January 21, 2023
- The fundamentals of investing 00:07
- Should I buy a place in New Zealand? 14:58
- Should I move some money into a Roth? 26:00
- The nuances of financial planning 34:06
Why the fundamentals of investing will serve you well in 2023.
On this week’s Money Matters, Scott and Pat explain how the basics of investing hold true regardless of what the markets do. A Colorado woman wants to know whether it makes sense to buy a place in New Zealand. Should a caller from California move some money into a Roth? Finally, Scott and Pat tackle the nuances of a financial plan with Allworth advisor Brian James.
Join Money Matters: Get your most pressing financial questions answered by Allworth's CEOs Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at email@example.com.
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." Scott Hanson here.
Pat: I'm Pat McClain. Thanks for joining us.
Scott: Right. With myself and my co-host, we are both financial advisors, certified financial planner, charter financial consultant. We spend our weekdays helping people like yourself plan their financial futures and broadcast our program on the weekends...
Scott: ...to be your financial advisor on the air.
Pat: So, in fact, on the air and on the podcast, we have a new affiliate joining us this weekend, which is KFYI in the Phoenix, Scottsdale area for a beautiful Arizona.
Scott: So glad you're joining us. And if you're just new to us, we've been doing this program for 27 years.
Scott: Long time.
Pat: Long time.
Pat: And it is a call-in talk show where people call in and ask financial questions anywhere from, you know, how do I save more money in taxes, what happens to my money when I die, debt, insurance, that sort of thing. So, we are not here to promote products, we are not annuity salespeople or life insurance salespeople like you hear on many of the programs, we are financial advisors and we're here to try to make people's life a little bit more secure.
Pat: Or at least that they understand their financial situation better.
Scott: It's interesting, Pat, I was having a conversation with a friend yesterday about just the financial markets and I said...I said I'm actually...I said I feel really...I said, "I feel really good about the financial markets." He's like, "What are you talking about?" I was on a bike ride with him and I said, "Well...I said, "For so long, things were just...things didn't make sense anymore." These tech companies kept going higher and higher, the crypto kept going higher and higher. Like, earnings didn't make a difference anymore. And then suddenly, all of these things came crashing back down to earth.
Scott: And people that thought it was super easy making money, I said, "It's not easy." There's no such thing as a free lunch. And these things never last.
Pat: The crypto thing just...it gets better and better. I gotta tell you, it gets...
Scott: Better? What do you mean better?
Pat: It gets better.
Scott: Or worse and worse?
Pat: The attitude of these people running these companies just...it's mind-boggling. It's absolutely...
Scott: Well, that's because they've gotten away with everything. Where has the Securities and Exchange Commission been the last few years on this?
Pat: Well, Scott, there was discussion. These look like securities to me.
Scott: But there are some...
Pat: The coins look like a security.
Scott: There are some...the SEC is taking some action. States are taking more action than the SEC. They do look like securities, but the reality is...the reason this is all gonna come down, and we talked about this when FTX blew up in Alameda that this is just the beginning. It will take till the end of 2023 to blow most of these up. And the reason is...
Scott: The coins or the companies?
Pat: The companies and the coins with them.
Scott: These trading companies, storage companies, whatever they are. I don't understand this.
Pat: Yeah. And the reason is they pledge the same collateral to everyone. So, they take their coin and then they pledge it to someone else to borrow their coin, to borrow their coin, to borrow their coin. It is a giant Ponzi scheme, as I have said for years, but...
Scott: "House of Cards."
Pat: ...this is my favorite though. You realize that Dogecoin...
Scott: Was a joke.
Pat: ...had a market value of $80 billion at one point in time, $80 billion. Some sucker bought in when the value wasn't that high.
Pat: Well, unfortunately, mostly younger people and some big institutional investors that were paying.
Scott: It's interesting. When you look at the who was the number one owner of crypto, it tends to be, to your point, Pat, younger, lower on the income. And the racial makeup is not the traditional racial makeup of the United States, it tends to skew towards minorities. So, I mean, the people who got taken were the most vulnerable.
Pat: Yes. Oh no. And then where big institutional investors in there recognizing, "They know where this is gonna go. And we're just hoping to get out before it all crumbles." That's where the big institutions are. But this was my favorite, these guys that started Three Arrows Capital. Su Zhu and two other guys started Three Arrows Capital. It is a bankrupt crypto hedge fund. So, it went under. It's gone. They're in bankruptcy.
Scott: Zero arrows now.
Pat: Three Arrows Capital. The founders got together and they're raising $25 million in seed money to start a new platform. So, I'm thinking you took a lot more than $25 million off the table and hid it somewhere, boys and girls, in this process. Sam Bankman-Fried saying he's broke, don't believe it.
Scott: So, did you...and have you seen the latest that there's $450 million that has gotten hacked since it's been in bankruptcy?
Scott: $450 million...
Scott: ...stolen by hackers...
Pat: Yes. Yes. Yes.
Scott: ...in the middle of bankruptcy.
Pat: Yeah. So, anyway, so these gentlemen from Three Arrows Capital, they're raising $25 million to start a new platform. What does this new platform do? It trades in distressed crypto debt. So, what this means...
Scott: I'm sure it's less than pennies on the dollar for [inaudible 00:06:06]
Pat: What this means, they estimate there's $20 billion market for crypto claims. So, let's say that I had some money in FTX and I had some money deposited in FTX and I'm now filing a claim in bankruptcy court to get my value out of it, which is what the trustee does, that's their job, I can sell that claim to someone else. I could say, "I had a million dollars in there. I think I'm gonna get back X amount, but I want the money now." I could sell my claim to you for pennies on the dollar. Well, these gentlemen, after bringing their own company into bankruptcy last year, they defaulted on a $2.4 billion loan to Genesis.
Again, firms lending money to firms, to firms, to firms. They're going to create a platform where people that have claims against their own company could trade in those claims. And this...I gotta...this...you've heard us for the last three years talk about how people should stay away from crypto, even when it was going up. I can't tell you how many other investment advisors told me that I didn't get it. And I always responded, "You're right. I don't get it." How could there be in value in...
Pat: ...in air that produces nothing and is only dependent upon someone else paying a higher price? It's the Beanie Babies without the Beanie Babies.
Scott: At least then you had the little things you could put on your shelves.
Pat: At the end of the day, you were still stuck with your Beanie Baby. But it will continue.
Scott: But I think what's important when we go through times like this is like, what can we learn collectively and individually as investors? Is there some wisdom we can gain from this? Can what we've witnessed help us as we move for the future to avoid whatever the next hot area is?
Pat: And what is that? I think one of the things we should learn is that we should try to get rid of this thought about fear of missing out, FOMO. So, you see companies like Tesla it's down what? 70%, 75%. And always thought, "How can this be that it's a car company?" They prevent...
Scott: It still trades for more than GM and Ford combined.
Pat: But it's a car company. It is a car company. You can pretend it's other things, but at the end of the day, they make money by selling cars. Why did people invest in Tesla? Because it was doing really well. The stock was doing well.
Scott: Yes. Do you know how many conversations you had with people about that?
Pat: Yes. But do you think it's the fear of missing out that causes people to make irrational decisions with their money?
Scott: Yeah. I think it's a bit of that. Well, there's no question that's part of it. I think also people are looking for some sort of new solution, right? So, like, whatever was, that's not working. So, in the past, the interest rates have been so low and tech stocks were going up. Like, maybe this is the new solution. People forgot about the dot-com bubble. That was like, "Well, that's not gonna happen again." Matter of fact, I remember having a conversation with someone about a year ago about the state of California because the majority of the tax revenues come from the top 1%, which is primarily capital gains, and I said...I said, "I don't know when the tech recession is gonna occur, but it will." And at the time, there was nothing in sight that this is gonna happen.
I have a friend of mine who's an engineer. He leads a large group of a big company. And this was six months ago, five months ago. He said some competitors were poaching some of his engineers and paying 50% to 60% more than he was paying. And he says these are jobs that are already a couple of hundred grand a year. And he's like, "I don't know how these companies can afford." And so I said, "Well, how is it going now?" He's like, "Oh, that's..." He says, "A very short window." And he says, "It's done." Totally done. But clearly, we're in a recession with tech stocks now. But I think what we need to be careful of...I saw an ad a couple of days ago popped up on my screen for Dogs of the Dow. It was the Dow 30. The Dogs of the Dow or the Dogs Dow 10 or whatever it was. The Dogs of the Dow strategy worked well last year. Which is just you buy the 10 stocks that have the highest dividends, and supposedly, it's gonna do well for you, which it doesn't every year, by the way. But...
Pat: Mostly because they're value stocks. And value comes in and out of...
Scott: But when I saw this ad, I thought of the old adage on Wall Street. "When the ducks quack, feed them." So, Wall Street...
Pat: It's not our adage.
Scott: No. So, what's the hot oh? What did well last year? Why don't we see if we can raise more money capital, sell more of our product to people based upon what did well last year? Not necessarily what's gonna help solve their long-term financial goals and problems, but whatever did well last year. That's what we need to be careful of now.
Pat: Yeah. And...
Scott: And I read stories like, "Oh, is the 60/40 portfolio dead?" which just means having a balanced portfolio between stocks and bonds. Like, how can it be dead? It had one bad year? It was an anomaly that you had stocks and bonds fall as much as they had complete in... You look at a standard deviation and it's almost a black swan event.
Pat: Yes. That it...but what's happening...
Scott: Highly unlikely [crosstalk 00:11:38]
Pat: What have we seen in the last few years, right? Run-up in tech, not really based on any fundamentals, right? Based on stories, NFTs, non-fungible tokens, which, you know...
Scott: I don't read too much about those anymore.
Pat: Cryptocurrencies, right? All of those, and SPACs, special purpose acquisition companies, which were all the rage for a couple of months.
Scott: So, I was at a conference, I won't mention the name company's name. A bunch of leaders and they brought in this...I think it was someone in charge of tech for one of these large financial services companies. And she was explaining how younger investors get...they get their advice from other sources. And I think that she was trying to let us old guys know that, like, if we don't wake up to how the world is changing, we're gonna be out of business one day. I think it was kind of what... And so she talked about how people get their information from Reddit and all the accounts that have opened on Robinhood and all this. And I'm thinking to myself, "Those weren't investment accounts. That's not investment advice, that's all the hot stuff." That's mostly crypto conversations going on. That or GameStop or these things that...all these things that blew up.
Scott: That's not advice.
Pat: Part of it's driven by excess liquidity in the marketplace from government funds and a lack of...
Scott: Let's lock everyone in the bedroom and let's send them checks.
Pat: Yeah. And a lack of social engagement. My boy...two of my four children were doing all the Reddit, and they were doing the meme stocks. Not so much the crypto, but the meme stocks.
Scott: Did they walk away with any money at the end of the day? Did they close out?
Pat: Yeah. They said that it really...they said...overall, they did well, but they said...on Reddit, they said the slightest sign that people that have been pumping it move back on the pump is when you liquidate. They said they recognized these were pump-and-dump schemes.
Scott: But that game is over.
Pat: But that game is over. They said that's over. That's all done. That's over. Anyway...
Scott: Anyway, interesting times as always. But look, just because last year was a rocky year and looks like this year is not starting out that great either, like, long-term fundamentals of investing have not changed.
Pat: And what are those, Scott?
Scott: You can primarily do three things with your money. You can simply keep it in cash, store it, put it in the bank, right? You can lend...no, it's four things, lend it to somebody else, you can buy bonds and companies or the government.
Pat: You can put it in the bank, which is lending money.
Scott: Or cash, whatever. You can own things that produce, such as companies or real estate, rental real estate, things that produce something, or you can speculate...
Pat: That's it.
Scott: ...and buy some raw land and hope it goes up in value, I'm gonna buy crypto and hope it goes up in value, I'm gonna buy gold and hope it goes up in value. They produce nothing, you're just hoping that someone else is gonna pay a higher price. That's primarily all you can do with your money. Yeah. You can get a little more fancy, you can make some derivatives around it...
Pat: You can spend it.
Scott: ...or you can spend it. May be better to spend it than doing some of those other foolish things.
Pat: The last one.
Scott: Anyway. Hey, we wanna take some calls. This program is driven in a large part by topics you bring to us through your calls. And to join us, our contact number is 833-99-WORTH. And we are in Colorado talking with Dee. Dee, you're with "Allworth's Money Matters."
Dee: Hi, Scott and Pat, thanks for taking my call.
Scott: Hi, Dee.
Pat: Hi, Dee.
Scott: What can we do for you?
Dee: So, my question is, I have a son who is heading to New Zealand to go to college. In the first year, he'll be in a hall, and then after that, will probably have to flat.
Dee: So, I'm thinking I might buy a home in Christchurch. And I'm just wondering what's the best option to finance that?
Scott: It sounds like you're from New Zealand?
Pat: You are a kiwi, no doubt.
Scott: Do you plan on moving back to that country at some point in time?
Dee: Maybe. Yeah. I...
Scott: So, your...
Dee: I don't know.
Scott: So, your son is going to college, just assume it's four years, and his first year he's in the dorm, is that right?
Scott: So, we're talking about a house he'll need for three years.
Dee: Well, then I have another child who is a senior this year, so she'll be another year behind him.
Pat: Okay. So, four years.
Scott: Have you ran the numbers of the difference between cost of owning something there versus renting? I'm no expert on New Zealand real estate, but from what I've read, the prices have just skyrocketed the last few years.
Pat: Oh, and especially Christchurch because you had that very, very bad earthquake in them, what, four or five years ago?
Dee: Yeah, but their...actually, their prices are one of the ones that did not skyrocket.
Dee: And it sounds like they're coming down. I don't know. I own two rentals here, so I like the idea of having a rental. Maybe we'll move there at some point.
Pat: What would it cost?
Dee: It's about $250,000, American.
Pat: And would he have roommates?
Dee: Yes. Definitely.
Scott: Okay. So, that's pretty cheap. What are you buying for $250,000? What is that?
Dee: Like a three-bedroom run-of-the-mill, nothing fancy house.
Scott: A house or a townhouse?
Dee: Yes. Yup.
Pat: A house. How would you pay for it?
Dee: Well, so, I have two properties in Colorado that are paid for. So, I was thinking I could take out a mortgage on one or both of them to rent a house.
Pat: And those are your rental properties?
Pat: And do you own a primary residence?
Pat: And is that paid for?
Dee: No. That I have a 2.875 interest rate on, and I owe about $170,000 on it.
Scott: And what's the value of that home?
Scott: And what are the value of the rentals?
Dee: The one-bedroom is about $400,000, and the other three-bedroom is probably $500,000.
Dee: Maybe more if we were to fix it up a little bit.
Scott: And any money in the bank?
Dee: Got about $30,000 in the bank.
Scott: Okay. And other investments?
Dee: Roth IRA, 401, rainy day funds.
Scott: Here's the...so I mean, you've got a few different challenges with this. One, you've got currency fluctuations, right? So, you could own this for a number of years and currency could either work in your favor or work against you in what your overall return is on this. You're talking about...you can't get much further from Colorado than New Zealand.
Pat: But Scott, she's from New Zealand.
Scott: I understand. Look, so in full transparency, when my oldest daughter was in college and she went...it was her second year and...second or third year, at a university outside of Portland, Oregon, we bought a house and she had, like...it was a five-bedroom. It was unbelievably cheap at the time. I remember I ran the numbers like, "This will pay for her [inaudible 00:19:28]" And it turned out to be a good...real estate prices were much lower back then.
Pat: Did you sell it when she graduated?
Scott: No, I still have it actually.
Pat: You do?
Scott: But I have a property management company [inaudible 00:19:37] and...but it's not that far away, and it's the same tax laws and all those sort of things.
Pat: But it can work. And once she graduated, it's rented out to families, not college students.
Scott: No, no, no, no.
Pat: Yeah, that's a good idea.
Scott: No college students. Sorry.
Pat: No. Yes. I was a college student at one point in time and I would not rent to me.
Scott: And they were girls, by the way, not boys.
Dee: I don't know. They can be worse than boys.
Scott: Yeah. [inaudible 00:20:09]
Pat: Do you think...the chances of you...are you from Christchurch?
Dee: No, I'm actually from the North Island.
Scott: You're from the North Island.
Dee: But I do like the South Island. I've been there a few times. I figure I'm gonna be going there a lot over the next four or five years.
Scott: My son went to...did one semester in Dunedin in New Zealand. Dunedin, did I pronounce that right?
Dee: Well, yes. There lies is a problem too. My daughter just...I thought she was gonna go to Christchurch and she came out and said, "Well, maybe I might go to Dunedin, so."
Scott: So, you just threw another wrench into this.
Pat: And what would a rent...what would a...
Dee: Well, I'm not. I just said I'm thinking about this. Nothing is said and is done.
Pat: You know, I gotta tell you, it's more...you're trying to solve a problem that doesn't exist.
Pat: I wouldn't do it. If you had a bunch of cash and you're looking for somewhere to put it, I still wouldn't be my first choice by any means, but... Not in New Zealand, but it would be in maybe somewhere in the United States because you're right, you've got currency risk.
Scott: But I wouldn't be in a hurry to buy a real estate anywhere right now.
Pat: But then yeah, you've got currency risk, you've got tax. I mean, you've increased your tax complications...
Pat: ...significantly because you've got income...
Scott: That's right.
Pat: ...and deductive...right? It's just...I wouldn't. I wouldn't. I wouldn't.
Pat: I wouldn't. You know, if you said, "I am absolutely 100% sure that I'm moving to Christchurch."
Scott: Yes. If you said, "No, that's our plan in six years from now. I've got other family there. As soon as I retire, that's where we're moving. I'm gonna buy the place that we'll eventually live in in retirement," then it would make sense.
Pat: And if interest rates were a little bit lower right now, I would probably go for it.
Scott: I think when you run the numbers, the cost of your mortgage is gonna be significantly higher than any rent you're gonna pay.
Pat: Yeah. And forget about the brain damage of managing and the taxes and the whole bit. So...
Scott: It sounds kind of fun though.
Pat: I understand that.
Dee: Doesn't it?
Scott: Yeah. It kinda sounds fun at first. It'd be fun to tell people at a party like, "Oh yeah, I have a flat in New Zealand, or a house in New Zealand." I guess. I don't know.
Pat: Is that your idea of fun, Scott?
Scott: Actually, I don't like those people.
Pat: Go to parties?
Scott: Oh, yeah.
Pat: Look at my balance sheet.
Scott: Okay. Fair enough. I hope you wouldn't be bragging about it.
Pat: Dee, one of my closest friends is from Christchurch and I have never been there. I've been to the North Island, but he says it's absolutely beautiful.
Dee: Yes. Yes, it is.
Dee: It should be on everyone's bucket list.
Pat: Oh yeah. And who doesn't love a good kiwi?
Scott: Appreciate the call. I did. My son was there for a semester and he needed a car for the semester, and so I thought, "Well, I'm just gonna rent him something." And he says, "Well, dad, how about I just buy something?" I'm like, "Well, then I gotta worry about selling it." So, he comes up with this car, it's like two grand for some old van that had been converted into some sort of, like, motor home. Well, maybe motor. I don't know. They have a specific name for them in New Zealand where you can park in certain areas and stay the night. So, someone had put a bed and a little refrigerator in this old van that he paid two grand for. And so I'm like...I started like, "Be there for four..."
Pat: Well, it fits him. It fits Blake.
Scott: He's into paragliding. He used it like crazy.
Pat: He had long hair, earring, right?
Scott: He still has long hair. Yeah. He still has earrings.
Pat: He looks like he should be living in a van maybe sometimes. Not to be negative.
Pat: Okay. Well, I thought when I said [crosstalk 00:23:53] `
Scott: 100%. Someone joked about our Christmas card a year ago. He said, "There's this beautiful family, and there's a homeless guy standing next to me."
Pat: Okay. So, he buys this van?
Scott: So, he buys the van. It worked great. We went to visit him. South Island was...it was really...
Pat: Did you stay in the van?
Scott: No, we did not stay in the van. But when he left, I said, "You gotta sell this thing, right?" Well, he came back and he hadn't sold it. And the story is his buddy was supposed to sell it, but somehow it got stolen or something, which is kind of what I figured when we put the two grand in this old van, I'm like, "I have a feeling it'd be nice if we can get 1500 bucks at the end of the semester."
Pat: Someone to join it today.
Scott: It was about what it would have cost to rent him a car for that semester.
Pat: He signed over the ownership to someone.
Scott: No, he wouldn't have done that. He didn't sign to...
Pat: I know. Well, your son is actually very good with the money. You were telling me he's been...he plays a lot of poker.
Scott: Yeah. [crosstalk 00:24:47]
Pat: Are we allowed to talk about that on the air? Was that...
Scott: I don't know. Why not? [crosstalk 00:24:49]
Pat: Did I cross a line:
Scott: We're gonna take a break in a minute. We'll take some calls here too. But he...I thought he should have been a math major in college, but he went to college and now he's in United Airlines flight program. And he goes to...he plays cards quite often and he's good at it.
Pat: He wins.
Scott: He wins more than...he says it's 100% odds. 100% odds. He plays the odds and he waits for someone else to make a mistake. So, when someone makes a mistake, he's...
Pat: How old is he?
Scott: He's 25.
Pat: There's a lot worse things your 25-year-old could be doing than playing poker or making.
Scott: He said the other night he folded on something and a guy, like, "Hey, you need to brush up on your math skills, young man," or something like that. And Blake said...I said, "Well, what'd you tell him?" He said, "I didn't tell him anything, but I took him for 450 bucks that night." Anyway.
Pat: That's awesome.
Scott: I don't know if it's awesome. I really don't know. if it's...
Pat: No, I think it's good. Why not? Right? He's winning more than he's losing. He doesn't see it as a game, he sees this as a math challenge.
Scott: And he has a part-time job for when he is a pilot, is what he told me. We'll see. There goes his pilot earnings to the car. We're taking a quick break. This is "Allworth's Money Matters."
Announcer: 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: I'm Pat McClain.
Scott: Hey, if you wanna be part of the program, you got a question for us, love to take your call. 833-99-WORTH. We're gonna take some more calls, and we're also gonna be joined by one of our financial advisors to talk about some other stuff. So, we're talking with Roxanne in California. Roxanne, you're with "Allworth's Money Matters."
Roxanne: Hi, Scott and Pat, thanks for taking my call.
Roxanne: My question is I work for the federal government and they offer the TSP Roth along with our TSP, and I wanted to know the advantages and disadvantages regarding the TST Roth. I maxed out my retirement. I turn 50 next month, oh, this week, and I...
Scott: Happy birthday.
Roxanne: Thank you. So, I'm maxing out the $30,000 that we're allowed to with the reserve. And so I was just kind of looking at the fact of, is there a benefit to the TSP Roth with the TSP? And if so, what percentage would I put in for my maximum?
Scott: So, the answer for the rest of the listeners, the TSP is federal government's equivalent of a 401(k) plan. And they call it a thrift savings plan. It doesn't have as many...
Pat: Just like a 401(k).
Scott: ...choices as a 401(k) typically, but it's very, very low cost, but not a huge menu to choose from, which is always perplexing to me. But what is your family income?
Roxanne: So, I'm single. I have no kids. I make about $175,000 a year. And then being a...I'm also an only child, so I will also get some inheritance from my father when he passes away.
Scott: And you live in the state of California?
Roxanne: Yes. I live in Sac.
Scott: You live in Sacramento. Would you continue after retirement to live in the state of California or would you live in a lower-income tax state?
Roxanne: I would hope to live in a lower-income tax state. That is the plan.
Scott: So, here's the...a Roth IRA, essentially, when you put money into a Roth IRA, you don't get a current tax deduction. The dollars still grow tax-deferred. And if you wait until retirement age and pull the money out, it's tax-free. Now, your traditional 401(k) or TSP, when you put money in, you get a tax deduction in this current year, our tax year. Money grows tax-deferred. When we pull the money out, it's taxed at that time. So, look, if you hit retirement, you've got option A is a million dollars in a traditional TSP, option B is a million dollars in a Roth TSP. I'd much rather have the Roth because it's all gonna be tax-free.
Having said that, in order to accumulate a large balance like that in the Roth, you would need to incur greater tax liability today. And so, when you're at this stage in life, I mean, it's, like, easier if you're young right out of college and your income is low because presumably, you'll be in a higher tax bracket. At this stage in your life with the way your income is, what we really need to look at is what will your income and tax situation look like when you retire, which is why Pat started with your income, where your income is today, and what's the likelihood of you staying in California because you're gonna be at 9.3% in California because you hit that about, as a single person, about $50,000 a year.
Pat: But you drive two hours east and you're at 0%.
Scott: So, you don't wanna take a tax deduction in a state where you wouldn't...where when you're gonna withdraw the money, you're gonna be in a tax-free state.
Pat: That's why you would not want a Roth. That is why you would not want a Roth.
Scott: You'd want the deduction in the state [inaudible 00:30:07]
Pat: You want the deduction in the state. So, how much money do you have in your thrift savings plan?
Roxanne: I have approximately $440,000. And for my job, we're mandatory retirement at 57. So, essentially I have seven years until retirement.
Pat: Got it. Are you air traffic control?
Scott: So, you're air traffic control, right?
Scott: Oh, okay. Whatever. Anyway.
Pat: I didn't know there were many mandatory.
Scott: At that young. Yeah.
Roxanne: Yeah. Law enforcement requires us to retire at 50.
Pat: Oh, well, even better. Even better.
Scott: And your pension is gonna replace what percentage of your income?
Roxanne: We get...like, out of...it's 40% out of the top three high years that we have. And so, essentially by the time I retire, I'll be making $180,000 or so.
Pat: Got it. Got it, got it.
Scott: And your pension will be about what?
Pat: 40% of that.
Pat: And, you know, it'll be $60,000, $70,000 a year. And presumably...
Scott: I would continue in then the pre-tax.
Pat: I would not, I wouldn't do the Roth. But I'll tell you, if you were my little sister, Roxanne, I would say, "Hey, Roxanne, do you ever think of leaving the federal government early and going to work in another law enforcement agency in the state of California?" And the reason I would say that is because the way the CalPERS pension safety plans are designed, they favor older employees on how they actually accumulate. So, I have had many friends. One the other day, he did exactly that. He worked for two different law enforcement agencies in the state of California and gets pensions from both of them. And then he told me that he gets his social security, so he's getting three pensions. But...
Scott: She might love her job.
Pat: Scott, I'm just...
Pat: I just threw it out there. If something comes knocking or you're like, "Yeah, I'm tired of this," it wouldn't...financially, it wouldn't be a bad idea to explore going to the Office of Emergency Services or to another law enforcement agency that is covered under California Public Employee Retirement System.
Pat: By the way, your pensions are good for the federal government, but they're not nearly as good as the pensions in the state of California.
Roxanne: Yeah. Local law enforcement has much better...
Pat: Yeah, you would've been retired today...
Pat: ...because 50 is the next week. Your 50th birthday.
Scott: So, all righty.
Pat: So, just stay where you're at.
Scott: Yeah. And put the extra savings. If you don't have an IRA, you can do a backdoor Roth, which it means you just contribute money into a traditional IRA and then immediately convert it. That would be an option for you to save some more money or, and/or just be tax-efficient on your outside savings. And you can have some additional retirement income from that as well. So, appreciate the call. And the Roth gets more challenging when people are nearing retirement at the peak of their career, right?
Scott: Typically, your 50s is your best...probably your best, for most people.
Pat: With the exception of the backdoor Roth, which is kind of a no-brainer.
Pat: There's a lot of different types of plans out there and how to maneuver going through them. A lot.
Scott: You mean the 401(k)s and all that, the pension?
Pat: In Roth IRA where...when we mentioned the backdoor Roth, I wanted to chime in there and say, "But if you've already got a deductible Roth IRA, make sure that you don't cause that to go into taxation by converting a non-deductible IRA to a Roth IRA." And then I realized this show is only an hour long and we can't get into all of it.
Scott: Hey, let's now...we're gonna be joined with Brian James. He's not only an Allworth advisor but he's the regional director. And he's one of our presenters for our new retirement planning workshop, "From Now to Next." So, Brian, thanks for...and you're in Cincinnati, right Brian?
Brian: I am. I am indeed out in the Midwest.
Scott: All right. Well, thanks for joining us. So, why do you bother take...you've been in this industry a long time and you're still doing these financial planning workshops. Why?
Brian: Well, it turns out that left to their own devices, people don't make the best decisions. And that includes me. I started in this industry in the mid-90s. That was the beginning of the internet boom. And I took 1,000 bucks, turned it into $2,000 and declared myself Warren Buffett. That was...I think it was Yahoo or something ridiculous. Actually, it's something that doesn't exist anymore. But anyway, and I thought that was all it was about.
But an older advisor figuratively grabbed me by the lapels and said, "You're not gonna last in this industry if that's how your brain works." And kind of gave me the idea, or introduced me to the idea of figuring out where you want to go over the long term and therefore, what should you do now so that you get the right outcome, a very long, you know, time into the future and how to make sure you're monitoring that on the way. And that really spoke to me. I'm a planner at heart. I like to plan ahead and not be surprised, frankly. And that speaks really well to this corner of the industry that we happen to be in.
Scott: And so, you enjoy doing these retirement planning workshops and helping people with their finances because you're...and that's why you're in the industry because you enjoy helping people...
Scott: ...in this particular area which you happen to be an expert at.
Pat: And what do we cover in these workshops?
Brian: Sure. So, we talk about financial planning, right? So, this is...the subjects that we cover are something that you...that, of course, Allworth would be walking you through, but these are things you can do on your own. Or if you happen to be working with another advisor or you wanna do it on your own, these are the topics you're gonna run across. There's seven important areas that, at some point, everybody stumbles across. If you've planned for those areas, or those different decisions that you have to think about, then it's gonna be a lot less stressful, right? So, confident decision-making because you understand the pros and cons of all the outcomes, that leads to stress reduction, which also tends to lead to happy marriages. My business card, gentleman, says that I'm a financial advisor, but what I really think I am after 25 years of this is an unlicensed marriage counselor or psychologist
Pat: Well, it happens. It happens. And by the way, this...
Scott: Well, how many times have you, Pat? You've done this as well, right? There's a...husband and wife come in and they want you to be the arbiter.
Pat: Oh yeah.
Scott: Right? Whether it might be a vacation property or a new car, or a certain investment, or whatever, right? Brian, and you've faced the same thing.
Brian: Oh, absolutely. When you can get two people to look each other in the eye and say what they really want with a third party, a disinterested third party in the room, that's my job. And very frequently, I find that the people who attend our workshops are people who have been seeking out financial education for a very long time. Those folks tend to be in really good shape. They don't tend to be trainwrecks. And they're simply looking for somebody to help them make big-picture decisions. But they also tend to be pretty conservative. And what that means is that they don't know, you know, they've done a great job of managing risk, but they don't know where their other bookend is, right? They know what they can't do, but they don't yet know what they can get away with. And so, I've spent a lot of time helping people.
Scott: What do you mean by that?
Brian: Yeah. What I mean by that is, you know, somebody might work too long, right? So, the saddest story I have in my career is a lady who broke down in tears when we told her she could have retired eight years ago. You know, that's normally happy news, but her thought was not the time ahead of her, it was the time behind her because she was thinking of the grandkids that she wanted to be around, but she did not. And her husband didn't stop to take a breath and take stock of where they are and what they could get away with, they just put their heads down and kept working. So, that led to an awful lot of stress because they had themselves absolutely convinced that retirement was not gonna work but they just had to work, work, work. It's that same little voice in the back of our heads that puts us in that place in the position to be independent in the first place. But you have to learn when to tell it to shut up because you know you've hit your goal. Lots of people without that...
Pat: Wait, wait, wait, stop.
Brian: ...will work themselves into the grave.
Pat: Brian, so there's this voice, and all I have to do, it's in the back of my head, just tell it to shut up and then it goes away?
Brian: Eventually. When you work hard...
Scott: I'm gonna try that. All those issues I've got in my life, just like, "You. Quiet."
Brian: No. No, that's it. Perhaps not a little voice. [crosstalk 00:38:42]
Scott: I'm gonna tell my...I'm gonna yell myself the next time dessert is served in front of me or [inaudible 00:38:46]
Pat: So, the seven steps, and I'm just gonna go through it real quick. It is a program that basically Scott and I designed years and years ago, and it's the...
Scott: By the way, the workshop is free. So, we're not sitting here trying to sell you something.
Pat: Yeah. But you're not gonna...you won't hurt yourself by attending. And if you...
Brian: You're gonna learn something. You're gonna walk away knowing a framework of how to build a plan.
Pat: Promise. And if you decide not to use our firm, don't use our firm. That's fine. But it doesn't hurt to actually...or if you don't wanna go, just go to our website and you can watch one on video. But here are the seven steps. I mean, it is this simple. One is, what is my need for income in retirement?
Scott: How much money do I really need to replace?
Pat: How much money do I need?
Scott: Can we get this rule of thumbs of 80% or 70% or 105%?
Pat: But it's...and what you're trying to do is replace...
Scott: We'll teach you a process.
Pat: Yeah. Replace your spendable income in retirement so that you see no degradation in your standard of living. So, that's number one. Number two is...
Brian: Yeah. And I wanna point out that it's not whatever percent of your gross income. Spoiler alert, it's not that hard.
Pat: That's right. That's correct. That's right. It's how much do you really need? It isn't percentages, it's you as an individual, how much money do you need so you'd experience no degradation in your standard of living. Number two is, how do my expenses change over time, especially if I'm going into retirement? Do they go up, do they go down? Number three is, what do my taxes look like in retirement? Should I actually be converting money from an IRA to a Roth IRA? Should I be doing distributions from this account versus this account? That's tax. The other is investments. What is the appropriate investment thesis and strategy for any one particular person?
Scott: I thought Brian is the one doing the workshop.
Brian: It's an important point there that's...
Pat: That's why I'm excited. I'm excited.
Brian: Investment side of things, the investment decision was not the first thing that you said. We all start with, "If I simply have a bigger pile of money, all my problems will be solved." Well, guess what? You do have a bigger pile of money than you had when you were in your 20s and you're still worried because we've never identified these other six steps. It's all connected.
Pat: That's right. That's right. So, everyone should have their own investment thesis. Like, what is the driver behind my decision-making in my portfolio? That would be your investment thesis. So, that's...the next thing on the list is risk. What risks are out there that can blow me out of the water that I'm not even aware of? The sixth step...
Brian: Where's the boogeyman hiding?
Scott: How do we mitigate that?
Pat: How do we mitigate it? And then estate planning. What happens to my money when I'm gone? How is the most effective way to get it downstream? And the last one is, "I'm now retired. Where should the money come from? What account, at what time, over what time period in my life should I be taking any money from these?" Oh, and by the way, you know, going with estate planning, if I have too much money, I might wanna shrink the size of my estate and give it away. Mostly to non-profits or to family members. And those are the seven steps that...look, we're proud of this process that we built because it isn't theoretical, it's practical. And it is a process that Scott and I and our team built years ago to walk people through a real-world retirement scenario.
Scott: Yeah. And we've been doing this for three decades.
Brian: All those steps you spoke through, that's all about discipline. I heard discipline over and over and over again. If I'm trying to lose weight, I can't hire the discipline. A coach can guide me and motivate me, but I'm the one who has to eat right and exercise. And this is not all that hypothetical of an example. But the good news about financial planning is I can hire someone to be disciplined for me. If I have the urge, if I'm an investor who has the urge to sell everything and run away and hide in a year like last year or worse, that's actually what you did, then you need to hire someone to be your discipline. That's what a financial advisor will do for you, and they will use a financial plan as a tool to do it.
Pat: Thank you. And Brian, we appreciate you being on the show, but I do have one question. We've had you on the show a number of times and you always bring in a food analogy to the equation.
Brian: I snuck in a weight loss one this time. Did you notice that?
Pat: I did.
Brian: It's all connected, Pat. It's all connected.
Scott: Brian, appreciate you for taking some time. And hey, let everyone know about the dates and times of the workshops. January 25th, 26th, and 28th in Cincinnati. And Brian will be doing that one. 25th, 26th, and 28th in Cincinnati. In Sacramento, February 1st, 2nd, and 4th. And in Denver area, February 2nd and February 4th. So, I threw a bunch of dates out. For more information on the latest workshop, go to allworthfinancial.com/workshops.
Pat: Or go to our website. If you can't attend any in person, go to our website and there are all types of information that will help you become a better planner, saver, investor. And by the way, for the podcast listeners that wanna write negative reviews about us being self-promotional, go ahead. Look...
Scott: That's about one out of 50?
Pat: That's where my point is. We do run a business, so at some point in time...
Scott: How about all the ads that...I mean, we could take outside sponsors.
Pat: I'm just saying, Scott. There's gonna be a couple of negative like, "These guys promote themselves." Well, listen...
Scott: You know, there was a prominent financial advisor, I'm not gonna mention his name, I fired...
Pat: Wait, wait, wait. So, if you feel like it, go ahead and write the negative thing that we're self-promotional. But that is 100% self-promotional. There is no question about it. We think that it is worth people's time and energy to attend these workshops or go to our website and learn something. If you decide not to hire us, don't hire us. That's fine too.
Scott: And the reality is us being practicing advisors, fiduciary advisors, we don't want outside sponsors.
Pat: That's right. So, what were you gonna say about the...
Scott: A private sponsor. There was a prominent financial advisor in some northern California city that would read ads for luxury cars, things that just seemed in conflict. There's nothing wrong with luxury cars. Having said that, you know, if you could afford a luxury car and you want one, fine. The typical buyer of a luxury car...
Pat: Finances it
Scott: ...finances it. Not because it's the best financial move, but they don't have the cash to buy the car.
Scott: And their retirement is not...they're not...typically, they tend not to drive those luxury cars for the rest of their lives because...
Pat: Yeah. I wish I could drive the same car for the rest of my life with no changes. I wish my car would never run out.
Scott: Your Volkswagen Rabbit?
Pat: Nah, it's...
Scott: Didn't you have a Volkswagen Rabbit?
Pat: I did drive a Volkswagen Rabbit for years. But the mere fact of going and getting a new car and actually learning the new systems in the car is utterly frustrating to me. I have no desire to learn how to operate a new automobile. Like, all the bells and whistles.
Scott: I had my car... I had a car for over two years, and I brought it in for services. I just didn't have one, like, pop-up where you can see in the dashboard. I said...I thought, "Didn't these cars have that?" He said, "Yeah, they have." Well, how does it...
Pat: There's a button right next to the steering wheel. I never even saw the button. I'm like, "Oh."
Scott: Two years.
Pat: And then that is...anyway, enough of that.
Scott: That's enough of our...this is our program for today. I hope you guys enjoyed yourself. If you think this podcast is decent, feel free to give us a positive...well, just give us a review, honest review, wherever you get your podcast. That would help. We appreciate that and we'll see you next week.
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.