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

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

Pat: I'm Pat McClain.

Scott: Super to be with everybody as we talk about financial matters. Myself and my co-host here, we're both financial advisors, certified financial planner, chartered financial consultant. We like to broadcast this program, take calls, help people make better choices with their finances.

Pat: Visit with people. Visit with people. Find out what's going on.

Scott: Who was I talking the other day about the markets? Someone was asking me about the market cycles. I said, you know, the nice thing about being in this industry after a long period of time, you've lived through all these different cycles. The dot-com, both run-up and blow-up. Financial crisis, both run-up and blow-up. And in some ways, it's quite helpful because you just get a different perspective on things.

Pat: This too shall pass.

Scott: Yeah.

Pat: Except for scams that continue to run their course year after year, after year, after year, which...

Scott: Are you thinking of a latest scam or something like that?

Pat: I've just been listening to "Hidden Brain," a lot of "Hidden Brain," the podcast recently.

Scott: With Shanka Verdanta or whatever.

Pat: Yeah. They had a whole thing on why people are susceptible to scams, like how scammers actually take advantage of people to scam on them. A lot of it is affinity scams.

Scott: From church or their other social groups.

Pat: That's right.

Scott: They must be a good guy.

Pat: Country club. "Good guy, you don't know him. I know it sounds unbelievable, but he's a great guy."

Scott: And we'll get to financial matters. This is a financial matter, though, this particular one. So I've lived in the same neighborhood for almost 20 years. We bought a lot there 20-some years ago, built a house, same house we've been for 20 years. And it's a golf community, but I don't golf at all. I've never once golfed on that golf course. But I remember talking to my neighbor. It was a couple streets over. He had a red Ferrari that he'd park out front every once in a while. And then he had like a big Ferrari flag that he flew in his backyard or whatever. And I remember I met this guy at another neighbor's house. I don't know if it was Monday Night Football or whatever. He had a Ferrari jacket on. Ferrari loafers. It was amazing. I didn't know Ferrari made loafers.

Pat: Ferrari jewelry.

Scott: But he was talking about all the money, he says, all the deals you can do. And he did these real estate syndicates of sorts. I'm like, "What do you do?" "Oh, yeah. Well, we did some different real estate investments." And he says, "Almost all my money comes from just the people in this neighborhood."

Pat: Okay?

Scott: All a scam.

Pat: The whole thing was?

Scott: All a scam. He's in federal prison now. I've never heard this story. Oh, really? I forget the guy's name. He was a big guy. He scammed all the neighbors in the neighborhood. To your point, in the neighborhood. These are people that he met at Monday Night Football parties or whatever. Super Bowl parties.

Pat: Affinity.

Scott: Your neighbors.

Pat: Yes. Yeah, makes the most sense.

Scott: If you're a psycho.

Pat: Of course he is. Of course he is.

Scott: Yeah. Yes. Of course he is.

Pat: Well, anyway. Anyway. So what made me think about this was we saw the last couple of weeks...was it last week that the exchange-traded fund for Bitcoin started trading?

Scott: A week or two ago, yeah.

Pat: And I thought, that's amazing. And was it Gary Gensler from the SEC came out and said, look, we're allowing this to happen, but you really probably shouldn't.

Scott: And interesting thing, so most of the big brokerage firms immediately offered these on their platforms. I think it was Vanguard said they weren't going to.

Pat: That's right. They may change course.

Scott: I mean, I don't know where those firms...

Pat: I don't know. I just, I thought to myself, this is really something that this is...

Scott: It might be coming back because my son made...he's mentioned it, brought up Bitcoin twice to me in the last couple of weeks.

Pat: And he's a leading indicator.

Scott: He gambles, plays poker, both at the card house and online. And on the online ones, he gets paid in bitcoin. He cashes out.

Pat: But he is successful at it.

Scott: He's making money. Is that success?

Pat: Has he figured out how much he makes an hour?

Scott: About a hundred bucks an hour.

Pat: He's figured it out.

Scott: He makes about a hundred bucks an hour taking money from people. I think he likes the online stuff because he doesn't know who they are. You don't see the people. Anyway. All right.

Pat: It's a financial show, we take financial calls.

Scott: But the point on the Bitcoin, he's like, "Yeah, I think I'm going to hold it until it reaches whatever." And I'm like, here we go again. It's back.

Pat: It is back. It is most certainly back.

Scott: Bitcoin is back.

Pat: But the, what are the non-fungible tokens are not back.

Scott: They're not. I forgot about those.

Pat: The dancing monkeys or angry monkeys.

Scott: People spending several hundred thousand for...

Pat: Yeah. Monkeys.

Scott: Non-fungible tokens. I haven't read anything about those in months.

Pat: No, haven't.

Scott: I think they're dead. Yeah.

Pat: Yeah. Hopefully.

Scott: It was a big transfer of wealth, though, from the unsuspecting to the creator of those things.

Pat: Yes. But the Dinar, the Dinar, the Iraqi Dinar, do you remember that one? That was years ago. There's always something. It's always something. If you listen to this show any length of time, you will know that we do not get enamored by the bright and shiny, the hot and new, the quick way to wealth. We just don't subscribe to that theory.

Scott: Usually those don't work out so well.

Pat: That's right.

Scott: There's no easy path.

Pat: Unless you're the first one in.

Scott: Unless you're super lucky, you inherit some money, or you happen to be employee number four at some company that becomes worth a trillion dollars or something. Other than that, it's hard.

Pat: You work and save. Work and save.

Scott: You work and save, yeah. So anyway, if you'd like to join our program, we'd love to take your calls. questions@moneymatters.com is where you can send us a note, questions@moneymatters.com or 833-99-WORTH. We're in Washington talking with Char [SP]. Char, you're with Allworth's "Money Matters."

Char: Thank you for taking my call.

Scott: Thank you, Char.

Char: Mm-hmm. So I have a question. It's about stocks. I have about...my husband and I, we have about $600,000 in 401(k) pre-tax savings. We have 30% in cash, 50% in index funds, about 10% in bond index, and then 10% in various stocks. Also, we buy stocks, and if it's a win, we sell it and take a quick win. And if it's a loss, we keep it forever and ever. So I was wondering...

Scott: Just to remind you of the poor decision or what? Why do you keep it forever?

Char: Let's just say it's not my choice.

Scott: Got it. Okay.

Char: Yeah. You know, we are close to retirement, and I think... Me and my husband, we have to merge our, I guess, our risk levels. I think he thinks that we're going to get a win so we keep it, that it'll turn around. And it occurred to me the other day that means we have a, I think we have too much in cash. We're not making money. And that if we sell when we make money and keep the losers, then we have short-term wins and long-term losses, which means we're going to lose a lot more, right?

Pat: Well, how much money are we talking about in the...

Scott: $600,000.

Pat: No, that's in the IRA. And the brokerage account is where you're... The money that you're buying these stocks in, are you doing it inside the IRA?

Char: Yes, I have one at Fidelity that's active with my employment, and then another one at E-Trade. It's pre-tax.

Pat: Okay. Okay. And none of it... So when you're buying these and selling these stocks, none of it's in a regular brokerage account. It's all in an IRA or a 401(k), is that correct?

Char: Almost true. We have about $75,000 in a Fidelity, and that one's not pre-tax.

Pat: Okay.

Char: And that one's in, I think I got VFIAX.

Scott: All right. You're not trading that one.

Pat: You're not trading that one.

Scott: You're not triggering taxes for yourself. So, I mean, let's start with the first thing, cash. You mentioned too much in cash. I think cash is fantastic. To put money that you're going to need within a short period of time.

Pat: What is a short period of time, Scott?

Scott: If I plan on buying...let's say you plan on buying a vacation home next year, or you're a couple of years off from retirement, you plan on moving somewhere and you want to have some flexibility to buy something before you sell your existing, or whatever it might be, you're going to take one big trip around the world. I don't care what it is. If it's money that you need within five years, cash is fantastic. That doesn't fluctuate in value. You know it's there. When you call up the bank to say time to transfer the funds, you know what the value is going to be. Great for short-term, terrible for long-term investments because it just doesn't earn that much. And if you consider stocks historically, if you go back the last hundred years, they've done about six to seven percentage points above that of the rate of inflation. So let's say inflation's 3%, they've averaged 10%. Historically, that's the kind of return you'd get as opposed to cash that's usually been about half a percentage point above inflation. So, particularly in 401(k) investments, having a large allocation to cash...I mean, unless you're planning on yanking those dollars out and spending them, it just doesn't make a lot of sense.

Pat: It makes no sense.

Scott: It makes you feel good because your portfolio doesn't swing as much.

Pat: But it doesn't...it isn't based on really what your timelines are.

Scott: Nor what your retirement needs and objectives are.

Char: Right. It's just kind of, well, it's worse than stagnating, right? Well, I think his thought is if he has cash and he sees a big deal, he can buy it.

Scott: Okay. So let's talk about the individual stocks for a moment. So you own index funds, right?

Char: Yeah, we have a lot of index funds.

Scott: And the reason index funds have become popular, one, they're low cost, but two, even more so, most professional managers can't outperform the market.

Pat: Especially the bond market.

Scott: Even with their teams of analysts doing all that research, the vast majority do worse than if they just said, you know what, let's just forget all this. Let's just buy the index. So on the one hand, you've got...you believe that, that's why you own index funds, but for some reason, your husband thinks he's got some skill that surpasses Wall Street to be able to trade stocks. Now, people invest for a lot of different reasons. Some of it is a bit of a sport, bit of gambling, bit of all those things. I think it's fine if it's kept to a small percentage of one's portfolio. And for example, if you and your husband... So obviously you and your husband don't see eye to eye on this. My guess is there's other parts of your marriage you don't always see eye to eye. I've been married 31 years. There's parts of my marriage we don't always see eye to eye, but we have a conversation. We say, look, how do we make this work for both of us, even though we don't fully agree? So maybe the right thing is that 10% never goes more than 10%. He can trade how he wants. Maybe it's 5%. I don't know.

Pat: I would have a tendency to actually segregate those dollars into the brokerage account, leave the 401(k) money as long as...

Scott: Or carve it out at 10% special IRAs.

Pat: A special IRA that will allow him to trade in it. And by the way, the idea that you never sell any losers, the thesis is just foul. It makes no sense at all because the question you should be asking...

Scott: Well, you'll sell any of the tomorrow's leaders if you sell the...

Pat: Yeah, but the question you should be asking, would I buy this stock today if it was available to me? And if you say, "Yes, I would buy this stock today if it was available to me," then you continue to hold it. And you do that with both your winners and your losers, not sell your winners and keep your losers. But that's a completely different...he'll need to call us directly to get that sort of input.

Char: That sounds like great advice. Thank you.

Scott: All right, Char.

Char: I do have a few other questions. I don't know if you have time.

Scott: Sure.

Pat: Fire away.

Char: Okay. So I'm a...

Scott: So we, for years, we were on the radio, live on the radio, where we had to live by the radio clock, right? So whenever the commercials were coming, the breaks, we had to get through the calls quickly to get the break. We've moved past that. We're still broadcast on terrestrial radio, but we designed this program now more as a podcast, and we schedule our calls. So it gives us time to have a little more in-depth conversation, which we enjoy. So fire away your next question. By the way, our screener wouldn't have scheduled you if they thought you were a bad call.

Char: Okay, so I'm a Boeing employee, and I have a pension. I'm lucky because, you know, the trend is to not do pensions.

Scott: Yep.

Char: But I do have a pension, and we're not sure, my spouse and I, what options. We have a lot of options to take and the big one is you know just take a lump sum. He looked, you can put it into a pre-tax.

Pat: Yeah, you can roll it into an IRA. And what's the size of that lump sum?

Char: It should be around $300,000.

Pat: Okay, so $300,000.

Char: Or we can take, you know a monthly chunk.

Pat: And so the number we'd like to compare to is the full joint and survivor. So in order to compare apples to apples, you take the pension lump sum and you compare what would happen if you took a pension and if you were to pre-decease your husband, he would receive exactly the same pension. And so the Boeing pension probably has seven or eight different options that you can choose from. The one we're interested in is the one that actually is the same level, whether you're living or dead, that goes to your husband. What is that number?

Char: Yeah, one second. I'm going to get that because I have it right here.

Scott: Okay.

Char: Yep, it's 100% survivor.

Pat: That's right.

Char: Yeah, and so that is around...if I retire when I want, it's about $1,800.

Pat: Okay. And how old will you be when you retire?

Cahr: Sixty-five.

Pat: Okay.

Scott: So a couple things on this, how old are you now?

Char: Sixty-two, and he's 65.

Pat: So does he work at Boeing as well?

Char: No.

Pat: Okay, so we're going to give you an answer today, but it's not going to be the right answer for three years from now. And the reason is that pension lump sum moves up and down based upon interest rates and your life expectancy. And so the higher the interest rate that they use internally on that pension lump sum, the lower your lump sum is. So we can answer...

Scott: The lump sum is probably less today than it was a year ago.

Pat: There is no question.

Char: Much lesser.

Pat: Right. Right. So you understand how it works. Right. So essentially what happens is the pension sets aside a lump sum of money for you. And they use this internal interest rate in order to determine that lump sum of money. And then the idea being is that if it's 7%, the internal interest rate based on a normal life expectancy, that pot of money should be empty at the remainder of your expected life.

Scott: Expected. Knowing that some people are going to die prematurely and some are going to live much longer.

Pat: What happens is the lower that interest rate, the higher the lump sum, the higher that interest rate, the lower the lump sum. But you need to do the calculation at that particular date and time.

Scott: And then there's a couple of ways to look at it. One is to say, what rate of return do I need to earn to provide that same income while maintaining my principal? That's how most people like to look at it.

Pat: And we'll refer to that as the hurdle rate.

Scott: The other one is to say, well, apples to apples, what rate of return would I need to provide that income to the remainder of my normal life expectancy and then have it go to zero by that point? So it's a lower rate of return you'd need to...

Pat: So the things that you take in common...

Scott: But most people don't like seeing their account balance going down.

Pat: That's right. So you want to calculate it based on a hurdle rate or what you would expect that you would return in a well-balanced portfolio.

Scott: So if you're retiring today with these numbers you just told us, it's about a 7.2% rate that you would need to achieve.

Pat: And then I would look at the rest of the assets. Right? And I might say, you know, you might be better off at 7.2% taking the monthly pension and getting more aggressive elsewhere in your 401(k).

Scott: Aggressive.

Pat: Right? Because you can look at that monthly pension as a bond portion of your pension...

Scott: Which will... Because you're not going to get a guaranteed 7.2% in the market today.

Pat: Not going to happen.

Scott: The older you are, the harder it is to justify a lump sum. Just because it's not that big, right? I mean, if you're retiring at age 80, your life expectancy might be 6 years. It's not going to be very much money.

Pat: So the answer to your question is call us back in three years.

Scott: We have hundreds of maybe...we have probably thousands of clients that have taken lump sums

Pat: And by the way, what happens is you can game this a little bit too, because inside every pension plan, they will tell you what interest index they're using to determine the pension lump sum. And so you can retire on December 29th and get 2024's pension interest rate, which would cause a certain lump sum, or you can retire the 1st of January 2025 and get a different lump sum. And you might know that interest rate 15 days in advance.

Char: Oh, okay.

Pat: All right. So this number. So if you were calling today and saying, "I'm leaving today," assuming everything else is equal, that you have a normal life expectancy, and that comes into play, your husband has a normal life expectancy, we would tell you today we'd be more inclined to take the pension. And I would increase the allocation in that 401(k) up to 70, 75% equities. Yes.

Char: Oh, you would take pesnion lump sum not monthly.

Pat: No, no, I'd take the monthly pension. I'd take the monthly pension if it was today, and I'd increase the 401(k) allocation more to equities. That's as little as we know about you now. Now, if you have millions of dollars elsewhere. That might change our opinion because you're able to tolerate a little bit more risk in the up and down. But you're not going to get an answer. In fact, you could worry about it if you want, but you're not going to get an answer until you're ready to retire. And I would plan on taking the pension. And if interest rates are really low at the time you go to retire, maybe you'll take the lump sum.

Scott: Yeah, a year ago, we probably would have said look towards the lump sum.

Pat: Oh, there's no question.

Scott: Because rates were so low.

Pat: There's no question.

Scott: It made the lump sum so large.

Pat: Yes, and actually it would be great for you.

Scott: It's different for each time. Char, so much appreciate the call. It was good talking with you. And Pat, I remember years ago, there was a season where you could take, and we did this for some clients, took a pension lump sum, went out and bought U.S. treasuries and matched... So, in this situation, you take the $300,000, you buy treasuries, and it equals the $1,800 monthly pension.

Pat: You're preserving your principal.

Scott: Only a fool would take the lump sum.

Pat: And you could buy 30-year treasuries, which is essentially equal to the person's life expectancy and maintain the principal.

Scott: I shouldn't say only a fool.

Pat: Many.

Scott: I can understand people's fear with all this, and sometimes it's just easier to take the path of least resistance. My guess is most of the listeners, that's not their...

Pat: Although, at $1,800, I wouldn't worry about the pension being in default.

Scott: That is true.

Pat: But if that number was $7,000 or $8,000 or $10,000...

Scott: What could ever go wrong with Boeing, Pat?

Pat: Well, remember what happened to all the airline pilots.

Scott: Yeah.

Pat: So United, American, Delta?

Scott: The pension benefit guarantee corporations guarantees to a certain level.

Pat: And age.

Scott: A lot of these people... Yeah, based on your age. It's based on age 65 and then if you retire before that, it's a lesser amount. I don't know, I forget what the...it's about 50 grand a year, 60 grand a year they get.

Pat: And these people were taking $150,000, $200,000 pensions and they had half to three quarters wiped out because the plan went into...the company went into bankruptcy, which required them to turn the plan over to the Pension Benefit Guarantee Corporation. And the PBGC, much like the FDIC, the Federal Deposit Insurance Corporation, has limits on it.

Scott: It's funny. I remember years ago arguing with someone. They were retiring from AT&T and I was arguing for them to take the pension, the monthly pension. This was, God, 25 years ago. Well, they were worried about AT&T going out of... And they were under the limits too. That was their concern. Like, first of all...

Pat: Now, that was not SBC. It was AT&T.

Scott: AT&T years ago. I said, first of all, let's look at the company and, you know, I said, how many things would have to go wrong? But secondly, you're already covered. You're well under the PBGC.

Pat: Now in saying all this, and you've got a choice between a pension and lump sum? Our answer was directed...

Scott: If you're way above the limits, you should definitely take the lump sum.

Pat: Yes.

Scott: If your pension is a hundred grand a year and you have an opportunity to take a lump sum, take the lump sum just because you get more protection. Otherwise, you don't have any insurance.

Pat: That's right. But every pension plan is different on how the pension lump sum is calculated. So this is specific to Char. So if you listen to this and say, oh, I'm absolutely going to take the pension, it may be the wrong answer.

Scott: And by the way, odds are you have no pension through your work. And no pension lump sum. If you have a pension, you probably work for the government of some sort.

Pat: I was reading this two weeks ago, 91% of people in the private have no pension.

Scott: Yeah. But government, almost most of them have pensions.

Pat: Yes.

Scott: All right, let's continue. We're in Maryland talking with Susan. Susan, you're with Allworth's "Money Matters."

Susan: Hi there. Thanks for taking my question. It's really pretty straightforward. I just want to know whether or not I should pay off the mortgage on my second home. It's a second home. It's located in Virginia Beach. It's worth about $500,000. I owe about $70,000. My interest rate is 3.625%. And I pay a little bit more than I have to every month. So I think it'll be paid off in July 2027 if I don't pay it all off now.

Pat: And do you owe anyone else money?

Susan: Yes, I also have a primary residence in the Washington metro area. It's a condo. It's a $250,000 mortgage at 2.5% interest.

Scott: Okay. How old are you?

Susan: Sixty-two.

Pat: And do you have money to pay it off?

Susan: Yes, I have... Well, I have $970,000 in a 403(b) at TIAA and I have $880,000 in a brokerage account at Schwab. And then I have $240,000 in cash and money market kind of money that I was planning... I was planning to live off the... I just retired. So I was planning to live off that $240,000 and until I turned 65.

Pat: And you have a pension coming in?

Susan: No, no pension.

Scott: Have you thought about any Roth conversions?

Pat: Thank you, Scott. We're going to answer a completely different set of questions before.

Scott: How old are you, Susan?

Pat: Sixty-two.

Susan: Sixty-two.

Scott: Okay. So, are you married?

Susan: Yes, but my husband and I have our finances completely separate.

Pat: How do you file your taxes?

Susan: Well, we filed jointly, but he has his money and I have my money.

Scott: Okay.

Susan: So, for example, both properties are in my name. And I have a trust and they're in my trust.

Pat: Well, the reason this is important is the income. We can recommend... Let's answer the question, and then we'll go to the Roth conversion.

Scott: It's 3.625%. Let's assume you could earn 1.5 percentage points higher if you, say, buy a CD, which is about what the market is right now. So your cost of, you'll make about $1,000 a year by keeping this mortgage in extra interest because you're earning more than you're paying in interest. But now, having said that, you're probably not getting a tax deduction on this anymore because you're probably taking a standard deduction and you are paying tax on the income. So instead of being $1,000, let's call it $700.

Pat: Yes, but you should not pay this off, nor should you be paying extra on it.

Scott: Because you can earn more in the cash. You're going to take your money out of your Schwab account, where it's earning more and paying...assuming it's earning more. If not, then move the cash to where it's getting a higher rate.

Pat: Yeah. I mean, there's a government money market funds in your brokerage account that are paying 5.1% right now. And remember, you can always pay it off at any point in time. So if that interest rate drops to 4% and it no longer makes sense for you to keep the cash, you can turn around, take the cash out and pay off the mortgage. But economically speaking, I could not make an argument as to why you should pay a penny extra.

Susan: Because it makes me feel good.

Pat: All right.

Scott: Well, then you got to say, is it worth 700 bucks a year?

Pat: You've gotta decide. If it's worth $700 or $800 do a year, pay it off. It's not gonna blow anything up.

Scott: It's not gonna make any difference in your financial plan. Whether you pay it off or don't pay it off, your financial life's not going to be any different.

Pat: If you were my sister, I'd say, yeah, do whatever you want.

Scott: Because it's not going to have that much of an impact.

Pat: That's right.

Scott: And if you feel that good about paying it off, then pay it off.

Pat: If you could go down to Virginia Beach, sit out there like a big wig, sipping your margarita or whatever you sip, staring at the ocean, thinking, "I own this thing," then do it.

Scott: There's something, there's something.

Pat: Oh, yeah. Listen, I have a vacation house that's paid for. I don't know how I'd feel...I'd probably feel a little bit differently if it wasn't paid for.

Susan: Yeah.

Pat: If it makes you feel good, pay it off.

Scott: So the real planning issue, though, Susan...

Pat: This is why you should have called.

Scott: So if for the next three years you spend down your cash and allow that 403(b) to continue to grow and whatever securities you own in your brokerage account at Schwab to continue to grow, you're taking a tax liability, either current or future tax liability and you're kicking it down the road and it might be worse in the future than what it would be in 2024 or 2025 or 2026.

Pat: Or '27 or '28. So the question that this is going in, I know your husband and you...

Scott: This is where you need to put...because you file your taxes jointly...

Pat: You need to actually coordinate whether you should be doing Roth conversions or taking income or both. So if it was just you and your husband wasn't in the picture, we would say...

Scott: For selling the highly appreciated stock in the brokerage account that you want to try to diversify away from.

Pat: Or taking a distribution from the 403(b), some from the brokerage account, some from the cash, and then converting some of the 403(b) into a Roth IRA.

Susan: You mean taking it now?

Pat: Yes.

Susan: Even though I don't need it, but take it now so that I don't have to pay higher...

Scott: She wouldn't take it out, you'd convert it to Roth.

Pat: You convert it to a Roth. So you're converting it... Let's say we just wait and you didn't take a dime out of this 403(b).

Scott: What's your husband make? What's his income?

Susan: What is he? He's retired. He's been retired for a long time.

Scott: He doesn't have a $ 300,000-a-year pension or anything, I'm guessing.

Susan: No.

Scott: Nor does he have multi-millions in the bank.

Susan: No.

Scott: She's laughing.

Susan: No, no, he's got an ex-wife. So he doesn't have anything.

Scott: Hence the reason that it's a separate property here.

Pat: Yes, you should be doing...and the idea being is if you don't convert some of that 403(b) into a Roth now and you wait until you're required to take a distribution on this this thing could be $2 million, right? You're 62 now, we go out 12, 13 years, it could be...

Scott: I mean, the way the tax rates work, Susan, is they're progressive. So there's some income we don't pay any taxes on, right? For most Americans, it's the standard deduction. You pay no taxes whatsoever on that standard deduction. And what is the standard deduction this year? It's $29,000 for a married filing joint. So the first, let's call it, $30,000 of income tax-free. Then there's some income, the next roughly $20,000, is taxed at 10%. So we've got $50,000 of income taxed at 10%. Then it goes to 12%. Then it goes to 22%, then 24%, all the way up to 37%. And then there's another 3.8% of Obamacare tax on top of that.

Pat: So the idea being is rather than postpone the taxation on all of this as much as possible and keep yourself in the lowest marginal tax bracket...

Scott: Can we take some for nothing or 10%?

Pat: And then when I need to take required minimum distributions out of my IRAs, which the 403(b) effectively will become an IRA, I assume at some point in time...

Scott: Almost 100 grand you could have a capital gain with no capital gain tax.

Pat: So you want to do it while you have control over the taxation and not when you're forced into a taxation. And you're in the prime spot, especially now. Are you taking Social Security now?

Susan: No.

Pat: Even better. Even better.

Susan: So I was going to wait until I was 65 to take any money out of Social Security or 403(b) or...

Scott: Well, don't think about taking it out. Think about just rearranging your assets to maximize your tax savings. And so one option and one strategy is converting some of the 403(b) to Roth. But another one, and along the same side, my guess is there's some securities in your brokerage account that have grown tremendously, some that you might want to pair a bit of their holdings, diversify a bit. This gives you a tremendous opportunity to sell a portion and not pay any capital gain taxes. I don't know the state of Maryland's rate, so they've got to factor that in, but... It's going to be de minimis.

Susan: It's always a 5%.

Pat: Okay. You're talking to people that live in California, so.

Scott: That's why I call it de minimis. Anywhere else is de minimis.

Pat: No tears for you.

Susan: No, we're the third worst place to retire.

Pat: All right. Well, listen, it must be awful at that house at Virginia Beach. I don't know how you do it.

Susan: Well, that's why I like it.

Pat: Which is, right? Which is, maybe that's your permanent residence.

Susan: In the future, yeah.

Scott: So our suggestion, Susan, is for you and your husband to meet with a good financial advisor and do a good plan. You could do some, what if scenarios, like, what if we did this and converted this? What if we sold that? And one, it'll show you your probability of success 30 years out, even with your current strategy. But by doing so, you've just got a great opportunity right now to really maximize your retirement savings.

Pat: It's tax planning.

Susan: Yeah, okay. All right.

Pat: All right. So what you got out of this is you're going to pay off that Virginia Beach house because you want to, which is great. Listen, it's not going to matter that much. And if it makes you feel good, then do it. And the other is that you and your husband need to sit down. And he doesn't really need to be involved if he doesn't have a lot of assets and you know what his income is. Right? Does he have a lot of money in 401(k)s or IRAs?

Susan: Yeah, he has some. And he gets a big social security check.

Pat: Okay. Well, then if you actually know those numbers, he doesn't even need to go to the meeting with you. You can plan around it.

Scott: Yeah, just get the previous year's tax returns.

Pat: Yeah, and plan around it. If you don't want to involve him, you don't have to.

Scott: Yep, agreed. Totally agreed.

Susan: Okay.

Pat: All right.

Susan: Sounds good.

Scott: Appreciate the call. Thanks for calling.

Susan: Thank you.

Scott: Pat, I want to follow up on your...like, I guarantee there's some listeners are thinking what, why would that guy recommend paying money, paying off the mortgage and foregoing that interest, losing out on 700, 800 bucks a year because it makes someone feel better? But the reality is we all make choices with our money that aren't necessarily designed to increase our net worth.

Pat: We go out to eat. We have children.

Scott: We have children. But there's a number of things and it's different for different people, different families, but we all make those decisions every day, every week. We choose to part with our finances in return for something, some experience, some material good, some benefit.

Pat: Some psychological benefit. And we explain to her the cost, and then it's up to her whether she wants to do it or not.

Scott: Yeah, she might say it's not...

Pat: For $700?

Scott: I don't have to worry about that payment and I can go...to your point. Or she might say, that's crazy. Why would I want to burn that money?

Pat: $700, yeah.

Scott: Look, if the goal is to maximize your net worth so you die with as much money as possible live in the smallest place you can. I mean, if you own a home, rent it out and buy a little tiny house and live there. Never go out to eat. Never entertain any guests.

Pat: Cancel all your subscriptions.

Scott: Yeah, no peacock streaming or anything.

Pat: I just got my internet bill lowered by $30 yesterday. Just called 'em, told 'em I'm thinking of quitting. They put me over to retention and, a nice conversation with the gentleman working out of South Africa, Johannesburg.

Scott: That's the call center in Johannesburg?

Pat: It was in Johannesburg, South Africa.

Scott: So you can understand their English?

Pat: I could. I understood them. I understood them.

Scott: That's the problem with some of those offshore call centers.

Pat: And then when I was on the phone with AT&T...so every couple years my wife and I actually just pull up all the subscriptions.

Scott: Were you the ones who made the phone calls?

Pat: Yes.

Scott: You spent a few hours?

Pat: Yeah, two hours total. Between AT&T and Xfinity?

Scott: You start adding them up, $30 a month here and $10 a month here and $6 a month here. Suddenly it's real money. Now I'm thinking I need to do it.

Pat: It was $260 for the Xfinity on an annual basis. We do it every two to three years. Just call them and say, hey, I'm thinking of quitting. And they push you over to retention.

Scott: By the way, I've worked with Pat a long time. And I remember you used to take your Lexus to Jiffy Lube or whatever and negotiate on the oil change. "$39? I'll give you $33."

Pat: It's where I grew up, man. It's where you grow up, right?

Scott: All right, let's continue back with calls here. It all adds up. And those silly subscription things. I signed up for Peacock to watch the football game last weekend thinking I'm going to cancel it. And then, then it was on my wife's Apple account and like, I don't even know how to cancel that. And then she's... And the next thing you know, we're out on the street.

Pat: It started with one too many subscriptions.

Scott: Just want to watch the football game.

Pat: One too many.

Scott: I didn't even care about the football game. I just wanted to see Taylor Swift. No, I'm kidding. I'm joking.

Pat: Why did they file for bankruptcy? Too many subscriptions.

Scott: They are kind of endless, aren't they?

Pat: Oh, no, correct.

Scott: Everyone wants a monthly subscription now. Oh, yes. Whatever it is. And it's only $3. You can cancel any time. Yes, yes.

Pat: I was on Amazon and an ad popped up for a subscription for toilet paper. True story. Like you could sign up and have toilet paper delivered to your house.

Scott: I was thinking that's one more thing, what happens if you end up with too much or too little? Both are a problem. We're not going to talk about toilet paper anymore. Just brings me back to the era of the lockdowns.

Pat: Oh, yes.

Scott: Come in the office and raid the office.

Pat: I got a case for a friend of mine. He put out a plea for help.

Scott: What a crazy era. All right, let's not even think about that.

Pat: He put out a plea for help. I said, "Okay, I got it. It's really cheap. It came from my office." And I said, "I will give it to you under one condition. You cannot tell anyone where you got this because I don't want anyone else calling me and asking me for toilet paper. I'm not going to become the local toilet paper dealer." Okay, let's move on.

Scott: Yes. We're in Indiana talking with Rock. Rock, you're with Allworth's "Money Matters."

Rock: Hey, how are you guys today?

Scott: We're great.

Rock: Hey, so I've got a question for you about college savings. I've been saving just in a bank account for my kids there in second and third grade, and I know that's not the best way to grow that money. So I started looking into a 529 account in Indiana. They will give you a tax credit of 25% up to 7,500 bucks a year.

Scott: A year? Yeah. $2,500 on $7,500 deposit maximum, or they'll give you a credit up to $7,500?

Rock: It's $1,500 credit if you put $7,500 in.

Scott: Okay.

Rock: And so I'm trying to figure out the best way. I have $20,000 in the bank, and I'm trying to figure out the best way to maximize that with that tax credit. Exactly.

Scott: You know. Yeah, exactly what you're thinking.

Pat: Yes. How do you do it?

Rock: Yeah, and I talked to a local advisor, and he said that if I trusted people, I could give them $7,500, and they could put it into my kid's 529 as a gift, and then they claim the tax credit.

Pat: No, don't, don't, no, no, no, no, no, no. Just $7,500 for each one of these kids this year.

Scott: Like you go to your siblings and say, "Hey, I'm trying to... Here, I'm going to give you $7,500 and you turn around and put it in the 529 plan. And then..."

Pat: Take the tax credit. Don't mess with any of that. Just put $7,500. It's $7,500 per child, correct?

Rock: The way I read it, it's just $7,500 per adult donating. Okay, well...

Scott: Okay, well, we'll find out if a husband or wife can double that. We're not experts on the state of Indiana's tax laws, 529.

Pat: Yeah, but you want to do it to the maximum in 2024, and then you want to use up the rest of it in 2025.

Rock: Okay.

Pat: Yeah, and you absolutely want to use the 529. And you're talking to two guys that went full circle. Like the day it came out, I put money into it for my children.

Scott: As did I.

Pat: And we have used it. In fact, we're using some of them now for my daughter to go to law school. And you can move it from beneficiary to beneficiary, which is how we did it.

Rock: Okay.

Pat: It's easy. It's easy. And then they converted it that if you don't use it in the child's lifetime, then there's an ability to actually convert it to a Roth IRA in the child's name.

Scott: There's a limit though on that.

Pat: There is a limit.

Scott: Yeah, spread this out over two or three tax calendar years. Yeah. That's what I would do.

Pat: Or if it's just $7,500 for you and $7,500 for your wife, right? Then do it that way. But use the maximum in '24 and the rest in '25. And you probably want to use the age-adjusted allocation in there.

Rock: Okay, so it's better to just wait and get the tax credit than going and gaming the whatever?

Scott: So the 529, think of it as just kind of an umbrella that you put on other investments. So whatever investments are available within the 529 are also available to you today.

Pat: You could buy it today.

Scott: Similar kind of investment.

Pat: And at the end of next year, you could take the money out of that investment and replicate it in the 529. Yeah.

Scott: Yeah, and get the 20% or 25% tax credit.

Rock: Okay, I see what you're saying. Gotcha. That makes sense.

Pat: Yeah, and never talk to that advisor again, by the way.

Scott: No, I would agree.

Pat; That is terrible advice. They just told you how to skirt the law.

Rock: Gotcha.

Scott: It's not an arm's length transaction. So first of all, if you make a gift to somebody, there's no strings attached to that for it to be their asset. If you still control it, it's not a completed gift. So it would essentially be you making that contribution, right?

Pat: And by the fact that they actually had to give you back that tax credit, that's a form of money laundering. It's a form of money laundering.

Rock: Yeah, it didn't seem good.

Pat: I mean, that advisor's terrible.

Scott: I mean, if you control a gift, it's not a completed gift. So therefore, it wouldn't be the family member actually making that decision or friend to make that decision. Can you imagine if someone asked you to do that? I'd be like, no, thank you.

Pat: Yeah, don't talk to that advisor.

Rock: Sounds like a plan.

Scott: Yeah, and if it's a family member, disown them.

Pat: Well, that's a little much.

Scott: I appreciate the call.

Pat: "Why aren't we allowed to come to Christmas at your house this year?" Well, listen, sister, your husband gave me some terrible advice.

Scott: I've seen people...I know somebody who they were like big donors and is retired and he's trying to give his money throughout his lifetime. And so he is above the 50% limit for deductibility. So he was giving his kids money and then having his kids turn around and donate to the charities that he wanted to do. Same kind of thing. And I'm like... Yeah. Yeah. It's...

Pat: Well, in politics, people go to prison for that. Campaign finance.

Scott: Yes, or not. You see that SBF, Sam Bankman-Fried, they decided not to pursue his political contributions, they dropped that case against him.

Pat: I didn't see that.

Scott: Yeah. They did it over the holidays, so nobody noticed.

Pat: I did not see that. So they're not going to claw back.

Scott: No. They're ignoring it.

Pat: I did not see that.

Scott: You wonder, because he gave millions to both... This is the guy who founded FTX. That was a big...a bit of a Ponzi scheme, the way he was taking, he's taking deposits and investing in the own...

Pat: So the bankruptcy... Wait, wait. The... Who said they're not... Because the fiduciary...

Scott: Whatever the federal prosecutor is not pursuing charges.

Pat: Okay, but the trustee for the bankruptcy is the one that should actually be pushing it because the trustee for the bankruptcy represents those people that lost money in the bankruptcy.

Scott: Yeah, but can they go back to a...

Pat: Can they go back to the federal government and push on it? I would hope. I would hope. I would hope. I would hope.

Scott: There is some lawsuits against some of the actors who got money from him. Larry David and...

Pat: Yes. To claw back.

Scott: Clawback. Anyway. Interesting. Is it interesting?

Pat: I think it is. I think it's actually...if that's in fact the case, and the trustee is violating their fiduciary obligation to the parties in the bankruptcy, quite frankly.

Scott: So let's say you make a political contribution to your local congressperson who's running for Congress. And then you later go bankrupt and you have creditors. Do you think the creditors can come back to that local congressman or congresswoman and say, "Hey..."

Pat: No.

Scott: Yeah.

Pat: But the money wasn't a product of a commission of a crime. If I robbed a bank and took the money home.

Scott: Okay, fine. That's a good point.

Pat: Even though you didn't know it was a commission of a crime at the time it was doing, after the fact it's a commission of the crime. All right. Anyway, this isn't a legal show.

Scott: Yes, it's not a legal show. Hey, I want to let everyone know that we've got a financial planning virtual event. So some of the topics we talk about here, it's kind of packaged in a way to help you make some wise choices. We're going to talk about five must-know strategies for building a confident financial plan. So it's really about kind of the financial plan, similar to the conversation we had with the earlier caller. During this virtual event, you're going to learn how to calculate your retirement income needs. And it's funny, Pat, when we first started as advisors, someone's going to be retiring. We would have the complete whole budget. Tell us where you spend your money, right? And they'd go through this list, and so you'd look at the list and say, okay...

Pat: Yeah, you show $4,000 a month in expenses, but you take home $7,000 or $9,000. Where's the difference?

Scott: This was a few years ago.

Pat: Yes, this was 30 years ago. Okay, 30 years ago.

Scott: Yeah. And so after a while, we realized that for most people, unless you're one of those strange people that keeps track of every expenditure, there's some people do, most people do not. So we have another way, it's kind of a quick and dirty way to calculate your retirement income needs without...and I think it's more accurate, it's clearly more accurate.

Pat: Which is in order to maintain your current standard of living.

Scott: Like what's coming through?

Pat: What are you spending now without actually looking at a budget?

Scott: Yeah. Well, we factor in things like what are you saving for in your 401(k), what's your FICA taxes, and some of those other things. But so we'll talk about that during the planning event. Also, we're going to talk about some approaches to investment management. And how things can be structured there and how to potentially save thousands of dollars on tax future tax fines, which I think also with our previous caller today we talked about it. So there's three different times you can participate in this virtual event. January 24th. That's a Wednesday, January 24th at noon Pacific. Thursday, January 25th at noon Pacific. And Saturday, January 27th at 9:00 a.m. Pacific. So any of those three times.

Pat: And you would go to allworthfinancial.com/workshops.

Scott: Yeah. So anyway, that's all the time we have in the program today. And it's been great having you with us.

Pat: And as always, if you've enjoyed this show, please take a moment to rate it. And if you are so inclined, share it with a friend.

Scott: Yeah, give use a review. We'd appreciate that. You've been listening to Scott Hanson and Pat McClain of Allworth's "Money Matters."

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