Tariffs and investing, 401(k) & 457 plans, smart rollover tax strategies, and insurance protection.
On this week’s Money Matters, Scott and Pat explore how tariffs and political shifts impact investing and the importance of having a long-term strategy. Then, they break down ERISA, 401(k), and 457 plans, and talk about when it makes sense to roll over your money into an IRA. Plus, they discuss advanced financial planning strategies, including balancing retirement savings with other long-term goals, and making sure you have the right insurance to protect your wealth.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McLean would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McLean, thanks for joining us.
Scott: Yep. What is today?
Pat: February the 3rd.
Scott: Monday, February the 3rd. The reason why we're giving you the date is because we're talking about financial stuff and by the time you listen to this on Saturday, some things will have changed by then. But there's just some truths that we're gonna learn that are timeless.
Pat: Well, look, as of this morning, I was wondering all weekend long, like, how the market's gonna open based on Canada's turnaround and saying, yes, we're gonna tariffs against you? But listen, good or bad, it's opened up conversations.
Scott: Yeah, look, and who knows where this is gonna go, right? I took a news fast this weekend.
Pat: Oh.
Scott: Because my wife says I'm spending too much time on my phone reading news. And then she says it puts me in a crappy mood or something.
Pat: Really?
Scott: And my daughter's like, "Don't become one of those, like, old guys sitting around watching Fox News." That's not gonna be me. So I took a news fast and then caught up on everything last night.
Pat: How was it? Do you feel...?
Scott: I was actually...
Pat: Do you feel cleansed?
Scott: That's the extent of my fasting, by the way. Complete sabbath from the news. That's it.
Pat: No food.
Scott: Yeah, sundown to sundown, no news. I think I might do it. I think I might try to put that into practice a little more. Because what's the difference?
Pat: Yeah, it doesn't really matter.
Scott: What are you gonna...It's not like anything that's gonna happen at that very moment is gonna impact my life.
Pat: Well, they could, but mostly you would hear about it from someone else.
Scott: I could break the news fast if like a meteor struck my house.
Pat: Yeah, but you'd probably hear...You don't probably have to read it. Someone would probably tell you if it was gonna affect your life.
Scott: But of course, the threat of the tariffs, the futures markets fell off over the weekend. The markets opened way down, then they recovered some and then...
Pat: Last I looked, they were down. The Dow was down 1. What does it...? Whatever.
Scott: Yeah, it doesn't...But I gotta tell you, it's a new...
Pat: And we'll see what turns out.
Scott: But the thing about...Because there are some of you listening that are thinking, oh my gosh, the markets are so expensive right now. Maybe it's time for me to pull out some, get out of the markets. I've got maybe...Things are gonna...Certainly, they're gonna go down because we've had two massive years. There's other views that have been sitting on the sidelines because you reduced your stock exposure or you got some lump sum from somewhere that you have not invested waiting for the markets to come back down. Regardless of where you are, if you own stocks, those are designed for long-term investments.
Pat: What does that mean, Scott?
Scott: Anything five-plus years. If you've got money that you're gonna be spending...
Pat: In five-plus years.
Scott: Yeah, if it's gonna be spent in less than five years, then...On a new car, it's money set aside for your home maintenance.
Pat: Distributions for your retirement.
Scott: Yeah, your income. You don't want that tied to the stock market because it's anyone's guess what it's gonna be worth.
Pat: That's right. That's right.
Scott: But if you go out five-plus years, you've got a high probability, extremely high probability, that the markets are gonna be higher five years from now than they are today. And the longer you go out, the greater the probability. There's never been a 15-year period, I believe it's a 15-year period, where stocks have not outperformed bonds. You go out long enough, they go up. This stuff that's going on right now is noise.
Pat: It is. I agree.
Scott: And we don't know what the outcome will be. Maybe this trade war is gonna be nasty. Maybe the markets are gonna go down horrible. Maybe everyone's gonna hate Trump in two months.
Pat: Scott, I just think of a friend of the family called me right when Trump was elected and said, "Hey, I'm thinking about getting back in the markets. What do you think?" And I said, "What do you mean back in the markets?" And this is a 61-year-old person.
Scott: Is it a close friend?
Pat: More so of my wife than myself. And she said...
Scott: Does your wife have a lot of close male friends?
Pat: No, this is a female. Does my wife have a lot of close male friends?
Scott: That sounds strange. A friend of mine, I was just assuming some male.
Pat: If my wife had a lot of close male friends, I probably wouldn't know about it, would I?
Scott: Maybe not.
Pat: So my answer is, I don't believe that my wife has a lot of close male friends.
Scott: Sorry.
Pat: Scott was drinking some water and almost lost it. So I said, "When did you get out of the market?" And he said, "Well, when Biden was elected." And I said, "Really?"
Scott: Oh my gosh.
Pat: And I said, "Why?" And she said...
Scott: Holy smokes.
Pat: "...I just hate Biden. I hated him." And I said, "Well, that really isn't a good reason to be out of the markets because the correlation historically..."
Scott: The stock market did pretty dang well when Biden was in office.
Pat: It did really well. It did pretty well. And so my point to her is, "You need a financial advisor. Not me. I'll refer you to someone in the firm. You're too close to your...well, no, you're too close to your investments emotionally. And you're too close to me to actually...to my wife to actually...I don't want to be your advisor, but you're too emotionally close to your investments. They're driven by your emotions." And you see the same...I was with some friends on Saturday night and they're all MAGA. I mean, like over the top.
Scott: Your neighborhood is...
Pat: Yes, a lot. I mean, they...
Scott: Pat lives in a small community in a relatively libertarian town to begin with.
Pat: That's right. That's right. And everyone there, there were four...
Scott: Not that MAGA is libertarian.
Pat: Oh, look, and God bless them. Wherever you want to go, right? Wherever you want to go. I'm not that far right or that far left personally, but I mean, they had all been to the inauguration. They were telling us about the balls and the whole...
Scott: That sounds like a nightmare.
Pat: Oh, I got...they invited me and I'm like, "Not a chance."
Scott: Gotta be so crowded and people everywhere. How do you get an Uber and all that stuff?
Pat: They don't. They walked.
Scott: In the freezing cold?
Pat: And it was freezing cold. But their point was they were so excited about the markets because Trump was in. And I just like, look, you can feel however you want, but statistically speaking...
Scott: Not gonna make it easy.
Pat: ...the correlation is not that high. The correlation is not that high. And I did think, we had a call a couple of weeks ago where a gentleman called and was worried about the tariffs and what happened after Smoot Hawley and the Jones Act, right?
Scott: That's right.
Pat: Right. And I was thinking this weekend, what if we really do these tariffs? Like, what if they are really massive?
Scott: That would not be good.
Pat: That would not be good. But it's not permanent.
Scott: That's right. It brings people to the table.
Pat: We need other countries' goods and services and they need our goods and services. That's the bottom line. So we're not gonna...
Scott: This could get nasty.
Pat: It could.
Scott: It could be nasty for months. We could have a pretty significant bear market in the stock market or this could be a short-term thing.
Pat: And it could just blow through.
Scott: Trump gets what he wants.
Pat: Well, Panama is now saying they're gonna decouple from China, right? And by the way, China is not the power it was five years ago because of their own economic problems.
Scott: Tremendous economic problems, which might be worse than we can actually see.
Pat: Yeah. It might be worse for everyone on a global scale because of their problems.
Scott: Economic problems. But they're not splashing cash around the globe like they were five years ago.
Pat: No.
Scott: It's the whole belt in the road thing.
Pat: Well, it's truly...I mean, Scott, so I was in Africa and we went into an airport. Did I tell this story?
Scott: Yeah, Africa story. I've wasted money too. But go ahead with yours first.
Pat: So we were...No, it wasn't Africa. I act like I'm a world traveler. We go on one big trip.
Scott: It was in South Sacramento.
Pat: It was.
Scott: We were close.
Pat: It was in Cambodia.
Scott: Oh, Mr. World Traveler.
Pat: Well, we go on one big trip. I wanted to see the Mekong Delta. Actually, the Vietnam War. Just...anyway.
Scott: And if you do one big trip a year, after many years, you've seen quite a bit of the world.
Pat: That's right. So we went into an airport in Cambodia that was...I called it the most optimistic airport in the world because it was massive. It was beautiful. And there were two planes there. It was no...And I asked someone, "Who built this?" And they said, "Well, Africa built it. They lent us the money."
Scott: Africa? China.
Pat: I'm sorry. Sorry. Sorry. "China built this. They lent us the money and then their contractors came in and built it and we're going to pay them back." And I thought, you're never going to pay them back.
Scott: I saw the same exact thing in Malawi. This massive stadium.
Pat: Where is Malawi?
Scott: Africa, middle of...
Pat: Okay, middle of Africa, all right.
Scott: Yeah, it's landlocked.
Pat: It's showing my geography ignorance.
Scott: And this beautiful stadium, like you'd see...like something we'd have here in the United States, like a huge stadium, all built by Chinese dollars, all built by Chinese labor...
Pat: For bullfighting.
Scott: And it had never been used. It was like 18 months.
Pat: Like, what are they going to have there? They don't have any money to build there. I mean, like...
Scott: They don't have a professional team? They probably have some sort of a soccer, football.
Pat: Probably, but not...How are they going to support?
Scott: The point being...
Pat: No one can pay $80 to go to see a game.
Scott: So the point being is...
Pat: What is the point?
Pat: ...that China's influence, global influence is waning. It's absolutely waning. And the threats that are made by this administration may or may not be real. May or may not be real. Right? The threats are real, but whether they fall through...but what it is doing is it's bringing people to the table.
Scott: That's the hope.
Pat: Well, it is.
Scott: Yeah, that's true.
Pat: I mean, it is. It is.
Scott: And either his negotiating tactics are going to work or they're not.
Pat: Or they're not.
Scott: Either way, we'll get past this.
Pat: This too shall pass.
Scott: I think what's interesting, when you mentioned that your friends are all excited about the markets because of Trump and your other friend had sold out because of Biden, that's not a very good long-term strategy, either one. Because just because somebody is in political power does not necessarily mean that the stock market...stock market is a leading indicator, not lagging.
Pat: Correct.
Scott: And by the way, many things that are driving stock prices don't take place for years in the future, or they don't take place at all.
Pat: Yes. Or the reality is that what set that particular stock in motion had nothing to do with that administration. Look at NVIDIA. Oh, and the whole...No, but look at how long that stock had been around before it actually rallied.
Scott: Oh, 20-some years, right? It's not a new company.
Pat: Yeah. Look at Intel, how well it did and didn't do anything for a period of time. And then look at what is it called, Deepsea? Whatever. It's not Deepsea. It shows you how interested you are. Me too. I read at the time the Chinese came overnight. Who knows the whole truth.
Scott: Yeah, whether there's truth or they're...
Pat: Whether they actually built it for $5 million or whatever the story or they stole it all from...or they sold to NVIDIA short and made up the story.
Scott: Whatever, right? Like, yes. It may be interesting news. Maybe it's fun to follow. Clearly, AI is going to have its implications on life. But from an investment standpoint, if you think somehow you're going to be smart enough to pick the winners and avoid the losers, good luck to you. I mean, there's a reason that so many funds have moved to indexed strategies as opposed to actively managed strategies. Because when you look at the studies, something like 90% of professional managers cannot outperform their own index. Years ago, I owned a mutual fund. I think that's was...I won't say the name because I don't want to bash them. This was a long, long time ago. It was a small cap...I think maybe it was a small cap international...global fund, something like that.
Pat: You couldn't get anything more esoteric than a small cap?
Scott: But you know what? I kept it for a long time. I didn't have much in it. But it was more for education for me and entertainment. Because their annual report would list their top 10 performers, all home runs, up 8,000%, whatever. And they also listed their bottom 10 performers, bankrupt, bankrupt, 2 cents a share, bankrupt, bankrupt. And I enjoyed it because the same amount of research and due diligence, the team of analysts and experts, all of them picked the top 10 and they picked the bottom 10.
Pat: That's right. That's actually pretty good. Right?
Scott: And so if you think you're going to be at your computer on Robinhood or on your phone on Robinhood and you're going to somehow outsmart the market, it's not going to do well for you.
Pat: That's right.
Scott: It's really not. Anyway, we should probably get some calls here because...Let's do this. Yeah. And we always enjoy taking our calls.
Pat: And if you want to join the show, 833-99-WORTH or questions@moneymatters.com.
Scott: Let's start off here with Lan. Lan, you're with Allworth's "Money Matters."
Lan: Oh, hi, Scott and Pat. Thank you for taking my call.
Scott: Yeah. Thanks for joining us.
Lan: So I have a couple of questions regarding the Employee Retirement Income Security Act. And I guess the acronym, how would you pronounce that?
Scott: ERISA?
Lan: E-R-I...ERISA?
Scott: ERISA.
Pat: ERISA.
Lan: ERISA. Okay. So my understanding is that some 401(k) and 457(b) plans are qualified at ERISA and some are not. So...
Pat: That's correct.
Lan: Is that right?
Pat: That is correct.
Lan: Okay. So if the plan is protected under ERISA, would you roll them out of the employer plan and into an IRA? And then my other question also is like, do you know if government employee plans have ERISA protection, government plans such as like the State of California and the County of Sacramento?
Pat: Yeah. So you have asked a really...
Scott: That's a good question.
Pat: ...really good question. And we will kind of break down the three different flavors, the differences between IRAs, 401(k)s and 457s. Right? Let's start with the 457.
Scott: The concept is this, right? So the tax law is set up in such a manner that you can say, "Hey, employer, don't send me all my pay. Take some of my pay and put it in a retirement account for me so it's there when I'm old." And the government encourages this because they don't want to have to take care...there's not enough money to take care of everyone at their old age if there's nothing saved. Right? So that's kind of the basic premise behind it. But there's quite a big difference between a 401(k) and a 457 because a 401(k) is the money is taken from your paycheck and it's put into a separate trust for your benefit.
Pat: So it sits in a trust. It isn't owned by the employer like a 457 is.
Scott: And a 457 is technically a salary deferral where you tell your employer, "Hey, don't pay me my full paycheck. Hold some back. You hold it back and pay it to me at some future date."
Pat: Which is why if you're employed by an organization, normally a state or county, that has both a 401(k) and a 457, because they are two different plans that sit under two different portions of the tax code, you could put the maximum into both. Right? So the 457 is for government employees. It doesn't exist for a private employer, a 457. They do have other tax deferral, salary deferral programs for typically highly-compensated people in private industry.
Scott: So then an IRA essentially where you take your own money, as long as you've got some wages, you can put it into a retirement account, it grows tax deferred.
Pat: So technically the...
Scott: And it's protected.
Pat: Yeah. The 457 is never your money until it's actually paid to you. So if you are putting money in...you know, let's say you work at a water district and you have a 457 and a 401(k) and that water district goes bankrupt, technically that 457 is actually an asset of that water district, and the 401(k) is not.
Scott: And you are just one of many creditors.
Pat: So if you had a waterfall of things that you would put money into, you'd put it in the 401(k) first in most circumstances. The difference is, again, there's no 59-and-a-half age for a 457. So you could take the money out.
Scott: As long as you're retired.
Pat: Or separated from service.
Scott: Thank you.
Pat: If you quit that water district at age 40, you could actually take that money out and there'd be no 10% penalties. You would pay tax on it.
Scott: Or roll into an IRA.
Pat: Or roll it into an IRA. So if you had a choice, you'd use the 401...all things considered, you'd use the 401(k) first until that was maximized, and then 457 second. Unless you knew that you were going to separate from service and you would want to get to those dollars for some reason, which is very, very rare. Does that make sense?
Lan: Yes, that makes sense. But my question is, would you roll them if they are protected under the ERISA? Would you roll those accounts out of the employee plan and put it in an IRA?
Scott: Okay. I clearly would roll a 457. Because I don't like the...You're calling from California, right?
Pat: Calling from California.
Lan: Yes, from California.
Scott: So the odds are California is not going to go bankrupt, but...
Pat: So the answer is you would absolutely roll the 457 into an IRA.
Scott: Particularly if you worked for a smaller municipality. You made it to the water district. I don't care. Maybe it's...What? Nobody knows. It's the weird things that can happen in life, right? Here's the difference between...
Pat: COVID lockdowns.
Scott: We don't know what the next weird thing is.
Pat: Here's the difference between an IRA and what we would call an ERISA plan. So the 401(k) is under ERISA. An IRA is open to creditors. They could put a claim against your IRA. But an ERISA plan is not.
Scott: But there was a Supreme Court ruling several years ago that said if you took money from an ERISA plan and moved it to an IRA, you had up to, I think it was a million dollars of protection.
Pat: Correct. That's 100% correct. So, you know, I just watched the...This is a little off topic, but I just watched the Netflix four-part series on O.J. Simpson trial.
Scott: Thanks for sharing. Is this a newer thing?
Pat: Brand new. It's fascinating. It's worth to watch.
Scott: I remember, Pat, we were in the lobby of our office with the TV monitor watching, waiting for the verdict to come out. The entire staff was out there. Our tiny little company back then.
Pat: And this is where it goes. The reason O.J. Simpson was able to actually spend money and live in retirement in Florida is because...
Scott: Before he was arrested.
Pat: Okay. He had a civil charge against him from the Goldman's and he lost. He lost the civil charge, right? Which means he owed them money. But his money was in a pension plan which was protected because of the ERISA rules. Had it been in an IRA, they could have gone after it. Right? And he flaunted that, by the way. I mean, in this documentary, they said he was living relatively large and letting them know, the Goldman's, that they were never going to get any money because it was protected under ERISA rules.
Scott: My guess is as soon as he got his pension checks, he spent it as quick as possible before they had a chance to...
Pat: So the difference between a 401(k)...
Scott: Lovely, lovely gentlemen.
Pat: ...and an ERISA, a 401(k) in an IRA is exactly that. An IRA may not have protection against creditors if there is a claim.
Scott: So if you plan on murdering somebody...Well, I mean, so for me, like, let's say I retired today from Allworth, a company, and I've got a 401(k) here. There's no question I would roll it into an IRA.
Pat: There's no question at all.
Scott: And I have enough umbrella insurance that if I have some strange lawsuit against me or a horrible thing happens, I've got umbrella insurance to protect me.
Pat: And I would roll my 457 into an IRA. So, Lan, are you separated from service?
Lan: Yes, I am retired and I have both 401(k) and 457. But the thing that's confusing me most is that they said not all 401(k) are qualified ERISA. For example, like an employee, a government employee plan. And I mean, I worked for the state, I retired from the state. And it's kind of confusing because the internet can give you a lot of information and sometimes it just isn't all tied together.
Pat: Your 457 is not an ERISA.
Scott: The biggest issue with the 457 is not an outside creditor. It's the employer suddenly having some...
Pat: It's an asset of the employers. That's the difference between a 401(k) and a 457. It does not sit in its own trust. It is technically owned by the employer and doesn't become yours until they pay it to you. For simplicity's sake, buy yourself a million or $2 million umbrella liability, which you should have anyway, or $10 million depending upon your net worth, or $20 million depending upon your net worth, and roll everything into an IRA. Are you over the age of 59-and-a-half?
Lan: No, I'm 58.
Pat: You're 58. Are you spending any money from the 401(k) or 457?
Lan: Not yet.
Pat: Do you plan to prior to age 59-and-a-half?
Lan: Probably not.
Pat: Then roll it all into an IRA.
Lan: Okay.
Pat: It just gives you a lot more flexibility. And it's easier to manage. It's all in one place. The difference between some people say, well, do you like Schwab or do you like Fidelity, or do you like E*TRADE, or do you like Altruist, or do you like...?
Scott: You like Chevron, you like BP, or you like Shell.
Pat: Yeah, they're all very, very similar and you could get the same products on each one of them. The idea that you actually take and consolidate all of these assets in pre-tax IRAs makes it so much easier to manage.
Scott: And you can have just as much diversification.
Pat: Hundred percent.
Scott: And greater flexibility in your investment options.
Pat: A hundred percent. So if you don't plan on spending any money out of these plans and you're under the age of 59-and-a-half, roll them in there. Now, if you plan on spending some of this money prior to age 59-and-a-half, then you may want to leave some money in the 401(k), as long as you separated from service after age 55. Because if you separate from service in the year in which you turn age 55, there are no penalties from taking distributions from a 401(k). The 59-and-a-half rule only applies to IRAs. It doesn't apply to 401(k)s as long as you're 55 or older in the year in which you separated. So if this sounds a little bit confusing...
Scott: It is.
Pat: ...it is. It is absolutely. So you go on the internet and you're looking at all this stuff...
Scott: So the Department of Labor the last number of years have been trying to get more power over IRAs. And I think they've been unsuccessful thus far. The last decade, they've been trying to regulate IRAs.
Pat: So you go on the internet and you're trying to research the difference between the two. The difference is one's an asset of the employer, the other isn't. The difference between an IRA and a 401(k) is one is open to creditors and the other is not. That's the basics. But I got to tell you 95-plus percent of the time when we meet with someone who's not going to take money out of a 401(k) or 457 prior to age 59-and-a-half, and they've separated from service after age 55, or they're 59-and-a-half-plus, we roll it into an IRA just for simplicity sake.
Lan: Okay. Okay, thank you.
Pat: The end of the day, people really only need to own about four accounts, a Roth IRA, an IRA, a brokerage account, and a cash management account.
Scott: And then if you're married, a spouse might will have this also. And if you inherited some money, you might end up with 10 accounts.
Pat: You might end up with 10 accounts. But you want to get it to the fewest number of accounts as possible just for ease management.
Lan: Okay. All right. Sounds good.
Pat: All right. Thanks, Lan.
Scott: Thanks, Lan.
Lan: Thank you.
Scott: Pat, there are definitely times when we recommend people not to roll. Here's a prime example. Somebody's 57 years old, planning on work another 5 years, they lose their job. Like, how many times have we seen that, right?
Pat: Often.
Scott: It's, I mean, very common.
Pat: In that situation...
Scott: Like, you might want to keep your 401(k) intact or at least some portion of it. In the event it takes you longer to get a job than you thought it would.
Pat: Because after age 55, as long as you've separated from service and prior to age 59-and-a-half, you could get the money without penalties.
Scott: Yes. So if you've got some uncertainty on your income between those years, or maybe you've retired at 57 and you might choose to pull some money out of that 401(k) before you're age 59-and-a-half, which you can do.
Pat: Yes.
Scott: You can also set up what's called a 72T distribution where, essentially at any age, if you're 48 and you've got so much money saved or you're one of those FIRE people...I don't hear much about that. What's...financial independence retire early. Live like a pauper. Save everything so you can quit working as young as possible.
Pat: Sounds miserable.
Scott: It does sound quite self-focused, doesn't it? Instead of, how can I contribute to society? Let me take what I can as quick as possible.
Pat: And then just lay around the house.
Scott: I guess.
Pat: Or the van.
Scott: But you can set up a series of payments and as long as it's designed to last you to your dying day, there's some formulas you got to follow, there's no tax penalty on it. So you can set it up. If you're 48, you have enough...you've got 10 million bucks in your 401(k) somehow because...you can set up a series of distributions. You probably have to roll it into an IRA in order to make it happen, but it's an alternative.
Pat: Yeah. Okay. Back to this O.J. series on Netflix. Scott, I'm telling you...I am telling you...So I said to...I was telling my friend about it. He goes, "Why are you watching this? You know everything." And I said, "No, I don't know everything." But what was most fascinating is the prosecuting attorneys and the defense attorneys were talking about their strategies going in to the trial and how those strategies changed throughout the trial.
Scott: One of the guys passed though. Who's the...?
Pat: Yes. One of the...
Scott: I forget his name.
Pat: Yes. But they didn't interview all of the defense and prosecuting...But it was interesting. And then what they felt the public view of the trial. I got to tell you, it was not a waste of time. I walked away from there thinking, holy smokes, how little we knew or I knew during the trial itself.
Scott: Did it change your opinion at all?
Pat: Hundred percent.
Scott: You're kidding me.
Pat: A hundred percent. Changed my opinion of the outcome 100%.
Scott: Would you like to disclose more? Because I find this quite fascinating.
Pat: I understand why the jury actually voted him not guilty. Hundred percent understand why the jury did.
Scott: Did you think he was not guilty after?
Pat: Not at all. I think he was, but...I think he was guilty, but I understand if I was on the jury, because of the evidence that was presented to me, I would have a hard time without a shadow of a doubt convicting him of the crime.
Scott: And do you think that was because the defense did such a great job? The hamstring and the prosecutors that...?
Pat: You mean the prosecutor...? Yes, that's exactly what I think. The defense did such a great job.
Scott: Yeah. You have enough money, hire a good enough defense, you can get out of anything.
Pat: The doubt that would be put into the mind of the jury because of the defense was...
Scott: And so you feel that if you were on the jury, you could not say without a shadow of a doubt that...
Pat: That is correct.
Scott: Interesting.
Pat: That is correct.
Scott: Well, now I've got something to watch. I'm excited.
Pat: I walked away from there thinking about it for a couple days saying, well, this is absolutely fascinating, right? This is absolutely fascinating. And if I'm asking myself honestly, would I have voted or would I have said he was not guilty? I think he was guilty, but I would have as a juror had to say he was not guilty.
Scott: Because you couldn't without a...
Pat: That's why he lost in the civil court, like, it was a slam dunk. Because it's a completely different measurement.
Scott: In civil, you don't need unanimous either, right? Nine out of 12 or whatever it is.
Pat: They didn't go too much into the civil court, but it goes back to...I don't know if it's funny, but because of ERISA law, he was able to...Had he rolled those monies into a [crosstalk 00:31:24.610]...
Scott: Oh, I know. I remember that at the time. He's going around, you see him golfing. How in the world is this guy in Florida golfing when he owes these people millions of dollars?
Pat: The whole thing was tragic, obviously. The whole thing.
Scott: And on protecting your assets, if you're a shady person, keep it in the 401(k)...
Pat: Keep it in the...
Scott: I mean, seriously, if you're kind of a shady person, you've got things lingering out there. Otherwise, move into an IRA and have umbrella insurance, which you just talked about.
Pat: Yeah, that's key.
Scott: It's pretty inexpensive. Odds are it'll never be used.
Pat: That's key.
Scott: And that, going back into history, it was Bill Clinton's umbrella policy that paid off Paula Jones.
Pat: I did not know that.
Scott: Yes. It was his umbrella insurance. Paid her off.
Pat: How much was it? How much...?
Scott: It was like 600 grand or 700 grand. You imagine that claim?
Pat: Although, years ago, I met an attorney who sued insurance companies on behalf of people that received sexually transmitted diseases.
Scott: Sued the insurance companies?
Pat: The person that gave them the STD, he would sue their insurance companies.
Scott: Yeah. Well, and so we'll go back to callers in a second.
Pat: Not a great...I didn't spend a lot of time talking to him. He explained to me what he did for a living.
Scott: Was he a friend?
Pat: He explained to me what...An acquaintance...I met him through someone else and he explained to me what he did and I said, "Well, that's awesome." We'll never talk again.
Scott: But like, most people aren't going to go kill their girlfriend and have to worry about the in-laws coming after them, right?
Pat: That's right.
Scott: But what could happen, driving down the road, get in a car accident, turns out it's your fault. A young, highly successful person gets killed. Huge lifetime value of future income stream, massive judgment against you.
Pat: That's why you need the liability insurance.
Scott: That's why you need the liability. Odds are it'll never be used, but in case there's something like that...And what happens...The first thing...We all see the billboards when you drive down the highway of all the...
Pat: How could you not? The attorneys?
Scott: Yeah. You can't...They're everywhere. They're all advertising and...
Pat: I like the Sweet James one. I looked it up.
Scott: You like the ad?
Pat: Well, no, I looked and I saw Sweet James and I'm like, I wonder if this guy...I've never heard of him before in the Sacramento area. So I looked him up. He's a national guy. He's just a great marketer.
Scott: But here's what happens. Let's say it's your spouse that gets killed. Your relatively young spouse has a phenomenal career, gets killed. You go to the personal injury...
Pat: You call Sweet James.
Scott: I don't know if Sweet James...They're going to do an asset search. First, they're going to see, is there any insurance? How much coverage is there in insurance? Is there a million dollars of liability on the car or do they have the absolute minimum that the state requires? Then what assets? They're going to do an asset search. Does this person have any money? If there's assets...
Pat: They will come after you.
Scott: Yes. They will come after you. So the more assets you have...
Pat: The bigger your liability and problems.
Scott: Yes. So not to pick on Sweet James. So Sweet James, I'm sure he's highly ethical, wouldn't do this. But it could be that it's a very frivolous claim and somebody looks and says, this guy's got $30 million. Let's just go after this guy. He's eventually going to pay up just to make this thing go away.
Pat: That's right. Oh, and by the way, I know nothing about Sweet James. Please, Sweet James...
Scott: He is an attorney. Don't say anything negative about him.
Pat: I know nothing about them. I just know that I see his ads fairly often.
Scott: This is nothing derogatory about Sweet James.
Pat: He's probably a great guy. The last thing I want to do is talk negative about Sweet James.
Scott: Of someone who spends their life suing people.
Pat: That's right.
Scott: Anyway, let's go back to the calls here. Let's talk with Jacob. Jacob, you're with Allworth's "Money Matters."
Jacob: Hi, Pat and Scott. I'm a lot younger than your average caller. I'm 22 and married. So...
Pat: What's taking you so long?
Jacob: Yeah, I'm hoping that you guys could impart some financial knowledge for the younger generation like me. So like, my wife and I, we started a 401(k).
Scott: How old were you...Just out of curiosity. It's funny because 50 years ago, this would have been normal. Today, what percentage of kids are married at 22?
Pat: I was married...
Jacob: Very low.
Pat: I was married at 23 and I had just turned 23. My wife was 22. We just celebrated our...
Scott: I was married at 25.
Pat: ...39th anniversary.
Jacob: We got married when we were 20. It was right before I turned 21.
Pat: Okay, you were 20 years of age. All right, so what's your question for us?
Jacob: So right now, we have, like, extra savings that we're...Like, we're trying to buy a house within two years and we also have extra savings and we're not sure if we should split our extra savings between, like, just into our 401(k) and Roth IRA for retirement or if we should try and invest it in some way towards purchasing a house given that it's so expensive to buy a house.
Pat: What's your family income?
Jacob: We make about 5 grand a month.
Pat: Between the two of you?
Jacob: Between the two of us, yes.
Pat: So $60K a year. How much money do you have saved?
Jacob: Seventy grand towards a house.
Pat: Wow.
Jacob: Like 10,000 for emergency fund.
Pat: So $80,000. How much do you have in your 401(k)s?
Jacob: She just started hers and then I have about $10,000.
Pat: And how much are you putting into the 401(k)s?
Jacob: We put in like...So she gets a 4% match. So she's putting in 4% to, like, take that 100% advantage. Then I put in around $200 a month.
Pat: And do you have a match?
Jacob: I do not have a match.
Scott: Okay. And how did you accumulate the 70 grand?
Jacob: Just saving throughout, like, high school, like from a young age, and then saving from having low expenses over the last few years.
Pat: Do you have term insurance on yourself and your spouse?
Jacob: No.
Pat: All right. So here's what I would do. I would...I like the fact that you're putting the money away for your wife in the 401(k) because she actually has a match. Rather than you...Because yours has no match, I would use the Roth IRA. And the reason I'd use the Roth IRA is you can pull that money out up to $10,000 purchase of a home. And so it gives you a little bit more flexibility and you don't need a tax deduction. I would buy some term insurance on each other, probably $300,000, $400,000, maybe $500,000 each on the outside.
Scott: And I think what's important about that...I'm assuming you don't have any kids yet?
Jacob: No, no kids yet.
Scott: But the plan is to have children at some point?
Jacob: Yeah. The plan is to have children after we hopefully buy a house.
Scott: I mean, the thing about getting insurance is you get it while you can be insured. No one knows what happens to our health, but if something happens and suddenly you can't get insurance or it's very expensive, then it becomes quite problematic.
Pat: And so I would use the Roth IRA. And where is that money invested in that $70,000 that you're saving for the house? Where do you have that parked right now?
Jacob: We have it in a high-yield savings.
Pat: I knew you did.
Jacob: So it's about 4.5%.
Pat: I knew you did. I think you're doing great.
Scott: Yeah, the question...Yeah. So I like the idea of Roth because you can pull those dollars out if you need them for the purchase of the home. And if you don't, then you can turn around and invest. I would have them conservatively invested in the Roth because you might use it for...And what's a house going to cost you?
Jacob: Well, we live in Sacramento area. We're in Rockland. So the median house is like...We're looking at like 400 grand to 500 grand.
Pat: You could be in the marketplace right now. You have enough for a down payment.
Jacob: I mean, yeah, I feel like we have enough for a down payment, but not enough for the monthly.
Scott: Making the monthly nut. Yeah. Yeah.
Pat: And you want to get 20% down so that you avoid PMI, payment mortgage insurance. And you're the perfect candidate for every state and federal program for first-time home buyers.
Scott: Yeah. Have you talked to a mortgage person?
Jacob: We've talked to a few mortgage people. My wife's in real estate, so she has a lot of...
Scott: All right. Then you guys know what you're doing.
Pat: Yep. But doing a great job.
Scott: By the way, you know what you're doing anyway.
Pat: Correct. Good job.
Jacob: Thank you.
Pat: Good job. Good job.
Jacob: Okay. So just kind of keep it going into 401(k) and then for me as a Roth.
Scott: That's correct.
Jacob: Don't open maybe a brokerage and put it into the [inaudible 00:40:31.791].
Pat: No.
Scott: I wouldn't invest these dollars at all.
Pat: Not at all. Not at all.
Scott: Because you want cash available. You find the right house at the right price, you want to be able to close as quick as possible. And the worst thing is let's say you put it in the markets in some way, and it just happens to be the markets are down and you're like, shoot, that 5 grand I put in is now worth $4,500.
Pat: I have an opinion though, Scott, that maybe I should or shouldn't share. You and your spouse should be actually investing as much in yourself as you possibly can. Either through your education or a trade.
Jacob: Yeah.
Scott: That's the key to wealth.
Jacob: Well, for me, I graduate in a year and I'm doing engineering.
Scott: Okay. Okay. Of course you are.
Pat: You know how many parents out there right now are saying, "I wish this kid was single?" You're like, "Where was my daughter when this guy got married?"
Scott: I'm going to send this interview to my son.
Pat: Yeah. So and your spouse as well as much as you guys can invest in either your education or your trade or both, the better off you'll be. And you know that.
Jacob: Yeah.
Pat: What type of engineering?
Jacob: Mechanical.
Pat: I will go into any building that you design.
Jacob: Yep. Probably more towards aerospace though.
Pat: Oh, perfect. I will fly in any plane that you're involved in the design of. Well, I appreciate it. Keep up the great work.
Jacob: All right. Thank you.
Scott: Of course everyone's like...My only concern with Jacob is like, make sure you have enough fun along the way because we've seen, Pat, where there are people that don't spend a dime...
Pat: But I'm sure...look, maybe this is fun for him.
Scott: That's a good point.
Pat: Right? Maybe this is fun for him. Right? Maybe it's important for him and that's...
Scott: Clearly important.
Pat: And that's very responsible.
Scott: Oh my gosh.
Pat: Oh, I wasn't like that at 22.
Scott: Yeah. Tomorrow I'm taking my daughter, senior in high school, on a college tour.
Pat: Are you? Where are you going?
Scott: I'm going to Southern California. It's a really interesting...We'll get back to callers. It's really interesting. I'm trying to figure out the right kind of school. Obviously, she's part of the equation.
Pat: You know, the school doesn't graduate. The child does.
Scott: Yeah, but it's interesting. I really want her to be somewhere where she can explore different ideas, have her own worldview, have her own religious views. But some schools, I don't want someone where they are protesting against Israel and they've got...it's like, I don't want something too far left, but not too far right. But I'm concerned if it's too far right, they're not going to let her have her own expression, her own ideas, and they're going to suppress certain thoughts. So it's really...
Pat: She's going to go online cult. Is that the answer?
Scott: I don't know, because I pulled up her grades this weekend. She's got a D in a class. I'm like, senior year, last semester.
Pat: Oh.
Scott: And I was like, hey...
Pat: Just try. Just come on.
Scott: I tell her, "Look, you can do what you...Like, you asked me, 'Can I do this on Thursday night?' Like, I don't care what you do as long as you live up...you maintain your responsibilities. But if you can't maintain your responsibilities, I'm going to have to restrict you. So now I've got to restrict her.
Pat: If you can't pay, don't play.
Scott: And I'm like, and I'm thinking, oh, please go to college.
Pat: Well, everyone has their own path, right?
Scott: You can't live at home forever.
Pat: Everyone has their own path.
Scott: Anyway, I don't know why I got on that topic, because that's what I've got tomorrow. I've been flying down to a couple of different colleges.
Pat: Sounds like a lot of fun.
Scott: She's been invited...She's applied to like 14 colleges, so...
Pat: Sounds like a lot of fun. Sounds great.
Scott: All right. We're in Michigan talking with Rick. Rick, you're with Allworth's "Money Matters."
Rick: Hey, how are you doing? I have a couple of questions here. I have quite a few questions. We are in a regional bank, which I don't know if that matters, but we have a lot of...
Pat: We're in? What do you mean you're in?
Rick: Well, we have money invested just in regional banks, smaller banks.
Pat: You have deposits there or you own shares in?
Rick: No, we have deposits.
Pat: Okay. Thank you. Thank you.
Rick: And we have a large deposit sum in this one bank and we just signed a two-year CD. I tried calling you last week and we couldn't get on. We had to make a decision because we were in that grace period, and you have to sign up or lose or whatever.
Pat: How big is the CD?
Rick: Almost $700,000.
Scott: And what's the interest rate?
Rick: Four or 4.1%.
Pat: And how's the title? Is it in a trust or is it just you? Is it you and your spouse?
Rick: My wife and I.
Pat: Do you own a trust?
Rick: No, we do not.
Pat: Do you have children?
Rick: Yes, grown children.
Pat: How many?
Rick: Four.
Pat: Okay. So if you and your spouse...I'm getting to an answer. If you and your spouse were to die, would the money in your estate go to your four grown children?
Rick: That's correct.
Pat: Okay. So look, if you had a trust, let's just talk about FDIC insurance.
Scott: Well, yeah, FDIC insurance.
Rick: That's my other problem.
Pat: This is where I'm going. So right now you have $500,000 in FDIC insurance.
Rick: Correct. But they told me that I also have $250,000 per beneficiary.
Pat: Not if it's in a trust. If it's not in a trust...
Scott: Are these transfer of death accounts?
Rick: I don't know what you mean by that.
Scott: Do they say POD on the title with the names of your four adult children?
Rick: I don't know. She's looking at it right.
Karen: It's both of our names.
Scott: Well, how...
Rick: [crosstalk 00:46:49.651]
Pat: Wait, Scott. Wait, wait, wait. So how is it titled?
Rick: Rick and Karen and then POD.
Scott: Payable on death. Yeah. So there's beneficiaries on the account.
Pat: Okay. That right?
Rick: Yeah. Yes, that's correct.
Scott: So continue on with FDIC coverage limits.
Pat: Okay. So here's how it works. FDIC limit is $250,000 for each individual times the number of beneficiaries not to exceed eight. So if I have a trust or, in this particular case, you mentioned POD, pay on death. It's you two times the number of beneficiaries not to exceed eight. If all four of your adult children are named on there, then you have coverage up to $2 million in FDIC insurance.
Rick: Okay. Okay. All right.
Pat: But in saying that, you should have a trust.
Scott: You got 700 grand just in this one CD and you've got other monies at other banks, you should have a trust. You're achieving the same objective, but you should still have a trust.
Rick: What good is a trust?
Pat: It's just the distribution of the assets is much cleaner at death.
Scott: And you've got other assets besides your CDs, I'm assuming. You probably have a house and other...
Rick: Yeah, we have a house. Yeah, we have quite a bit of assets. But we also have...my other question too is we have another, what do you want to say, $280,000 in another bank, $200,000 in another little bank, another $250,000 in another, $45,000 in another one. Is there something we should be doing with that?
Scott: There's easier ways to accomplish this.
Pat: But you do have FDIC, it's per institution.
Scott: But there are programs that banks have started...Is it CDARS, is that what it's called?
Pat: CDARS.
Scott: CDARS. So this is a loophole that the banks have driven a truck through, essentially. And because there's these limits, right, $250,000 per individual. So what happens with banks is bank A makes a deal with bank B and bank C and says, hey, if I get a large deposit, I'm going to send some of that deposit your way. And when you get a large deposit, you send that deposit our way. And that way we can make sure that our account holders have insurance up to a million, $2 million, $5 million, $15 million, $20 million. And it's called a CDARS program. And it goes by a couple different names and different institutions.
Pat: Allworth has something for cash management.
Scott: So when you go into the bank, say, "Do you have this program?" Just describe the program.
Pat: You can have it all in one place.
Scott: You can have it all in one place. And essentially what they're doing is they're brokering out the CDs in all these different places.
Rick: Okay. Is there a way...We weren't real comfortable signing a two-year...I mean, we just made a rash decision real fast into a two-year CD. Is there any way to get out of that without penalty?
Pat: I think it's just the interest up until now.
Scott: Yeah. I would call them, but I believe it's just the interest up...You're going to miss...Why did you end up with a...What was the hurry?
Rick: Well, it's a 10-day grace period.
Pat: No, no, no, no, no, no, no, no.
Scott: It's not like they take the money afterwards.
Pat: No, that's what they say. You could have just dropped it into a savings account.
Rick: Yeah, we could have.
Pat: And you should have.
Rick: We were just under pressure. We were under pressure. We were at the last day of the 10-day grace period. We got to do something. We got to do something. And we thought if we put it into savings, then we would just lose our interest because interest rates are going down. And so we were just thinking, okay, if we'd lock it up for two years at least. And then after we did that, we thought, oh, well, it's a 180-day period that you have to pay your interest for 180 days. That's 6 months, so we're going to lose $18,000.
Pat: No. No.
Rick: You want to call the bank for me?
Pat: What you just said to me...
Scott: I don't know how the bank's contract is. I have no idea.
Pat: You were rolling out of a regular time CD, correct?
Rick: Yeah, same thing, 13-month CD we were in.
Pat: Okay. So the 13-month CD is just like a 13-month bond. It comes due. They pay it. It sits there. You can move it all to the...and you accrue all that interest and it's paid. It could sit in the money market account or savings account and could sit there indefinitely if you wanted to.
Scott: You could find cash accounts that are going to pay 4.1% that are completely liquid and FDIC insured.
Pat: And you stated that interest rates are going to go down. I don't know. I don't know. I know I would not have bought a two-year CD. And if you were my brother...
Rick: See, you guys should have talked to me last Friday.
Pat: Well, dang it, Jacob, if we were here all the time...
Scott: His name's Rick.
Pat: Oh, I'm sorry. I'm sorry, Rick.
Scott: I don't know where Jacob came from.
Rick: Now we don't know what to do. I guess [crosstalk 00:52:04.845] let it sit there for six months and then pull it back out [inaudible 00:52:08.618].
Pat: Do you do any online banking at all?
Rick: No.
Scott: Do you have any investments outside of...besides CDs? Do you own any mutual funds or stocks or ETFs?
Rick: Yeah, we have stocks. Yeah, I have stocks.
Pat: And where do you have them? What brokerage firm?
Karen: JP Morgan.
Rick: JP Morgan.
Pat: They're not going to want to buy them.
Scott: You have a lot of different investments.
Pat: I feel like you're borrowing trouble.
Scott: You're making it harder than it really is.
Scott: Yeah. I mean, unless you have nothing else going on in life and you feel like driving around in these community banks.
Rick: Well, believe me, we're frustrated. Yeah. [crosstalk 00:52:48.129]
Scott: So ask them if you...
Rick: And the other thing that we're real concerned about too is the time in which we live. Now we're talking about digital currency and all this stuff. Are we going to lose all of our liquid cash that we have that's not in a stock or a property or a house? I mean, everything we own is paid for. I owe nothing.
Scott: That's right. Well, here's the thing. Nobody knows the future, right? If our whole system of our government collapses and everything, we have a new order, then you want to be young and have a lot of guns and ammo.
Rick: Okay. Thanks.
Scott: No, just the worst case scenario, right? So I seriously doubt we're going to see that, but there's no guarantee in life. If you were a retiree in Russia when the Soviet Union collapsed, things got pretty bad for you. Just reality, right? So right now you've got money in certificates and deposits that are backed by the U.S. government, the same agency that prints the dollars, makes the money, right? So as long as our system of government is in place, you're going to be fine. I don't know how...you can't get much more conservative than that. You can't be any more conservative. So you can't be any more conservative than that.
Rick: Is it better to invest in a bigger bank than a regional bank?
Pat: Well, it doesn't make any...
Scott: As long as you have the FDIC insurance.
Pat: It doesn't make any difference. Actually, I don't even know if the FDIC makes any difference anymore because when First Republic went out, they covered everyone.
Scott: I know. It's crazy.
Pat: There was no risk at all to anyone. They just said everyone's covered.
Scott: Unbelievable.
Pat: Right? It was unbelievable. But you're doing fine.
Scott: You're doing fine.
Pat: The two-year wouldn't have been my choice, but you didn't...
Rick: Why?
Pat: Because I would have bet shorter. I would have put it...
Scott: Well, my guess is you, Pat, because you've made your life...It doesn't have to be this complicated. You're not getting any additional benefit out of life for the complication that you're going through here.
Pat: Maybe he likes the people at the savings and loan. Maybe he likes the people.
Scott: Appreciate the call, Rick. You say you have an account at a wealth management firm of sorts. I don't know why you're not getting the advice from them. That's frankly...If that's not the kind of person that gives you advice, then maybe you should have somewhere where you're going to get the right kind of advice. It really seems a little odd to me. Anyway, we're out of time. It's been great being here with you. This has been Scott Hanson and Pat McLean. We come here every Saturday and just drop this on Saturday mornings.
Pat: And if you've liked the podcast, please rate and review.
Scott: And forward to a friend.
Pat: See you next week.
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McLean, thanks for joining us.
Scott: Yep. What is today?
Pat: February the 3rd.
Scott: Monday, February the 3rd. The reason why we're giving you the date is because we're talking about financial stuff and by the time you listen to this on Saturday, some things will have changed by then. But there's just some truths that we're gonna learn that are timeless.
Pat: Well, look, as of this morning, I was wondering all weekend long, like, how the market's gonna open based on Canada's turnaround and saying, yes, we're gonna tariffs against you? But listen, good or bad, it's opened up conversations.
Scott: Yeah, look, and who knows where this is gonna go, right? I took a news fast this weekend.
Pat: Oh.
Scott: Because my wife says I'm spending too much time on my phone reading news. And then she says it puts me in a crappy mood or something.
Pat: Really?
Scott: And my daughter's like, "Don't become one of those, like, old guys sitting around watching Fox News." That's not gonna be me. So I took a news fast and then caught up on everything last night.
Pat: How was it? Do you feel...?
Scott: I was actually...
Pat: Do you feel cleansed?
Scott: That's the extent of my fasting, by the way. Complete sabbath from the news. That's it.
Pat: No food.
Scott: Yeah, sundown to sundown, no news. I think I might do it. I think I might try to put that into practice a little more. Because what's the difference?
Pat: Yeah, it doesn't really matter.
Scott: What are you gonna...It's not like anything that's gonna happen at that very moment is gonna impact my life.
Pat: Well, they could, but mostly you would hear about it from someone else.
Scott: I could break the news fast if like a meteor struck my house.
Pat: Yeah, but you'd probably hear...You don't probably have to read it. Someone would probably tell you if it was gonna affect your life.
Scott: But of course, the threat of the tariffs, the futures markets fell off over the weekend. The markets opened way down, then they recovered some and then...
Pat: Last I looked, they were down. The Dow was down 1. What does it...? Whatever.
Scott: Yeah, it doesn't...But I gotta tell you, it's a new...
Pat: And we'll see what turns out.
Scott: But the thing about...Because there are some of you listening that are thinking, oh my gosh, the markets are so expensive right now. Maybe it's time for me to pull out some, get out of the markets. I've got maybe...Things are gonna...Certainly, they're gonna go down because we've had two massive years. There's other views that have been sitting on the sidelines because you reduced your stock exposure or you got some lump sum from somewhere that you have not invested waiting for the markets to come back down. Regardless of where you are, if you own stocks, those are designed for long-term investments.
Pat: What does that mean, Scott?
Scott: Anything five-plus years. If you've got money that you're gonna be spending...
Pat: In five-plus years.
Scott: Yeah, if it's gonna be spent in less than five years, then...On a new car, it's money set aside for your home maintenance.
Pat: Distributions for your retirement.
Scott: Yeah, your income. You don't want that tied to the stock market because it's anyone's guess what it's gonna be worth.
Pat: That's right. That's right.
Scott: But if you go out five-plus years, you've got a high probability, extremely high probability, that the markets are gonna be higher five years from now than they are today. And the longer you go out, the greater the probability. There's never been a 15-year period, I believe it's a 15-year period, where stocks have not outperformed bonds. You go out long enough, they go up. This stuff that's going on right now is noise.
Pat: It is. I agree.
Scott: And we don't know what the outcome will be. Maybe this trade war is gonna be nasty. Maybe the markets are gonna go down horrible. Maybe everyone's gonna hate Trump in two months.
Pat: Scott, I just think of a friend of the family called me right when Trump was elected and said, "Hey, I'm thinking about getting back in the markets. What do you think?" And I said, "What do you mean back in the markets?" And this is a 61-year-old person.
Scott: Is it a close friend?
Pat: More so of my wife than myself. And she said...
Scott: Does your wife have a lot of close male friends?
Pat: No, this is a female. Does my wife have a lot of close male friends?
Scott: That sounds strange. A friend of mine, I was just assuming some male.
Pat: If my wife had a lot of close male friends, I probably wouldn't know about it, would I?
Scott: Maybe not.
Pat: So my answer is, I don't believe that my wife has a lot of close male friends.
Scott: Sorry.
Pat: Scott was drinking some water and almost lost it. So I said, "When did you get out of the market?" And he said, "Well, when Biden was elected." And I said, "Really?"
Scott: Oh my gosh.
Pat: And I said, "Why?" And she said...
Scott: Holy smokes.
Pat: "...I just hate Biden. I hated him." And I said, "Well, that really isn't a good reason to be out of the markets because the correlation historically..."
Scott: The stock market did pretty dang well when Biden was in office.
Pat: It did really well. It did pretty well. And so my point to her is, "You need a financial advisor. Not me. I'll refer you to someone in the firm. You're too close to your...well, no, you're too close to your investments emotionally. And you're too close to me to actually...to my wife to actually...I don't want to be your advisor, but you're too emotionally close to your investments. They're driven by your emotions." And you see the same...I was with some friends on Saturday night and they're all MAGA. I mean, like over the top.
Scott: Your neighborhood is...
Pat: Yes, a lot. I mean, they...
Scott: Pat lives in a small community in a relatively libertarian town to begin with.
Pat: That's right. That's right. And everyone there, there were four...
Scott: Not that MAGA is libertarian.
Pat: Oh, look, and God bless them. Wherever you want to go, right? Wherever you want to go. I'm not that far right or that far left personally, but I mean, they had all been to the inauguration. They were telling us about the balls and the whole...
Scott: That sounds like a nightmare.
Pat: Oh, I got...they invited me and I'm like, "Not a chance."
Scott: Gotta be so crowded and people everywhere. How do you get an Uber and all that stuff?
Pat: They don't. They walked.
Scott: In the freezing cold?
Pat: And it was freezing cold. But their point was they were so excited about the markets because Trump was in. And I just like, look, you can feel however you want, but statistically speaking...
Scott: Not gonna make it easy.
Pat: ...the correlation is not that high. The correlation is not that high. And I did think, we had a call a couple of weeks ago where a gentleman called and was worried about the tariffs and what happened after Smoot Hawley and the Jones Act, right?
Scott: That's right.
Pat: Right. And I was thinking this weekend, what if we really do these tariffs? Like, what if they are really massive?
Scott: That would not be good.
Pat: That would not be good. But it's not permanent.
Scott: That's right. It brings people to the table.
Pat: We need other countries' goods and services and they need our goods and services. That's the bottom line. So we're not gonna...
Scott: This could get nasty.
Pat: It could.
Scott: It could be nasty for months. We could have a pretty significant bear market in the stock market or this could be a short-term thing.
Pat: And it could just blow through.
Scott: Trump gets what he wants.
Pat: Well, Panama is now saying they're gonna decouple from China, right? And by the way, China is not the power it was five years ago because of their own economic problems.
Scott: Tremendous economic problems, which might be worse than we can actually see.
Pat: Yeah. It might be worse for everyone on a global scale because of their problems.
Scott: Economic problems. But they're not splashing cash around the globe like they were five years ago.
Pat: No.
Scott: It's the whole belt in the road thing.
Pat: Well, it's truly...I mean, Scott, so I was in Africa and we went into an airport. Did I tell this story?
Scott: Yeah, Africa story. I've wasted money too. But go ahead with yours first.
Pat: So we were...No, it wasn't Africa. I act like I'm a world traveler. We go on one big trip.
Scott: It was in South Sacramento.
Pat: It was.
Scott: We were close.
Pat: It was in Cambodia.
Scott: Oh, Mr. World Traveler.
Pat: Well, we go on one big trip. I wanted to see the Mekong Delta. Actually, the Vietnam War. Just...anyway.
Scott: And if you do one big trip a year, after many years, you've seen quite a bit of the world.
Pat: That's right. So we went into an airport in Cambodia that was...I called it the most optimistic airport in the world because it was massive. It was beautiful. And there were two planes there. It was no...And I asked someone, "Who built this?" And they said, "Well, Africa built it. They lent us the money."
Scott: Africa? China.
Pat: I'm sorry. Sorry. Sorry. "China built this. They lent us the money and then their contractors came in and built it and we're going to pay them back." And I thought, you're never going to pay them back.
Scott: I saw the same exact thing in Malawi. This massive stadium.
Pat: Where is Malawi?
Scott: Africa, middle of...
Pat: Okay, middle of Africa, all right.
Scott: Yeah, it's landlocked.
Pat: It's showing my geography ignorance.
Scott: And this beautiful stadium, like you'd see...like something we'd have here in the United States, like a huge stadium, all built by Chinese dollars, all built by Chinese labor...
Pat: For bullfighting.
Scott: And it had never been used. It was like 18 months.
Pat: Like, what are they going to have there? They don't have any money to build there. I mean, like...
Scott: They don't have a professional team? They probably have some sort of a soccer, football.
Pat: Probably, but not...How are they going to support?
Scott: The point being...
Pat: No one can pay $80 to go to see a game.
Scott: So the point being is...
Pat: What is the point?
Pat: ...that China's influence, global influence is waning. It's absolutely waning. And the threats that are made by this administration may or may not be real. May or may not be real. Right? The threats are real, but whether they fall through...but what it is doing is it's bringing people to the table.
Scott: That's the hope.
Pat: Well, it is.
Scott: Yeah, that's true.
Pat: I mean, it is. It is.
Scott: And either his negotiating tactics are going to work or they're not.
Pat: Or they're not.
Scott: Either way, we'll get past this.
Pat: This too shall pass.
Scott: I think what's interesting, when you mentioned that your friends are all excited about the markets because of Trump and your other friend had sold out because of Biden, that's not a very good long-term strategy, either one. Because just because somebody is in political power does not necessarily mean that the stock market...stock market is a leading indicator, not lagging.
Pat: Correct.
Scott: And by the way, many things that are driving stock prices don't take place for years in the future, or they don't take place at all.
Pat: Yes. Or the reality is that what set that particular stock in motion had nothing to do with that administration. Look at NVIDIA. Oh, and the whole...No, but look at how long that stock had been around before it actually rallied.
Scott: Oh, 20-some years, right? It's not a new company.
Pat: Yeah. Look at Intel, how well it did and didn't do anything for a period of time. And then look at what is it called, Deepsea? Whatever. It's not Deepsea. It shows you how interested you are. Me too. I read at the time the Chinese came overnight. Who knows the whole truth.
Scott: Yeah, whether there's truth or they're...
Pat: Whether they actually built it for $5 million or whatever the story or they stole it all from...or they sold to NVIDIA short and made up the story.
Scott: Whatever, right? Like, yes. It may be interesting news. Maybe it's fun to follow. Clearly, AI is going to have its implications on life. But from an investment standpoint, if you think somehow you're going to be smart enough to pick the winners and avoid the losers, good luck to you. I mean, there's a reason that so many funds have moved to indexed strategies as opposed to actively managed strategies. Because when you look at the studies, something like 90% of professional managers cannot outperform their own index. Years ago, I owned a mutual fund. I think that's was...I won't say the name because I don't want to bash them. This was a long, long time ago. It was a small cap...I think maybe it was a small cap international...global fund, something like that.
Pat: You couldn't get anything more esoteric than a small cap?
Scott: But you know what? I kept it for a long time. I didn't have much in it. But it was more for education for me and entertainment. Because their annual report would list their top 10 performers, all home runs, up 8,000%, whatever. And they also listed their bottom 10 performers, bankrupt, bankrupt, 2 cents a share, bankrupt, bankrupt. And I enjoyed it because the same amount of research and due diligence, the team of analysts and experts, all of them picked the top 10 and they picked the bottom 10.
Pat: That's right. That's actually pretty good. Right?
Scott: And so if you think you're going to be at your computer on Robinhood or on your phone on Robinhood and you're going to somehow outsmart the market, it's not going to do well for you.
Pat: That's right.
Scott: It's really not. Anyway, we should probably get some calls here because...Let's do this. Yeah. And we always enjoy taking our calls.
Pat: And if you want to join the show, 833-99-WORTH or questions@moneymatters.com.
Scott: Let's start off here with Lan. Lan, you're with Allworth's "Money Matters."
Lan: Oh, hi, Scott and Pat. Thank you for taking my call.
Scott: Yeah. Thanks for joining us.
Lan: So I have a couple of questions regarding the Employee Retirement Income Security Act. And I guess the acronym, how would you pronounce that?
Scott: ERISA?
Lan: E-R-I...ERISA?
Scott: ERISA.
Pat: ERISA.
Lan: ERISA. Okay. So my understanding is that some 401(k) and 457(b) plans are qualified at ERISA and some are not. So...
Pat: That's correct.
Lan: Is that right?
Pat: That is correct.
Lan: Okay. So if the plan is protected under ERISA, would you roll them out of the employer plan and into an IRA? And then my other question also is like, do you know if government employee plans have ERISA protection, government plans such as like the State of California and the County of Sacramento?
Pat: Yeah. So you have asked a really...
Scott: That's a good question.
Pat: ...really good question. And we will kind of break down the three different flavors, the differences between IRAs, 401(k)s and 457s. Right? Let's start with the 457.
Scott: The concept is this, right? So the tax law is set up in such a manner that you can say, "Hey, employer, don't send me all my pay. Take some of my pay and put it in a retirement account for me so it's there when I'm old." And the government encourages this because they don't want to have to take care...there's not enough money to take care of everyone at their old age if there's nothing saved. Right? So that's kind of the basic premise behind it. But there's quite a big difference between a 401(k) and a 457 because a 401(k) is the money is taken from your paycheck and it's put into a separate trust for your benefit.
Pat: So it sits in a trust. It isn't owned by the employer like a 457 is.
Scott: And a 457 is technically a salary deferral where you tell your employer, "Hey, don't pay me my full paycheck. Hold some back. You hold it back and pay it to me at some future date."
Pat: Which is why if you're employed by an organization, normally a state or county, that has both a 401(k) and a 457, because they are two different plans that sit under two different portions of the tax code, you could put the maximum into both. Right? So the 457 is for government employees. It doesn't exist for a private employer, a 457. They do have other tax deferral, salary deferral programs for typically highly-compensated people in private industry.
Scott: So then an IRA essentially where you take your own money, as long as you've got some wages, you can put it into a retirement account, it grows tax deferred.
Pat: So technically the...
Scott: And it's protected.
Pat: Yeah. The 457 is never your money until it's actually paid to you. So if you are putting money in...you know, let's say you work at a water district and you have a 457 and a 401(k) and that water district goes bankrupt, technically that 457 is actually an asset of that water district, and the 401(k) is not.
Scott: And you are just one of many creditors.
Pat: So if you had a waterfall of things that you would put money into, you'd put it in the 401(k) first in most circumstances. The difference is, again, there's no 59-and-a-half age for a 457. So you could take the money out.
Scott: As long as you're retired.
Pat: Or separated from service.
Scott: Thank you.
Pat: If you quit that water district at age 40, you could actually take that money out and there'd be no 10% penalties. You would pay tax on it.
Scott: Or roll into an IRA.
Pat: Or roll it into an IRA. So if you had a choice, you'd use the 401...all things considered, you'd use the 401(k) first until that was maximized, and then 457 second. Unless you knew that you were going to separate from service and you would want to get to those dollars for some reason, which is very, very rare. Does that make sense?
Lan: Yes, that makes sense. But my question is, would you roll them if they are protected under the ERISA? Would you roll those accounts out of the employee plan and put it in an IRA?
Scott: Okay. I clearly would roll a 457. Because I don't like the...You're calling from California, right?
Pat: Calling from California.
Lan: Yes, from California.
Scott: So the odds are California is not going to go bankrupt, but...
Pat: So the answer is you would absolutely roll the 457 into an IRA.
Scott: Particularly if you worked for a smaller municipality. You made it to the water district. I don't care. Maybe it's...What? Nobody knows. It's the weird things that can happen in life, right? Here's the difference between...
Pat: COVID lockdowns.
Scott: We don't know what the next weird thing is.
Pat: Here's the difference between an IRA and what we would call an ERISA plan. So the 401(k) is under ERISA. An IRA is open to creditors. They could put a claim against your IRA. But an ERISA plan is not.
Scott: But there was a Supreme Court ruling several years ago that said if you took money from an ERISA plan and moved it to an IRA, you had up to, I think it was a million dollars of protection.
Pat: Correct. That's 100% correct. So, you know, I just watched the...This is a little off topic, but I just watched the Netflix four-part series on O.J. Simpson trial.
Scott: Thanks for sharing. Is this a newer thing?
Pat: Brand new. It's fascinating. It's worth to watch.
Scott: I remember, Pat, we were in the lobby of our office with the TV monitor watching, waiting for the verdict to come out. The entire staff was out there. Our tiny little company back then.
Pat: And this is where it goes. The reason O.J. Simpson was able to actually spend money and live in retirement in Florida is because...
Scott: Before he was arrested.
Pat: Okay. He had a civil charge against him from the Goldman's and he lost. He lost the civil charge, right? Which means he owed them money. But his money was in a pension plan which was protected because of the ERISA rules. Had it been in an IRA, they could have gone after it. Right? And he flaunted that, by the way. I mean, in this documentary, they said he was living relatively large and letting them know, the Goldman's, that they were never going to get any money because it was protected under ERISA rules.
Scott: My guess is as soon as he got his pension checks, he spent it as quick as possible before they had a chance to...
Pat: So the difference between a 401(k)...
Scott: Lovely, lovely gentlemen.
Pat: ...and an ERISA, a 401(k) in an IRA is exactly that. An IRA may not have protection against creditors if there is a claim.
Scott: So if you plan on murdering somebody...Well, I mean, so for me, like, let's say I retired today from Allworth, a company, and I've got a 401(k) here. There's no question I would roll it into an IRA.
Pat: There's no question at all.
Scott: And I have enough umbrella insurance that if I have some strange lawsuit against me or a horrible thing happens, I've got umbrella insurance to protect me.
Pat: And I would roll my 457 into an IRA. So, Lan, are you separated from service?
Lan: Yes, I am retired and I have both 401(k) and 457. But the thing that's confusing me most is that they said not all 401(k) are qualified ERISA. For example, like an employee, a government employee plan. And I mean, I worked for the state, I retired from the state. And it's kind of confusing because the internet can give you a lot of information and sometimes it just isn't all tied together.
Pat: Your 457 is not an ERISA.
Scott: The biggest issue with the 457 is not an outside creditor. It's the employer suddenly having some...
Pat: It's an asset of the employers. That's the difference between a 401(k) and a 457. It does not sit in its own trust. It is technically owned by the employer and doesn't become yours until they pay it to you. For simplicity's sake, buy yourself a million or $2 million umbrella liability, which you should have anyway, or $10 million depending upon your net worth, or $20 million depending upon your net worth, and roll everything into an IRA. Are you over the age of 59-and-a-half?
Lan: No, I'm 58.
Pat: You're 58. Are you spending any money from the 401(k) or 457?
Lan: Not yet.
Pat: Do you plan to prior to age 59-and-a-half?
Lan: Probably not.
Pat: Then roll it all into an IRA.
Lan: Okay.
Pat: It just gives you a lot more flexibility. And it's easier to manage. It's all in one place. The difference between some people say, well, do you like Schwab or do you like Fidelity, or do you like E*TRADE, or do you like Altruist, or do you like...?
Scott: You like Chevron, you like BP, or you like Shell.
Pat: Yeah, they're all very, very similar and you could get the same products on each one of them. The idea that you actually take and consolidate all of these assets in pre-tax IRAs makes it so much easier to manage.
Scott: And you can have just as much diversification.
Pat: Hundred percent.
Scott: And greater flexibility in your investment options.
Pat: A hundred percent. So if you don't plan on spending any money out of these plans and you're under the age of 59-and-a-half, roll them in there. Now, if you plan on spending some of this money prior to age 59-and-a-half, then you may want to leave some money in the 401(k), as long as you separated from service after age 55. Because if you separate from service in the year in which you turn age 55, there are no penalties from taking distributions from a 401(k). The 59-and-a-half rule only applies to IRAs. It doesn't apply to 401(k)s as long as you're 55 or older in the year in which you separated. So if this sounds a little bit confusing...
Scott: It is.
Pat: ...it is. It is absolutely. So you go on the internet and you're looking at all this stuff...
Scott: So the Department of Labor the last number of years have been trying to get more power over IRAs. And I think they've been unsuccessful thus far. The last decade, they've been trying to regulate IRAs.
Pat: So you go on the internet and you're trying to research the difference between the two. The difference is one's an asset of the employer, the other isn't. The difference between an IRA and a 401(k) is one is open to creditors and the other is not. That's the basics. But I got to tell you 95-plus percent of the time when we meet with someone who's not going to take money out of a 401(k) or 457 prior to age 59-and-a-half, and they've separated from service after age 55, or they're 59-and-a-half-plus, we roll it into an IRA just for simplicity sake.
Lan: Okay. Okay, thank you.
Pat: The end of the day, people really only need to own about four accounts, a Roth IRA, an IRA, a brokerage account, and a cash management account.
Scott: And then if you're married, a spouse might will have this also. And if you inherited some money, you might end up with 10 accounts.
Pat: You might end up with 10 accounts. But you want to get it to the fewest number of accounts as possible just for ease management.
Lan: Okay. All right. Sounds good.
Pat: All right. Thanks, Lan.
Scott: Thanks, Lan.
Lan: Thank you.
Scott: Pat, there are definitely times when we recommend people not to roll. Here's a prime example. Somebody's 57 years old, planning on work another 5 years, they lose their job. Like, how many times have we seen that, right?
Pat: Often.
Scott: It's, I mean, very common.
Pat: In that situation...
Scott: Like, you might want to keep your 401(k) intact or at least some portion of it. In the event it takes you longer to get a job than you thought it would.
Pat: Because after age 55, as long as you've separated from service and prior to age 59-and-a-half, you could get the money without penalties.
Scott: Yes. So if you've got some uncertainty on your income between those years, or maybe you've retired at 57 and you might choose to pull some money out of that 401(k) before you're age 59-and-a-half, which you can do.
Pat: Yes.
Scott: You can also set up what's called a 72T distribution where, essentially at any age, if you're 48 and you've got so much money saved or you're one of those FIRE people...I don't hear much about that. What's...financial independence retire early. Live like a pauper. Save everything so you can quit working as young as possible.
Pat: Sounds miserable.
Scott: It does sound quite self-focused, doesn't it? Instead of, how can I contribute to society? Let me take what I can as quick as possible.
Pat: And then just lay around the house.
Scott: I guess.
Pat: Or the van.
Scott: But you can set up a series of payments and as long as it's designed to last you to your dying day, there's some formulas you got to follow, there's no tax penalty on it. So you can set it up. If you're 48, you have enough...you've got 10 million bucks in your 401(k) somehow because...you can set up a series of distributions. You probably have to roll it into an IRA in order to make it happen, but it's an alternative.
Pat: Yeah. Okay. Back to this O.J. series on Netflix. Scott, I'm telling you...I am telling you...So I said to...I was telling my friend about it. He goes, "Why are you watching this? You know everything." And I said, "No, I don't know everything." But what was most fascinating is the prosecuting attorneys and the defense attorneys were talking about their strategies going in to the trial and how those strategies changed throughout the trial.
Scott: One of the guys passed though. Who's the...?
Pat: Yes. One of the...
Scott: I forget his name.
Pat: Yes. But they didn't interview all of the defense and prosecuting...But it was interesting. And then what they felt the public view of the trial. I got to tell you, it was not a waste of time. I walked away from there thinking, holy smokes, how little we knew or I knew during the trial itself.
Scott: Did it change your opinion at all?
Pat: Hundred percent.
Scott: You're kidding me.
Pat: A hundred percent. Changed my opinion of the outcome 100%.
Scott: Would you like to disclose more? Because I find this quite fascinating.
Pat: I understand why the jury actually voted him not guilty. Hundred percent understand why the jury did.
Scott: Did you think he was not guilty after?
Pat: Not at all. I think he was, but...I think he was guilty, but I understand if I was on the jury, because of the evidence that was presented to me, I would have a hard time without a shadow of a doubt convicting him of the crime.
Scott: And do you think that was because the defense did such a great job? The hamstring and the prosecutors that...?
Pat: You mean the prosecutor...? Yes, that's exactly what I think. The defense did such a great job.
Scott: Yeah. You have enough money, hire a good enough defense, you can get out of anything.
Pat: The doubt that would be put into the mind of the jury because of the defense was...
Scott: And so you feel that if you were on the jury, you could not say without a shadow of a doubt that...
Pat: That is correct.
Scott: Interesting.
Pat: That is correct.
Scott: Well, now I've got something to watch. I'm excited.
Pat: I walked away from there thinking about it for a couple days saying, well, this is absolutely fascinating, right? This is absolutely fascinating. And if I'm asking myself honestly, would I have voted or would I have said he was not guilty? I think he was guilty, but I would have as a juror had to say he was not guilty.
Scott: Because you couldn't without a...
Pat: That's why he lost in the civil court, like, it was a slam dunk. Because it's a completely different measurement.
Scott: In civil, you don't need unanimous either, right? Nine out of 12 or whatever it is.
Pat: They didn't go too much into the civil court, but it goes back to...I don't know if it's funny, but because of ERISA law, he was able to...Had he rolled those monies into a [crosstalk 00:31:24.610]...
Scott: Oh, I know. I remember that at the time. He's going around, you see him golfing. How in the world is this guy in Florida golfing when he owes these people millions of dollars?
Pat: The whole thing was tragic, obviously. The whole thing.
Scott: And on protecting your assets, if you're a shady person, keep it in the 401(k)...
Pat: Keep it in the...
Scott: I mean, seriously, if you're kind of a shady person, you've got things lingering out there. Otherwise, move into an IRA and have umbrella insurance, which you just talked about.
Pat: Yeah, that's key.
Scott: It's pretty inexpensive. Odds are it'll never be used.
Pat: That's key.
Scott: And that, going back into history, it was Bill Clinton's umbrella policy that paid off Paula Jones.
Pat: I did not know that.
Scott: Yes. It was his umbrella insurance. Paid her off.
Pat: How much was it? How much...?
Scott: It was like 600 grand or 700 grand. You imagine that claim?
Pat: Although, years ago, I met an attorney who sued insurance companies on behalf of people that received sexually transmitted diseases.
Scott: Sued the insurance companies?
Pat: The person that gave them the STD, he would sue their insurance companies.
Scott: Yeah. Well, and so we'll go back to callers in a second.
Pat: Not a great...I didn't spend a lot of time talking to him. He explained to me what he did for a living.
Scott: Was he a friend?
Pat: He explained to me what...An acquaintance...I met him through someone else and he explained to me what he did and I said, "Well, that's awesome." We'll never talk again.
Scott: But like, most people aren't going to go kill their girlfriend and have to worry about the in-laws coming after them, right?
Pat: That's right.
Scott: But what could happen, driving down the road, get in a car accident, turns out it's your fault. A young, highly successful person gets killed. Huge lifetime value of future income stream, massive judgment against you.
Pat: That's why you need the liability insurance.
Scott: That's why you need the liability. Odds are it'll never be used, but in case there's something like that...And what happens...The first thing...We all see the billboards when you drive down the highway of all the...
Pat: How could you not? The attorneys?
Scott: Yeah. You can't...They're everywhere. They're all advertising and...
Pat: I like the Sweet James one. I looked it up.
Scott: You like the ad?
Pat: Well, no, I looked and I saw Sweet James and I'm like, I wonder if this guy...I've never heard of him before in the Sacramento area. So I looked him up. He's a national guy. He's just a great marketer.
Scott: But here's what happens. Let's say it's your spouse that gets killed. Your relatively young spouse has a phenomenal career, gets killed. You go to the personal injury...
Pat: You call Sweet James.
Scott: I don't know if Sweet James...They're going to do an asset search. First, they're going to see, is there any insurance? How much coverage is there in insurance? Is there a million dollars of liability on the car or do they have the absolute minimum that the state requires? Then what assets? They're going to do an asset search. Does this person have any money? If there's assets...
Pat: They will come after you.
Scott: Yes. They will come after you. So the more assets you have...
Pat: The bigger your liability and problems.
Scott: Yes. So not to pick on Sweet James. So Sweet James, I'm sure he's highly ethical, wouldn't do this. But it could be that it's a very frivolous claim and somebody looks and says, this guy's got $30 million. Let's just go after this guy. He's eventually going to pay up just to make this thing go away.
Pat: That's right. Oh, and by the way, I know nothing about Sweet James. Please, Sweet James...
Scott: He is an attorney. Don't say anything negative about him.
Pat: I know nothing about them. I just know that I see his ads fairly often.
Scott: This is nothing derogatory about Sweet James.
Pat: He's probably a great guy. The last thing I want to do is talk negative about Sweet James.
Scott: Of someone who spends their life suing people.
Pat: That's right.
Scott: Anyway, let's go back to the calls here. Let's talk with Jacob. Jacob, you're with Allworth's "Money Matters."
Jacob: Hi, Pat and Scott. I'm a lot younger than your average caller. I'm 22 and married. So...
Pat: What's taking you so long?
Jacob: Yeah, I'm hoping that you guys could impart some financial knowledge for the younger generation like me. So like, my wife and I, we started a 401(k).
Scott: How old were you...Just out of curiosity. It's funny because 50 years ago, this would have been normal. Today, what percentage of kids are married at 22?
Pat: I was married...
Jacob: Very low.
Pat: I was married at 23 and I had just turned 23. My wife was 22. We just celebrated our...
Scott: I was married at 25.
Pat: ...39th anniversary.
Jacob: We got married when we were 20. It was right before I turned 21.
Pat: Okay, you were 20 years of age. All right, so what's your question for us?
Jacob: So right now, we have, like, extra savings that we're...Like, we're trying to buy a house within two years and we also have extra savings and we're not sure if we should split our extra savings between, like, just into our 401(k) and Roth IRA for retirement or if we should try and invest it in some way towards purchasing a house given that it's so expensive to buy a house.
Pat: What's your family income?
Jacob: We make about 5 grand a month.
Pat: Between the two of you?
Jacob: Between the two of us, yes.
Pat: So $60K a year. How much money do you have saved?
Jacob: Seventy grand towards a house.
Pat: Wow.
Jacob: Like 10,000 for emergency fund.
Pat: So $80,000. How much do you have in your 401(k)s?
Jacob: She just started hers and then I have about $10,000.
Pat: And how much are you putting into the 401(k)s?
Jacob: We put in like...So she gets a 4% match. So she's putting in 4% to, like, take that 100% advantage. Then I put in around $200 a month.
Pat: And do you have a match?
Jacob: I do not have a match.
Scott: Okay. And how did you accumulate the 70 grand?
Jacob: Just saving throughout, like, high school, like from a young age, and then saving from having low expenses over the last few years.
Pat: Do you have term insurance on yourself and your spouse?
Jacob: No.
Pat: All right. So here's what I would do. I would...I like the fact that you're putting the money away for your wife in the 401(k) because she actually has a match. Rather than you...Because yours has no match, I would use the Roth IRA. And the reason I'd use the Roth IRA is you can pull that money out up to $10,000 purchase of a home. And so it gives you a little bit more flexibility and you don't need a tax deduction. I would buy some term insurance on each other, probably $300,000, $400,000, maybe $500,000 each on the outside.
Scott: And I think what's important about that...I'm assuming you don't have any kids yet?
Jacob: No, no kids yet.
Scott: But the plan is to have children at some point?
Jacob: Yeah. The plan is to have children after we hopefully buy a house.
Scott: I mean, the thing about getting insurance is you get it while you can be insured. No one knows what happens to our health, but if something happens and suddenly you can't get insurance or it's very expensive, then it becomes quite problematic.
Pat: And so I would use the Roth IRA. And where is that money invested in that $70,000 that you're saving for the house? Where do you have that parked right now?
Jacob: We have it in a high-yield savings.
Pat: I knew you did.
Jacob: So it's about 4.5%.
Pat: I knew you did. I think you're doing great.
Scott: Yeah, the question...Yeah. So I like the idea of Roth because you can pull those dollars out if you need them for the purchase of the home. And if you don't, then you can turn around and invest. I would have them conservatively invested in the Roth because you might use it for...And what's a house going to cost you?
Jacob: Well, we live in Sacramento area. We're in Rockland. So the median house is like...We're looking at like 400 grand to 500 grand.
Pat: You could be in the marketplace right now. You have enough for a down payment.
Jacob: I mean, yeah, I feel like we have enough for a down payment, but not enough for the monthly.
Scott: Making the monthly nut. Yeah. Yeah.
Pat: And you want to get 20% down so that you avoid PMI, payment mortgage insurance. And you're the perfect candidate for every state and federal program for first-time home buyers.
Scott: Yeah. Have you talked to a mortgage person?
Jacob: We've talked to a few mortgage people. My wife's in real estate, so she has a lot of...
Scott: All right. Then you guys know what you're doing.
Pat: Yep. But doing a great job.
Scott: By the way, you know what you're doing anyway.
Pat: Correct. Good job.
Jacob: Thank you.
Pat: Good job. Good job.
Jacob: Okay. So just kind of keep it going into 401(k) and then for me as a Roth.
Scott: That's correct.
Jacob: Don't open maybe a brokerage and put it into the [inaudible 00:40:31.791].
Pat: No.
Scott: I wouldn't invest these dollars at all.
Pat: Not at all. Not at all.
Scott: Because you want cash available. You find the right house at the right price, you want to be able to close as quick as possible. And the worst thing is let's say you put it in the markets in some way, and it just happens to be the markets are down and you're like, shoot, that 5 grand I put in is now worth $4,500.
Pat: I have an opinion though, Scott, that maybe I should or shouldn't share. You and your spouse should be actually investing as much in yourself as you possibly can. Either through your education or a trade.
Jacob: Yeah.
Scott: That's the key to wealth.
Jacob: Well, for me, I graduate in a year and I'm doing engineering.
Scott: Okay. Okay. Of course you are.
Pat: You know how many parents out there right now are saying, "I wish this kid was single?" You're like, "Where was my daughter when this guy got married?"
Scott: I'm going to send this interview to my son.
Pat: Yeah. So and your spouse as well as much as you guys can invest in either your education or your trade or both, the better off you'll be. And you know that.
Jacob: Yeah.
Pat: What type of engineering?
Jacob: Mechanical.
Pat: I will go into any building that you design.
Jacob: Yep. Probably more towards aerospace though.
Pat: Oh, perfect. I will fly in any plane that you're involved in the design of. Well, I appreciate it. Keep up the great work.
Jacob: All right. Thank you.
Scott: Of course everyone's like...My only concern with Jacob is like, make sure you have enough fun along the way because we've seen, Pat, where there are people that don't spend a dime...
Pat: But I'm sure...look, maybe this is fun for him.
Scott: That's a good point.
Pat: Right? Maybe this is fun for him. Right? Maybe it's important for him and that's...
Scott: Clearly important.
Pat: And that's very responsible.
Scott: Oh my gosh.
Pat: Oh, I wasn't like that at 22.
Scott: Yeah. Tomorrow I'm taking my daughter, senior in high school, on a college tour.
Pat: Are you? Where are you going?
Scott: I'm going to Southern California. It's a really interesting...We'll get back to callers. It's really interesting. I'm trying to figure out the right kind of school. Obviously, she's part of the equation.
Pat: You know, the school doesn't graduate. The child does.
Scott: Yeah, but it's interesting. I really want her to be somewhere where she can explore different ideas, have her own worldview, have her own religious views. But some schools, I don't want someone where they are protesting against Israel and they've got...it's like, I don't want something too far left, but not too far right. But I'm concerned if it's too far right, they're not going to let her have her own expression, her own ideas, and they're going to suppress certain thoughts. So it's really...
Pat: She's going to go online cult. Is that the answer?
Scott: I don't know, because I pulled up her grades this weekend. She's got a D in a class. I'm like, senior year, last semester.
Pat: Oh.
Scott: And I was like, hey...
Pat: Just try. Just come on.
Scott: I tell her, "Look, you can do what you...Like, you asked me, 'Can I do this on Thursday night?' Like, I don't care what you do as long as you live up...you maintain your responsibilities. But if you can't maintain your responsibilities, I'm going to have to restrict you. So now I've got to restrict her.
Pat: If you can't pay, don't play.
Scott: And I'm like, and I'm thinking, oh, please go to college.
Pat: Well, everyone has their own path, right?
Scott: You can't live at home forever.
Pat: Everyone has their own path.
Scott: Anyway, I don't know why I got on that topic, because that's what I've got tomorrow. I've been flying down to a couple of different colleges.
Pat: Sounds like a lot of fun.
Scott: She's been invited...She's applied to like 14 colleges, so...
Pat: Sounds like a lot of fun. Sounds great.
Scott: All right. We're in Michigan talking with Rick. Rick, you're with Allworth's "Money Matters."
Rick: Hey, how are you doing? I have a couple of questions here. I have quite a few questions. We are in a regional bank, which I don't know if that matters, but we have a lot of...
Pat: We're in? What do you mean you're in?
Rick: Well, we have money invested just in regional banks, smaller banks.
Pat: You have deposits there or you own shares in?
Rick: No, we have deposits.
Pat: Okay. Thank you. Thank you.
Rick: And we have a large deposit sum in this one bank and we just signed a two-year CD. I tried calling you last week and we couldn't get on. We had to make a decision because we were in that grace period, and you have to sign up or lose or whatever.
Pat: How big is the CD?
Rick: Almost $700,000.
Scott: And what's the interest rate?
Rick: Four or 4.1%.
Pat: And how's the title? Is it in a trust or is it just you? Is it you and your spouse?
Rick: My wife and I.
Pat: Do you own a trust?
Rick: No, we do not.
Pat: Do you have children?
Rick: Yes, grown children.
Pat: How many?
Rick: Four.
Pat: Okay. So if you and your spouse...I'm getting to an answer. If you and your spouse were to die, would the money in your estate go to your four grown children?
Rick: That's correct.
Pat: Okay. So look, if you had a trust, let's just talk about FDIC insurance.
Scott: Well, yeah, FDIC insurance.
Rick: That's my other problem.
Pat: This is where I'm going. So right now you have $500,000 in FDIC insurance.
Rick: Correct. But they told me that I also have $250,000 per beneficiary.
Pat: Not if it's in a trust. If it's not in a trust...
Scott: Are these transfer of death accounts?
Rick: I don't know what you mean by that.
Scott: Do they say POD on the title with the names of your four adult children?
Rick: I don't know. She's looking at it right.
Karen: It's both of our names.
Scott: Well, how...
Rick: [crosstalk 00:46:49.651]
Pat: Wait, Scott. Wait, wait, wait. So how is it titled?
Rick: Rick and Karen and then POD.
Scott: Payable on death. Yeah. So there's beneficiaries on the account.
Pat: Okay. That right?
Rick: Yeah. Yes, that's correct.
Scott: So continue on with FDIC coverage limits.
Pat: Okay. So here's how it works. FDIC limit is $250,000 for each individual times the number of beneficiaries not to exceed eight. So if I have a trust or, in this particular case, you mentioned POD, pay on death. It's you two times the number of beneficiaries not to exceed eight. If all four of your adult children are named on there, then you have coverage up to $2 million in FDIC insurance.
Rick: Okay. Okay. All right.
Pat: But in saying that, you should have a trust.
Scott: You got 700 grand just in this one CD and you've got other monies at other banks, you should have a trust. You're achieving the same objective, but you should still have a trust.
Rick: What good is a trust?
Pat: It's just the distribution of the assets is much cleaner at death.
Scott: And you've got other assets besides your CDs, I'm assuming. You probably have a house and other...
Rick: Yeah, we have a house. Yeah, we have quite a bit of assets. But we also have...my other question too is we have another, what do you want to say, $280,000 in another bank, $200,000 in another little bank, another $250,000 in another, $45,000 in another one. Is there something we should be doing with that?
Scott: There's easier ways to accomplish this.
Pat: But you do have FDIC, it's per institution.
Scott: But there are programs that banks have started...Is it CDARS, is that what it's called?
Pat: CDARS.
Scott: CDARS. So this is a loophole that the banks have driven a truck through, essentially. And because there's these limits, right, $250,000 per individual. So what happens with banks is bank A makes a deal with bank B and bank C and says, hey, if I get a large deposit, I'm going to send some of that deposit your way. And when you get a large deposit, you send that deposit our way. And that way we can make sure that our account holders have insurance up to a million, $2 million, $5 million, $15 million, $20 million. And it's called a CDARS program. And it goes by a couple different names and different institutions.
Pat: Allworth has something for cash management.
Scott: So when you go into the bank, say, "Do you have this program?" Just describe the program.
Pat: You can have it all in one place.
Scott: You can have it all in one place. And essentially what they're doing is they're brokering out the CDs in all these different places.
Rick: Okay. Is there a way...We weren't real comfortable signing a two-year...I mean, we just made a rash decision real fast into a two-year CD. Is there any way to get out of that without penalty?
Pat: I think it's just the interest up until now.
Scott: Yeah. I would call them, but I believe it's just the interest up...You're going to miss...Why did you end up with a...What was the hurry?
Rick: Well, it's a 10-day grace period.
Pat: No, no, no, no, no, no, no, no.
Scott: It's not like they take the money afterwards.
Pat: No, that's what they say. You could have just dropped it into a savings account.
Rick: Yeah, we could have.
Pat: And you should have.
Rick: We were just under pressure. We were under pressure. We were at the last day of the 10-day grace period. We got to do something. We got to do something. And we thought if we put it into savings, then we would just lose our interest because interest rates are going down. And so we were just thinking, okay, if we'd lock it up for two years at least. And then after we did that, we thought, oh, well, it's a 180-day period that you have to pay your interest for 180 days. That's 6 months, so we're going to lose $18,000.
Pat: No. No.
Rick: You want to call the bank for me?
Pat: What you just said to me...
Scott: I don't know how the bank's contract is. I have no idea.
Pat: You were rolling out of a regular time CD, correct?
Rick: Yeah, same thing, 13-month CD we were in.
Pat: Okay. So the 13-month CD is just like a 13-month bond. It comes due. They pay it. It sits there. You can move it all to the...and you accrue all that interest and it's paid. It could sit in the money market account or savings account and could sit there indefinitely if you wanted to.
Scott: You could find cash accounts that are going to pay 4.1% that are completely liquid and FDIC insured.
Pat: And you stated that interest rates are going to go down. I don't know. I don't know. I know I would not have bought a two-year CD. And if you were my brother...
Rick: See, you guys should have talked to me last Friday.
Pat: Well, dang it, Jacob, if we were here all the time...
Scott: His name's Rick.
Pat: Oh, I'm sorry. I'm sorry, Rick.
Scott: I don't know where Jacob came from.
Rick: Now we don't know what to do. I guess [crosstalk 00:52:04.845] let it sit there for six months and then pull it back out [inaudible 00:52:08.618].
Pat: Do you do any online banking at all?
Rick: No.
Scott: Do you have any investments outside of...besides CDs? Do you own any mutual funds or stocks or ETFs?
Rick: Yeah, we have stocks. Yeah, I have stocks.
Pat: And where do you have them? What brokerage firm?
Karen: JP Morgan.
Rick: JP Morgan.
Pat: They're not going to want to buy them.
Scott: You have a lot of different investments.
Pat: I feel like you're borrowing trouble.
Scott: You're making it harder than it really is.
Scott: Yeah. I mean, unless you have nothing else going on in life and you feel like driving around in these community banks.
Rick: Well, believe me, we're frustrated. Yeah. [crosstalk 00:52:48.129]
Scott: So ask them if you...
Rick: And the other thing that we're real concerned about too is the time in which we live. Now we're talking about digital currency and all this stuff. Are we going to lose all of our liquid cash that we have that's not in a stock or a property or a house? I mean, everything we own is paid for. I owe nothing.
Scott: That's right. Well, here's the thing. Nobody knows the future, right? If our whole system of our government collapses and everything, we have a new order, then you want to be young and have a lot of guns and ammo.
Rick: Okay. Thanks.
Scott: No, just the worst case scenario, right? So I seriously doubt we're going to see that, but there's no guarantee in life. If you were a retiree in Russia when the Soviet Union collapsed, things got pretty bad for you. Just reality, right? So right now you've got money in certificates and deposits that are backed by the U.S. government, the same agency that prints the dollars, makes the money, right? So as long as our system of government is in place, you're going to be fine. I don't know how...you can't get much more conservative than that. You can't be any more conservative. So you can't be any more conservative than that.
Rick: Is it better to invest in a bigger bank than a regional bank?
Pat: Well, it doesn't make any...
Scott: As long as you have the FDIC insurance.
Pat: It doesn't make any difference. Actually, I don't even know if the FDIC makes any difference anymore because when First Republic went out, they covered everyone.
Scott: I know. It's crazy.
Pat: There was no risk at all to anyone. They just said everyone's covered.
Scott: Unbelievable.
Pat: Right? It was unbelievable. But you're doing fine.
Scott: You're doing fine.
Pat: The two-year wouldn't have been my choice, but you didn't...
Rick: Why?
Pat: Because I would have bet shorter. I would have put it...
Scott: Well, my guess is you, Pat, because you've made your life...It doesn't have to be this complicated. You're not getting any additional benefit out of life for the complication that you're going through here.
Pat: Maybe he likes the people at the savings and loan. Maybe he likes the people.
Scott: Appreciate the call, Rick. You say you have an account at a wealth management firm of sorts. I don't know why you're not getting the advice from them. That's frankly...If that's not the kind of person that gives you advice, then maybe you should have somewhere where you're going to get the right kind of advice. It really seems a little odd to me. Anyway, we're out of time. It's been great being here with you. This has been Scott Hanson and Pat McLean. We come here every Saturday and just drop this on Saturday mornings.
Pat: And if you've liked the podcast, please rate and review.
Scott: And forward to a friend.
Pat: See you next week.
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.