. Beautiful. Yeah. Yeah, you need do you know a 10-year plan with a financial advisor.

Scott: But it sounds to me like you're being really wise about this. You haven't done any major moves. You're seeking out counsel. You're calling this program. You want to do the right thing. And so I would, like one takeaway, just feel good about that and feel comfortable with that because you're not in a rush. You don't need to be. And by those steps you're taking, this will make your life better, not worse.

Wendy: Yeah, I'm just too scared to make a choice or a decision to what to do.

Pat: At some point in time, you're going to have to sit down with a qualified advisor who is not a salesperson that gives you alternatives.

Scott: And you pay an hourly fee or fee for financial planning.

Pat: Or you pay an asset management fee, but it's all predicated on a fee, not a commission. Because the reason that person went to the hospital when your mother was there was to generate a commission. And you saw it. You saw it, but they come in, they're dressed in a nice suit. They're really super nice.

Scott: And it may be that that's all they know, right?

Wendy: Yeah.

Pat: If all you have is a hammer, everything looks like a nail. So you're...

Scott: Yeah, a good financial advisor. Wendy, you can sit down and go through all these different scenarios. Okay, if I bought, like maybe buying a place for your work is the perfect solution for you. My guess is you get a lot of satisfaction out of your work.

Wendy: Yeah, that's the other thing that people keep asking about, you know, planning for retirement and, you know, I really, I love what I do. I mean, it's [crosstalk 00:50:54.092]. I don't know about the retirement part.

Scott: So maybe these dollars, the best use of these dollars is setting Wendy up in such a manner that she can thrive.

Wendy: Travel.

Pat: Okay, we said thrive. But close enough.

Scott: It's all those things, Wendy. It's all those things of your priorities. It's listing them out, sitting down, "Here's my wants and my dreams and my hopes and my needs." And then a good financial advisor can put together a variety of different scenarios. It's like, "Okay, if we do this, here's the impact it's gonna have here. If we do this, here's the impact it's gonna have there." And so you can make an informed decision as opposed to just going something off your gut. So I really appreciate the call and again, I think you should feel good about where you are here. You're being prudent. You didn't go out... I had one client, literally, like two days after he received an inheritance, went out and bought a brand new Lincoln, top-of-the-line Lincoln. And it was just so bizarre. So bizarre, but whatever. Yeah, anyway. All right, we're out of time. It's been great being here with you. And if you haven't been to our website in a while, Pat mentioned it earlier, allworthfinancial.com. Lots of great educational stuff on there. We'll see you next week. This has been Allworth's "Money Matters."

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