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

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

Pat: I'm Pat McClain. Thanks for joining us.

Scott: That's right. We're coming to you the last weekend in February. Myself and my co-host here, we're both financial advisors, certified financial planner, charter financial consultant, spend our weekdays helping people like yourself, plan their financial future, have some financial independence in their lives, and we broadcast our program on the weekends, hopefully, to be your financial advisors on the air and appreciate the opportunity to be of service to you. And it appears that the market volatility has returned.

Pat: Yes. Well, I don't think it really ever...

Scott: Okay. Maybe not. I mean, the first couple weeks of January were so strong that...

Pat: I was thinking to myself this morning, this is the time that money is made. And it's hard to see that. It's hard to see that because you look at your account and you're like, "What's this Pat McClain talking about? There's no money being made." There will be money being made, and it will be made over time, but it will only be made if you make the right moves in the most painful times.

Scott: And if companies make the right moves, I mean, what's really interesting, Pat, is that these market cycles are healthy and necessary in a free market economy because in the robust times when things are going well, when money's cheap or almost free like it was when interest rates were zero, it's easy for companies to get kind of fat and happy. They're hitting their top-line numbers, their profits are up. They think...They don't think twice about how they're spending their money. A lot of excesses, which isn't the best use of capital, right?

Pat: And taking flyers on things that they probably, you know, that with a hope, when I say flyer, they're doing things in their business that they hope will propel their growth forward significantly. But they know there's risk in those maneuvers, those decisions. And I think about Meta, Facebook, and their VR, how they much they bet on that.

Scott: They changed the name of the company for crying out loud.

Pat: How much that the bet was on that? And that is a byproduct of...

Scott: Shouldn't say they changed the name of the company.

Pat: Mark Zuckerberg did. But that is a byproduct of just easy business at that point in time. If Mark Zuckerberg had to make the decision today to bet on Meta on this virtual reality, do you believe that he would be doing that today?

Scott: Probably not today.

Pat: Probably not today, because there's not excess in the companies, and this is a normal part of a business cycle.

Scott: Yeah. So, when companies, and you read about layoffs, that's bad if you're the one who got laid off. But if the company has more employees than is really necessary, maybe those people could be used doing something else productive for society.

Pat: Yes. And you and I've owned business, a number of business for how many years? Thirty plus years. Our own business goes through these business cycles. It happens to us as well.

Scott: Yeah, it is more businesses, of course, right? Things are going up, everything's up and to the right.

Pat: Yeah. And you're making a little bit like, "Okay, well, let's try this and see if it moves the ball, or let's try this."

Scott: Yeah. And then when revenue's slow, you're starting to think, "Well, where do we have waste in the organization?"

Pat: That's right.

Scott: Like, why are we doing this? This doesn't make any sense. It's costing us how much to do this? Why? Who benefits? Nobody? Like, what's the point? So, that's what's kind of healthy through these cycles. But to your point, Pat, from an individual investor, they need to remain invested, not on the sidelines.

Pat: They need to maintain equity position...

Scott: In the right areas.

Pat: In the right areas, or in fixed income positions, but in the right areas. So, going to cash is not the answer because the markets will rebound. They will, if history is any guide, which I believe...

Scott: It is, of some guide, yes.

Pat: It is, yes. That the markets will come back. They will come back higher than they have historically. And the longer...

Scott: They always have.

Pat: The longer this bear market goes on, the harder it is to stay invested. That is just the reality.

Scott: Particularly when interest rates on cash have come up to where they are. Because it wasn't very many long ago, it was, TINA, there is no alternative. And it was in describing stocks. We talked about it when the stock market was sky-high. TINA, like, of course, there are alternatives. It's foolish to think just because interest rates are low, you're gonna pile everything into stocks. Of course, now we're seeing the pullback on stocks. But it's also foolish to say, just because prices are down, I am now going to move things that, historically, have done very well and move those into a cash asset.

Pat: So, let's think about the inverse of why interest rates are low. Why did the Federal Reserve lower interest rates?

Scott: To spur on the... Well, a lot of it was during the lockdowns. You shut companies down, people are out of work. We worried.

Pat: What we're trying to do is encourage more capital investment, riskier behavior by not only companies, by making the interest rates zero or close to zero, but by individuals to push them into...

Scott: Correct.

Pat: ...riskier assets. What happens when...?

Scott: And this happened all the way back from the financial crisis, interest rates will remain low, extremely low since that time.

Pat: That's right. And so what happens when they raise interest rates? They're trying to slow down riskier behavior.

Scott: Both from corporate, boardrooms, as well as from individuals.

Pat: Yes. And the inverse. And it will go through a cycle again. Interest rates, you know, even now on a historical basis, are relatively low.

Scott: But if you're a longer-term investor, this stuff should be noise to you.

Pat: It's hard when you get that state.

Scott: And I'm gonna give you one extreme, Pat, this was years ago. I had some clients, their son-in-law passed away, tragically. And so they asked if I could meet with their daughter, who was a widow, single mom. And so I met with this woman and she clearly needed help with her finances. Her husband had a kind of traditional broker at one of the big named firms. I don't think the name exists anymore because they all merged in it with one, but... And her husband talked to his broker, his financial consultant, like once a week, like, to buy and sell stuff and all that, right? So, he dies. She's now trying to figure out, how do I manage that account plus the life insurance proceeds, how do I somehow take this, what is now a lump sum cash, and turn this into an income stream to replace my husband's salary. And so, obviously, things weren't working too well with that kind of traditional broker. So, she's in my office and we're having a conversation, and she says, "Yep, but the labor report's coming out on Friday with the jobs report." And I said, "What?" Well, with the jobs report coming out?"

Pat: You knew it was coming out, but you didn't... What does that matter to her?

Scott: I said, "What does that have to do with anything" Well, that's what I asked her, "What's that have to do with...?" Well, because based upon that, the market could do this, and I'm thinking, "Oh, this poor woman," right? She thinks in order to be successful, she needs to pay attention to what's going on in the jobs report on Friday. I mean, it's lunacy. You don't wanna put your head in the sand when things are going through cycles, but you don't wanna overstress every little report that comes out. The more transactions you do as a result, odds are the worst performance you're gonna have, not the better.

Pat: And if you've been a longtime listener of our program, you will know that in the good times, we are telling people to rebalance their portfolios.

Scott: Yeah, don't be too greedy.

Pat: Don't put too much risk in there. There will be rainy days, there will be sunny days, there will be sunny days again, and there will be rainy days again.

Scott: And when things were up, we also said, "Look, those excess returns, don't spend them." Right? If you've got a pile of cash to last the rest of your life, and you think, "Wow, I made 20% last year, that was much more than I was expecting. Why don't I go buy a new car? Why don't I take this vacation?" or whatever.

Pat: Because those excess returns are the ones that are gonna buoy the portfolio.

Scott: And years like we had last year.

Pat: Yes.

Scott: And maybe this year, who knows what this year's gonna finish up like. All right. Let's take some calls. We love having you as guests on our program. And to be part of our program, 833-99-WORTH is the contact number to join us. Or if you wanna be a guest on our program, just send us an email at questions@moneymatters.com. And we're gonna talk to, looks like a couple here in California. Vince and Samantha, welcome to Allworth's "Money Matters."

Vince: Hello, Scott and Pat, how are you guys doing? This is Vince and my wife Samantha.

Samantha: This is Samantha.

Pat: Hi.

Scott: Hello, Vince and Samantha, what could we do for you?

Pat: Are we the arbiters here to help with the discussion?

Vince: Yeah. Hey, yeah, we're a team, this is a team, so we make sure we understand the answers and stuff like that. So, that's how we roll.

Pat: Good.

Vince: Well, our question we have is that, well, the information is that we plan to retire in June of 2024, I'll be 55 and Samantha will be 52-and-a-half. And we work for the state of California, so we'll be having a pension. And our question is, when we...we have a 401, 457, we plan to roll it over to a traditional IRA when we retire, and then start doing conversions to Roth IRA. And we're trying to figure out for helpful retirement planning on when is the best time to do that with our current funds that we have.

Scott: And how much will your pensions be at retirement time?

Vince: Our pension will be about $140,000 a year.

Pat: Between the two of you?

Vince: And I'm sorry, go ahead.

Pat: Between the two of you?

Vince: Yes, it's total.

Pat: And you said you will be 55 in June of '24, or you are 55 now?

Samantha: No, yeah, he'll be 55 in June of 2024.

Pat: And Samantha, you'll be 52.

Scott: And what do you have in your retirement accounts, your 401(k), 457 ballpark?

Samantha: Between the two of us, we have about $2 million.

Scott: Well, you guys have been great savers.

Samantha: Yeah, [crosstalk 00:12:26] early.

Scott: And what do you have in as far as money outside of retirement accounts?

Samantha: We have our private investment about 575k. And then we have CDs and savings. And we just recently sold our house, that's about 700k. And then we have a Roth IRA between the two of us for 250k.

Scott: And the 700k doesn't include the proceeds from the house, or it does?

Samantha: That does include the proceeds.

Scott: And where are you living now?

Samantha: In Folsom.

Scott: Are you renting?

Samantha: Oh, we're renting. Yes, we're renting.

Vince: We're renting an apartment.

Pat: And do you plan on moving and buying a place?

Samantha: Not really sure at this point, we just decided just to downsize and move into an apartment just to see where we're gonna go from there, whether we continue renting or we purchase a house.

Scott: And what was the proceeds from the sale of the home?

Samantha: The proceeds of the sale?

Vince: From after the paying the agents and all that, it was $638,000.

Scott: Okay, thank you. And was the home paid for?

Samantha: Yes.

Scott: All right. You guys are good savers.

Pat: Yeah, no kidding.

Scott: And what's your income today?

Vince: Total income today is...for gross is about $250,000.

Scott: And you're doing the maximum into the retirement plans?

Vince: Currently, no. We dropped it down to about $2,000 a month each, so it'll be $4,000 total. We were trying, at the time, is build up some of our private investments to carry us through till 60 if we need to access IRAs.

Pat: Fifty nine and a half. Okay. So, you have laid out a host of financial planning opportunities that are just mind-boggling to me. My head is spinning and you've made a couple of minor mistakes, but you're great savers. First of all, you are asking me right now whether you should actually take tax-deferred income and make it taxable via conversion to a Roth IRA and grow it forward. At the same time, you're at a much higher income now than you were, but you lowered your 401(k) and 457. So, here's what I would do, I would actually look... And you both have the 401(k).

Scott: Let me pop up a little higher before. You both participate in Social Security or no?

Samantha: Yes.

Vince: Yes, we do.

Scott: Okay. So, you're both paying 7.65% of your pay is going into Social Security. So, when you factor that out, your pension income is not going to be too far off what's been coming through the checkbook now.

Pat: Correct. And because of the fact that you were putting money into the 401(k) or 457, I assume at the maximum level at one point in time?

Vince: Yeah, we were before, but then we cut that.

Pat: Yeah, I understand. I understand. But you didn't get $2 million in your 401(k) and 457 by making the minimum contribution.

Scott: That's right.

Pat: ...or even $2,000 a month. That's why I knew they answered it. Here's what I think I would do. I liked the fact you're asking this...

Scott: Do you guys have kids?

Samantha: Yes, we do.

Scott: Okay.

Pat: Okay. I would, the Roth IRA conversion is, yeah, probably you're gonna do that there. But let's take advantage between now and June of 2024, and maybe I would actually put the maximum into the 401(k)s and 457s on both sides. And that way, you've actually lowered your taxable income to about $150,000. So, let's talk about why we're okay doing that. And you're worried about this 59 1/2 thing, and you said emphatically we're going to move our 401(k)s and 457 into IRAs when you retire. That may absolutely be the worst decision. And let me tell you why, the 457 is a deferred compensation plan that actually has no restrictions at how you get it the money once you retire. By you moving it into an IRA, you have now put restrictions on it till age 59 years.

Scott: Now you might wanna take $1.8 million of the $2 million or whatever...

Pat: And move it.

Scott: ..and move it to an IRA, but you'll want keep some money in either, Vincent, if your 401(k) account, or Samantha, a 457. And so you can take withdrawals if wanted or needed.

Pat: And why the 401(k) for Vince and not for Samantha, Scott?

Scott: Well, 401(k), if you're 55 or older, when you leave service, you have access to it. You don't have to be 55, or 59 1/2.

Pat: So, what you're worried about this liquidity event, which is why you actually lowered your contributions to the 401(k) and 457 for the ages between the date you retire in age 59 1/2. And I'm telling you that, that fear should not exist. And so the Roth IRA, we're gonna worry about the Roth IRA when we get to the Roth IRA, but your world is kind of in turmoil right now. So, you've got plenty of money and you've got plenty of liquid money, by the way, money that you could get at now. So, you have $575,000 in, you call private investments, so I'm gonna call it a brokerage.

Vince: Yeah, index funds. Yeah, basically index funds.

Pat: Okay. A brokerage. And you have $700,000 in bank CDs. I don't know if, and I assume you're using a high-yield money market or something along those lines in order to get the most out of that.

Vince: Yes, we are.

Pat: So, you could put about a $100,000 between the two of you in the 401(k)s and 457s.

Scott: They may or may not wanna contribute that much. They might wanna use a Roth for a portion of it because the way our income tax structure works today, it's very progressive.

Pat: Scott, you didn't say they may or may not wanna put it into 457 or 401(k). You say...

Scott: They may wanna do 401(k) and Roth 401(k) or 457 and Roth 457.

Pat: That's exactly it.

Scott: Because taxable income, first of all, we can take it a standard deduction. It's almost 30 grand for a married couple. So, let's call it 30,000. And then the tax bracket or adjusted gross income moves from a 24% to a 32% bracket at $182,000 plus the...but we also get, roughly the $30,000. So, it's $210,000 of gross income that comes in that is taxed at 24% federal. When we go above that, it's taxed at 32%. So, in my mind, that's kind of the cutoff line that, in your situation, I'd be looking at doing a Roth. My personal preference, wouldn't want to try to go and convert if you're in a 32% bracket, or a 35% bracket, or a 37% bracket. And then you also have the Obamacare tax thrown on top of that at 2.9%.

Pat: And take it one step further, you don't know whether you're going to buy or rent, or do you know whether you're gonna continue to live in the state of California or you're going to move out?

Vince: Yes, that's true.

Samantha: No idea.

Vince: Not yet.

Pat: Okay. So, I get why you called about the Roth conversion at retirement. Let's just get the low-hanging fruit first, right? And if you said emphatically, oh yes, you're leaving the state, your kids have both left the state and you're moving wherever, we would say don't do it... I would do everything before tax on the 401(k) and 457, not any Roth, right?

Vince: Mm-hmm.

Pat: Because California, you're at... you're at 9% really quickly.

Scott: So, way before a $100,000.

Pat: So, the answer to your question that you called about, should we do a Roth conversion after we retire, maybe, probably, you'd have to actually map what your lifetime income looks like and then figure in required minimum distributions at age 75 for you. But today, today, you need to go back and change your contributions into that 401(k) and 457. And if I thought I was moving out of the state of California, to, let's say, Tennessee, Nevada...

Scott: Texas, Florida.

Pat: Even low-income tax, Arizona, right? I would put it all in pre-tax, all of it. And I'd do both the 401(k) and the 457s. And between... Because you both have access to both of those.

Vince: Okay. Yeah. And then the thing is, is that we understand like when you hit 60, that if you do Roth conversion from your traditional IRA, also the reason why we want to do traditional IRA, because we wanna have more control with the money as opposed to leaving it in with the state of California. Because the provider for that is very restrictive on [crosstalk 00:22:01]

Pat: Vince, Vince, Vince.

Scott: We understand. But if you stated that you reduced your contributions to your employer-provided retirement plans, your 401(k) and 457 because you wanted the flexibility unless we misheard you...

Vince: No, I was referring to, I'm sorry. Yeah, I agree with you on that part, but I was referring to why when we retire, we wanna roll it over to [crosstalk 00:22:27]

Scott: Look, I get that. I understand. But you're gonna have to weigh if you need any liquidity. If you think you might be buying a house that's gonna cost you more than $700,000, and you're gonna...can dig into the brokerage, too. There's plenty of money there. But you don't need to make up your decision about whether you're going to actually roll it into an IRA today, you don't need to make that decision until after you retire. And even then after you retire, it's not an all-or-nothing. But what we do...

Vince: [inaudible 00:23:04], yeah.

Scott: Yeah. It's not an all-or-nothing.

Pat: So, move 90% to an IRA...

Scott: Or just do some planning.

Pat: Or do some... Yeah.

Scott: Or just do some planning and figure out, this is where we think we're going to go. But if you were my brother, you'd be my little brother by the way, I would say this is easy. This is easy. We're gonna put the maximum we can into...remember both of you have both the 457 and 401(k) available to you, which is just an oddity. It's highly unusual. And you're gonna take advantage of that. And you're gonna put the max into both yours, and Samantha, you're gonna put the max in yours. And at that point in time, you're doing over a $100,000. You've lowered your income, you've actually...

Pat: And, Scott, I might disagree. Like, you might use a Roth for portion of that unless you're highly confident you're gonna leave the state of California. If you were 50% confident, Scott, would you take the risk?

Scott: Why put everything in pretax?

Pat: Okay. Because I think there's probably gonna be a time my life, I'm not gonna be a resident of California.

Vince: Eventually, we're gonna have to take that money out and we have Social Security and stuff. So that's why we did it.

Pat: And we understand it now. No, I get it.

Vince: [crosstalk 00:24:18]

Pat: No, no, no. I understand why you're asking the question. You didn't get this much money by making tons of bad mistakes. We're just kind of cleaning up the edges. And if you did nothing other than what you've been doing right now, you would be fine too.

Scott: You would be fine.

Pat: But if you were my little brother, I'm like, "Let's just do this" and to Scott's point, maybe 75% goes in pre-tax and 25% goes into the Roth.

Scott: I'd run the numbers. I'd do a pro forma tax return.

Pat: I wouldn't, Scott. Where do your kids live? Do they live in the state of California?

Samantha: Yes.

Pat: They do. Any grandkids yet?

Samantha: No.

Vince: No.

Pat: All right.

Vince: We do have family. We're taking care of our parents, so they're in the Sacramento area, too.

Pat: Okay. You're here for a while.

Vince: We're gonna be around here for a while.

Pat: All right. So, I would probably, I'd do the numbers, but my guess is it's gonna be about 75% pre and 25% in Roth. And I would do the maximum today. I wouldn't even think about it. And I would invest till I was 90. And when you get closer to retirement, go and pay for a financial plan, or go and pay someone for a financial plan.

Scott: Run the numbers.

Pat: And run the numbers, or go to your tax account and ask them to run the numbers. But I know where we're gonna land. I could run the numbers and I know exactly where we're gonna land.

Scott: Well, obviously, you guys are set financially for retirement, so I hope you're not having any concern about that.

Pat: The hard part's done. We're just cleaning up around the edges.

Vince: It's a good problem to have.

Pat: It is.

Vince: It's a good problem to have. Believe me.

Scott: I wouldn't call them problems. You've accumulated some assets and you picked a good career that gave you a nice pension and you're well set on retirement, so.

Pat: So appreciate the call.

Scott: Congrats for the both of you. We're taking a quick break. Stick around for more Allworth's "Money Matters."

Man: Can't get enough of Allworth's "Money Matters," visit allworthfinancial.com/radio to listen to the "Money Matters" podcast.

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

Pat: And Pat McClain. That was an interesting call. As is often the case, people will call in with one question. We never even answered his question, you know that. His question was, should I roll money from my IRA to my Roth IRA when I retire in June of 2024? And we never answered the question. The reason we didn't answer the question is that wasn't the right question. The right question is, am I taking advantage of everything that is in front of me today?

Scott: You know, it's interesting, though, like, if I did most of my plumbing repairs at my house, but suddenly there was something kind of major, it's gonna have a pretty big impact. I'd say I'm gonna hire a plumber and have a professional there, right, to do it. Even on taxes, same sort of thing, legal issues, same sort of thing. But there's a reluctance for people who've done a... For some people who've done a good job saving to reach out to financial advisors for professional advice. And I think, it's in large part because so many people in our industry are just salespeople in disguise. They don't really do the true planning. They're not certified financial planners or charter financial consultants, or there's a few other designations out there, but they don't do any true planning. And so they tend to avoid people like that. And I look at a previous caller, even if they... Let's assume for a moment, and maybe it's a big assumption, let's assume that they don't need any help when it comes to managing their investments. Okay, that's an assumption.

Pat: Well, I would question that bud.

Scott: That's the assumption. Clearly, they could benefit by working with someone, a good planner to deal with all those other issues that pop into play. Like, their brokerage account, index funds, what kind of funds should we have on there? What liquidity might be necessary from there? Do we look at it generating some income from there? And, of course, the IRA, what's that gonna be worth by the time they're 72 with the...

Pat: Isn't it 75 for them?

Scott: Seventy five now. Didn't it just change? It did just change, yeah. It'll be 75 for them. Those are the kind of... And then we can look at Roth. And then if you're thinking about staying in the California versus leaving, what's that cost to you?

Pat: Or New York to Florida, or...

Scott: Correct. The high-cost state to low cost.

Pat: Illinois to a low-cost state, right? I like your analogy about, like, if you're doing something, I will do minor plumbing repairs around the house, including replacing faucets, I mean, physically replacing the faucets. But the minute I run into something that is like, "Whoa, I can't watch a video on this or understand it," and then I might be doing more damage than I possibly realize.

Scott: Pat, I'll never forget, this was probably 20 years ago. I was referred to this couple, he had, it was roughly $20 million in stock from his employer, worked for the right company, things went well. Maybe it was $25 million. It was a lot of money. And as I'm talking to him, he does his own taxes. Like, "Who's your financial advisor?" "I don't have a financial advisor." And I said, "Well, you don't do your own plumbing, too, do you?" And his wife says, "Yes, he does his own, he does everything." And so we talked about some things. He chose not to hire us, chose not to hire a CP that we introduced to him. And he called me like four years later. He had left the state of California and moved to Nevada. And the state of California was coming after him for unpaid taxes because he had sold some stock options. And the accrual, while he lived in the state of California, that accrual was still payable due to California. Still, the case, by the way, all these years.

Pat: Because it was earned in California. It doesn't matter when you sold it to the date that they leave the state.

Scott: On those stock options. And so he called me and said something to the fact of, "Is there any sort of letter of engagement?" I'm like, "What?" Because he's looking for a get-out-of-jail-free card. He's looking for, "I went and got advice and no one told me this advice."

Pat: I'll just show to the IRS.

Scott: Yes. Because that's a clear argument. You still might owe the taxes, but you're gonna avoid the penalties. And I remember thinking, here's somebody at $25 million and, I don't know if he was too cheap or too arrogant to hire an advisor, whether it's me or somebody else.

Pat: Or he just thought the process was too easy and he could master it himself.

Scott: He didn't know the landmines that were out there. All right. Let's continue with calls. Again, if you wanna be part of the program, 833-99-WORTH is the number here, 833-99-WORTH. We're in Arizona talking with David. David, welcome to Allworth's "Money Matters."

David: Thank you very much. How are you?

Scott: We're great. What can we do for you? How can we possibly help?

David: My wife and I are retired, we're both 79 and I've been retired for about 4 years. We have a broker from a large company who's also a certified planner, financial planner. And we have currently three accounts with him. One is a traditional IRA, which I had rolled over my money from my company. And we have two Roth IRAs that are both over five years old. So, I'm a little concerned about, I need to try to... We don't have a lot, we have a total of about $190,000 in our traditional and about $38,000 each in our Roth IRAs. I have an RMD that's about $9,000 a year, this year. And our account balance is basically about $81...fixed type of income 81% and 19% growth. It used to be 60% growth and 40% fixed income until about a year and a half ago.

Scott: And what happened then?

David: So, my broker and I got together and we decided we ought to change that a bit in order to have more available income. He wasn't sure about what was gonna happen in the COVID years. So, we did fine in 2020 but, of course...or 2021. But in 2022, we didn't do well. We lost about 14%.

Scott: Okay. By the way, worst bond year in history. So, it was...

David: The worst bond year in history. Yeah. Right.

Scott: That's why. So don't expect that to happen again this year. The statistical chances of that occurring are almost zero.

David: Well, that's what everything I've read. My broker suggests we keep the current mix the same. And he's not excited about it, and I'd like to take half of the money and invest in short-term T-bills.

Scott: Are you living off these dollars?

David: I'm living off, yeah, some of them. Right.

Scott: Are you taking more than the required minimum distribution?

David: Yeah, I usually take about $10,000 more than the required distribution, which is $9,000 or $10,000.

Scott: So, you're taking $19,000 a year out of $260,000 portfolio. What other assets do you have?

David: Of course, we have Social Security account. Both of us, and my wife has a little retirement, about $900 a month plus Social Security.

Pat: And your house is paid?

David: The house still has about a $100,000 left on it.

Scott: What's the value of the home?

David: About $490,000.

Scott: And do you plan on downsizing or moving anytime soon?

David: Nope.

Scott: What's the interest rate on the mortgage?

David: 3.4%.

Scott: What's your family income then ballpark?

David: About $52,000 a year.

Scott: Including the $19,000 in distributions?

David: No. Add that in.

Pat: So, $71,000?

David: Roughly. Right.

Pat: You and your wife both in good health?

David: We see doctors a lot. My wife's in good health. I have some heart issues, but I feel great.

Pat: Do you have kids?

David: No, we don't.

Pat: No children.

David: No children.

Pat: Are you gonna say it? Are you gonna say it, Scott?

Scott: Reverse mortgage.

Pat: Reverse mortgage.

Scott: That's exactly what I was gonna say.

Pat: That's exactly what I was thinking. That's why I asked if you're gonna say it. Not as an opportune time as it was a couple years ago.

Scott: I mean, here's how I look at it. So, you're looking at do you do some tweaks to your portfolio, which is really what this is. And I'm looking at more like, you're 79, right? No one gets out of here alive, right? So, we don't know if you've got 15 years, 10 years, right?

Pat: Four days.

Together: We don't know.

David: Could be. Right.

Scott: Right. But you feel great. I just kinda look at like, look, if you think this is the last house you're gonna live in, right?

David: Yep. It is the last one. I think so.

Scott: And that's your hope. My father got a reverse mortgage before he passed away at about your age, I think, maybe he was a tad younger. And people probably screaming at the...

Pat: All that it does... In a situation like this, it's like all it would do is so you don't have to make that mortgage payment. And you could provide income. There's enough room in there that you could actually take income. You could actually lower your distributions from your IRA down to the required minimum distributions. Make more than that $10,000 up with the reverse mortgage. And the U.S. government-backed reverse mortgages.

David: But the amount you pay at the beginning of a reverse mortgage is huge.

Scott: That's right. I'm not gonna dispute that. That is right.

Pat: It's more expensive than a traditional mortgage.

Scott: But there is no question.

Pat: You don't have to make payments. And as long as...

Scott: If you told me that your objective is to die with as much money as possible, then we would not recommend that. One of the reasons we asked if you have children was to see if there was...

Pat: We wanna make sure that if you pass your wife's taken care of, clearly, obviously, right?

David: Yes.

Scott: But if you both passed away today, where would that money go? The equity in your home and your IRAs, where would it end up?

David: So, we have a will and we distribute it among my brothers and their kids.

Pat: Okay. I'm gonna tell you, it is the R word in our industry, but it is a tool for certain people that makes all the sense in the world. And you happen to be one of them.

Scott: Well, my father had a reverse mortgage. Incidentally, he did it without even talking to me, which I find funny because I am a financial advisor, but I guess I'm still his little boy. I guess like, "What does Scott know?"

Pat: Little Scotty.

Scott: He only manages $15 billion. He can't even find his way home. But I had encouraged him before, like, why not have some more financial freedom in your life at this stage? I mean, you're constricting your lifestyle because of money, I assume.

David: No, we lived our lifestyle when we were young and really physical in good shape and went all over the world and we've done everything. So, we're content about that.

Scott: Well, go ahead. You can get a reverse mortgage at any point in time you want. But the way your portfolio is managed is fine. If you want to go and buy, you know, some short-term treasuries, you may own a bunch of short-term treasuries in your IRA already. And they might just be under a different name other than short-term treasuries. But that isn't the big question. The big question is, look, I mean, if you were my dad, I wouldn't get rid of any of the growth. I wouldn't take that 90% out of IRA. In fact, I would actually probably have a tendency to wanna go the other direction at this point in time to move it to 30% equities and 70%.

Pat: In this situation, you might want 7 years of income not tied to the stock market, 20,000 times 7.

Scott: Roughly.

Pat: And ballpark because you get interest and stuff.

Scott: So, yeah, if you wanna do that. But I would encourage you to get a reverse mortgage.

Pat: Unless you truly have no need for additional cash.

Scott: Or you wouldn't spend it.

Pat: If you're not gonna spend it, then absolutely don't know.

Scott: What's your monthly payment on the mortgage?

David: Eight hundred and some dollars a month.

Scott: There you go. Well, that's the extra $10,000 you're taking out of that IRA every year.

David: Yeah, pretty much. That's right.

Scott: All we're talking about is...

Pat: You don't have to make that decision today, honestly, right? Food for thought for you.

Scott: All we're talking about is just using liquidity from an asset other than your IRA. That's all the reverse... And you're right, it is expensive. It is expensive.

David: How about taking dividends instead of reinvesting them, taking the dividends and using them as a...

Scott: It's not gonna make any...

David: ...put them in T bills and then use them as a source of money in short-term.

Pat: It's not gonna make any difference.

David: Okay.

Scott: Let me ask you a question. So, assuming that you outlive your brothers, and this goes to your nieces and nephews, do you think they'd worry about how much something cost if they got the money?

Pat: Sorry to laugh.

Scott: Some will. Some will.

David: Yeah, they probably... It would be a drop in the bucket to them anyway, they're all doing well, so I don't care.

Scott: There we go. All right, think about it. Think about it. But what you're doing now, you're fine. You're worried about something as you should be, you're fine. Buy the treasuries if you want. It's not gonna make much difference. But I would...

Pat: Well, short-term treasuries are gonna have about the same yield as the fixed-income portfolio today.

Scott: That's not gonna make any difference. It's gonna make you feel a little bit differently, but it won't make any difference in the long run, so. Appreciate the call.

Pat: Yeah, thanks, David. And just, look, in full disclosure, and if you've been a long-time listener, you've heard this before, but if not, you haven't. Years ago, 20 years ago I had a negative impression of reverse mortgages. Like, why would someone do a reverse mortgage? They're expensive. Same kind of thought...

Scott: A 100%. And we voiced it here on this program.

Pat: We did. We did on this program why they were bad. Then we started to educate ourselves more on them. And the more we looked at them, we thought this is a phenomenal tool for those at retirement time that are running out of other options for income, or want to stay in their same home, or can't quite afford the house they wanna buy, or they just want some additional liquidity.

Scott: Or they wanted to spend everything and not worry about what went downstream.

Pat: There are people like that. And so the more we start looking at, the more we were intrigued by this product, not for our client base, primarily, but for people who didn't have a lot of other options. For whatever reason, they got to retirement, didn't have a lot of other options. And we were so intrigued that we created a separate company, Liberty Reverse Mortgage. We staffed it with people and grew that to a couple 100 employees. And Genworth Financial bought it from us before the financial crisis.

Scott: When did we sell it? In '08?

Pat: '07, we were the third largest in the nation at the time. And the reason I'm saying this is here's how I feel about these things, right? So, our motto there was changing lives. And the stories we would hear from people, there was one of the earlier first reverse mortgages, one of our employees, his mother-in-law came to him. She was 84 and said, "Hey, Steve, can you tell me how these reverse mortgages work?" And so the more he started having conversation with her, what they found out was that his mother-in-law had ran up a bunch of credit card debt, had like $40,000 in credit card debt. She was using credit cards to supplement her income. She didn't quite have enough income. And she got to the point where she couldn't get any more credit. She was literally rationing her food because she did not wanna be a burden on her children. She was a widow. She had been in the same house for 30 or 40 years, whatever it was, just the last thing she wanted to do was leave her house, her community, the local grocery store, etc. And so she got a reverse mortgage. And all that meant was that she now had some liquidity. And so sometimes I tell people, look, if I were on my deathbed today and someone asked me to reflect on my career, yeah, I'm proud of what we've built at Allworth. We've got great, but I think what I would feel the best about is the impact we had with that reverse mortgage company and lifting the awareness in the industry.

Scott: And this isn't so that people could get at money to actually take the money and then invest it, which is often the case...

Pat: No, no, no.

Scott: ...in the reverse mortgage industry. When we started the company, you couldn't get, in most circumstances, clients that were further away from each other. We're in wealth management.

Pat: That's right. That's right.

Scott: We're used to dealing with people with money. Reverse mortgages was a 100% [crosstalk 00:45:02]

Pat: And sometimes people had very little.

Scott: Very, very little.

Pat: Like, the case, I just meant. She had nothing.

Scott: I remember having friends tell me, you're cheating old people. And I thought, "You're ignorant. You're just ignorant."

Pat: And when you do a reverse mortgage, we're not gonna get into the deals. When you do a reverse mortgage, you're not giving up control of the house, the equity is still there.

Scott: We don't sell reverse mortgages today. Look, if you're...

Pat: We're just trying to sell the last caller.

Scott: I really was, wasn't I?

Pat: Yeah. Well, we don't personally sell them. Our company doesn't sell them.

Scott: I really was. I think that would be the best thing for us.

Pat: Look, don't give up on those tools. And if you have a family member that where money's really tight, that could be an opportunity. And the equity that's in the house when they pass away, that equity still goes to the heirs, so. Let's continue on here in Montana with Kathy. Hi, Kathy. You're with Allworth's "Money Matters."

Kathy: Hi, thank you for taking my call.

Pat: Yeah. Glad you joined us.

Kathy: Longtime listener, love your show. Love the banter between the two of you. And at times when you get off subject, I find myself cracking up out loud.

Pat: Oh, I'm sorry about that.

Scott: Thank you Kathy.

Pat: And you're in Montana. Where in Montana?

Kathy: It's called the Bitterroot Valley. We're about an hour south of Missoula, where the university is.

Pat: Yes.

Scott: Cool.

Pat: Yes, I... In fact, I was there last summer. Beautiful. It's close to where they filmed "Yellowstone." But I was talking to a friend there that lives in Missoula, yesterday and she said it was relatively cold.

Kathy: Yes. The Canadians have reminded us that it's still wintertime. Yeah. I woke up this morning about 6:30, and it was negative 5 with a light wind at negative 16.

Pat: Yes. Yes, yes. And are you a transplant to Montana?

Kathy: Yep. Retired from Sacramento.

Pat: That's so funny.

Kathy: Yes. Living the dream. Living the dream.

Pat: Oh, beautiful. What can we do for you? How can we help?

Kathy: I wanna know what are the pros and cons of having an executor. My husband and I have an estate and will in place, and my brother is currently the executor on our estate. So, what are the pros and cons of having a family member, whether it's a sibling or a child versus a third party to handle your estate upon your passing?

Pat: And how many children do you have?

Kathy: We each have... Well, it's two marriages. So, combining, so I have two and he has one.

Pat: And did the kids ever live together?

Kathy: No.

P; Okay. And how old were... So the kids aren't like all together. They probably know each other, but they're not like siblings. Correct?

Kathy: Correct. But they are friends, and yeah, we do do things together. They're all in their late 30s, early 40s.

Pat: Okay.

Scott: Would one of your children be proficient enough to handle the job?

Kathy: Oh, yes, yes. But right now I have my brother doing it. He's a few years younger than I am. And so it's like, you know... I mean, obviously, our goal... Our mother is still alive and she's 85. So, our goal is, you know, we'll live into our 80s or 90s.

Pat: Okay. And you can always change your estate plan as time goes on, right?

Kathy: Exactly.

Pat: How much money is outside of the IRAs including the value of the home?

Kathy: I'm gonna say our total net worth is upwards of $3 million. I'm gonna say the IRA, there's probably about 300 in a traditional IRA.

Scott: Okay. So, $2.7 million. And the reason I ask about that, that moves by beneficiary, so it's not probated.

Kathy: Correct.

Pat: And it doesn't matter what the executive or the will says.

Kathy: Correct.

Scott: And you could actually do TODs on the rest, too, which is transfer on death.

Kathy: Of the...

Scott: Any brokerage accounts?

Kathy: Oh, yeah. Yes.

Pat: And a home.

Scott: Yeah, and the home.

Kathy: Because right now, it's basically set up to...the estate is divided by three.

Scott: Look, whoever's the executor or trustee, they have a fiduciary responsibility to act in the beneficiary's best interest, a legal obligation. And I'll share personal experience. Last Christmas in 2021, we sat my four children down, my wife and I, and we had a list of our assets and we explained how the trust was. So, I have four children, three boys and a girl, and two of them are in the business world. One is still in college. And my daughter is a teacher, soon to be a law school student. But we explained how the trust was constructed and what would happen with the money. And then said, "Okay, we have chosen as the executor of the estate these two children, what are your thoughts?" And the other two naturally said, "Well, why can't we do it?" And we said, "Well, explain, your brothers have a fiduciary responsibility. It's more of an administrative task than anything. And this is why we chose them because they have a background in..."

Pat: Degree in business.

Scott: In business. And the two were offended. And so I changed it, and now all four of them.

Pat: You're kidding.

Scott: And it's not gonna matter. It will not matter...

Pat: It's not gonna matter.

Scott: ...unless they get tied up in some sort of a...

Pat: See, I mean, you could hire an independent, but...

Scott: I wouldn't.

Pat: ...the fees are a lot.

Scott: I wouldn't. So, either three of your kids, one of the kids or your brother, it's all fine. You don't need to hire a... The only time you really want an outside trustee is if there's great animus in the relationship between the children or...

Pat: Or if there's a reason you didn't want the assets to go to the person right away, you'd want a trustee involved.

Scott: Or if you had a special needs beneficiary that you wanted to be managed into either perpetuity or long period of time. And even then you might decide someone inside the family, so.

Kathy: Right. And I understand all. I was the executor of my mother-in-law's estate. And, yeah, there is responsibility obviously in doing everything in a timely fashion.

Pat: I trust my family more than some person I don't know. That's [crosstalk 00:51:43]

Scott: I would.

Pat: Some of it becomes very personal, too.

Kathy: Right, exactly.

Pat: As you know.

Kathy: It's like, I have a five-page document written up with all the instructions, and passwords, and combination for this and that. Everything that's for my brother.

Pat: Good for you.

Scott: But you wouldn't wanna give that to a firm.

Pat: That's right.

Kathy: ...and know who has that. Okay.

Pat: I'd leave your brother on for now and have the discussion with the kids and if they're all comfortable doing it together, let them do it together. So, I appreciate the call.

Scott: Yeah, thanks for joining us, Kathy. I hope that was somewhat helpful. Anyway, thanks so much for taking your time to be with us. We'll see you next week. This has been Scott Hanson and Pat McClain, Allworth's "Money Matters."

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