Skip to content.

February 24, 2024 - Money Matters Podcast

A lesson on portfolio diversification, clearing up confusion about IRA tax rules, and how proper financial planning can lead to golden opportunities.

On this week’s Money Matters, Scott and Pat start the show by tying the commercial real estate crisis to the importance of diversification. Then they help a caller who says she is getting mixed messages on how to handle two inherited IRAs. A world traveler asks how to break the news to his father that he wants to invest in indexes instead of real estate. Finally, Allworth’s Brian James joins the podcast with real world examples of hidden opportunities that proper financial planning presents.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here.  You can also be on the air by emailing Scott and Pat at

Download and rate our podcast here.


Automated Voice: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join "Allworth's Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

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

Pat: Pat McClain.

Scott: Glad you are here with us. We're talking about financial matters. Both myself and my cohost, we're both financial advisors, certified financial planner, charter financial consultant. Essentially, we've been doing this stuff a long time.

Pat: Yes.

Scott: We've been doing in this program a long time.

Pat: Yes. 30 years.

Scott: Twenty...

Pat: Is that right?

Scott: Almost 29 years.

Pat: Oh, all right.

Scott: It was right before my daughter was born, my oldest daughter, Sally. Hard to believe, 28 years old.

Pat: Yes. My oldest is buying a home.

Scott: Mine just did.

Pat: Oh, she did. Congrats. Maybe. I don't know.

Scott: What do you mean?

Pat: It's scary. Well, not for me. It's just part of growing up.

Scott: Yeah. It's funny, I was talking to my daughter because I helped her with the home. I imagine you're helping your son with... Okay.

Pat: Yes, a little.

Scott: And she says, "Dad, of my friends, who have homes, I don't know anybody who was able to buy a house without the help from some parents." That's what she said.

Pat: Interesting.

Scott: She said, "A handful of friends that are already home..." Well, not at her age 28, "That own homes," she says, "I don't know any who didn't get some help from their friends."

Pat: Interesting.

Scott: And I thought, how much more challenging it is today than, say, 30 years ago or 60 years ago, or whatever.

Pat: Yes. I don't know if it's just geography-dependent or just life in general. Do you think it's geography-dependent?

Scott: Yeah, I think some professions pay relatively the same regardless of where you live and you can have a very nice lifestyle in different parts of the country as opposed to living in New York City or downtown San Francisco.

Pat: Which, by the way has a massive impact on commercial real estate and large cities because companies are now realizing that people will work for less if they work remotely in a less expensive place.

Scott: Or in a less expensive place.

Pat: Or work remotely in a less expensive place, so therefore, the companies can pay them less and they will still take the jobs.

Scott: That's exactly what, particularly now, the employment market has changed quite a bit in the last year.

Pat: So, you used to compete for a job 10 years ago if you were something that was acquired in office. You competed with the people in your geography.

Scott: That's exactly right.

Pat: And now, it's the equivalent of on-shoring, where the companies were offshoring years ago because they could get lower labor costs in certain parts of the world. Now, they're realizing, "We can do the same thing with American workers by having them work in, you know, small town, middle America."

Scott: Well, there's a lot of people who are willing to take a lesser pay to go elsewhere.

Pat: For a standard of living, which actually might be higher.

Scott: Yeah, so it's interesting. So, our studio here is in Folsom, California, in Northern California, we're in a suburb of Sacramento. And I've lived in this community 30 years, roughly, a couple more years, like, 30 years and kind of watched the region grow, but there's been a lot of people over the years that they would choose to get a job in the Bay... Actually a couple of weeks ago at the Super Bowl, I'm talking to a buddy of mine, he says he was getting up at 5:00 a.m. the next morning to drive to Silicon Valley for work. And he says, he goes down there, like, Monday and Tuesday, and works remote, because quality of life and life's so much less expensive in the Folsom region compared to Silicon Valley.

Pat: And the point being...

Scott: ...three-and-a-half hour drive.

Pat:, in commercial real estate, we're seeing massive disruptions, in New York, San Francisco, Chicago, Atlanta, because of this change in work, where some of the commercial real estate high rises in San Francisco are down 70% from their high, 70%.

Scott: Or more.

Pat: Yeah. And so, when you think about diversification in your portfolio, you think, "Holy smokes. Who could have ever, ever predicted a pandemic would change a cultural shift in how employees consume their work environment? Who?" Just, like... And so, I know...

Scott: My friend...

Pat: ....and like even our... We've been trying to get people to come back to four days a week. And there are some people that work in the office five days a week. There are others, maybe there are one day. I mean... "I do go to work." And they're like, "Sorry, this is what I'm doing." And you're like, "Okay."

Scott: But so, it goes back to... So, I was having a conversation with a friend of mine who he said, you know, "The commercial real estate people that are in the commercial real estate believe that, many of them believe that this, there shouldn't be a place for equities if you can do commercial real estate. And there's people in equities that say there shouldn't be a place in commercial real estate if you can do equities. And I say, an asset is an asset is an asset. And you can get exposure to reach real estate investment trusts traded, not non-traded that are sold to you by salespeople. But the point of diversification is to protect yourself from things that...

There was an article just the other day about someone who had very large wealth a couple of years ago. And you think about this, I had a run a couple of days ago with a buddy of mine who was... he was in banking most of his career and now he does private lending. Like, this whole shadow banking that's emerged in the last decade, a lot of these commercial loans are not through banks anymore. They're through these private lenders that sometimes are syndicated and sell them off in little pieces or whatnot, the loans on these. And just talking to him, we were talking about the challenge with a lot of these loans, it's not like a mortgage. You buy a house, you put 20% down, you get a mortgage...

Pat: And it's fixed.

Scott:, you've got a fixed rate. Two, it doesn't matter if your home goes up 30% in value or down 50% in value, it doesn't matter how many rooms you're occupying or not occupying, as long as you're keeping up on your property taxes and insurance...

Pat: They're good. And paying your mortgage.

Scott: could lose nothing that the bank can do to say, "I don't like you anymore. We want your house." It's different in commercial mortgages. So, a typical commercial mortgage will have a couple of things. One is, the interest rate is usually fixed for a short period of time, 5 years, 7 years, maybe 10 years, maybe 15 years, pretty rare, but it's usually a shorter period of time, and then it resets. Secondly, there are what are called covenants, which mean that the landlord, the owner of the building who had taken on the mortgage and typically signs a personal guarantee on it states that, "One, we're gonna have a certain amount of occupancy in the building. Two, our rent rolls are gonna be a certain amount. So, we're gonna collect X dollars for rent. And three, we'll make sure that we always have at least, say, 20% equity or 30% equity, some amount of equity in the building." And if they miss the covenant they have to come up with cash or they'll call the loan completely."

Pat: If it's way underwater, well, the lender might extend and pretend, right? I mean, try to milk this, just keep this thing going on.

Scott: So, I heard it... It was the same guy who was telling about the story. This was an office building in Marin County. He said, "Three years ago, three years ago, it sold for $72 million. The mortgage was roughly 50% of the value."

Pat: Okay, 35 million.

Scott: When in the default, went to auction, the note sold for $8 million.

Pat: No.

Scott: Yep. That's the kind of bloodbath because there's almost no one lending.

Pat: Yeah, so you've got to be cash buyer. $8 million.

Scott: $8 million.

Pat: And that person that bought it need to be very patient because they're either going to cut the rates, which by the way, will create a spiral, right? So, now, that person that bought it for $8 million...

Scott: Cut rent rates.

Pat: ...they could cut the rent rates in order to keep the building full, which actually then.

Scott: The building wasn't very full at all.

Pat: Yes, but for $8 million you could charge...

Scott: Which is the problem, right? So, this guy buys a building, probably some family, maybe a few families coming together thinking they're being conservative, just a 50% mortgage, they only have 50%, but yet the value fell almost 90%.

Pat: So the new buyer goes in there and says, "Hey, I don't actually need that much of a return in order to justify my $8 million purchase. I'm going to lower my rent," which then causes the rest of the whole geography...

Scott: To go down.

Pat: Who sets... They're gonna want to fill up. They're like, "This is great. We only paid 8 million bucks for the building. Small loan. I'll reduce rent 50%. Why do we care?"

Scott: Yes, and it creates a spiral. But the point being you're going to own assets in your portfolio that you're going to be unhappy with because you're going to compare them with other assets, right? So, bonds that last year, you weren't happy with.

Pat: Last year was a wash. The year prior, you're right.

Scott: You were unhappy with, right? And you're going to compare them and you're going to say, "Why don't I own more of this or why don't I own more of that?" But the idea behind diversification, and I hate to say it, is that you should be unhappy with about a third of your portfolio at any one time.

Pat: Yeah, that's about it. You should...

Scott: I think there's a second thing to pay on this particular story though is debt, debt. There's no such thing as a free lunch. When you take on debt, you need to understand what the implications are. And actually, I don't think this is an extreme story I've told at all. I think this is going to happening all across the United States. I remember years ago counseling, a group of dentists decided to become in the development business. And so, they bought some land and built a couple of gyms. And then, the financial crisis hit and they weren't able to sell the memberships like they thought. And suddenly what happened is they had these personal guarantees, which are very common. And what went from nice, secure finances, secure retirement, they tend to do, but they were all independent, all did failure wolf, most of them went to bankruptcy

Pat: Not even past the capital call. They just...

Scott: Well, there was no way they could come up with it, but they were so far in the water.

Pat: Oh, they just didn't have it.

Scott: Just like this building, this example of this building.

Pat: It is. And that was...

Scott: So the point being, for that long story is, diversification, it's diversification. You should... When you look at the portfolio, if you're disappointed with about a third of the things that you own...

Pat: Yeah, that's not bad.

Scott: any point in time, and you know why you own them, what it is is every asset class goes through its own little market cycle and it all doesn't happen in tandem.

Pat: Very rarely happens in tandem.

Scott: So what you hate today...

Pat: Probably tomorrow's winner.

Scott: And winner today...

Pat: Maybe tomorrow's loser.

Scott: That's right. Same thing with you look at different... The reason the index funds paths have grown so much is because people look at these investment performances from individuals and they're like, "Well, yeah, you did really great the last five years." But just because you were a top performer the last five years doesn't give us an indication that you will be the next for five years. And in fact, typically, the only reason they had over-performance is they happened to own those types of asset classes that were over-outperformers. And just by maybe pure luck, right? Or that's the bias that that particular manager had, right? But they're not going to be able to switch into the next set of over-performers.

Pat: Scott, thinkk about the Janus funds in the late 1997, '98.

Scott: Yeah, and then they all blew up.

Pat: All of them.

Scott: Anyway, I don't think that name exists anymore, does it?

Pat: I don't know.

Scott: Janis Henderson? And not to disparage the company, I'm sure they've got some great stuff.

Pat: It was just their asset classes that they were prone to.

Scott: Well, usually when something's on fire, these are businesses too. They go through market cycles and they try to raise capital. They say, "Hey, look how good we're doing here. Look at the five-star fund. Open for... You know, we're going to close it soon. Bring your assets in." All that kind of stuff. All right, we're going to take some calls. Let's go to Deanna. Deanna, you're with "Allworth's Money Matters."

Deanna: Good morning, how are you?

Scott: We're fantastic, Deanna, thank you.

Deanna: Hey, so my question is on inherited IRAs. I actually have received two IRAs that are being held at two different companies.

Scott: And when did you inherit these?

Deanna: Just last year '22.

Scott: All right. And it was not a spouse.

Deanna: No, it was a parent. And my parent was already receiving his required minimum distributions. And so, one investment company told me I don't have to take the required minimum distributions as long as the account is empty in 10 years. And the other one insists on sending me required minimum distribution. So, I'm looking for...

Scott: So here's the challenge.

Deanna: ...what is the rule?

Scott: Which tax act was that, Pat? So, the tax law, it was in one of the tax packages.

Pat: I don't remember.

Scott: Okay. So, this is a recent change. Because in the past, it used to be you can stretch an inherited IRA over your life expectancy. So...

Pat: That was five years ago, you could.

Scott: father passed away four years ago, small IRA. And I'm taking out as little as I can. And it's based over my life expectancy, which is much longer than 10 years, I hope. But, no, statistically, it is based on the chart. But the law has changed. But there's still some questions in there that we're all waiting for the Treasury to give clarification on.

Deanna: Right. So, what do I do between here and then?

Scott: So, what we should be doing is let's think about the things that we can control, right, which is, how old are you?

Deanna: 62.

Scott: And are you currently employed?

Deanna: Yes.

Scott: And how much are these IRAs?

Deanna: Couple of hundreds.

Scott: Okay, so $200,000.

Deanna: A couple hundred thousand. Yeah.

Scott: Okay. So, $200,000. Are you contributing to your 401(k)?

Deanna: 457 and 403(b) or something like that, 503(b), something like that?

Scott: Okay. Are you doing the maximum?

Deanna: Yes.

Scott: You are? And your spouse? Are you married?

Deanna: Yes, my spouse is retired.

Scott: Okay. Do you think your income is going to be significantly less in the future, your taxable income?

Deanna: No.

Scott: You think it's going to be higher? Or you've got 20-some thousand that's going to be dropping through?

Deanna: Right.

Scott: Like, what's the point...

Deanna: That's where I'm trying to get at.

Scott: My question is, so let's pretend like you have two financial institutions and they have two different interpretations of the law that's been somewhat murky.

Deanna: Correct.

Scott: There could have been some clarification from the Department of Treasury recently that I don't know about, but I'm just seeing, this isn't the only situation that we've had things like this from this particular tax bill regarding inherited IRAs. But you still might be better off taking out one-tenth every year. Because what you don't want to do is leave this... Let's say that you just let this all grow and suddenly it's the 10th year and this $200,000 is now worth $350,000 and you gotta cash it in. Now, you've got $350,000 dropping on your tax return all in one year.

Pat: Which was exactly where I was going with this is, look, you know that this thing needs to be empty in 10 years. Can we agree on that?

Deanna: Yes.

Pat: Okay. So the question is how do we actually phase that emptying of that over the next 10 years? When do you plan on retiring?

Deanna: In the next couple of years.

Pat: And your income will stay the same in retirement as it is while you're working?

Deanna: I think so because I'm putting the maximum into the deferrals right now.

Pat: Well then it's a wash. I would take it over the 10 years.

Scott: I would take it over the 10 years.

Scott: I wouldn't want to defer just because...

Pat: That's right.

Scott: ...the way the tax system work, it's so progressive and steep, so your taxes on these inherited IRAs for people could go anywhere from zero because of standard deductions up to 37%. So, the first few dollars we have coming into the household is taxed at 10%, then the next chunk's taxed at 12%, then 22%, then 24%, then 32%, then 35%, then 37%. And then, you live in the state of California, so that's anywhere from 0 to 13.3%. So, what we'd hate to have happen, let's assume that you're in a tax bracket where you're...let's say you're in the 22% tax bracket, which is actually a very large tax bracket for the feds, I'd much rather see you take these distributions over 10 years and remain in that 22% tax bracket than to defer, and then the 10th year, suddenly you're paying at 37%.

Deanna: Okay.

Scott: Right. So, this idea of...

Deanna: So it doesn't really matter what the rule is then. Is it better to take...

Pat: In your situation.

Scott: Yeah. And we know it has to be empty in 10 years, much different than your 401(k) 457, 403(b), right? You've got room to play with that, but this, you don't have any room to play with. So, what you do is you put the maximum you can into every tax deferral while you're taking income from this because it will wash at that point in time.

Deanna: Okay.

Scott: Right?

Deanna: All right.

Scott: So, that's why. It is what it is. But, look, you need to take it out over the 10-year period. You need to start taking the distribution, regardless of what they're saying. You know, you could leave it there until 10 years, but you'd hate to voluntarily pay more income tax. Well, maybe you'd like that, voluntarily pay more income tax.

Deanna: No. Nope. No, I don't like that at all.

Scott: Yeah, so that's that's what you want to do.

Deanna: All right. Thank you so much.

Pat: All right.

Scott: All right. Appreciate the call.

Pat: Glad you called.

Scott: Pat...

Pat: It's hard to...

Scott: How do you keep track?

Pat: I think it was last week that someone called about this backdoor Roth conversion, right, where you do excess after-tax contributions to your 401(k). Just some loophole that... Like, no one in Congress ever said, "Let's design a good retirement policy with tax law." It's all, I mean, the 401(k) that came, not because someone designed a retirement plan, it was a financial professional who was reading this subsection 401(k) and said, "Wait a minute, we can set up a payroll-deducted retirement account based upon these rules." That's how the 401(k) came to be, right? Wasn't like Congress said, "Let's..." then they said, "Well, we better put some limits on it." And deduct these IRAs.

Scott: If you built a house like you...

Pat: Oh, my gosh.

Scott: tax laws...

Pat: Can you imagine?

Scott: one would live in it.

Pat: No, it'd be a disaster. Which is why tax planning has become so important to overall financial planning and wealth management.

Scott: And retirement planning. Absolutely.

Pat: Oh, yeah.

Scott: I mean, we have a team of CPAs whose job at large part is to help with the tax planning to ensure that we're maximizing where we can maximize. Because the... Look, when you're talking about the difference between giving... Well, most people aren't in a 10% bracket, but a lot, the majority of Americans are in 12%. Actually, half Americans don't pay any income taxes, but they don't have any dollars saved.

Pat: So, it doesn't really...

Scott: So, let's talk about people that have dollars saved. Even people with dollars saved, a lot of them are in a 12% tax bracket. And with the right kind of planning means we either pay 12% or up to 37%, which is exactly... This question was, who was right? And our answer was, doesn't matter.

Pat: It didn't matter.

Scott: It doesn't matter because what we do know, and we're waiting for clarification...

Pat: We implied that she had a pension coming, because she mentioned the 457, which meant state employee or some sort of government employee and, yes, we did imply that.

Scott: I implied that. And I assumed you did as well.

Pat: I did as well.

Scott: Yeah. So, it's not like there was going to be a couple of years of planning where there was no income.

Pat: Yeah, twice she was comfortable that her income would be the same anyway.

Scott: All right. Let's continue on with calls here. We're talking with Brian. Brian, you're with "Allworth's Money Matters."

Brian: Hi, Scott and Pat.

Scott: Hi, Brian.

Brian: Love the show.

Scott: Thank you.

Brian: I listen every Saturday to the podcast.

Scott: Awesome.

Brian: Always enjoy it. I got a question that's maybe your view as financial advisors and parents could be helpful. I had lunch with my dad a couple of weeks ago and we were talking about finances, and he was saying how him and my mom would like to help me maybe purchase a home, whether it be for personal or investment. He's helped my older brothers with home purchases and they want to kind of equalize it, which I appreciate.

Scott: Okay. Yeah, it's pretty normal.

Brian: And he's pretty keen for me to invest in real estate, but my investment style has been saving as much as I can and investing in index funds. And so, I don't know if he is biased towards real estate and I am the best...

Scott: So, do you already own a home?

Brian: No.

Scott: How old are you?

Brian: 38.

Scott: Have you owned a home in the past?

Brian: No, I've just ranted just to keep my housing cost as low as possible so I can put away... You know, eventually, I got to a good emergency savings and then eventually good 401(k). And by then houses were rather expensive. Then I'm not married, no kids. And then, recently, I like to travel, so I'm out of the country could be three to six months a year.

Pat: That changes things. And so when you move out of the country, do you keep your rental or do you give it up?

Brian: Last time I kept it for about three months, but this time I'm thinking it's time to move on anyway and I'm gonna get rid of it to be on the roads.

Pat: Are you gainfully employed?

Brian: Yes, and I could work remote, and I make it with kind of two jobs.

Scott: People is out to get this lifestyle

Pat: I know. Where did I go wrong?

Scott: I know.

Brian: Yeah, it's not bad.

Pat: So, you sit down on an island and you actually have like a Photoshop bookshelf behind you when there's really a beach.

Scott: And, Brian, you said you're 37?

Pat: 38.

Brian: 38.

Scott: And what's your income ballpark from your employment?

Brian: $150,000.

Scott: And what do you have saved?

Pat: Everything.

Brian: Everything, $430,000, $300,000 of which is retirement tax advantage and the rest is money market and index funds.

Scott: I hear that you don't want to buy a home.

Pat: Yeah, why would you want to buy a home?

Brian: Yeah, I don't. So, it's like, do I convince my dad that, you know, this is my strategy? I certainly appreciate the funds. My thought would be to invest most of the money into VTI and maybe take those options to fund travel.

Scott: How old is your dad?

Brian: He is 74. And well, they're pretty well set for their retirement.

Scott: They're not doing this for state tax purposes then. They want to even out.

Brian: No.

Scott: They gifted their other two kids.

Pat: Yeah, they wanna gift the... And what do you think of getting a rental home?

Brian: You know, I think it's kind of like I work in real estate as an accountant. And it's kind of like chefs and restaurants, they don't cook all day and then go home and make elaborate meals. And I think when I get home, I'm just tired of looking at real estate and I prefer... My strategy is to focus a lot of my time on my career, travel, and then passive investing versus... Most people I talk to don't like being a landlord.

Scott: Yeah, I don't like being a landlord.

Pat: I can't live with it.

Brian: And then, I mean, with my index funds, I don't have to put furniture in them.

Scott: No, I get it. You know what's funny?

Brian: I don't have to pay property tax.

Scott: So, I'm gonna tell you... So, two days ago, I'm on a walk with my wife, and I said to her...actually, I'm on a walk with my wife and I got a text from a property manager. Can you please call me? And I, like, "Is the house on fire?" Right? And I text back and the washer was broken and they thought it's time to get a new washer and dryer.

Pat: Your mutual fund never calls you.

Scot: And it's been a good investment for...but I said to my wife, "I really love equities." And I said, here's the conversation we had.

Pat: You had this conversation with your wife on a walk.

Scott: She barely tolerated it, but, yes.

Pat: How romantic.

Scott: I was trying... No. Well, and I said, one of the benefits about getting a little older... You're still quite young, you didn't remember the pain of the financial crisis. One of the benefits of getting older, you've lived through all these cycles. And you see that companies, the values of companies, continue to grow. And when you look over the long-term return, you mentioned VTI, the Total Stock Market Index, you look at the long-term return of stocks, it's about six to seven percentage points above that of the rate of inflation. It's hard to replicate that in any other asset class.

Pat: It is real.

Scott: Real estate, rental, anything.

Pat: it is,

Scott: And it never calls you and says the washer is broken.

Pat: And there's no leverage in there, so the downside risk isn't as great.

Scott: Correct.

Pat: So just tell... I'd have a conversation with your dad and say, "Look, my lifestyle's a little unconventional, but I'm happy." I'm assuming you're happy. "I would love to take these dollars and invest them for the long-term for my own financial security, just like my brother's financial, but in a slightly different way." And I'd take it one step further. I would take a clip of this show and say, "Hey, I talked to these guys that I listened to their podcast. And this is what they said."

And quite frankly, your dad may know it. And by the way, that's the only way we're gaining listeners, is one at a time. But it might change his view of the world enough that says, "Oh, okay. Well, my son's taking this seriously. And he reached out to these financial professionals that manage, you know, $20 billion and they kind of under $19 billion and they kind of understand it. So, here's where you go, dad. And see where it lands. But quite frankly, if I had a child like yours that said to me, "This is what I'd like to do." I'd say, "Okay, make sense." So, yeah.

Scott: So, I have four kids, 28, 26, 16, and 13. Same wife, just a big spread. My oldest daughter, I just helped with the purchase of her first house. And I told my son who's 26, I said, "Hey, two years from now, maybe sooner, actually it might be the end of next year before the tax law change, two years from now, I'm gonna do something similar for you." But I already know he's just a different kind of guy. And for him, he's probably not going to want to buy a house...

Pat: At least at that point in time.

Scott: that point in time. So, I'll probably structure something different for him. Hopefully, it'll allow me to coach him some, because this is my profession, but to help guide him in what to do. But I don't think it would be buying a home for him. But I still feel the desire to let that...something that has similar economic value to that child so he doesn't feel like I'm playing favorites. And I don't want to play favorites. And I want to help him get launched in life. So, Brian, so, that's the answer to this question. I have a couple of questions for you. Of these places you've traveled in world, what was your favorite?

Brian: Oh, recently it would probably be Malaga, Spain, although I almost don't want people to find out about it because I was really still a young...

Scott: Is that the southern tip?

Brian: Yeah, that's in the southern tip. You can take a ferry to Africa just about. But, yeah, great weather, has the old town, has the beach, got everything.

Scott: I've actually been to Malaga. All right. Second favorite.

Brian: Second favorite.

Scott: Or where do you plan on going next?

Brian: Lisbon was quite good.

Scott: I like Lisbon.

Brian: Lisbon is a great place.

Pat: I've never been to Lisbon, I'd like to.

Brian: Lisbon, it's a little overcrowded, but it was quite good.

Scott: Yeah, it's quite the American.

Brian: And the next stop is Italy.

Scott: And where?

Brian: Where in Italy?

Scott: Yeah.

Brian: Starting in Milan because the flight path is good from Sacramento where I am, and hop on a train and go wherever looks good, maybe towards the south.

Scott: And where's your next place you're going? That's what the Milan is?

Pat: Oh, Milan.

Scott: That's your next place.

Brian: Milan, Yeah, Italy.

Scott: Yeah, good for you. Listen, live it. As my kids would say, that boy can send it.

Pat: That's more of like a ski term.

Scott: Yes, but it goes in life too. Like, live it. My kids have that tattoo on the side of their foot, and their cousins do, "Send it."

Pat: Do they, really?

Scott: Yeah. Send it.

Pat: That's gotta... That had to be...

Scott: And I told my wife I'd want to do it just to have the bond with my kids.

Pat: I would do it, other than it sounds grossly painful to get your foot tattooed.

Scott: I have no tattoos. All right. I appreciate the call, Brian.

Pat: It's gotta be painful.

Scott: But it can't be that painful.

Pat: To have you're foot tattooed? I mean, come on. I don't have any.

Scott: A variety of different pain.

Pat: I will pay for that tattoo Scott just because I think you'd be funny with a tattoo.

Scott: I had a conversation the other day, again with my wife on it, because she's opposed to it. And I told her, Christmas, I said, "What did you want for Christmas?" I said, "I want the 'Send it' tattoo to the side of my foot. Okay.

Pat: It's just totally out of character for me. I understand.

Scott: Oh, it is.

Pat: It's 100% out of character.

Scott: But I think my kids would really get a kick out of it.

Pat: You know, like...

Scott: They'll get a kick out of that.

Pat: ..."Dad gets it."

Scott: And I'm a quite avid skier and I ski with my kids and so...

Pat: And you send it.

Scott: ...I can't send it actually.

Pat: You can't send it.

Scott: Not like many people can send it. My son just broke his hand out snowboarding. Had to put a pin in it.

Pat: Oh, really?

Scott: My youngest, yeah. Three weeks ago. I was on a trip to Alaska years ago and my buddy slipped on ice walking and broke his hand. And one of the guys on a trip was an orthopedist. And we went to the local town, a little dock-in-the-box thing...

Pat: Really?

Scott: ...they let him set his hand and they set the cast so that he could hold the ski pole, right?

Pat: So he can continue the trip.

Scott: Yes. He should have "Send it." If anyone should have a "Send it" tattoo, that guy can send it.

Pat: Holy smokes.

Scott: Yeah, I always travel with an orthopedist. That's just weird. That's how I roll.

Pat: This last call though, I've got a friend of mine who's roughly my age, like, 50s. He has no children. Single guy. And his lifestyle is very similar. And I'll call him sometimes and he'll be...last I talked to him he was in Australia. And last year he was in Spain for a few months, he was in Croatia for a few months, and he'll rent these houses for like three months at a time.

Scott: And he's okay being by himself, obviously. He's never been married. So I figured he's at...

Pat: He's a certain kind of personality, right?

Scott: Yes, yes. I mean, it sounds really exciting, but I couldn't do it.

Pat: I've known for 20 some years and he said he'd kind of like to be married. I'm thinking, "I don't think you really would."

Scott: That's what you said.

Pat: Because he probably would be. My guess is you've dated a few nice women over the years.

Scott: Yes.

Pat: But you're 57.

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

Pat: I think so. But, you know, it's interesting. He just kind of look at everyone's way like, "Well that seems like a really cool...I like your lifestyle. That seems like a really interesting lifestyle." Not sure I really want that.

Scott: I could not do it. I know that for a fact.

Pat: Hey, we're going to talk now to one of our regional director, advisor, Brian James, in our Cincinnati office. Brian's a certified financial planner. Again, leads our Cincinnati office and has been with us for a number of years. Brian, thanks for taking some time to join us.

Brian J.: Hey, you bet. I always enjoy it.

Pat: Yeah, so...

Scott: We have these conversations occasionally [crosstalk 00:35:00.651] with some of our advisors to kind of, like, what's financial planning look like in the real world versus someone's calling a radio show/podcast and getting short interactions.

Pat: That's exactly right. These are actual clients, like, what the problem was, what happened?

Scott: What were the solutions? What was the outcome? Oftentimes we have no idea what the outcome is with the advice that we give. We just assume it's all perfect. So, Brian, when you worked with some medical professionals employed by a big hospital chain, tell us about that story and what was going on there.

Brian J.: Yeah, sure. So, it's a very interesting case. She does a little bit on the side for various organizations. She's an anesthesiologist, so she does some...she had her own practice on the side and she works as part of the large hospital. And everybody knows about this, it's all in the up and up. It's just kind of complicated and confusing. So, for her own practice, she's basically a small business and that opens up a number of opportunities. There are really cool things you can do in that case. If you are your own sole practice and you don't have any employees, you can do something that's called a solo(k) or an individual 401(k), which can allow you to put up to $70,000 in the right situation away pre-tax if you want to. But you also...

Scott: Yeah, and these are self-employed people, right, that can do it... Because sometimes people look at a SEP IRA and think that's the limit or whatnot. But these solo(k)s, they allow you to do the same kind of contribution limits as, like, a profit-sharing plan but if you establish for yourself.

Pat: But this was...

Brian J.: Exactly.

Pat: Was this a side business for her?

Brian J.: Yes, this was a side business. The same thing. She just did what she did doing anesthesiology, you know, for some local practices as well as what she did for the hospital.

Pat: Got it. So she's pretty common.

Brian J.: But that added some wrinkles.

Pat: Yeah. Which is by the way...

Brian J.: Yes, exactly.

Pat: ...for anesthesiologists, it's pretty common that you would belong to a group and then you do some time in these skin care or...

Scott: Yeah, a little surgery centers.

Pat: centers all over the place. So, when you went to her, was the discussion that she wanted to save more, was it taxes? Did you consider a defined benefit pension plan, or was that too much?

Brian J.: So, here's how these conversations start, right? You asked about, you know, what is it like in real-world financial planning? Most people don't know the questions that they should be asking. They just know that they have a bunch of stuff happening and they're probably missing opportunities because they haven't taken the time to learn about them. So, yes, we absolutely looked at all of those different options to find benefit pension plan, sticking with a simple SEP IRA maybe if she wanted to keep it super simple. But in her case, she wasn't gonna be working that much longer. And they also have some other things, right? It's not all about how can I stuff a bunch of money in my 401(k)? They also had investment properties and kids getting through college, so they needed some cash flow now. So, that ruled out the defined benefit plan. But for them, the solo(k) was a great compromise.

Scott: And just define benefit plan. Here's how it can work really well for particularly someone who's nearing retirement with no employees. Because you can say, you know, "What if I had a pension that promised me $30,000 a year in retirement?" And you're 55 years of age. Well, you just run the numbers. How much do I need to set aside in this retirement plan to fund $30,000? It might be 150 grand a year. Which, if it's all your income, it's all your income. It enables you to shove boatloads into retirement plans for the right circumstances.

Pat: It really does.

Scott: Yeah, it's may...

Brian J.: Yeah. It's a time value calculation, right? Exactly. A present value, what can I put in now to create a pension for myself who's going to retire in three, four, five years, which if you've got the cash flow to support it...

Scott: If you have the cash.

Brian J.: ...and you don't have a bunch of employees to worry about, then it can work great.

Scott: That's two big Fs.

Brian J.: In her case, lots of other obligations.

Scott: Got it. And so, for the rest of the listeners, if you're self-employed, late in your career, looking to really stock away some money quickly in your income, you have a lot of options, the defined benefit pension plan, it's a little bit more expensive administratively, but I've seen it work beautifully for the [inaudible 00:39:12.702].

Brian J.: Yeah. You basically need an actuary in the mix to make sure you're doing the calculations right. This is not something you're gonna do on turbo tax on your own. This is why all the financial people have careers

Scott: We have a division that specializes in that...

Pat: That's right.

Scott: ...out of our Phoenix office, Scottsdale office.

Brian J.: That's why we exist, don't forget.

Pat: So, and then, how much was she able to put away?

Brian J.: In her case, so she ended up going with the individual(k) because that allowed her to accomplish her other goals. They had nothing to do with any of this. So, in her case, it's up to $70,000 depending on how much she makes. So, another concern she had was she wanted to slow down a little bit. She can control the throttle on her career, and she's hit a point where she wants to be backing off a little bit. So, that will limit that $70,000 if she wants to, but that's now her choice. But she's got a much higher ceiling than she did before when she only had a SEP IRA.

Scott: So it's essentially any work that she's doing outside of the hospital system is going 100% to her retirement.

Brian J.: Exactly. If that's the way she wants to run it. She can change that year to year, but it also have to be coordinated with her hospital's benefit plans too. You can have 10 jobs and max out all the 401(K)s, the IRAs code under that that a while ago.

Scott: Yeah, so whatever she contributes in her employer, excluding the match, whatever employer matches... Yeah, I get it. Perfect. Tell us about another client's situation here.

Brian J.: Sure. So, moving on, the other one I had some fun with here was, this is another case, a little younger couple, both professional, decent income, making about $350,000 between the two of them.

Scott: I would say that's decent income, Brian. I don't know.

Brian J.: That's very decent income. They're doing quite well. That brings with it questions, right? So it answers a lot of questions, but it brings a whole set of new ones, which is we could be doing other things. What are the things we should be doing? I don't know. We should go talk to somebody. And that's how they came to me. They were at a point where the kids were getting bigger and the house was getting smaller, seemingly. And they were starting to think about, "Well, maybe we're bored of this neighborhood. Maybe we need to go buy a bigger house just to kind of change things up a little bit." But they knew that was going to have a cost to it.

So we ran a financial plan to say, "Look, yeah, you can afford this. This is not a question of can you, it's a question of should you, meaning what sacrifices will you have to make to get there? Because it's got to come from somewhere." So, we basically said, "Your jobs are going to stay the same, but you have a bigger expense monthly. Where will that come from?" So, we had to reduce what they were putting away into their 401(k)s and 529s to account for a larger mortgage payment. And we ran the numbers that way.

And in the end, they decided, "You know what? A bigger house will make us happier in the short run, but it won't be that long, six, seven years before the kids are all up and out of the house anyway. And now, we have a great, big, gigantic house with too many bedrooms." So, what their thought was, after doing all of that, the decision was, "Let's continue to focus on the savings. We'll just live with the house now. It's not that bad...

Scott: And that they should.

Brian J.: ...then we'll focus on our retirement home when the kids are gone."

Scott: It's because they had trouble seeing what the cost of the bigger house is going to be, right?

Brian J.: Exactly.

Scott: And when you sat with them and ran the numbers and said, "Here's how many more years you're going to need to work."

Pat: I imagine that was one of the...

Scott: "Here's the sacrifice you will need to make in order to buy this bigger house."

Pat: Because if you reduce your savings for retirement, here's what this means for your retirement.

Scott: I got to admit this, I grew up in a family with five kids. And I was people like, "I need a bigger house." And I'm like, "Ah, I don't think that's a need." Because the house I grew up with...

Brian J.: In this particular case, it would have set up arguments in the future because it wouldn't have mattered eventually, and they would have started talking about, we shouldn't have bought this house five years ago. We should have done something different because now we have a big house that we have to sell, and maybe or maybe not, the market is conducive to selling that much.

Scott: And, you know, they're making $350,000 and they're probably thinking this is what people who make $350,000 are supposed to do.

Brian J.: Yeah, well, they see it, they see people. Their friends are moving to different neighborhoods.

Scott: Right, I get it.

Brian J.: Everybody's bored in their current home. I need something shiny to look at.

Pat: Yeah. And after several months, it feels the same at the previous home.

Scott: Yeah, that's because they moved with the house. But the point being is, it's really important that you can do what-if scenarios in financial planning, where you could actually say, this is what will happen if you make this move. This is what will happen if you stay where you're at. Oh, and by the way, you did them a large favor, quite frankly, by getting that off the plate. They knew the cost associated with that before actually making that.

Brian J.: That was actually my absolute favorite moment as a financial planner. My favorite moment is when I have talked a client through all the pros and cons, here's option A, B, and C, and here's the pros and cons of each one, and they understand it enough. Where in the case of a married couple, as soon as they stop looking at me and they look at each other, then I know I've done my job and they understand what their options are, and now, they're going to talk about which one they're going to choose. That is the absolute best feeling in the world.

Pat: Thank you.

Scott: Well, yeah, I totally agree with you, Brian. Thanks for taking a little time to be with us. It's interesting, Pat. We've really focused on education. We've been doing this radio program for a long time, right? Do a lot of webinars, seminars about education. And to Brian's point, it's, like, when people can understand...

Pat: Their situation.

Scott: ...their situation, then they're empowered to make wise choices for themselves.

Pat: Regardless of what their neighbors are doing.

Scott: That's right. What's going to make the most sense for them?

Pat: Comparison is the thief of joy.

Scott: I never heard that before. That's probably true. The sin of comparison. Always looking to your neighbor.

Pat: Yeah. Comparison is the thief of joy. I read that quote. I wish I remembered who said it.

Scott: Well, hey, it's been great being here with everyone this weekend. Glad you took the time to be part of "Allworth's Money Matters." If you like this program, please do us a favor, give us a review, or forward on to someone that you think could benefit from it. See you next week. This has been Scott Hanson of Pat McClain.

Automated Voice: 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 a state planning attorney to conduct your own due diligence.