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

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

Pat: And Pat McClain, thanks for joining us.

Scott: That's right. I'm glad you were with us. Last week when we were together, we said we were gonna talk about the riveting changes in the 401(k) space, and IRAs, and stuff. There are quite a few, we will.

Pat: Yep. Wake the kids, call the neighbors.

Scott: We'll have those discussions. Here we are starting through the year, the old saying, "so goes January, so goes the year," means nothing.

Pat: I didn't believe any of that stuff. It's like saying, "So goes today, so goes tomorrow." Eh, I don't think so. It is impossible to predict the future of the markets. You know what I found interesting? And, we'll take some calls here momentarily, but if we look, Wall Street analysts in 2022, they nailed almost perfectly the predictions of the earnings of the S&P 500 of the broad markets, the broad market. As a group, they predicted $221 a share, for the companies that comprised of the S&P 500, and based upon current, we don't know how the fourth quarter's quite finished out yet, but it looks like they missed it by about $1. So, less than a percentage point. That's how accurate on the...

Scott: The group.

Pat: ...on the S&P 500 index. On the earnings, when it comes to how the overall markets did, they all missed out grossly. So, the S&P 500 finished the year at $3,800 and some change. We look at, J.P. Morgan was predicting the S&P 500 at $5,100. Goldman Sachs was predicting the S&P of 50, 50. Citigroup was predicting the S&P at $4,900. Bank of America said it was gonna be $4,600. They're way off. Way off. So, that was predicted to earn, but they couldn't predict the price, which is actually, it makes all the sense in the world. Because the price of something over the short term, is actually driven by lots of factor, including emotional earnings of companies, well-run companies, can give ranges of what they actually think they're gonna earn.

Scott: Which is the whole point I brought this up, because prices of assets can change over the short term that have no correlation to their underlying fundamental, the underlying value of it. That's why, you might buy the corner gas station for a million bucks, let's say. And, you know, it's earning a $100,000 a year, and you think this is great and 3 years down the road you go to sell it and you might only get $700,000 for it. And you're like, "Wait a minute..."

Pat: Even though it's earning 100...

Scott: That's right.

Pat: ...continues to earn 100.

Scott: Or more, because prices are based upon what people are willing to purchase something for at that particular moment. And, they can fluctuate over time. That's why when we talk about if you're gonna own stocks, real estate, these are long-term investments. Yeah. And what happens if you start using instruments that guarantee against losses in those portfolios? You give up return, you give up return. Those do not come free. It's an insurance policy. Someone else is taking that risk and you are paying a premium for that. And so, I was listening to a radio show this last week where they were talking about these index annuities again and again and again. And, they keep talking about downside risk, but they never talk about the upside caps. What can happen if the markets do well, which they will over time?

Pat: Yeah. Anyway, let's go to some calls because we've got calls here to talk with. To join our program. 833-99-WORTH. And we're in Tennessee, talking with Margarita. Margarita, you're with Allworth's Money Matters.

Margarita: Hi, and Happy New Year.

Pat: Thank you.

Margarita: Thanks for taking my call.

Pat: Thank you.

Scott: Thank you.

Margarita: Really appreciate it.

Pat: Thanks so much.

Scott: What part of Tennessee are you from, Margarita?

Margarita: Well, actually, I'm from Los Angeles, California.

Scott: You don't sound like you're from Los Angeles. I'm sorry.

Margarita: I'm actually from Los Angeles.

Scott: Okay. How can we help you?

Margarita: I wanted to get some feedback on whether I should pay off a mortgage loan.

Scott: Okay.

Margarita: The balance of the mortgage loan is $270,000, at 2.99% interest rate.

Pat: And what's the...

Scott: Is it a 30-year or 15-year?

Margarita: It was a 30-year.

Scott: And how much time do you have left on it?

Margarita: About 19 years.

Scott: Okay. And, what's the value of the home?

Margarita: About $890,000.

Scott: How old are you?

Margarita: How old am I?

Scott: Yeah.

Margarita: You never ask a woman that.

Scott: Listen, I am not making judgments here. I didn't call you a woman or a man.

Margarita: Well, I declare I'm a woman [inaudible 00:05:38.924].

Scott: Okay.

Margarita: I'm 61 years old.

Scott: Thank you.

Pat: 61. Thank you. I know I'm not supposed to ask a woman that, although I never understood why. And, are you retired?

Margarita: Yes, I am.

Pat: And, do you have a pension?

Margarita: I do. I'm fortunate and blessed. I do have a pension.

Pat: And if you were gonna pay this mortgage off, where would you get the money to pay it off?

Margarita: Well, actually I just sold some property the second time the feds increased the interest rate. So, I was fortunate enough to be able to sell my property there, then.

Pat: And, what were the proceeds from that property?

Margarita: Correct.

Pat: How much money?

Margarita: Total was $285,000.

Pat: Okay. So, you could easily take those proceeds, pay off this mortgage, and $285 after tax, I assume?

Margarita: Correct.

Pat: I wouldn't do it. Yeah. Because you can invest in cash assets right now and earn more.

Scott: Yes. Yes, I would not...

Pat: You could put money in a high-yield savings account and earn more than you're paying.

Margarita: Because actually, that's where the money is located right now. I did a ladder CD, I started it about maybe six months ago or so.

Scott: And what's the yield on the, how far out did you go on the ladder? How many years?

Margarita: Well, I staggered it. I have a six-month CD. I believe it said like 4.2% APY.

Pat: Fine, and we'll stop there. So, if you're earning 4.25% on risk-free money and paying 2.99%, the only reason you would look at paying it off, you would think about, is because that monthly mortgage payment you need to make each month, but there's no reason you couldn't structure it in such a manner. I would just take the money out of your cash account each month to make the mortgage payment, if that's a problem. So, what you did is exactly what we were gonna recommend you do.

Scott: Yeah, it's perfect. It was perfect.

Pat: But I would take the money from those CDs and use that to pay that mortgage payment.

Scott: Why?

Pat: Because I have a feeling that's the only reason she's thinking about paying off her mortgage.

Scott: Well, how much money do you have? How much is your pension?

Margarita: I net about $8,000 a month.

Scott: And how much money do you have in 401(k)s, IRAs, 457, things like that?

Margarita: I have a rollover IRA, about $286,000. I have a Roth IRA at about $37,000. I have a 457 at about $148,000. I have another 401(k), about $37,000. And then I have a mutual fund, various mutual funds at about $237,000. And then I have an emergency fund, about $90,000.

Scott: I agree with Pat. You're, like, in great shape.

Pat: You're awesome. So, just some cleanup I would do, just a little bit of cleanup. You said your emergency fund was 90%...

Scott: Don't pay off the mortgage unless and until interest rates are less than what your mortgage rate is. That's right. And so, here's what I would do. Margarita, by the way, are you married?

Margarita: No. I had a gray divorce.

Scott: Would you like to be married? There's lots of people out there that would like to meet you.

Margarita: I tried hard for 25 years, though.

Scott: So, you wanna take this rollover, the 457, the 401(k), and you wanna combine them all together and do the single rollover? So, you should take that 457 and the 401(k), and put it in the rollover together.

Pat: And you can have great diversification in one IRA, with a variety of different investment companies.

Scott: Yeah, that's right. And, the cost would be similar to whatever you're paying in the 457 and 401(k). So, that's just kind of basic cleanup to make it easier to manage. And then these mutual funds, you wanna make sure they're highly tax efficient. Truly great job, great savings. Absolutely, do not pay off the mortgage, and appreciate the call.

Pat: Yeah. It makes a lot of sense to keep that mortgage. Let's continue on. Let's talk to Glen, in Northern California. Glen, you're with Allworth's Money Matters.

Glen: Hi.

Pat: Hey, Glen.

Glen: Long-term listener, enjoys the show.

Scott: Well, thank you.

Pat: Thank you.

Glen: I have three questions, but they're all complicated, so I think you all only wanna take one.

Scott: Great. Let's start and see where we go.

Glen: So, we're sitting on a lot of stock. My wife worked for a company for a long time and it's Apple stock. And, I think that's relevant because any other stock we might have sold. Anyways, it's valued at about...

Scott: I'm sorry. Say that again. It's a what stock?

Pat: Apple. Apple.

Scott: Okay. Thank you.

Glen: Apple. Apple stock. So, it's valued at $3.5 million now, and we're trying to figure out how to get rid of it. In a sense...

Scott: And she... Diversify what you mean. She worked for Apple?

Glen: Yeah. She had just retired from Apple. Yes.

Scott: And is the $3.5 million, this is all outside of retirement accounts? Not in the 401(k)?

Glen: It's all outside of...well, actually, then it's more. In an IRA, there's $1.2 million, but this $3.5 million is all from RSU, with a basis of about $500,000, I guess.

Scott: Okay. And the IRA, there's $1.2 million of Apple in the IRA?

Glen: Yeah. And one of the IRAs, there's $1.2 million as well. So, like, we're doing everything wrong here [crosstalk 00:11:25].

Scott: Well, fortunately, it was Apple stock.

Pat: It worked out. Yes.

Scott: I mean, if you are gonna work for...

Scott: Enron, or WorldCom, or...

Pat: Yeah, JCPenney. Yeah.

Glen: Yeah. Right. Well, so the fear is we're in a, you know, we are in accumulation stage now. I'm 62, so I'm gonna retire when I get laid off and, you know, so I want to make, I want this money to be given as some sort of income and it doesn't pay a dividend. So, it seems like it should be sell and buy something else. But, just was wondering your thoughts on what we should probably do.

Scott: And what do you have in retirement accounts? What do you have in addition to this? If you told me you had $50 million, I'm like, "Oh, no big deal." If this is all of your life savings, then...

Glen: No. So, in retirement accounts, total is close to $5 million.

Scott: Not including the $1.2 with the Apple stock or including?

Glen: Yeah, not including, so, you know, including the Apple stock.

Scott: Okay.

Glen: So, there's $5 million with that Apple stock also in one of the IRAs.

Scott: Yep.

Glen: And then, you know, for other money set aside for retirement, we have about $1.5 kind of account that's intended and balanced to give us dividends. So, sort of an income-producing account, as opposed to say owning real estate and getting income that way.

Pat: And do you have any bond in your portfolio or fixed income?

Glen: There's probably some. We use a financial manager who's managing that. Actually, an Allworth financial manager.

Scott: Okay.

Glen: You might ask, "Why didn't we ask him this question?" Because we listen to your radio show, so we thought it'd be fun to call in.

Scott: And, you're still working, you're about to retire, or?

Glen: Yeah, I'm still working. And, when I lose, I won't quit my job because I like it. But if economic factors lay me off, then I will retire. Maybe look for some side jobs.

Scott: And, what kind of income are you used to living on? What's the family income?

Pat: What do we need?

Glen: Twelve K a month, here in California, just paying property taxes and all that.

Scott: So, $144,000 a year. Net?

Glen: Yeah, net. After taxes.

Pat: That shouldn't be hard, but you look at this, which is exactly, Scott and I are looking at each other saying, "Okay, well, this is a diversification play," and how do you do that? How do you do that effectively as possible?

Scott: Yeah, I mean, we've got roughly $10 million of savings, right?

Glen: Yep.

Scott: And you need $144,000 net, let's call it even $200,000 a year, gross. That's 2%.

Pat: Yeah. Easy.

Scott: I would be less focused on income-producing investments, more focused on what's gonna produce a good total return long term. I mean, you can get...

Pat: Yeah, with a 2% distribution, you've got lots and lots of room for volatility in the marketplace.

Scott: Yeah. So, I mean, the easiest thing on diversifying with Apple is the stuff in the retirement account, that's...

Pat: That's easiest because there's no tax consequences.

Scott: And then, with the other stuff, I would look at a direct indexing strategy around that with the Apple stock.

Pat: Yeah. But, I mean, the question is, when do we sell...

Scott: That's right.

Pat: ...the tax implications on it.

Scott: And how much risk do you wanna continue to expose yourself to? It doesn't feel like there's risk in Apple, because it's been such a great performer. But obviously, if we all look at historical returns of companies and no one's a leader forever.

Scott: And there has been risk in Apple, years past. Yeah.

Glen: All right. And, there always could be risk again. I mean, they're heavily dependent on China and, you know, the argument I use is that...

Scott: The risks are there. They just...

Glen: ...try to shift it down or something.

Scott: The risks are there, people don't always recognize them.

Pat: So, the thing that I'd start with is the money inside of the IRAs and getting rid of the Apple inside of there. And then, by doing that, you've got yourself down to a 35% exposure to Apple stock in your overall portfolio.

Scott: Taxes are gonna be a real issue for you, because with $5 million from retirement accounts, it's a decade from now when you've got required minimum distributions, let's say it's gonna be $10 million at that point, pretty realistically, now, your required minimum distributions are gonna be about almost $400,000 a year.

Pat: So, the first statement I would make is I would plan on spending more than $12,000 a month.

Glen: Yeah. And, I've actually been considering dripping, you know, working with FA, you know, dripping out of the IRAs now, to sort of help lower the RMDs later.

Pat: And, are you giving any money to charities, or is that a goal?

Glen: That was one of the other two questions.

Scott: Well, it all fits in. That's fine.

Glen: If maybe we have so much money, we should consider a charitable remainder trust.

Pat: That's exactly what I was thinking.

Glen: That way we could get a dividend and not pay the taxes.

Pat: That's exactly what we're thinking. I mean, you can take some of this Apple stock, transfer it to a charitable remainder trust. Once you get some tax deduction, not the full tax deduction on the fair market value, but you get some tax deduction. The charity liquidates the stock, they don't pay any capital gain tax, then they pay you an income typically based until your dying day. And then the remainder goes to the charity, hence charitable remainder trust. And there are some different flavors of those. I like that.

Scott: I like that. If you want to leave some to some sort of charity, then that makes total sense. It never makes sense If someone's like, and I've met people, they just, for whatever reasons, they say, "I don't think nonprofits helpful and I have no desire to give money to a non-profit." And, if that's someone's, you know, worldview, mindset, it makes no sense to set these up.

Pat: That's right. Because you're still better off, actually in the long run...

Scott: Paying the taxes.

Pat: Paying the taxes.

Scott: If you don't want the money to go anywhere else. But if you say, "Hey, I'd have some portion of my estate, I wouldn't mind going somewhere else," that can make total sense.

Pat: Yeah. And, depending upon what that number is, then I'd work around it. But, Scott, wouldn't you use...

Glen: I think...

Pat: Wouldn't we put in a...look at using a direct indexing around the Apple stock with the dividend, $1.5 million in the brokerage account?

Scott: Probably, depending on what the tax structure is with the assets and I'm assuming it's not cash.

Pat: That's right.

Scott: Yeah.

Glen: Okay. So, that's cool. So, this leads in, maybe this is worth then mentioning. One thing we wanna do is, if we were to put money in the charitable remainder trust, that means we can't access it in case of bad things, for example, long-term care. So, the question would be, should we self-fund long-term care from this? Or should we actually consider some of these interesting long-term care programs where you can put a bunch of money in and right now, it's kind of like life insurance in that if you don't use it, you'll get the principal back, but you don't...

Pat: It doesn't matter.

Scott: You've got plenty of...

Pat: You have more than enough money to self-fund long-term care. If you want that downside protection and you wanna put, you know, $300,000 into what they call their life insurance with a rider on it for long-term care, you know, you wanna put a couple hundred thousand dollars, it's not gonna matter one way or the other. You know, the question is do you wanna self-insure? Or do you want that little bit of insurance? You have more than enough money to self-insure for long-term care. More than enough.

Glen: Okay.

Pat: We haven't even started talking about the other assets outside of this.

Scott: Correct. Home and real estate. Right.

Pat: Right?

Glen: Right.

Scott: So, that...

Glen: Well, that's part of the... Yeah.

Scott: What was that?

Glen: Yeah. Yeah, understood. We haven't, you know, and, I mean, some of the other planning is we wanna sell the house here, but still stay in California and buy another house. So, that's gonna bump up our taxing, and stuff. But I think that's in the noise [SP], kind of [crosstalk 00:20:03]

Pat: Yeah. So, if you want to buy it, you know, we have many clients with yours and I'm like, "Here's what it looks like." You're fine either way, that is not a big decision one way or the other.

Scott: But if I were in your shoes, the first thing I would do is, well, I would diversify out of the Apple and the IRA immediately. And, there's other listeners that are going to be like, "What? That's such a good stock." I remember somebody talking to somebody with GE in 2000, this was in 2000, GE was one of the best-performing companies in the 1990s. Clearly the best-performing large company, right? You couldn't go wrong. The stock did phenomenally well. And people argue, "Oh, it's so diversified. It's almost like the S&P 500." What's that stock done over the last 20 years?

Pat: Oh, it's been terrible. Scott...

Scott: Whacked. It's worth less now than it was 20-some years ago.

Pat: Scott, I have a client that retired from GE, about 15 years ago, and we had this conversation exactly. And he was like, "Well, it's done great." I'm like, "It did. It did great. It's not doing great, it did great." And there is, you know, tons of risk in a single holding that are unknown. I'd review this portfolio with him again last week. We still have a little bit of GE in the portfolio and he's wondering how we could get rid of it.

Scott: Yeah, well, it's been a disaster for him.

Pat: It has, fortunately, we acted on that.

Glen: It's funny you bring that up because I was heavily invested in GE because it was a dividend-paying stock. Once I hit 50, I decided I wanted stock that were more safe, supposedly, and it was a dividend-paying stock. And, of course, they cut the dividend as well as tanked.

Scott: That's right.

Pat: Yeah.

Scott: Well, and cutting the dividend may have been part of the tank, but it was a lot of financial engineering behind GE, but that's a different story altogether. So, if I were in your situation at this stage in life, personally, I would be more concerned about maintaining my lifestyle and what I've got. I'd be more concerned about that than trying to have the $10 million be worth $20 million. Right. That would be my...

Glen: Right.

Pat: So, if...

Scott: It might get to go to 20, but I would rather my number one concern would be to make sure that I can maintain my...and with that, it would be diversify in a way. And, I would diversify out of an IRA immediately.

Pat: Right away. Right away.

Scott: And, you might say it's down, but those were all markets down.

Glen: And then start diversifying the other.

Scott: I'm sorry, say that again, Glen?

Glen: Yeah. And then start diversifying out of the [crosstalk 00:22:31] Apple.

Scott: I would seriously look into a charitable remainder trust.

Pat: And tell us about your heirs. Do you have children or someone that this money will go to?

Glen: No, we have no kids. And originally, it's like, we're not [crosstalk 00:22:45].

Scott: Oh, then this might make even more sense for a charitable remainder trust...

Pat: Yes.

Scott: ...for a pretty good chunk of it.

Pat: I could make an argument that this would make more sense for CRT, charitable remainder trust.

Glen: Okay.

Scott: Yeah. If the plan is that you don't have kids to leave it to, you've got a pretty significant estate.

Glen: No. Yeah. So, I mean, we might have some to leave to nephews or [crosstalk 00:23:06].

Scott: Yeah, yeah. But, I mean, there'd still be plenty to sprinkle around.

Pat: Yeah. The first thing I would do, well, two things. I would diversify out of the stock and the IRA immediately, and then I would do some planning. I don't think there's a real rush. I'd take some time to look at all your options on the charitable remainder trust and get something signed [crosstalk 00:23:33]

Scott: Are any of these RSUs your basis? Are any of 'em have a high basis in them? The individual stocks?

Glen: Yeah, they do. So, we can drip some out now, in fact, the last RSUs that are out, actually 141. So, I always watch, you know, it's funny because what you do now when you own this much in one stock, is every day you get up in the morning and you look at the ticker price.

Pat: Yes.

Glen: I want to get away from that.

Scott: You don't have to. Yeah.

Glen: Well, exactly. So, there are some that we'll have no gain on, but there's lots for the basis of 25.

Scott: Okay. Yeah. So, the stuff with no gain on just right now, or even with a little bit of gain on it...

Pat: Yeah, [crosstalk 00:24:14] too.

Scott: ...just right now, get it out of the portfolio. I mean, you're not in the state, you're not 40, you're not gonna make it up. Right now it's preservation, and de-accumulation.

Glen: Exactly. That's what you've taught us.

Scott: Yeah. Well, it's not only that. I mean, Apple, it's mathematically impossible for Apple's next 20 years, the performance of their stock to be what it was the last 20 years. It's just not possible.

Glen: We've had a really good growth phase.

Pat: Oh, it's unbelievable.

Scott: I mean, how much more can we increase the market share for iPhones?

Pat: I mean, yes. I mean, even, like, what are the improvements from one, you know, generation to the next?

Scott: Maybe they'll surprise us and come out with something that will...

Pat: Maybe my phone will actually learn how to fly. I don't know.

Glen: Agreed. I think we've seen great growth at $1.2 million IRA.

Scott: It's worked great. Well, very well for you.

Glen: Growed only from the after-tax, $6,000 you can put into an IRA when you were working.

Scott: Yes.

Glen: I think that only has a basis of, you know, $60,000 is at $1.2 million.

Pat: That's right. It's unbelievable. Yeah. Yeah. It's unbelievable. So, you know, what to do and I wouldn't waste...

Glen: Thank you.

Pat: ...a lot of time getting there. And then, you and your wife, you know, in fact, if you have a favorite charity, these CRTs, some charitable remainder trust, some charities will actually pick up the tab to actually put them together.

Scott: Oh, yeah. They'll do all the work. They'll do all the estate planning for you.

Pat: Yes.

Scott: They'd be more than happy to. Hey, wish you well, Glen, appreciate the call. And we're gonna take quick breaks. Stick around for more Allworth's Money Matters.

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

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

Pat: And Pat McClain.

Scott: And we've got Steve Sprovach is gonna join us. Steve is in our Cincinnati office, financial advisor, and he does a daily radio program in Cincinnati. Steve, welcome to our program.

Steve: Yeah, good to be with you guys.

Scott: What is the show that you do on a daily basis? Because, I mean, Pat and I do this for an hour a week, and, like, obviously, you have more energy than we do.

Steve: Well, and I'm not younger than you. I know that. No, we call it "Simply Money." And, we're on every day, on AM Radio in Cincinnati, have been for over 20 years. I took over as co-host about a year ago, and best way I put it is, if you don't get "The Wall Street Journal," we're gonna talk about probably the five or six more important topics that day. And, gets a lot of traction. A lot of people know our name and I enjoy the heck outta doing it.

Pat: Oh, good.

Scott: Perfect.

Pat: And Steve joined us, part of Allworth about six years ago now. And by the way, if you wanna listen to their podcast version of it, you can certainly do that at allworthfinancial.com and find it there. But, you know, here's the beginning of the year. You've got some data that lists the top five goals for those who make financial resolutions. What are those if you wouldn't mind sharing?

Steve: Yeah. You know, it's kind of interesting that for the first time, and I can't remember how long, a company called Numerator, did a pretty interesting survey. And, more than half of the people responded with financial resolutions. You know, usually, it's, I'm gonna lose 20 pounds or something like that. But, maybe it's because of a rough 2022, not real sure, but more than half of the respondents said they were gonna do things like save more money, track spending, reduce spending, cut spending, financial resolutions. We'll see how long they last, because I got a funny feeling there, like, weight loss resolutions, and by the third week of January, might be out the window. But I think it's pretty interesting that that's the focus of a majority of people in the United States.

Pat: And of that survey, were majority of them on changing spending patterns or savings?

Steve: Yeah. Number one, and by a good bunch, number one financial resolution, save more money, which I have a little bit of a problem with. That's like saying, "I'm gonna lose 20 pounds." Okay, great idea, but you gotta be a little more specific than that, you know, in my case, yeah, lose 20 pounds, how do you do it? Well, if I would stop reaching in the refrigerator at around 8 p.m. to get that pint of ice cream, I would lose 20 pounds. That's the resolution, not lose 20 pounds. So, when you say save more money, okay, that's a great concept, but you gotta be a little bit, you know, specific, what am I gonna do to save more money? And I think the key there is don't make it voluntary. Don't say, well, if I have 100 bucks left over at the end of the month, I'll put that in the bank. You know, be a little bit more specific about what you're going to do in order to save more money. So, save more money is the consequence, not the action.

Pat: And Steve, you've been a financial advisor for how many years?

Steve: About 40 years.

Pat: Forty years, okay. So, what have you seen with clients over those years, the ones that have saved the best, the most diligent? Like, what are a couple steps that people can do there?

Steve: Yeah. You know, and I'm not saying make your life about money. Life is for living, but money is a tool. And, I think the people that just keep it in mind of what's the purpose of me buying this item? Is it a need or a want? I wanna retire. How do I get there? It's knowing what little steps to take and being intentional. Just have a constant in the back of your mind, this is what I need to do to attain these goals. I'll give you a great example. When people sit down with me to do a financial plan, to see if they are on track, sure, they'll bring in their statements, we'll go over their investments, 401(k), and everything else. And then I get to the million-dollar question, okay, how much do you spend per month? And, 9 outta...

Pat: Nobody knows.

Steve: ...10 times I get this blank stare, right?

Pat: Nobody knows.

Steve: I mean, you guys have been there. You know it.

Pat: You know, it's funny, Steve. I remember years ago, we used to use these, when helping people prepare for retirement, we'd have them fill out a budget, like, where...all the expenses. And then you'd look at it and you'd say, "Okay..."

Steve: Never get it back.

Pat: Well, no, you'd say, "This says that you've spent as a family $62,000 last year, but you had $110,000 come to the checkbook. Where's the other dollars? They're like, "Oh..." And, they kind of realized that instead of trying to have someone come up with a budget, let's just look at when it comes to retirement, what are they actually spending?

Scott: Which is, you know, step one in the seven personal decision points for obvious reasons. But when you think about it, I think it all goes back into forcing yourself to, that's why you talked about, you know...

Pat: Force yourself into what?

Scott: Forcing yourself into saving, which is why the 401(k) works so greater. The 457.

Pat: Or not spending.

Steve: Yep.

Scott: Or not spending, well, first of all, if you're the average American, you're gonna spend everything that comes through the house. So, the idea is to...

Steve: Rule number one. Exactly.

Scott: You gotta stop it before it comes through the house. That's number one.

Pat: Yeah.

Steve: If you don't see it you don't spend it. And I agree with you. That's why 401(k)s do work, but you can also do payroll deduction for a savings account.

Pat: That's right.

Steve: I mean, why not? You know, you can...if you wanna be intentional about saving and getting ahead in attaining your goals, take the decision-making away from it, you know, just have it automatically done.

Scott: And, was there anything around investing at all? So, we talked about the savings, but was there anything around, like, I'm going to become a better investor, the top five goals?

Steve: No, but one of 'em, and this is kind of a trick way of taking a look at this answer. Forty percent of the people said they wanted to pay off loans. And, you know, if you get a bonus, or a windfall, or, you know, some money drops in your lap, the first thing 99% of the people are gonna think about is, "Oh, I can buy what with that." Okay. But, you know, a credit card is a type of loan. And, one of the questions I'll ask people is, what would you think if I had a guaranteed 22% rate of return, would you invest in it? And, of course, they're gonna say, "What's the catch?" Well, that's what you're doing when you're paying off the credit card.

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

Steve: So, you know, if you're carrying a balance, and I'll tell you what, some of these credit cards today, they're pushing 30%, you know...

Scott: Really?

Steve: If you read the fine print, which nobody does. Yeah. I mean, usually, it's a guy named Vinny, charging you that kind of, you know, interest rate.

Pat: Okay. All right. People should not carry balances on credit cards.

Scott: That is right.

Steve: No, don't carry balances. Yeah. And I would call that an investment, I really would. Pay off your credit cards if you carry a balance. Sure.

Pat: That's absolutely right. Money not going out is exactly the same as...

Steve: You bet.

Pat: ...money coming in. So, it works that way. Well, we do appreciate you being part of...

Scott: When does your show run? What time and what station?

Steve: It's on every night in Cincinnati AM Radio, 55 WKRC from 6 p.m. to 7 p.m. or you can go on iHeartRadio or wherever you get your podcast and just search for "Simply Money."

Pat: "Simply Money."

Scott: Thank you, Steve.

Steve: You bet.

Scott: Yeah, appreciate it. Yeah, have a great new year.

Steve: Good talking to you guys.

Scott: Thanks.

Pat: Yeah, good talking to you.

Steve: Thank you too.

Pat: And I don't know if he was joking about wanting to lose 20 pounds, but whatever.

Scott: Well, I haven't seen him since before the I don't know. I don't know. I haven't seen him in a couple years.

Pat: He looked good last time I saw him, so who knows. I guess most of us have. Do you set goals at the beginning of the year?

Scott: Oh, I'd think about it, but I used to when I was much younger.

Pat: Yeah. I had a young person ask me, "So have you set goals for this year?" And I thought I'm 56. It's a little different. I reflect on my life, what would I like to do a little different this year?

Scott: That's right.

Pat: What things should I structure...? Are there some people in my life that I just wanna spend more time with that I haven't spent the time with? Are there some things I'm doing with my days that I'd rather not do or should be doing?

Scott: I think like that. What should I lean into? What should I lean out of?

Pat: Yeah, that's probably a good way to look at it.

Scott: And I heard a gentleman say it the other day. He said, "When he was younger it was force and now it's flow." And I thought, eh, that probably...

Pat: There's what?

Scott: Force, when you're younger you used to force things, and then as you get older, you let things flow a little bit.

Pat: Well, one of the benefits of getting older, a lot of things are just easier.

Scott: That's true.

Pat: Right?

Scott: And, you know what to ignore.

Pat: Maybe that's why things are easier.

Scott: Right?

Pat: I'm not gonna engage in that. I'm just gonna let that go.

Scott: There's certain kind of topics with the spouse that you're just gonna go...

Pat: It's not gonna go...

Scott: ...because I know the outcome.

Scott: Well, whatever you want. Or coworkers, you're like, "Yeah, we're younger." When I was 30, I'd actually go to the mat on most of them and now I'm like, "Meh, I'm not just gonna waste the energy."

Pat: Anyway, we're gonna take a call now. By the way, Pat and myself are gonna be in the studio on Thursday, January 19th, just a few days from now, from 3 to 4 Pacific Time answering questions, kind of a little call-in session. So, if you'd like to join us, send us an email, questions@moneymatters.com. You can send that right now. Sign up and we'll get back in touch with you and schedule a time for you to call, and we will take your question. Again, questions@moneymatters.com. And, let's now go to Michigan, and we're gonna talk with Jen. Jen, you're with Allworth's Money Matters.

Jen: Hello? Yes. Hi. How are you?

Scott: We're great.

Pat: Good, Jen. What can we do for you?

Jen: Hi, I have a question.

Scott: Okay.

Pat: Okay.

Jen: I retired last year at 59. I'm 60 now, and I have the option to draw down one of my pensions, which is a cash balance. The other one is the SAP that will continue to grow till I turn 65 and, you know, maybe up to 70. My question is to draw down the cash balance, should I draw it down lump sum or roll it over to a bank account and some type of plan?

Scott: Okay.

Jen: I really need the money to pay my debt in full, so I would be stress-free, but I just didn't know which way to really go.

Scott: All right. So, Jen, you said you're 60. And so I assume that you worked for some old line company, where they converted your pension from a regular pension into a cash balance in the last 10-plus years.

Jen: Well, it was an original type for like the first 14 years.

Scott: Yeah, yeah.

Jen: After 14 years, they converted to that so it's like the old one is still sitting there. And then you got the cash balance. So, the cash balance is the one that I can take now.

Scott: That's right. That's right.

Pat: And, how much is in the cash balance?

Jen: Roughly $20,000.

Scott: And how much is in the other pension plan? You said that you'll start taking income...

Jen: That one should be about 60 or 70. And, when they sent the outline all the way up to your age, 65, it should be at about $100,000.

Pat: And what are you living off now?

Jen: I have a part-time job.

Pat: And is that enough for you to live on?

Jen: No.

Pat: You own a home?

Jen: No.

Pat: And how much debt do you have?

Jen: About $5,000, $6,000, $7,000. I just want it gone.

Pat: Got it, got it, got it. And so, how much are you earning in your part-time job?

Jen: It's less than what I was making in my career job.

Pat: Yeah, okay. So, here's the concern about at 60 years old, taking retirement dollars to pay off debt while you're still working. Like, what happens if you're in a position where you can no longer work? A physical condition or something?

Jen: I would still have that other pension.

Pat: In social security?

Jen: My 401 and my social security.

Pat: And how much is in your 401(k)?

Jen: That's probably about $60. It got kinda hit with the COVID, but yeah.

Pat: And how much money do you have in cash?

Jen: Actually, I have went through that when I was offered this last year, then found the part-time job.

Pat: Okay.

Jen: I had 12 months emergency savings saved up.

Pat: All right. I think you should work more. Hate to say it. I would try to pay, I would work more and pay that down out of your work.

Jen: It's harder to pay it down without the money that I used to make.

Scott: I understand. But how did you accumulate this $5,000? Did that all happen since you've been unemployed?

Jen: Some of it, yes. Yes. Emergency things [crosstalk 00:39:43].

Pat: Yeah, and so what... Scott, I would take $10,000. She's a low tax year.

Scott: We would suggest you roll that into an IRA, the cash balance into an IRA, and just take out only what you need to pay off that credit card and leave the rest in a high-yielding account.

Jen: Okay. How does the IRA...okay, that's what I thought. But how does the IRA... Can you take money out...

Scott: Sure, yeah.

Jen: ...once a year or...

Pat: Anytime you want.

Scott: Every day.

Pat: Yeah.

Scott: Once you're over age 59 and 1/2, you can take it out every day if you want. So, I'd roll the $20,000... It's taxable to you when you pull it out. That's the only thing you need to be [crosstalk 00:40:24]

Pat: And so, you're just gonna take out the $6,000 to pay off the debt and you're gonna worry about your tax liability on that in the year 2024.

Jen: Okay.

Pat: All right. So, you might get a tax bill on there.

Scott: You might not.

Pat: It depends on what your income for the year is, but you may not. It depends on how much money you make in the total year. So, I would roll the $20,000 into a bank CD or a high-yield money market account that you could find online almost anywhere. And then, take out the $6,000, pay down that debt, and try not to ever touch this again, and try to get some more hours.

Scott: And then the more I'm thinking about this. So I'm thinking, if you're my sister, I would say, Jen, there's no way we should take social security until we're age 70.

Jen: Oh, I wasn't taking social security, period. Not now. I'm still working. I plan on working till...

Pat: Oh, I understand.

Scott: I understand.

Pat: You're not eligible today, but you will be in a couple years. But there's such a big difference in the amount of monthly income you're getting 2 years from now versus the time you're age 70. I would frankly rather see you having to spend down some of that pension or 401(k) dollars between the ages of 60 to 70, to have a higher social security payment down the road than taking it earlier. Taking social security before it's 70 could be disastrous for you.

Scott: For you.

Pat: For you.

Jen: I wasn't gonna, yes.

Scott: Yeah. Okay. So, hold off on that. And roll that money into a high-yield money market account. Take the six grand and try to get some more. Quite frankly, you need more income.

Jen: Right, because I need to rebuild my emergency fund...

Scott: That's right.

Jen: ...which l always lived off, right, which I always hated.

Pat: That's right. That's right. So, appreciate the call.

Scott: Yeah. We wish you well, Jen, and hope things go well.

Pat: Essentially, in social security, if you've listened to this program for a long period of time, it's different for everybody first of all. But as a general rule, if you need social security, that income for your retirement income, wait as long as possible.

Scott: The more dependent you are on it, the more dependent...

Pat: That's probably a better way to put it. And, the majority of Americans, for the majority of Americans, social security income is the majority of their retirement income. So, the majority of Americans should wait till age 70 to collect social security.

Scott: Which isn't the case at all. Which is not the case at all.

Pat: No, no, no. Not at all.

Scott: Most people take it as early as they can.

Pat: All right. But most people don't listen to this program. And if you've accumulated multiple millions, then you're probably better off taking it early because of legislative changes coming in the future.

Scott: As soon as you can.

Pat: Yeah. It's straight off. All right, Scott, we talked about the changes in the 401(k)s. Here's the big one. So, for those people that in [crosstalk 00:43:21]

Scott: This all came at...

Pat: By the way, that big spending package, this is all part of the big spending package that Congress signed, passed and the president signed the final days of 2022. We've got the Federal Reserve raising interest rates to slow down the economy to slow inflation. Right? On the one hand, then you've got Congress spending money like there's no one's business. There's more pork in that thing that was...

Scott: All right. Are you okay now? Are you ready?

Pat: No, I mean, are you ready?

Scott: I try not to worry of things that I have no control over and it is ridiculous. One is trying to slow and the other, Scott, I don't think they worry about that, I think most of 'em worry more about getting reelected.

Pat: No.

Scott: And playing it right rather than the outcome, so.

Pat: Even if you have to embellish your resume to get elected apparently.

Scott: Oh, that's something. That is something.

Pat: We won't talk about that Santos.

Scott: Santos. Oh, that is something. That is something. All right. That is...

Pat: Sorry, I brought that up. Let's focus on the 401(k).

Scott: I know, I was talking to my children about that. I'm like, "This is amazing. This Santos, what's his first name?"

Pat: I don't know. Let's move on.

Scott: New York.

Pat: Congressman.

Scott: Okay. So, required minimum distributions have moved to age 73 versus 72 from your IRAs. And this starts January 1 of 2023, and in 2033...

Pat: Look, so, and if you have yet to hit your required minimum distribution age, you just got another year and in the year 2033, it moves to 75.

Scott: But it's bumped progressively until that point, according to...

Pat: Yeah.

Pat: I mean, I haven't seen the fine print on it yet.

Pat: Yeah. Yeah, I'm thinking, "Yeah, make this complicated." And then the other was, we're digging into it, is 529 plans up to $35,000 can be moved into a Roth IRA by the year 2024. But we have not seen any of the...that was in the legislation in the past, but we haven't seen any of the particular, so we don't know if it's an annual.

Scott: Wait, wait. Repeat that, what do you...

Pat: Money in a 529 plan. So, if you were putting money away for your kids in a 529 plan, you are now allowed to convert it to a Roth IRA in the year 2024.

Scott: In your own name?

Pat: We don't know yet.

Scott: Okay.

Pat: We don't know yet. This is all that we're seeing. And then they increased the contribution limits for 401(k)s to $22,500, up from $20,500. So, another 2 grand. And then you do the catch-up provision if you're over age 50, which is another $7,500. So, you can put a maximum of $30,000 if you are over the age of 50 and $22,500 if you're under the age of 50. And by the way, just go on and do it if you can. Put the maximum into your 401(k) if possible.

Scott: Well, so, Roth accounts that are issued by your employer, so this would be Roth 401(k)s, etc., you won't have to worry about required minimum distributions beginning in 2024. Part-time employees are eligible for 401(k)s sooner, that's a good thing. There's also an automatic enrollment minimum contribution of 3% of pay effective 2025. So, employees have the option to opt out, but gotta work from somewhere, they're automatically going to enroll you in that.

Pat: If they have a 401(k)?

Scott: If they have a 401(k). You can use it as an emergency savings.

Pat: I didn't quite get this. I didn't get this, that you could put $2,500 a year in. And what I came to understand, it's because you could get the employer match on it. But they may or may not offer a match on these emergency savings. So, I've read a couple different accounts of this. You know, I think a lot of this stuff is just this, $2,500 for emergency savings in a Roth account is just window dressing. Just garbage. Just doesn't help people. You know, if you can't save $2,500 outside of your 401(k), you're probably going, "Well, maybe, just it's for savings."

Pat: Well, Steve, earlier in the program made mention you can also have a payroll, deduct money, go into a savings account.

Scott: That's right. And, if you miss your required minimum distribution, the penalty is no longer 50%. It's 25%, which I've been doing this for 30-plus years. Well, we are financial advisors. I don't know if I've ever seen anyone miss an RMD.

Pat: Oh, I have.

Scott: Have you?

Pat: Oh, yes.

Scott: A big one?

Pat: Like three years in a row. They came to me and they had missed three years in a row,

Scott: And did they end up paying the...

Pat: And I said, "Here's what you need to do. You need to take those out. You need to notify the IRS and pay the taxes on it."

Scott: And...

Pat: Said, "So, what if I just start taking the requirement of distributions out today?" I said, "Well, you can try that."

Scott: Well, that was a different age.

Pat: And he tried that and he never got audited.

Scott: That was a different age, though.

Pat: Yes, that's correct.

Scott: Where now the trustee...

Pat: IR custodian reports to the IRS. Back in those days, there was no one reporting to the IRS what the account balances were and what the...yes.

Scott: Required minimum distribution, but now, in fact, this goes to a whole subject, half of the population probably doesn't really even need to file a tax return. All the information that exists.

Pat: With the 25% penalty, there might actually be a time and some planning when you'd recommend somebody to skip your required minimum distribution and take it out the following year. Someone has a sale of a business or something, and the next year they're just gonna have a very low taxable income. I bet there'll be some planning around that. You look at me like I'm crazy, or you think...

Scott: I'm thinking that's actually fascinating that your brain thinks that way.

Pat: What do you mean? I take that as a compliment.

Scott: No, no, no, no.

Pat: It's a 25% penalty, right?

Scott: Yeah.

Pat: Top federal rates, roughly 40%, let's call it 40% plus state. There might be a time when someone's at the highest income this year. Next year, they're gonna be in a very low or no taxable income other than a required minimum distribution. You might have 'em forgo a required minimum distribution...

Scott: And pay the taxes on it the next year.

Pat: ...and pay the 25%. Might be less taxation.

Scott: Could be. That's interesting.

Pat: That's one out of 'em.

Scott: I know.

Pat: One out of a million maybe, but that's interesting.

Scott: There we go.

Pat: Yep. Changes.

Scott: It would certainly be nice to see more portability around 401(k)s. In other words, allowing people to transfer their balance to an IRA of their choosing, to a firm of their choosing.

Pat: Oh, while they're employed without age restriction.

Scott: Yes, because what ends up happening, and we see it a lot, Pat, people come to us mid-50s, they want help. Their largest savings is their 401(k). We do the best we can. Some 401(k)s, we have the ability to actively manage the account, which means we can trade in the account for our...

Pat: And put for them.

Scott: ...models and whatnot, but that's a minority of companies. Most people, it's like, "Well, this is the best we can do."

Pat: Here's what you do.

Scott: And this is how often you should look at it and this is what you should send to me. It's a very mechanical process.

Pat: Yeah. But I don't think we're gonna see any sort of portability come, I've been talking about it for 30 years and we've yet to see it, so I don't think we'll see it.

Scott: So, before we go, if...

Pat: Yep. Our workshops we've got coming up. Our 7 Personal Decision Point workshops. If you are nearing retirement and/or recently retired, you really ought to come to one of these workshops. You'll learn something. I guarantee you're gonna learn something.

Scott: We walk through the steps, the things you need to think about in this retirement process.

Pat: Yes, you'll learn something and you'll make better decisions as a result. We're gonna be in Cincinnati at January 25th, 26th, and 28th. We'll be in Sacramento the 1st, 2nd, and 4th of February, and we're gonna be in Denver the 2nd, and 4th of February. You can get all the information at allworthfinancial.com/workshops. We're out of time. It's been great being with you. This is Allworth's Money Matters.

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