IRS rules that complicate generosity, how to extend retirement savings, the cost of improper tax planning, and more.
On this week’s Money Matters, Scott and Pat discuss whether the stock market is overpriced. Then, they address real-life questions from listeners, including a unique case where tax rules complicate a generous gesture from an 11-year-old wishing to donate her livestock show earnings to a community cause. They also delve into the benefits of waiting until age 70 to claim Social Security and explore the impact of legislative risks on retirement planning. Finally, they help a small business owner understand why he should be making quarterly tax payments.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McLean would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McLean.
Scott: Glad you are here with us to talk about financial matters. Both myself and my co-host here are both practicing advisors and have been for a number of decades and do this program because, one, we enjoy it, and two, we like to see and help you with some decisions with your own finances.
Pat: Yes, and like many things at work, you don't look forward to going to work, but once you're there, you're involved.
Scott: Yeah, yeah, yeah.
Pat: I feel the same way about the gym, yoga, bicycle riding, many, many things in my life I don't look forward to doing them, but once I'm engaged...
Scott: My daughter was complaining about something, "I don't know if I want to go tonight." I'm like, here's my experience. If there's something I know I'm going to enjoy, it's good for me, I've never regretted going. Push yourself.
Pat: Just go and you'll be glad you did.
Scott: Anyway, this is a financial program, we'll talk about...
Pat: Not our psychology.
Scott: We're off to another phenomenal start to the year...
Pat: Crazy.
Scott: ...stock market-wise. Of course, we had the inauguration this last week and we're not going to talk about it.
Pat: No, please, no. We try to stay apolitical. We try, but we too are human and it may bleed through at times. No need to actually send us emails if you see us bleeding through our political leanings at some point in time.
Scott: But it's just, I mean, the stock prices, if they grow faster than the underlying earnings, that's not a great thing.
Pat: Yes. And I've seen a number of articles this week referencing back to Bob Shiller's CAPE Index and how the stock market is grossly overpriced.
Scott: Unless we've hit some new era where people are comfortable with higher multiples than they have in the past. Which we don't know because the multiples the last 30 years were higher than the multiples of the previous 70.
Pat: Yes. Maybe there's a feeling of optimism in the air that just drives it higher and higher. Who knows?
Scott: But if you're a long-term investor, should you really be happy? Particularly if you're still working and saving, I don't think you should be happy when the market goes up. If you're still contributing to your portfolio. Well,
Pat: Well, Scott, that's not fair.
Scott: Well, you want to see the economy grow and the underlying earnings of the companies grow.
Pat: Okay, so I'm saving for retirement. I'm just saying from a purely rational standpoint.
Scott: I know we're humans. I like looking at my numbers as much as the next guy or gal. I get it. It's been pretty good a couple years. Then when you factor in inflation though, you got a discount of about 25% of the growth you've had the last 5 years.
Pat: In terms of purchasing power?
Scott: Yeah, because what's the difference? Everything else is so expensive. It doesn't really matter. But this goes exactly to an article that I was going to share later in the show, but I'll share it now, which goes to these...It's an article that came out on January 10th in "The Wall Street Journal." "How you can see through Wall Street's ritual of wrong."
Pat: Ritual of wrong? Is this Jason Zwieg?
Scott: It is.
Pat: I can tell by the...Just by the...
Scott: Oh, you haven't seen this article. Every December, Wall Street predicts which various assets will return over the coming year. Every January, the predictions begin to be proven wrong. And so they call this the annual forecasting ritual, and it's absurd.
Pat: It's ridiculous.
Scott: The point of his article was they're not supposed to actually...everyone knows that they don't know what they're talking about. The point of this article...
Pat: I mean all the big banks, they have their economists. They give this prediction of where the S&P is going to finish at the end of the year.
Scott: That's right. In 2024, the average return forecast for the S&P was 7.4% by stock analysts and 1.3% by market strategists. I don't know what the difference between a stock analyst and a market strategist is.
Pat: You kind of do.
Scott: Yeah, I do. I don't think there's a big difference between that, venture funds, and private equity, and hedge funds, and the whole bit. But the S&P realized 26.3%. So way off. But his point is the reason they do this is to create conversations with people that are actually going to engage with them. That the Wall Street firms come out with these predictions...
Pat: So the big banks have the, here's the prediction.
Scott: They all do it.
Pat: And that way their clients want to have a conversation.
Scott: And re-examine their portfolio to make sure that they're allocated in the proper positions.
Pat: Well, I've never been one for making predictions on the markets.
Scott: I don't like making predictions about almost anything. It's interesting. I just thought, this guy really does...Jason Zweig really does...
Pat: He took like a year sabbatical. I thought he retired or something. Then he popped back up again.
Scott: Yeah. Is he part of this...remember the Zweig funds? Was he...?
Pat: Maybe. I don't know. He's been around a long time. It might be. Did he have funds too?
Scott: Yeah, back in the day.
Pat: This isn't an endorsement of his funds or him for that matter. But I don't know that much about him.
Scott: Don't you remember back in the day?
Pat: I like his columns. They put a flashlight on scams, on abuses in the marketplace.
Scott: On manipulations of investors.
Pat: And he had one last week on...I think he writes...it drops Friday afternoon, I believe. A week ago was on the conflicts of interest that independent advisors like us have with custodians like Schwab, Fidelity, [crosstalk 00:06:17.396].
Scott: I read that. Yes.
Pat: Which it's real.
Scott: It's real.
Pat: Yeah, it's real.
Scott: Yes, it's 100% real.
Pat: He didn't quite explain it nor did he talk about...Anyway.
Scott: The intricacies of it. Especially for smaller advisors, that they have to actually produce a certain amount of revenue for the custodians to stay on there. So oftentimes, the custodians will say, you need to kind of start doing this.
Pat: Charge your clients more.
Scott: Or you write the check. All right. Let's take some calls. 833-99-WORTH is our number. If you want to join us, you can also send us an email, questions@moneymatters.com. We're starting with Stephanie. Stephanie, you're with Allworths "Money Matters."
Stephanie: Yes. Good morning. Thank you for taking my call.
Scott: Yeah. Glad you joined us.
Stephanie: Okay. My granddaughter shows at our county livestock show. And if she wins with one of her projects, and it's a 501(c)3 organization, the local businesses will buy her project.
Pat: I've done that. I bought...
Scott: Well, I don't know what you're talking about.
Pat: So what happens...Correct me, Stephanie.
Scott: Showing what?
Pat: So Stephanie, correct me if I'm wrong. So a friend of mine is involved in 4-H, and his children are involved in 4-H. So they raise steer, heifers, whatever they are. They bring them out to the county fair, and at the end of the project, they sell them, and people like me can buy X amount of beef. So I bought...
Scott: Is that what you're talking about, Stephanie?
Stephanie: Yes, sir. Yes, sir. So she raises rabbits, and then she shows other projects like a plant project. And this year, she grew a plant. We had a local burn victim in our area, which I'm super close to. He worked for my company. And he was burned 90% of his body, and he lived. And so she said...she did this project, a plant project in a firetruck. She grew a plant in a firetruck, and she said, "If I win, I want to give all my money to him." And so she did. She won reserve. And so all these buyers contributed over $50,000 for him. So now there's a dilemma because she received the fair...We talked to the fair to see if they would be able to write the check directly at him, and they said no. So she's going to receive a 1099 Miscellaneous for the $50,000. And so...
Scott: Where's the money now?
Stephanie: It's in a check. They haven't deposited. They haven't cashed it. They haven't done nothing because they don't know what to do. And evidently, asking different CPAs, they all have different answers.
Pat: Oh, yes.
Scott: Here's the kind of principle. So when you give to a nonprofit, it's supposed to go to the cause, not the individual. So as an example, I could set up a scholarship fund. But if my scholarship fund said it's only going to benefit children with the last name of McLean who hosts podcasts, and Pat did the same thing, set up, it would be a sham transaction and that it wouldn't be allowed because this isn't really a nonprofit. You're just trying to benefit one individual. In this case, it'd be a quid pro quo. And so there's been lots of different case law, and I'm not in a tax attorney by any means, there's lots of different case law over the years about ensuring that if stuff goes to charity, it actually goes to charity. So when something like this, if there's an organization in town that helps burn victims, of which they're helping him, you can donate to that.
Pat: Understand, but she's going to receive this as income at $50,000. She can't deduct all $50,000.
Scott: The most she can do is...it's either 50% or 60%.
Pat: It's cash versus securities. So I ran into the same...
Stephanie: We have some [crosstalk 00:10:23.637].
Pat: Stephanie, I ran into the same problem because I have a donor advice fund. And when they asked me to do this, I said, "Okay, perfect. I'm just going to take my donor advice fund and send it over to the nonprofit." And then the nonprofit, they said, "No, no, no, you can't do that." It has to actually go to the person that actually raised the cattle and sold it, in your case, plants. So the accountants told you that it won't work because of the fact that she can't give 100% of it away against the income.
Scott: She can give it away, but she can't take it...she can only deduct either 50% or 60%. It was 50% for years and...
Pat: I don't know what it is today. We'll look it up.
Stephanie: Well, I guess they're telling her she's going to pay tax on the $50,000. But my question is when she...and I guess they're okay with that, but once she pays the tax on it and she writes him a check, is he then going to have to pay tax?
Scott: Correct.
Stephanie: Double tax?
Scott: No, that'd be a gift. She can gift him the money.
Pat: But she can't deduct it.
Scott: No, she can't deduct it. She can't deduct it.
Stephanie: The gift laws...she can only gift so much up in 2025.
Pat: This is a prime example. Look at...the irony of this, here's this young...How old is she?
Stephanie: She's 11. Oh,
Pat: Oh, right? Eleven-year-old, beautiful 11-year-old wins $50,000 best in show and she wants the money to go to this burn victim. And Congress has made it so complicated that she can't...there's no way she can get that $50,000 directly to that person.
Scott: She can't deduct it because he's not a charity, but she can gift it.
Stephanie: And they said if he had a 501(c)3, then she could and then [crosstalk 00:12:07.073]...
Pat: But then she's limited, but she's still...$50,000, she could deduct half of that. But she'd still have taxable income. And a 1099...
Stephanie: Somebody even said...there was even a thought, one of the CPAs said, "Well, now it's going to be added on to her dad's income for the year, which may put him in a different taxable bracket." I'm like, "Oh, this is such a mess."
Scott: That's right. That's right. That's right. That's right.
Pat: But she should be able to gift him money just like...
Scott: That's correct. You can gift your kids money.
Pat: Yeah, but if...
Scott: She can't take a deduction.
Pat: Yeah. It could possibly be added to the parent's income.
Scott: It seems to me the best way to get as much as possible, you can't get the 50 grand directly to him, but as much as possible, if there is a 501(c)3 that's willing to help him, well, she can gift 50% of the $50,000 to that. Now she's got $25,000 that she's going to have to pay income on. And probably self-employment income.
Pat: So I did this...
Scott: And then pay the taxes. And then what's left, she can just give it to him as a gift.
Pat: I did this years and years ago, years and years ago, probably 25 years ago. Similar situation. I found a local fire department that actually had a 501(c)3, gave the money to them, and then they gave it to the person.
Scott: It's 60% of adjusted gross income.
Pat: Sixty percent adjusted gross income.
Scott: But yes, yes, there's no way all 50 grand is going to go to him. Your accountants are right. I've
Stephanie: I've heard that she's definitely going to have to pay tax on the $50,000 and then she can gift $19,000 in 2025. And he wouldn't have to pay tax on that $19,000.
Pat: That's correct. Is he married?
Stephanie: He's not. He's 25.
Pat: Okay. And then she could do it again next year too.
Stephanie: Correct. That's what we were thinking. But I guess my question is...
Pat: No, wait, wait, wait. But that's not true. I mean, she could give as much as she wanted. She has a lifetime exemption.
Scott: Okay. But you know, okay, she's 11 though.
Pat: She'd have to file a gift tax return.
Scott: She's 11.
Pat: She'd have to file a gift tax return.
Scott: How complicated has this become? This is amazing.
Pat: Well, she's met with a number of accountants and called a national podcast...
Scott: I know.
Pat: ...trying to figure it out. And we're like...
Stephanie: She got this check two weeks before...two weeks into December. And then I'm like, "Oh, we got to figure something out before the end of this year." So if she was able to gift him some in '24, then in '25...
Pat: Oh, it's too late to do a 501(c)3 contribution. That has to be done in the calendar year.
Stephanie: Yeah, so now that's passed. So then now it's like, we're sitting here in '25. And again, they don't have this check cashed because they don't know what to do with it and how to do it. And they got a new CPA, but I don't...again, I've talked to three different ones and I keep getting different ways. And then I'm like, you call the IRS and go, "Hey, how do you do this?"
Pat: Don't call the IRS.
Scott: First of all, what she needs to do is go back and figure out what all her expenses are with actually...
Pat: Yes. Because she's gonna have to...like, the reality is she's gonna have to file a tax return for 2024. It sounds like self-employment, 1099. Right? So what expenses has she had, did she incur in 2024 to offset the $50,000? Right.
Scott: Right. So travel expenses, if she stayed in a hotel to show this particular plant.
Pat: All that stuff.
Scott: All the expenses associated with this.
Pat: Maybe bring it down to $48,000, a couple thousand or something.
Stephanie: Yeah, that's really...that's where we're at.
Pat: But then we've got...then we have self-employment tax.
Scott: Which is 15.3%.
Pat: And then income tax.
Scott: And then income tax.
Stephanie: Why would you take self-employment, because of the amount?
Pat: No, because it would be considered...
Scott: It's a contract.
Pat: Yeah. Unless it's some sort of a capital appreciation.
Scott: It's a 1099.
Stephanie: Because I think in this [crosstalk 00:16:11.289]...
Pat: How long did it take to grow the plant?
Scott: By the way, we're not experts on winning [crosstalk 00:16:15.111]
Pat: Listen, you're going to have to go back...
Scott: We have nothing for you. I mean, you heard the same stuff you've heard from the three different CPAs, right?
Stephanie: Yeah.
Pat: Yeah. We talked it in circles.
Stephanie: So...
Scott: I mean, the best outcome would be whatever the parent organization that runs this thing to say, "Look, here's the deal. Here's how much it's costing us by having to go through here." If she can just say, "I would rather have my money go to a nonprofit and..."
Pat: I don't know why they legally couldn't do that.
Stephanie: If she donates it to a nonprofit, she can...
Scott: It's too late now.
Stephanie: ...donate...Why is that?
Scott: Well, she can, but she's not going to get a tax deduction for it because she doesn't have...
Pat: Unless you have some income in 2025. And she can only deduct...
Stephanie: Well, she's gonna...Ugh, yeah, because...so, like, because the check's not cashed is what you're saying? Because she...
Pat: It doesn't matter.
Scott: She received it. It doesn't matter when you cashed it.
Stephanie: Okay. She received it in '24. Okay.
Pat: She had constructive receipt, whether she cashed it or not is irrelevant.
Stephanie: Okay. So then worst case, she'll pay tax on it. Have her...
Pat: If this is my 11-year-old, I'd say, "Listen, make sure you understand this when you grew up." Look it, run it through the sausage mill, whatever's left, gift to the gentleman...
Scott: That's what I'd do.
Pat: ...which is probably...
Scott: $37,000, maybe $35,000.
Pat: All righty?
Stephanie: Gift it to him and...yeah, okay. Sounds good.
Pat: Appreciate it. And by the way...
Stephanie: Thank you.
Pat: ...what kind of a plant was it?
Stephanie: It was a multitude of plants, but her project was called Beauty from Ashes. And she just...with her parents' guidance, because we knew this young man, you know, like, hey, let's give back. She's been given...she's won a lot in her...
Pat: In her long life.
Stephanie: ...young career. And so we were just looking for a way that...and we thought most of all, she might get like $3,000. And man, the community, if you'd been there that night, unreal.
Pat: I imagine.
Stephanie: Everybody's just $20,000, $10,000. I mean, it's just crazy.
Scott: Oh, that's nice.
Stephanie: So it was really a blessing. God was good.
Pat: And what part of the...
Stephanie: I appreciate y'all taking...
Pat: What part of the country are you from?
Stephanie: Small town, Splendora, Texas. Houston...it's north of Houston.
Scott: Very nice. Very nice.
Stephanie: Yeah. So, great community.
Pat: I'm sorry we don't have any great answers. You've talked to everybody, like...
Stephanie: I know.
Scott: There's no great way to do this.
Stephanie: [crosstalk 00:18:43.257] whatever...
Pat: Nope. All right. Appreciate the call.
Stephanie: I don't want it double taxed. So, I appreciate it. Thank you.
Scott: Thank you.
Pat: I guess the way to do this, it could have been the donors be like, hey, don't write the check to this...I know you committed last night when you were at the charity, raised the paddle or whatever. Don't contribute. We're going to instead go to this 501(c)3 that helps us.
Scott: Yeah. But how would you get in...?
Pat: Yeah. But so Scott, I think I bought one or two of these steers and same thing. I'm like, okay, just I want it to come from my donor advice fund because I'm not going to take receipt of the meat. And then they're like, no. So finally I scratched it.
Scott: Oh, because you've got an incidental benefit from it. Some sort of...
Pat: That's right, and I didn't want any. And so I said, just give it to a homeless shelter or whatever, you know, food banks.
Scott: Still didn't work.
Pat: Still didn't work. So I ended up...but then I just said, well, I don't want to eat that much beef, but I was at a friend's house for barbecue and they served some of the steak, and then I was so disappointed in myself.
Scott: You gave it away.
Pat: I gave it away.
Scott: Why did I give that good meat away?
Pat: I said to my wife, [crosstalk 00:19:43.033]
Scott: [crosstalk 00:19:43.285] that was a bad idea.
Pat: It was so good. Not a big steak eater, but it was really good.
Scott: You know what's interesting about a call like this? So here's this 11-year-old, right, who...like, there's some kids that just grow up with this drive. She obviously has a heart to serve, like, and then other kids are just victims. They grow up to be victims their entire life. It's just really interesting.
Pat: And some could be siblings in the same family.
Scott: All right. I know.
Pat: Right? My wife and I always joke, we hate those parents who talk to us. "Oh, what are the kids up to?" "Oh, well, you know, Bill's at Princeton. He's finishing up Princeton. Yeah, he's got law school there. And then the Susie's got, you know, [crosstalk 00:20:25.609] Like, "What's your kid doing?" We just [crosstalk 00:20:29.417].
Scott: Well, he's down at the Regal.
Pat: Taking tickets.
Scott: He works three nights a week at Regal, but he's really good with the video games. He's scooping the popcorn.
Pat: I bet they don't have that at Princeton.
Scott: That's funny. Yeah. And I'm also reminded, you mentioned, like, Future Farmers of America or 4-H or something like that. So Pat and I have lived in the same community for 30-some years. My kids have gone to public school at...Oak Ridge High School is like a high school in our region, which it's very much a suburb of Sacramento.
Pat: And used to be...
Scott: Cattle land.
Pat: Yeah. I mean, when I first moved to Eldorado Hills, there was a sign on the way in that said, "Dogs molesting livestock will be shot." And I always loved that song...sign, and the song.
Scott: But you go not very far out of Eldorado Hills and it's very much rural. So the next high school up is Ponderosa High School. And my daughter actually goes...in the afternoons of the high school, she goes to some sort of animal health thing that she does there working with animals, but they're known for that. But people in...the Oak Ridge kids joke around, oh, if you're on the cheer squad, is it a requirement that you're also a Future Farmer of America?
Pat: They're making fun of the...
Scott: Oh, yeah, all the time.
Pat: ...people down the road.
Scott: The farming hicks up the hill. I think it's absolutely hilarious. Yeah, whatever.
Pat: Anyway, I don't know why we're talking about that. Let's continue on with calls. We're in Ohio. By the way, I had never had a call like that, this last one before.
Scott: No, after 28 years.
Pat: Not about when do I start Social Security? How do I do a Roth conversion? It was an interesting one.
Scott: Frank, you're with Allworth's "Money Matters."
Frank: Mine won't be as interesting. I'm sorry. So, mine's hopefully simple. I'm 66 years old. I'm going to start collecting Social Security in February, which is awesome. I work full time, so that's good. So I'm 66 and so many months, right? So I get that. And I'm debating which way to do this. I want to pay off some debt, some high credit card debt, unfortunately, I got myself into. So, about $30,000 worth of credit card debt that I'm into. I know, don't beat me up too much on that, but it's true. So should I...and I have a 401(k) that's got $350,000 in it. Would it be better to take the money out of the 401(k), pay the debt off because it's high interest, and then pay myself back, because I'll be collecting $3,200 in Social Security, and just put that back into the 401(k) every month?
Pat: How much do you earn?
Frank: About $70,000.
Scott: And are you married?
Frank: Yep. [inaudible 00:23:27.205]
Pat: Okay. Does your wife work?
Frank: She does not.
Scott: And what other assets do you have outside of this 401(k)? Do you have money in the bank or...?
Frank: No, that's it. That's it.
Scott: And so you start Social Security [crosstalk 00:23:41.962].
Pat: When do you plan on retiring?
Frank: Seventy-two. [inaudible 00:23:47.277]
Pat: Do you own your own home?
Frank: Yes. Paid off.
Scott: What's the value of it?
Frank: I'd guess probably in the $250,000 range.
Scott: And $30,000 in credit card...and I assume the interest rates are...
Pat: Why are you starting Social Security? I think it's a big mistake.
Frank: Why did I do that?
Scott: Yeah. Why are you starting now?
Frank: I was told by a financial advisor that it would be worth it. You know, do it now. It wouldn't pay...It would be more beneficial. [inaudible 00:24:18.819] more money to collect it at 66 and 8 months.
Pat: Are you of good health, you and your spouse?
Frank: Yes. Yeah.
Pat: Does longevity running your family?
Frank: My dad's 94, still alive.
Pat: I wouldn't start...
Scott: I would wait until 70.
Pat: I'd wait.
Scott: Unless you have some big pension that's going to replace your salary when you retire, do you?
Frank: No pension. No pension.
Pat: So your retirement, you have $350,000 in retirement savings.
Frank: Yep.
Scott: And you're making $70,000 a year.
Pat: You have five years worth of income saved for retirement. You don't have enough money to retire.
Frank: No, I don't. But what I plan on doing is taking that money and just put it in my 401(k) until I retire.
Pat: You can't do that.
Frank: I can't?
Pat: No.
Scott: It doesn't work like that.
Pat: I mean, you could have more withheld from your paycheck.
Scott: Yes. Do you have a 401(k) at your employer now?
Frank: I do.
Scott: Yeah, you could do that. It still doesn't make sense. And the reason he used 66 years, 10 months was that's when you could, you know...
Pat: Take it without a wage...you can earn as much as you want.
Scott: Yeah, without any sort of wage penalty. I don't understand. Well, so the answer to your question is how I would actually address this, I would actually go down to the bank, get a home equity line of credit with a much lower interest rate, probably 8% to 10% lower, and then I would convert all that interest rate to home equity line of credit. So the difference between there is...
Pat: Probably 8% or 9%. I don't know what they are today.
Scott: It's significantly lower. And the reason is, is because the bank actually uses your house as collateral and the credit card company use nothing as collateral. So that's why there's a lower cost of money there. Then I would actually set up a plan to pay that off in 6, 12 months, right, out of earned income. And I would defer Social Security until age 70.
Pat: And not touch the 401(k).
Scott: And not touch the 401(k).
Pat: Let's step back for a second, Frank. So the reason you have credit card debt is because you've been spending more than you're earning today.
Frank: No doubt.
Pat: And so you're talking about taking money out of your retirement account, which is really for the day that you can no longer work. You're hoping to retire at 72, but you don't know what happens. One out of two Americans retire earlier than planned. And oftentimes it's a health issue, either of ourself or of a loved one.
Frank: Yeah. You know, life happens. And I have a family that needs money here and there.
Pat: Yes, I get it.
Frank: A disabled grandchild. And it just adds up. And all of a sudden, the money's gone.
Pat: I get it. But do you want to be 78 and be that recipient of that?
Frank: No, but...I agree. I agree.
Scott: So this is how I would do it. I'd go to the bank, get a home equity line of credit. Get $30,000 on it. Take that money out. Pay the credit cards off. Pay that off within 12 months.
Pat: Let's try to pay it by the time you retire at 72. Amortize it over that.
Scott: So it's only a...
Pat: It's negligible. The payments are almost nothing.
Scott: Okay. Leave the 401(k) where it's at. Make sure it's invested probably 60% to 70% equities and the rest bonds and cash. Defer the Social Security until age 70 or until you quit working. And then that way you can retire comfortably. You actually taking that Social Security now, you're going to end up spending it.
Pat: You're going to increase your standard of living. It just happens.
Scott: That's how I would do it.
Frank: Okay. Well, that is good advice.
Pat: And I don't know what the financial advisor...why they thought that taking it out...What was the point of that? What was the financial...what was the rationale why you should take Social Security at 66?
Frank: Well, the way he explained it was you're not going to...If you live to this age...he did this mathematical equation. Still, you're going to get more money getting it now than if you live to 90.
Pat: That's not...
Scott: I'm more concerned about your standard of living at 75, 80, 85, 90. That's my biggest concern.
Pat: Yeah, and it increases by 8% plus a year, your Social Security benefit between now and age 70.
Scott: If you live longer than a normal life expectancy, it pays to defer. You get more by deferring.
Frank: People like me, we listen to people like you and...
Pat: No, I get it. I mean, look, even if it was a push...I would actually say, even if it was a slightly detrimental and a slight reduction of payments, I would still argue to defer this as long as possible. Because the bigger the check you're going to get from Social...You need that. You're going to need that Social Security check. It's not going to be just like a nice to have. You're going to need it.
Frank: Yep. Yep. I know that. I know that. Again, sometimes you live in the moment.
Pat: Whatever happened in the past is irrelevant, right? So here's our moment today. All we can do is deal with what we've got today and make the best decision for today and tomorrow.
Frank: Yep.
Pat: All right?
Frank: Well, I take your advice. All right. Thank you.
Pat: All right. Thank you, Frank. Yeah, really glad you called.
Scott: By the way, if you've listened to this podcast at all, our theory on Social Security is if your income is so large that you actually don't need it to live on, take it early. And what we're doing there is we're trying to mitigate legislative risk.
Pat: And if you're at a point where, for whatever reason, you don't have as much retirement assets as you need, and you're going to need to rely upon Social Security, which the majority of Americans...The majority of Social Security recipients receive the majority of their income from Social Security.
Scott: Over 50%.
Pat: Yeah. a lot of people are very dependent upon Social Security. And if that is going to be you, then defer as long as possible. If you're still healthy and can work, defer that until age 70 because...
Scott: I mean there is legislative risk there. We've talked about it many, many times, but not for the people that need it to live.
Pat: I can't imagine. I'm 62. I can't imagine.
Scott: How did that happen?
Pat: No kidding. We've been working together for 35 years.
Scott: I still act like I'm 24 though, most of the time.
Pat: Until you're like back or neck or shoulder.
Scott: Oh, I know. When you get up in the morning and you're like, okay, let's just do the little test. Anyway, you were saying 62.
Pat: By the time I'm 75, I don't expect that Social Security will continue to flow to me. Even if I started at 66 and 10 months.
Scott: Yeah, I don't expect to get it.
Pat: I wouldn't even put it in the plan. In fact, most of our advisors for those people with a higher net worth or higher income, right, you don't have to be high net worth to have high income, you could have pensions, those are the people most at risk of losing Social Security benefits, not low-income people.
Scott: I write a bi-weekly column for InvestmentNews. It's an industry publication. So none of you who listen read it, nor should you, because it's all for the industry. But there's a particular writer, this woman who she's a CFP and she's an expert on Social Security. Our concept of, don't ignore legislative risk, if you've got plenty of assets and you think there could be means testing, that's an argument for taking it early. I remember she was arguing against that 10 years ago like that was foolishness to even think that. The last couple of articles I've read by her have started to bring that up because it's going to be depleted, the Social Security Trust Fund, 2033, 2034, maybe earlier now that they just passed this bill to get rid of the wage elimination provision. I'm sure some of you listen, if you retire from a state of municipality and had some reduction in Social Security, you're going to get a bump in your Social Security.
Pat: Most certainly.
Scott: Yeah. If you're in a situation like our last caller or a loved one, another option that he's probably going to look into somewhere down the road is reverse mortgage.
Pat: Nothing wrong with that. That's the biggest asset you own. It's the only way to bring liquidity to it, unless you downsize. Another way.
Scott: Yeah. It is important to own a home in retirement because you don't have to deal with increasing rents.
Pat: Inflation. Moving around. All right. We're talking with Richard. Richard, you're with Allworth's "Money Matters."
Richard: Hello.
Pat: Hey, Richard.
Richard: How are you guys doing?
Pat: We are great.
Richard: I listen to your show all the time and I appreciate your advice. I am a small business owner, really small. It's just me, and I've been doing it since 2018. I worked 23 years for a large semiconductor company and then got laid off. I'd been doing this on the side, like moonlighting, for a long time and I decided to go into business for myself.
Pat: Oh, good for you.
Richard: I'm not an Inc. I'm not an LLC or anything like that. I'm just a sole proprietor. I do my own taxes. It seems like I pay a lot in taxes. My question, my general question for you is I don't make quarterly payments.
Scott: Why?
Richard: I just don't.
Pat: When do you pay?
Scott: Did you pay a penalty over here?
Pat: When do you pay?
Richard: Yeah, I do. I do pay a penalty. I looked it up. My last penalty was, it said $1900 I paid in penalty.
Pat: What was your income?
Richard: Last year it was $226.5K.
Scott: This isn't a little business.
Pat: Yeah, this is a real...
Scott: I was expecting some eBay sales thing. You had $18,000 last year or something.
Pat: Selling Legos on eBay. So $225,000 a year. Have you set up a self-employment...?
Scott: Do you have much expenses on that or are you a consultant of sorts? Is it your expertise you're selling?
Richard: My expertise. I provide a service that has very little overhead. I work out of my home office.
Pat: I don't understand why you're not paying quarterly taxes. I mean they're kind of a pain and they don't even fall in the same months because it's January 15th, April 15th, June 15th, September 15th. So it's not even a...Isn't that right?
Scott: July 15th.
Richard: I guess I feel like I'll just keep the money, make the interest on it or whatever, and then just pay the penalty.
Pat: October 15th? I might have been the number...My month's way off. See, I don't even remember the month.
Scott: I would file quarterlies. Have you set up a self-employment retirement plan, like a uni-k?
Richard: No. When I got laid off, all my money got rolled over into...I have two IRAs, a traditional IRA and a Roth IRA.
Pat: How much do you have in those?
Richard: So my traditional, I have just over a million and then in my Roth, I have $27,000. And my wife has about...because she used to work too, she has about $150,000 in her IRA.
Scott: How much is your wife's income?
Richard: She doesn't really work. She stays at home.
Pat: How old are you?
Richard: I am 58 years old, be 59 in July.
Scott: And is your home paid?
Richard: My home's paid for. My wife's retired as well.
Pat: How long do you think you're gonna do this?
Richard: So I can do this into retirement because it's not that physical. So I can do it. And if I hired somebody, I could even do it even longer.
Scott: And do you have much money in savings?
Richard: So we generally put money in savings, but we generally get wiped out around tax time.
Scott: Okay. Another reason you should...
Richard: So this is one of the reasons why I'm asking.
Pat: Do you expect a pension in retirement?
Richard: I don't expect a pension, no.
Pat: You need to save more. Yeah, you need to save more. And one of the ways that you could do that is actually just set up a self-employment 401(k). Very, very easy. And you do it with one. It looks just like an IRA.
Scott: Back to Pat's point, I mean, part of it is like, I can do this indefinitely, which you might be able to should your health hold up, right? But I've got a really good friend of mine, his wife had a nasty stroke 17 years ago and, I mean, his world changed. And so he had to retire early to take care of his wife. And those things happen, right? And maybe it won't happen, but we need to plan for...We're all going to get older and eventually we're going to get sick.
Pat: So if you were sitting in my office, I would say, okay, look, we need to do a couple things. One is that we're going to pick a clear retirement date. It's not going to be an indefinite and we're going to actually aim at that retirement date. So you said you're 58, correct?
Richard: Yes.
Pat: So I'd say, okay, let's pick a retirement date of 65 or 67 or whatever. And we would actually aim your finances at that date, right, which would be a realistic date. Obviously, life happens, it would change. And then I would actually build the financial plan backwards from that date, including Social Security, your IRAs, your Roth IRAs, and you most certainly need to save more. Quarterly taxes was the easiest thing. You got to file quarterly.
Scott: It's 1900 bucks for a slight inconvenience. I don't know about you, but 500 bucks a quarter just for taking the time to write the check.
Pat: You're going to do estimates, right? They're estimated taxes. So you're going to take last year's income.
Scott: And the penalties are gonna go up anyway because interest rates are higher than they were year previous.
Pat: So that's a no-brainer. The idea of a solo-k or a uni-k, you can funnel about 70 grand a year into that.
Scott: Easy.
Pat: And deduct it so you don't have to pay.
Scott: It's going to lower your tax liability. So you'd go and do a pro forma for 2025, pay quarterly taxes, start the uni-k, and then base your estimated payments on this pro forma, which is after the 401(k) contributions. Obviously, self-employment tax sits in there as well. But then that's how you would determine your quarterly taxes. You pay quarterly and then you start saving more on a monthly basis. You're not saving anything for retirement, by the way.
Richard: Right. I'm not familiar with the terms you just mentioned, pro forma and uni-k.
Scott: So a pro forma would mean I'm just going to run a simulated tax projection of income for the year 2024, 2025, right? And a uni-k is nothing but a self-employment tax.
Pat: Solo-k or uni-k, they're called both those things.
Pat: It's nothing but a self-employed 401(k).
Pat: For people with no employees.
Scott: With no employees.
Pat: And they cost almost nothing to set up.
Scott: They look just like IRAs, but the limits are higher.
Richard: If it's self-employed, what was that?
Scott: Like you had a 401(k) at your own employer, your previous employer. It looks just like that. You have an investment selection. You actually...rather than it come out of your paycheck, you just write checks into it.
Pat: Yeah. If you google uni-k or solo-k, you'll find some more areas where you can read about that.
Richard: Okay, great.
Scott: Yeah. But yeah, you can contribute...
Pat: I was just looking right here, 70 grand.
Scott: Yeah. So it might make sense for you to sit down with a financial advisor, pick a target date of retirement, and then work backwards as to how much you need to save to get there. And it would include your Social Security benefits for both you and your spouse. Is your house paid for?
Richard: Yes, my house is paid for.
Scott: That's good. But yeah, [crosstalk 00:40:20.908].
Pat: You mentioned something about having an employee. Are you considering having an employee?
Richard: Yeah, I've thrown it around.
Pat: I mean, it does change your work quite a bit, right? I mean, but if you want to...
Scott: He doesn't want an employee. Did you hear the enthusiasm in his voice?
Pat: Yeah. That's why I was just asking him. But the reality is you have no business to sell at this point. So when you start thinking about business, that might make sense. It might be a time to bring somebody in.
Scott: It's still a consulting business.
Pat: Yeah, I know.
Richard: Right.
Pat: They're buying your expertise.
Richard: I don't get totally wiped out when I pay taxes. I mean, we'll have like maybe 10 grand left.
Pat: How much do you have in your bank now?
Richard: I think we have about $70K right now.
Pat: Okay. You make $225,000 a year. You've got $7,000 in the bank and a bit over a million dollars saved for retirement.
Scott: $1.2 million. So you got about five or six times...
Pat: Yeah, you're far, far away from...
Scott: Not dissimilar to previous call, but it's just a different...
Pat: Yeah, just different numbers. You just need to...
Scott: I totally agree with Pat. If you really run the numbers, like pick some date in the future that...So that you could retire, maintain your standard of living. Maybe you won't, but to be at a point where work is a total option and not an obligation.
Richard: Right.
Scott: And when you're at that point, it's quite liberating because then it's like, I don't know if I want to work for this client or not work for this client.
Richard: Right, right, right. I'm not at that point. Yeah. Okay.
Pat: And what did you make at your previous employer?
Richard: When I got laid off, it was right over $90K a year.
Pat: And how long ago was that?
Scott: '18.
Richard: 2018.
Pat: Oh, you've done well for yourself.
Scott: You've done great. What a great business.
Pat: I know. You said small business, it's a great...
Scott: What a great business. You should be very proud, right? And you built...
Pat: Did your spouse work outside the home prior to that?
Richard: Yeah, she worked for a major bank.
Pat: And your kid...When was your last child off the payroll?
Scott: When did they become a...?
Richard: Well, we don't have no children. Just my wife and I.
Scott: All right. Yeah, you need to...I would sit down with an advisor or do it yourself and run pro forma, figure out the tax.
Pat: You have plenty of money saved to replace $90,000 a year. But you're...about enough to save for that. You don't have enough saved to replace a $200,000 a year income.
Richard: Right, right. Okay.
Pat: And my guess is you haven't been spending all...You probably paid off your home over the last several years and maybe did a remodel on the house and done some other stuff like that. That would be my guess.
Richard: Yeah, yeah. No, I have. It was three years ago when I paid off the house and then we've done a few small renovation projects.
Scott: There we go.
Pat: Yeah. Well, now's the time to...Let's save some of these dollars.
Scott: Yeah, kick it into gear.
Pat: Pay our quarterly taxes and move forward that way.
Richard: Okay.
Scott: All right. Appreciate the call.
Richard: Yeah, I wrote everything down. I appreciate you guys' information and expertise. Thank you very much.
Scott: Thank you, Richard. And by the way, just as a reminder, these are...We always encourage people to seek out their own advice. This isn't technically a client engagement. It's a CYA.
Pat: But I find that funny is that he...My guess is he probably won't. The consultant will not consult a consultant.
Scott: What?
Pat: He's a consultant. But my guess is he won't seek out a financial advisor for consultation on his own retirement. That's just my guess.
Scott: That's probably correct. The consultant...
Pat: Well, you know why...
Scott: The consultant will not consult a consultant.
Pat: That's just the rule of thumb. That's how it works.
Scott: One of the truisms in life. Consultants don't...
Pat: I've never quite heard that one before.
Scott: I just made it up.
Pat: Oh. Do you think that's the case?
Scott: It sounded like it with him.
Pat: Okay. I kind of wonder if that would be the opposite though.
Scott: Oh, I...What my experience is and then yours is, typically the more someone has...their career has been...they've been delegators, they've been leaders of things, the more likely they are to hire advisors. Because they went through their careers saying, I don't have this expertise, but man, that gal is phenomenal at what she does and he's phenomenal at what he does. And so those people tend to have no problem. They find the right person, they trust him or her.
Pat: Okay. And what's the opposite of that? The people that are used to delegating...
Scott: The ones that are the hardest to hire advisors are engineers. Particularly engineers that haven't led big groups or led projects.
Pat: What do you think he was?
Scott: I think he was an engineer of some sort.
Pat: He left a tech firm making $90,000 a year, he's making $225,000 now, six years ago.
Scott: Well, and look, so he was 52 when he lost his job. Those years between 50 and 60 or 55 and 65 are typically the years you're going to make the most amount...your income will never be higher and your opportunity to save and invest for retirement is never going to be greater. And one, like oftentimes your kids, you've raised...most people raise children. The children by that point, if they're not out of the house, they're close out of the house.
Pat: That's the hope.
Scott: That's right. That's the hope.
Pat: That they become self-feeders at some point in time?
Scott: Yes, and contributing members of society along with that.
Pat: Oh, that too? I'm just worried about myself.
Scott: Not just a self-feeder, but hopefully someone that contributes to others and that benefit to the globe.
Pat: Okay, all right. That was just me thinking out loud.
Scott: But look, if you find yourself in a situation like this, you need to reinvent yourself. Because we've seen...I can't tell you how many times we see people in their 50s lose their job. I mean, I know a bunch of people right now. Intel is...
Pat: Down the street.
Scott: ...a mile and a half from here. At one point there were 7,000 employees. I don't know what there are today.
Pat: Fifteen hundred.
Scott: I know a lot of people in their 50s that were just laid off, took a package, early retirement. I don't know all their financial situations, but I can guarantee you a lot of them are not in the place that they want to be financially. And they have to either reinvent themselves, engage in a new career. But it's a phenomenal time to be self-employed because you can have clients anywhere and do over Zoom. It's not like having to travel out somewhere every week and show up and fly out Sunday night and show up Monday morning somewhere.
Pat: The key is clients.
Scott: Well, that is the key, getting some clients.
Scott: If you could get them anywhere, you should get them. Let's go with that. And it's also an interesting time, Pat, where we've certainly counseled lots of people in their 50s that have hated their job, counting down, I only have seven more years. I'm going to suck it out seven more years. And like, what else would you like to do? I'd actually like to do this sort of thing. Well, then even if it pays less income and maybe instead of planning on retiring seven years, now it's 10 years or 12 years, but doing something you really enjoy. That adds value.
Pat: And then we find those people not in a rush to retire.
Scott: It changes the whole dynamic.
Pat: Certainly. Certainly. It's quite interesting.
Scott: Hey, by the way, if you enjoy...Last weekend, I did this trail run.
Pat: How far?
Scott: Twenty miles.
Pat: What, are you slowing down?
Scott: I somehow got sucked back in.
Pat: Well, 15 years ago, you did the 100-mile...
Scott: Yes, I ran the Western States 100-mile Endurance Run.
Pat: Which is...
Scott: It starts at the base of Squaw Valley, Palisades, excuse me, in the Sierra Nevadas and finishes at...it's about...
Pat: It's all downhill.
Scott: ...17,000 feet of climbing.
Pat: Oh, but it's downhill.
Scott: Well, yeah, but it's about 17,000 feet of climbing, 17,000 or 18,000 feet of climbing. Anyway, I did that years ago.
Pat: Do you find it harder to run downhill or uphill?
Scott: Oh, uphill.
Pat: You do.
Scott: You can't trail run unless you can figure out how to run downhill. Otherwise, you're done.
Pat: You're gonna hurt yourself.
Scott: Because half the time you can kind of coast and recover. You can open it up and you can let the engine kind of recover. Anyway, why am I talking the details?
Pat: You ran 20 miles on a trail.
Scott: I got sucked back in because my daughter is now getting into Ultras. And I ran one with her last May and now I'm signed up. I made the mistake after the race as I'm recovering and I'm signing, committing to this other one that I'm going to do in a couple weeks. So now I'm training for this other 50K.
Pat: The closest I've gotten to an Ultra was a pair of shoes I bought called Ultras, but not actually running. So you're doing a 50K, which is 30...?
Scott: Yeah, 50 kilometers, 31 miles. And trails. But I ran 20 and I remember at the end I was kind of beat up. Like, I'm 58.
Pat: How old's your daughter?
Scott: She's 29.
Pat: And how far will she run?
Scott: She ran 100K last fall and she wants to do a 100-miler. She would like to do the Western States 100, but it's really hard to get into.
Pat: And shes' a sports psychologist.
Scott: She's a sports psychologist.
Pat: Which I just find fascinating. I was talking to my youngest son who went back to school to become a marriage family counselor.
Scott: Oh, nice.
Pat: And I'm like, you should check out what Hanson's daughter's doing. She's a sports psychologist. And so, I;m like...
Scott: Okay,we have time. She was telling us that we need to hire a sports psychologist for our 14-year-old daughter who plays volleyball. Because Ruby, she plays like a travel team, but she's not the best player. She's kind of middle-of-the-pack player and she doesn't really work that hard at it. She could certainly work harder, but I'm thinking...
Pat: Why?
Scott: I'm not gonna...If someone...like, she strives to be an Olympian, great. Then I'll throw all the resources behind her. But if that's not really her passion, why do I want to create it?
Pat: You mean the sports psychologist said that you should hire a sports psychologist. Very similar to how we tell people they should hire a financial advisor.
Scott: Exactly. But not her because it's her sister. How could she...? Anyway, my point of the story, we drove...it was a point to point, we're driving out. This guy Bill comes up and he says, "Oh, Scott, I'm so...I just downloaded your podcast because it just dropped and I was hoping to be able to listen to it this morning on the training run that I'm going on because I love your guys' podcast." And he says, "But it drops at..." I don't even know what time it drops. Whatever time it drops, he was like downloading as he's driving to the trailhead and it's not the greatest service. And he was just really excited that it was fully downloaded so he can listen to us as he does his trail run. And I'm thinking, if I had to listen to us, I don't know what's more painful, a long run or listen to us for hours.
Pat: Or both, do both.
Scott: That's what he was doing.
Scott: Combine the two. Maybe it's like it's a deflection thing. You got such other pain somewhere else, you don't feel...
Pat: So this is a long way to get to the fact that you're trying to promote our podcast.
Scott: That's correct. Okay.
Pat: Well, couldn't you have just said it? Why do we have to go into your friend Bill and this whole running thing? Can't you just say, "Please listen to our podcast or share it with a friend?"
Scott: Share it. We're trying to...it's actually better than...there's way more listeners than we thought when we did some studies, and now we're like, let's see where we can take this thing.
Pat: Look, our marketing people say we could hit the tipping point at some point in time and go viral.
Scott: Maybe it's another 30 years from now. Yeah. So make sure you give us a review and share it with some friends.
Pat: Please.
Scott: Been great having you. This has been Scott Hanson and Pat McClain of Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McLean.
Scott: Glad you are here with us to talk about financial matters. Both myself and my co-host here are both practicing advisors and have been for a number of decades and do this program because, one, we enjoy it, and two, we like to see and help you with some decisions with your own finances.
Pat: Yes, and like many things at work, you don't look forward to going to work, but once you're there, you're involved.
Scott: Yeah, yeah, yeah.
Pat: I feel the same way about the gym, yoga, bicycle riding, many, many things in my life I don't look forward to doing them, but once I'm engaged...
Scott: My daughter was complaining about something, "I don't know if I want to go tonight." I'm like, here's my experience. If there's something I know I'm going to enjoy, it's good for me, I've never regretted going. Push yourself.
Pat: Just go and you'll be glad you did.
Scott: Anyway, this is a financial program, we'll talk about...
Pat: Not our psychology.
Scott: We're off to another phenomenal start to the year...
Pat: Crazy.
Scott: ...stock market-wise. Of course, we had the inauguration this last week and we're not going to talk about it.
Pat: No, please, no. We try to stay apolitical. We try, but we too are human and it may bleed through at times. No need to actually send us emails if you see us bleeding through our political leanings at some point in time.
Scott: But it's just, I mean, the stock prices, if they grow faster than the underlying earnings, that's not a great thing.
Pat: Yes. And I've seen a number of articles this week referencing back to Bob Shiller's CAPE Index and how the stock market is grossly overpriced.
Scott: Unless we've hit some new era where people are comfortable with higher multiples than they have in the past. Which we don't know because the multiples the last 30 years were higher than the multiples of the previous 70.
Pat: Yes. Maybe there's a feeling of optimism in the air that just drives it higher and higher. Who knows?
Scott: But if you're a long-term investor, should you really be happy? Particularly if you're still working and saving, I don't think you should be happy when the market goes up. If you're still contributing to your portfolio. Well,
Pat: Well, Scott, that's not fair.
Scott: Well, you want to see the economy grow and the underlying earnings of the companies grow.
Pat: Okay, so I'm saving for retirement. I'm just saying from a purely rational standpoint.
Scott: I know we're humans. I like looking at my numbers as much as the next guy or gal. I get it. It's been pretty good a couple years. Then when you factor in inflation though, you got a discount of about 25% of the growth you've had the last 5 years.
Pat: In terms of purchasing power?
Scott: Yeah, because what's the difference? Everything else is so expensive. It doesn't really matter. But this goes exactly to an article that I was going to share later in the show, but I'll share it now, which goes to these...It's an article that came out on January 10th in "The Wall Street Journal." "How you can see through Wall Street's ritual of wrong."
Pat: Ritual of wrong? Is this Jason Zwieg?
Scott: It is.
Pat: I can tell by the...Just by the...
Scott: Oh, you haven't seen this article. Every December, Wall Street predicts which various assets will return over the coming year. Every January, the predictions begin to be proven wrong. And so they call this the annual forecasting ritual, and it's absurd.
Pat: It's ridiculous.
Scott: The point of his article was they're not supposed to actually...everyone knows that they don't know what they're talking about. The point of this article...
Pat: I mean all the big banks, they have their economists. They give this prediction of where the S&P is going to finish at the end of the year.
Scott: That's right. In 2024, the average return forecast for the S&P was 7.4% by stock analysts and 1.3% by market strategists. I don't know what the difference between a stock analyst and a market strategist is.
Pat: You kind of do.
Scott: Yeah, I do. I don't think there's a big difference between that, venture funds, and private equity, and hedge funds, and the whole bit. But the S&P realized 26.3%. So way off. But his point is the reason they do this is to create conversations with people that are actually going to engage with them. That the Wall Street firms come out with these predictions...
Pat: So the big banks have the, here's the prediction.
Scott: They all do it.
Pat: And that way their clients want to have a conversation.
Scott: And re-examine their portfolio to make sure that they're allocated in the proper positions.
Pat: Well, I've never been one for making predictions on the markets.
Scott: I don't like making predictions about almost anything. It's interesting. I just thought, this guy really does...Jason Zweig really does...
Pat: He took like a year sabbatical. I thought he retired or something. Then he popped back up again.
Scott: Yeah. Is he part of this...remember the Zweig funds? Was he...?
Pat: Maybe. I don't know. He's been around a long time. It might be. Did he have funds too?
Scott: Yeah, back in the day.
Pat: This isn't an endorsement of his funds or him for that matter. But I don't know that much about him.
Scott: Don't you remember back in the day?
Pat: I like his columns. They put a flashlight on scams, on abuses in the marketplace.
Scott: On manipulations of investors.
Pat: And he had one last week on...I think he writes...it drops Friday afternoon, I believe. A week ago was on the conflicts of interest that independent advisors like us have with custodians like Schwab, Fidelity, [crosstalk 00:06:17.396].
Scott: I read that. Yes.
Pat: Which it's real.
Scott: It's real.
Pat: Yeah, it's real.
Scott: Yes, it's 100% real.
Pat: He didn't quite explain it nor did he talk about...Anyway.
Scott: The intricacies of it. Especially for smaller advisors, that they have to actually produce a certain amount of revenue for the custodians to stay on there. So oftentimes, the custodians will say, you need to kind of start doing this.
Pat: Charge your clients more.
Scott: Or you write the check. All right. Let's take some calls. 833-99-WORTH is our number. If you want to join us, you can also send us an email, questions@moneymatters.com. We're starting with Stephanie. Stephanie, you're with Allworths "Money Matters."
Stephanie: Yes. Good morning. Thank you for taking my call.
Scott: Yeah. Glad you joined us.
Stephanie: Okay. My granddaughter shows at our county livestock show. And if she wins with one of her projects, and it's a 501(c)3 organization, the local businesses will buy her project.
Pat: I've done that. I bought...
Scott: Well, I don't know what you're talking about.
Pat: So what happens...Correct me, Stephanie.
Scott: Showing what?
Pat: So Stephanie, correct me if I'm wrong. So a friend of mine is involved in 4-H, and his children are involved in 4-H. So they raise steer, heifers, whatever they are. They bring them out to the county fair, and at the end of the project, they sell them, and people like me can buy X amount of beef. So I bought...
Scott: Is that what you're talking about, Stephanie?
Stephanie: Yes, sir. Yes, sir. So she raises rabbits, and then she shows other projects like a plant project. And this year, she grew a plant. We had a local burn victim in our area, which I'm super close to. He worked for my company. And he was burned 90% of his body, and he lived. And so she said...she did this project, a plant project in a firetruck. She grew a plant in a firetruck, and she said, "If I win, I want to give all my money to him." And so she did. She won reserve. And so all these buyers contributed over $50,000 for him. So now there's a dilemma because she received the fair...We talked to the fair to see if they would be able to write the check directly at him, and they said no. So she's going to receive a 1099 Miscellaneous for the $50,000. And so...
Scott: Where's the money now?
Stephanie: It's in a check. They haven't deposited. They haven't cashed it. They haven't done nothing because they don't know what to do. And evidently, asking different CPAs, they all have different answers.
Pat: Oh, yes.
Scott: Here's the kind of principle. So when you give to a nonprofit, it's supposed to go to the cause, not the individual. So as an example, I could set up a scholarship fund. But if my scholarship fund said it's only going to benefit children with the last name of McLean who hosts podcasts, and Pat did the same thing, set up, it would be a sham transaction and that it wouldn't be allowed because this isn't really a nonprofit. You're just trying to benefit one individual. In this case, it'd be a quid pro quo. And so there's been lots of different case law, and I'm not in a tax attorney by any means, there's lots of different case law over the years about ensuring that if stuff goes to charity, it actually goes to charity. So when something like this, if there's an organization in town that helps burn victims, of which they're helping him, you can donate to that.
Pat: Understand, but she's going to receive this as income at $50,000. She can't deduct all $50,000.
Scott: The most she can do is...it's either 50% or 60%.
Pat: It's cash versus securities. So I ran into the same...
Stephanie: We have some [crosstalk 00:10:23.637].
Pat: Stephanie, I ran into the same problem because I have a donor advice fund. And when they asked me to do this, I said, "Okay, perfect. I'm just going to take my donor advice fund and send it over to the nonprofit." And then the nonprofit, they said, "No, no, no, you can't do that." It has to actually go to the person that actually raised the cattle and sold it, in your case, plants. So the accountants told you that it won't work because of the fact that she can't give 100% of it away against the income.
Scott: She can give it away, but she can't take it...she can only deduct either 50% or 60%. It was 50% for years and...
Pat: I don't know what it is today. We'll look it up.
Stephanie: Well, I guess they're telling her she's going to pay tax on the $50,000. But my question is when she...and I guess they're okay with that, but once she pays the tax on it and she writes him a check, is he then going to have to pay tax?
Scott: Correct.
Stephanie: Double tax?
Scott: No, that'd be a gift. She can gift him the money.
Pat: But she can't deduct it.
Scott: No, she can't deduct it. She can't deduct it.
Stephanie: The gift laws...she can only gift so much up in 2025.
Pat: This is a prime example. Look at...the irony of this, here's this young...How old is she?
Stephanie: She's 11. Oh,
Pat: Oh, right? Eleven-year-old, beautiful 11-year-old wins $50,000 best in show and she wants the money to go to this burn victim. And Congress has made it so complicated that she can't...there's no way she can get that $50,000 directly to that person.
Scott: She can't deduct it because he's not a charity, but she can gift it.
Stephanie: And they said if he had a 501(c)3, then she could and then [crosstalk 00:12:07.073]...
Pat: But then she's limited, but she's still...$50,000, she could deduct half of that. But she'd still have taxable income. And a 1099...
Stephanie: Somebody even said...there was even a thought, one of the CPAs said, "Well, now it's going to be added on to her dad's income for the year, which may put him in a different taxable bracket." I'm like, "Oh, this is such a mess."
Scott: That's right. That's right. That's right. That's right.
Pat: But she should be able to gift him money just like...
Scott: That's correct. You can gift your kids money.
Pat: Yeah, but if...
Scott: She can't take a deduction.
Pat: Yeah. It could possibly be added to the parent's income.
Scott: It seems to me the best way to get as much as possible, you can't get the 50 grand directly to him, but as much as possible, if there is a 501(c)3 that's willing to help him, well, she can gift 50% of the $50,000 to that. Now she's got $25,000 that she's going to have to pay income on. And probably self-employment income.
Pat: So I did this...
Scott: And then pay the taxes. And then what's left, she can just give it to him as a gift.
Pat: I did this years and years ago, years and years ago, probably 25 years ago. Similar situation. I found a local fire department that actually had a 501(c)3, gave the money to them, and then they gave it to the person.
Scott: It's 60% of adjusted gross income.
Pat: Sixty percent adjusted gross income.
Scott: But yes, yes, there's no way all 50 grand is going to go to him. Your accountants are right. I've
Stephanie: I've heard that she's definitely going to have to pay tax on the $50,000 and then she can gift $19,000 in 2025. And he wouldn't have to pay tax on that $19,000.
Pat: That's correct. Is he married?
Stephanie: He's not. He's 25.
Pat: Okay. And then she could do it again next year too.
Stephanie: Correct. That's what we were thinking. But I guess my question is...
Pat: No, wait, wait, wait. But that's not true. I mean, she could give as much as she wanted. She has a lifetime exemption.
Scott: Okay. But you know, okay, she's 11 though.
Pat: She'd have to file a gift tax return.
Scott: She's 11.
Pat: She'd have to file a gift tax return.
Scott: How complicated has this become? This is amazing.
Pat: Well, she's met with a number of accountants and called a national podcast...
Scott: I know.
Pat: ...trying to figure it out. And we're like...
Stephanie: She got this check two weeks before...two weeks into December. And then I'm like, "Oh, we got to figure something out before the end of this year." So if she was able to gift him some in '24, then in '25...
Pat: Oh, it's too late to do a 501(c)3 contribution. That has to be done in the calendar year.
Stephanie: Yeah, so now that's passed. So then now it's like, we're sitting here in '25. And again, they don't have this check cashed because they don't know what to do with it and how to do it. And they got a new CPA, but I don't...again, I've talked to three different ones and I keep getting different ways. And then I'm like, you call the IRS and go, "Hey, how do you do this?"
Pat: Don't call the IRS.
Scott: First of all, what she needs to do is go back and figure out what all her expenses are with actually...
Pat: Yes. Because she's gonna have to...like, the reality is she's gonna have to file a tax return for 2024. It sounds like self-employment, 1099. Right? So what expenses has she had, did she incur in 2024 to offset the $50,000? Right.
Scott: Right. So travel expenses, if she stayed in a hotel to show this particular plant.
Pat: All that stuff.
Scott: All the expenses associated with this.
Pat: Maybe bring it down to $48,000, a couple thousand or something.
Stephanie: Yeah, that's really...that's where we're at.
Pat: But then we've got...then we have self-employment tax.
Scott: Which is 15.3%.
Pat: And then income tax.
Scott: And then income tax.
Stephanie: Why would you take self-employment, because of the amount?
Pat: No, because it would be considered...
Scott: It's a contract.
Pat: Yeah. Unless it's some sort of a capital appreciation.
Scott: It's a 1099.
Stephanie: Because I think in this [crosstalk 00:16:11.289]...
Pat: How long did it take to grow the plant?
Scott: By the way, we're not experts on winning [crosstalk 00:16:15.111]
Pat: Listen, you're going to have to go back...
Scott: We have nothing for you. I mean, you heard the same stuff you've heard from the three different CPAs, right?
Stephanie: Yeah.
Pat: Yeah. We talked it in circles.
Stephanie: So...
Scott: I mean, the best outcome would be whatever the parent organization that runs this thing to say, "Look, here's the deal. Here's how much it's costing us by having to go through here." If she can just say, "I would rather have my money go to a nonprofit and..."
Pat: I don't know why they legally couldn't do that.
Stephanie: If she donates it to a nonprofit, she can...
Scott: It's too late now.
Stephanie: ...donate...Why is that?
Scott: Well, she can, but she's not going to get a tax deduction for it because she doesn't have...
Pat: Unless you have some income in 2025. And she can only deduct...
Stephanie: Well, she's gonna...Ugh, yeah, because...so, like, because the check's not cashed is what you're saying? Because she...
Pat: It doesn't matter.
Scott: She received it. It doesn't matter when you cashed it.
Stephanie: Okay. She received it in '24. Okay.
Pat: She had constructive receipt, whether she cashed it or not is irrelevant.
Stephanie: Okay. So then worst case, she'll pay tax on it. Have her...
Pat: If this is my 11-year-old, I'd say, "Listen, make sure you understand this when you grew up." Look it, run it through the sausage mill, whatever's left, gift to the gentleman...
Scott: That's what I'd do.
Pat: ...which is probably...
Scott: $37,000, maybe $35,000.
Pat: All righty?
Stephanie: Gift it to him and...yeah, okay. Sounds good.
Pat: Appreciate it. And by the way...
Stephanie: Thank you.
Pat: ...what kind of a plant was it?
Stephanie: It was a multitude of plants, but her project was called Beauty from Ashes. And she just...with her parents' guidance, because we knew this young man, you know, like, hey, let's give back. She's been given...she's won a lot in her...
Pat: In her long life.
Stephanie: ...young career. And so we were just looking for a way that...and we thought most of all, she might get like $3,000. And man, the community, if you'd been there that night, unreal.
Pat: I imagine.
Stephanie: Everybody's just $20,000, $10,000. I mean, it's just crazy.
Scott: Oh, that's nice.
Stephanie: So it was really a blessing. God was good.
Pat: And what part of the...
Stephanie: I appreciate y'all taking...
Pat: What part of the country are you from?
Stephanie: Small town, Splendora, Texas. Houston...it's north of Houston.
Scott: Very nice. Very nice.
Stephanie: Yeah. So, great community.
Pat: I'm sorry we don't have any great answers. You've talked to everybody, like...
Stephanie: I know.
Scott: There's no great way to do this.
Stephanie: [crosstalk 00:18:43.257] whatever...
Pat: Nope. All right. Appreciate the call.
Stephanie: I don't want it double taxed. So, I appreciate it. Thank you.
Scott: Thank you.
Pat: I guess the way to do this, it could have been the donors be like, hey, don't write the check to this...I know you committed last night when you were at the charity, raised the paddle or whatever. Don't contribute. We're going to instead go to this 501(c)3 that helps us.
Scott: Yeah. But how would you get in...?
Pat: Yeah. But so Scott, I think I bought one or two of these steers and same thing. I'm like, okay, just I want it to come from my donor advice fund because I'm not going to take receipt of the meat. And then they're like, no. So finally I scratched it.
Scott: Oh, because you've got an incidental benefit from it. Some sort of...
Pat: That's right, and I didn't want any. And so I said, just give it to a homeless shelter or whatever, you know, food banks.
Scott: Still didn't work.
Pat: Still didn't work. So I ended up...but then I just said, well, I don't want to eat that much beef, but I was at a friend's house for barbecue and they served some of the steak, and then I was so disappointed in myself.
Scott: You gave it away.
Pat: I gave it away.
Scott: Why did I give that good meat away?
Pat: I said to my wife, [crosstalk 00:19:43.033]
Scott: [crosstalk 00:19:43.285] that was a bad idea.
Pat: It was so good. Not a big steak eater, but it was really good.
Scott: You know what's interesting about a call like this? So here's this 11-year-old, right, who...like, there's some kids that just grow up with this drive. She obviously has a heart to serve, like, and then other kids are just victims. They grow up to be victims their entire life. It's just really interesting.
Pat: And some could be siblings in the same family.
Scott: All right. I know.
Pat: Right? My wife and I always joke, we hate those parents who talk to us. "Oh, what are the kids up to?" "Oh, well, you know, Bill's at Princeton. He's finishing up Princeton. Yeah, he's got law school there. And then the Susie's got, you know, [crosstalk 00:20:25.609] Like, "What's your kid doing?" We just [crosstalk 00:20:29.417].
Scott: Well, he's down at the Regal.
Pat: Taking tickets.
Scott: He works three nights a week at Regal, but he's really good with the video games. He's scooping the popcorn.
Pat: I bet they don't have that at Princeton.
Scott: That's funny. Yeah. And I'm also reminded, you mentioned, like, Future Farmers of America or 4-H or something like that. So Pat and I have lived in the same community for 30-some years. My kids have gone to public school at...Oak Ridge High School is like a high school in our region, which it's very much a suburb of Sacramento.
Pat: And used to be...
Scott: Cattle land.
Pat: Yeah. I mean, when I first moved to Eldorado Hills, there was a sign on the way in that said, "Dogs molesting livestock will be shot." And I always loved that song...sign, and the song.
Scott: But you go not very far out of Eldorado Hills and it's very much rural. So the next high school up is Ponderosa High School. And my daughter actually goes...in the afternoons of the high school, she goes to some sort of animal health thing that she does there working with animals, but they're known for that. But people in...the Oak Ridge kids joke around, oh, if you're on the cheer squad, is it a requirement that you're also a Future Farmer of America?
Pat: They're making fun of the...
Scott: Oh, yeah, all the time.
Pat: ...people down the road.
Scott: The farming hicks up the hill. I think it's absolutely hilarious. Yeah, whatever.
Pat: Anyway, I don't know why we're talking about that. Let's continue on with calls. We're in Ohio. By the way, I had never had a call like that, this last one before.
Scott: No, after 28 years.
Pat: Not about when do I start Social Security? How do I do a Roth conversion? It was an interesting one.
Scott: Frank, you're with Allworth's "Money Matters."
Frank: Mine won't be as interesting. I'm sorry. So, mine's hopefully simple. I'm 66 years old. I'm going to start collecting Social Security in February, which is awesome. I work full time, so that's good. So I'm 66 and so many months, right? So I get that. And I'm debating which way to do this. I want to pay off some debt, some high credit card debt, unfortunately, I got myself into. So, about $30,000 worth of credit card debt that I'm into. I know, don't beat me up too much on that, but it's true. So should I...and I have a 401(k) that's got $350,000 in it. Would it be better to take the money out of the 401(k), pay the debt off because it's high interest, and then pay myself back, because I'll be collecting $3,200 in Social Security, and just put that back into the 401(k) every month?
Pat: How much do you earn?
Frank: About $70,000.
Scott: And are you married?
Frank: Yep. [inaudible 00:23:27.205]
Pat: Okay. Does your wife work?
Frank: She does not.
Scott: And what other assets do you have outside of this 401(k)? Do you have money in the bank or...?
Frank: No, that's it. That's it.
Scott: And so you start Social Security [crosstalk 00:23:41.962].
Pat: When do you plan on retiring?
Frank: Seventy-two. [inaudible 00:23:47.277]
Pat: Do you own your own home?
Frank: Yes. Paid off.
Scott: What's the value of it?
Frank: I'd guess probably in the $250,000 range.
Scott: And $30,000 in credit card...and I assume the interest rates are...
Pat: Why are you starting Social Security? I think it's a big mistake.
Frank: Why did I do that?
Scott: Yeah. Why are you starting now?
Frank: I was told by a financial advisor that it would be worth it. You know, do it now. It wouldn't pay...It would be more beneficial. [inaudible 00:24:18.819] more money to collect it at 66 and 8 months.
Pat: Are you of good health, you and your spouse?
Frank: Yes. Yeah.
Pat: Does longevity running your family?
Frank: My dad's 94, still alive.
Pat: I wouldn't start...
Scott: I would wait until 70.
Pat: I'd wait.
Scott: Unless you have some big pension that's going to replace your salary when you retire, do you?
Frank: No pension. No pension.
Pat: So your retirement, you have $350,000 in retirement savings.
Frank: Yep.
Scott: And you're making $70,000 a year.
Pat: You have five years worth of income saved for retirement. You don't have enough money to retire.
Frank: No, I don't. But what I plan on doing is taking that money and just put it in my 401(k) until I retire.
Pat: You can't do that.
Frank: I can't?
Pat: No.
Scott: It doesn't work like that.
Pat: I mean, you could have more withheld from your paycheck.
Scott: Yes. Do you have a 401(k) at your employer now?
Frank: I do.
Scott: Yeah, you could do that. It still doesn't make sense. And the reason he used 66 years, 10 months was that's when you could, you know...
Pat: Take it without a wage...you can earn as much as you want.
Scott: Yeah, without any sort of wage penalty. I don't understand. Well, so the answer to your question is how I would actually address this, I would actually go down to the bank, get a home equity line of credit with a much lower interest rate, probably 8% to 10% lower, and then I would convert all that interest rate to home equity line of credit. So the difference between there is...
Pat: Probably 8% or 9%. I don't know what they are today.
Scott: It's significantly lower. And the reason is, is because the bank actually uses your house as collateral and the credit card company use nothing as collateral. So that's why there's a lower cost of money there. Then I would actually set up a plan to pay that off in 6, 12 months, right, out of earned income. And I would defer Social Security until age 70.
Pat: And not touch the 401(k).
Scott: And not touch the 401(k).
Pat: Let's step back for a second, Frank. So the reason you have credit card debt is because you've been spending more than you're earning today.
Frank: No doubt.
Pat: And so you're talking about taking money out of your retirement account, which is really for the day that you can no longer work. You're hoping to retire at 72, but you don't know what happens. One out of two Americans retire earlier than planned. And oftentimes it's a health issue, either of ourself or of a loved one.
Frank: Yeah. You know, life happens. And I have a family that needs money here and there.
Pat: Yes, I get it.
Frank: A disabled grandchild. And it just adds up. And all of a sudden, the money's gone.
Pat: I get it. But do you want to be 78 and be that recipient of that?
Frank: No, but...I agree. I agree.
Scott: So this is how I would do it. I'd go to the bank, get a home equity line of credit. Get $30,000 on it. Take that money out. Pay the credit cards off. Pay that off within 12 months.
Pat: Let's try to pay it by the time you retire at 72. Amortize it over that.
Scott: So it's only a...
Pat: It's negligible. The payments are almost nothing.
Scott: Okay. Leave the 401(k) where it's at. Make sure it's invested probably 60% to 70% equities and the rest bonds and cash. Defer the Social Security until age 70 or until you quit working. And then that way you can retire comfortably. You actually taking that Social Security now, you're going to end up spending it.
Pat: You're going to increase your standard of living. It just happens.
Scott: That's how I would do it.
Frank: Okay. Well, that is good advice.
Pat: And I don't know what the financial advisor...why they thought that taking it out...What was the point of that? What was the financial...what was the rationale why you should take Social Security at 66?
Frank: Well, the way he explained it was you're not going to...If you live to this age...he did this mathematical equation. Still, you're going to get more money getting it now than if you live to 90.
Pat: That's not...
Scott: I'm more concerned about your standard of living at 75, 80, 85, 90. That's my biggest concern.
Pat: Yeah, and it increases by 8% plus a year, your Social Security benefit between now and age 70.
Scott: If you live longer than a normal life expectancy, it pays to defer. You get more by deferring.
Frank: People like me, we listen to people like you and...
Pat: No, I get it. I mean, look, even if it was a push...I would actually say, even if it was a slightly detrimental and a slight reduction of payments, I would still argue to defer this as long as possible. Because the bigger the check you're going to get from Social...You need that. You're going to need that Social Security check. It's not going to be just like a nice to have. You're going to need it.
Frank: Yep. Yep. I know that. I know that. Again, sometimes you live in the moment.
Pat: Whatever happened in the past is irrelevant, right? So here's our moment today. All we can do is deal with what we've got today and make the best decision for today and tomorrow.
Frank: Yep.
Pat: All right?
Frank: Well, I take your advice. All right. Thank you.
Pat: All right. Thank you, Frank. Yeah, really glad you called.
Scott: By the way, if you've listened to this podcast at all, our theory on Social Security is if your income is so large that you actually don't need it to live on, take it early. And what we're doing there is we're trying to mitigate legislative risk.
Pat: And if you're at a point where, for whatever reason, you don't have as much retirement assets as you need, and you're going to need to rely upon Social Security, which the majority of Americans...The majority of Social Security recipients receive the majority of their income from Social Security.
Scott: Over 50%.
Pat: Yeah. a lot of people are very dependent upon Social Security. And if that is going to be you, then defer as long as possible. If you're still healthy and can work, defer that until age 70 because...
Scott: I mean there is legislative risk there. We've talked about it many, many times, but not for the people that need it to live.
Pat: I can't imagine. I'm 62. I can't imagine.
Scott: How did that happen?
Pat: No kidding. We've been working together for 35 years.
Scott: I still act like I'm 24 though, most of the time.
Pat: Until you're like back or neck or shoulder.
Scott: Oh, I know. When you get up in the morning and you're like, okay, let's just do the little test. Anyway, you were saying 62.
Pat: By the time I'm 75, I don't expect that Social Security will continue to flow to me. Even if I started at 66 and 10 months.
Scott: Yeah, I don't expect to get it.
Pat: I wouldn't even put it in the plan. In fact, most of our advisors for those people with a higher net worth or higher income, right, you don't have to be high net worth to have high income, you could have pensions, those are the people most at risk of losing Social Security benefits, not low-income people.
Scott: I write a bi-weekly column for InvestmentNews. It's an industry publication. So none of you who listen read it, nor should you, because it's all for the industry. But there's a particular writer, this woman who she's a CFP and she's an expert on Social Security. Our concept of, don't ignore legislative risk, if you've got plenty of assets and you think there could be means testing, that's an argument for taking it early. I remember she was arguing against that 10 years ago like that was foolishness to even think that. The last couple of articles I've read by her have started to bring that up because it's going to be depleted, the Social Security Trust Fund, 2033, 2034, maybe earlier now that they just passed this bill to get rid of the wage elimination provision. I'm sure some of you listen, if you retire from a state of municipality and had some reduction in Social Security, you're going to get a bump in your Social Security.
Pat: Most certainly.
Scott: Yeah. If you're in a situation like our last caller or a loved one, another option that he's probably going to look into somewhere down the road is reverse mortgage.
Pat: Nothing wrong with that. That's the biggest asset you own. It's the only way to bring liquidity to it, unless you downsize. Another way.
Scott: Yeah. It is important to own a home in retirement because you don't have to deal with increasing rents.
Pat: Inflation. Moving around. All right. We're talking with Richard. Richard, you're with Allworth's "Money Matters."
Richard: Hello.
Pat: Hey, Richard.
Richard: How are you guys doing?
Pat: We are great.
Richard: I listen to your show all the time and I appreciate your advice. I am a small business owner, really small. It's just me, and I've been doing it since 2018. I worked 23 years for a large semiconductor company and then got laid off. I'd been doing this on the side, like moonlighting, for a long time and I decided to go into business for myself.
Pat: Oh, good for you.
Richard: I'm not an Inc. I'm not an LLC or anything like that. I'm just a sole proprietor. I do my own taxes. It seems like I pay a lot in taxes. My question, my general question for you is I don't make quarterly payments.
Scott: Why?
Richard: I just don't.
Pat: When do you pay?
Scott: Did you pay a penalty over here?
Pat: When do you pay?
Richard: Yeah, I do. I do pay a penalty. I looked it up. My last penalty was, it said $1900 I paid in penalty.
Pat: What was your income?
Richard: Last year it was $226.5K.
Scott: This isn't a little business.
Pat: Yeah, this is a real...
Scott: I was expecting some eBay sales thing. You had $18,000 last year or something.
Pat: Selling Legos on eBay. So $225,000 a year. Have you set up a self-employment...?
Scott: Do you have much expenses on that or are you a consultant of sorts? Is it your expertise you're selling?
Richard: My expertise. I provide a service that has very little overhead. I work out of my home office.
Pat: I don't understand why you're not paying quarterly taxes. I mean they're kind of a pain and they don't even fall in the same months because it's January 15th, April 15th, June 15th, September 15th. So it's not even a...Isn't that right?
Scott: July 15th.
Richard: I guess I feel like I'll just keep the money, make the interest on it or whatever, and then just pay the penalty.
Pat: October 15th? I might have been the number...My month's way off. See, I don't even remember the month.
Scott: I would file quarterlies. Have you set up a self-employment retirement plan, like a uni-k?
Richard: No. When I got laid off, all my money got rolled over into...I have two IRAs, a traditional IRA and a Roth IRA.
Pat: How much do you have in those?
Richard: So my traditional, I have just over a million and then in my Roth, I have $27,000. And my wife has about...because she used to work too, she has about $150,000 in her IRA.
Scott: How much is your wife's income?
Richard: She doesn't really work. She stays at home.
Pat: How old are you?
Richard: I am 58 years old, be 59 in July.
Scott: And is your home paid?
Richard: My home's paid for. My wife's retired as well.
Pat: How long do you think you're gonna do this?
Richard: So I can do this into retirement because it's not that physical. So I can do it. And if I hired somebody, I could even do it even longer.
Scott: And do you have much money in savings?
Richard: So we generally put money in savings, but we generally get wiped out around tax time.
Scott: Okay. Another reason you should...
Richard: So this is one of the reasons why I'm asking.
Pat: Do you expect a pension in retirement?
Richard: I don't expect a pension, no.
Pat: You need to save more. Yeah, you need to save more. And one of the ways that you could do that is actually just set up a self-employment 401(k). Very, very easy. And you do it with one. It looks just like an IRA.
Scott: Back to Pat's point, I mean, part of it is like, I can do this indefinitely, which you might be able to should your health hold up, right? But I've got a really good friend of mine, his wife had a nasty stroke 17 years ago and, I mean, his world changed. And so he had to retire early to take care of his wife. And those things happen, right? And maybe it won't happen, but we need to plan for...We're all going to get older and eventually we're going to get sick.
Pat: So if you were sitting in my office, I would say, okay, look, we need to do a couple things. One is that we're going to pick a clear retirement date. It's not going to be an indefinite and we're going to actually aim at that retirement date. So you said you're 58, correct?
Richard: Yes.
Pat: So I'd say, okay, let's pick a retirement date of 65 or 67 or whatever. And we would actually aim your finances at that date, right, which would be a realistic date. Obviously, life happens, it would change. And then I would actually build the financial plan backwards from that date, including Social Security, your IRAs, your Roth IRAs, and you most certainly need to save more. Quarterly taxes was the easiest thing. You got to file quarterly.
Scott: It's 1900 bucks for a slight inconvenience. I don't know about you, but 500 bucks a quarter just for taking the time to write the check.
Pat: You're going to do estimates, right? They're estimated taxes. So you're going to take last year's income.
Scott: And the penalties are gonna go up anyway because interest rates are higher than they were year previous.
Pat: So that's a no-brainer. The idea of a solo-k or a uni-k, you can funnel about 70 grand a year into that.
Scott: Easy.
Pat: And deduct it so you don't have to pay.
Scott: It's going to lower your tax liability. So you'd go and do a pro forma for 2025, pay quarterly taxes, start the uni-k, and then base your estimated payments on this pro forma, which is after the 401(k) contributions. Obviously, self-employment tax sits in there as well. But then that's how you would determine your quarterly taxes. You pay quarterly and then you start saving more on a monthly basis. You're not saving anything for retirement, by the way.
Richard: Right. I'm not familiar with the terms you just mentioned, pro forma and uni-k.
Scott: So a pro forma would mean I'm just going to run a simulated tax projection of income for the year 2024, 2025, right? And a uni-k is nothing but a self-employment tax.
Pat: Solo-k or uni-k, they're called both those things.
Pat: It's nothing but a self-employed 401(k).
Pat: For people with no employees.
Scott: With no employees.
Pat: And they cost almost nothing to set up.
Scott: They look just like IRAs, but the limits are higher.
Richard: If it's self-employed, what was that?
Scott: Like you had a 401(k) at your own employer, your previous employer. It looks just like that. You have an investment selection. You actually...rather than it come out of your paycheck, you just write checks into it.
Pat: Yeah. If you google uni-k or solo-k, you'll find some more areas where you can read about that.
Richard: Okay, great.
Scott: Yeah. But yeah, you can contribute...
Pat: I was just looking right here, 70 grand.
Scott: Yeah. So it might make sense for you to sit down with a financial advisor, pick a target date of retirement, and then work backwards as to how much you need to save to get there. And it would include your Social Security benefits for both you and your spouse. Is your house paid for?
Richard: Yes, my house is paid for.
Scott: That's good. But yeah, [crosstalk 00:40:20.908].
Pat: You mentioned something about having an employee. Are you considering having an employee?
Richard: Yeah, I've thrown it around.
Pat: I mean, it does change your work quite a bit, right? I mean, but if you want to...
Scott: He doesn't want an employee. Did you hear the enthusiasm in his voice?
Pat: Yeah. That's why I was just asking him. But the reality is you have no business to sell at this point. So when you start thinking about business, that might make sense. It might be a time to bring somebody in.
Scott: It's still a consulting business.
Pat: Yeah, I know.
Richard: Right.
Pat: They're buying your expertise.
Richard: I don't get totally wiped out when I pay taxes. I mean, we'll have like maybe 10 grand left.
Pat: How much do you have in your bank now?
Richard: I think we have about $70K right now.
Pat: Okay. You make $225,000 a year. You've got $7,000 in the bank and a bit over a million dollars saved for retirement.
Scott: $1.2 million. So you got about five or six times...
Pat: Yeah, you're far, far away from...
Scott: Not dissimilar to previous call, but it's just a different...
Pat: Yeah, just different numbers. You just need to...
Scott: I totally agree with Pat. If you really run the numbers, like pick some date in the future that...So that you could retire, maintain your standard of living. Maybe you won't, but to be at a point where work is a total option and not an obligation.
Richard: Right.
Scott: And when you're at that point, it's quite liberating because then it's like, I don't know if I want to work for this client or not work for this client.
Richard: Right, right, right. I'm not at that point. Yeah. Okay.
Pat: And what did you make at your previous employer?
Richard: When I got laid off, it was right over $90K a year.
Pat: And how long ago was that?
Scott: '18.
Richard: 2018.
Pat: Oh, you've done well for yourself.
Scott: You've done great. What a great business.
Pat: I know. You said small business, it's a great...
Scott: What a great business. You should be very proud, right? And you built...
Pat: Did your spouse work outside the home prior to that?
Richard: Yeah, she worked for a major bank.
Pat: And your kid...When was your last child off the payroll?
Scott: When did they become a...?
Richard: Well, we don't have no children. Just my wife and I.
Scott: All right. Yeah, you need to...I would sit down with an advisor or do it yourself and run pro forma, figure out the tax.
Pat: You have plenty of money saved to replace $90,000 a year. But you're...about enough to save for that. You don't have enough saved to replace a $200,000 a year income.
Richard: Right, right. Okay.
Pat: And my guess is you haven't been spending all...You probably paid off your home over the last several years and maybe did a remodel on the house and done some other stuff like that. That would be my guess.
Richard: Yeah, yeah. No, I have. It was three years ago when I paid off the house and then we've done a few small renovation projects.
Scott: There we go.
Pat: Yeah. Well, now's the time to...Let's save some of these dollars.
Scott: Yeah, kick it into gear.
Pat: Pay our quarterly taxes and move forward that way.
Richard: Okay.
Scott: All right. Appreciate the call.
Richard: Yeah, I wrote everything down. I appreciate you guys' information and expertise. Thank you very much.
Scott: Thank you, Richard. And by the way, just as a reminder, these are...We always encourage people to seek out their own advice. This isn't technically a client engagement. It's a CYA.
Pat: But I find that funny is that he...My guess is he probably won't. The consultant will not consult a consultant.
Scott: What?
Pat: He's a consultant. But my guess is he won't seek out a financial advisor for consultation on his own retirement. That's just my guess.
Scott: That's probably correct. The consultant...
Pat: Well, you know why...
Scott: The consultant will not consult a consultant.
Pat: That's just the rule of thumb. That's how it works.
Scott: One of the truisms in life. Consultants don't...
Pat: I've never quite heard that one before.
Scott: I just made it up.
Pat: Oh. Do you think that's the case?
Scott: It sounded like it with him.
Pat: Okay. I kind of wonder if that would be the opposite though.
Scott: Oh, I...What my experience is and then yours is, typically the more someone has...their career has been...they've been delegators, they've been leaders of things, the more likely they are to hire advisors. Because they went through their careers saying, I don't have this expertise, but man, that gal is phenomenal at what she does and he's phenomenal at what he does. And so those people tend to have no problem. They find the right person, they trust him or her.
Pat: Okay. And what's the opposite of that? The people that are used to delegating...
Scott: The ones that are the hardest to hire advisors are engineers. Particularly engineers that haven't led big groups or led projects.
Pat: What do you think he was?
Scott: I think he was an engineer of some sort.
Pat: He left a tech firm making $90,000 a year, he's making $225,000 now, six years ago.
Scott: Well, and look, so he was 52 when he lost his job. Those years between 50 and 60 or 55 and 65 are typically the years you're going to make the most amount...your income will never be higher and your opportunity to save and invest for retirement is never going to be greater. And one, like oftentimes your kids, you've raised...most people raise children. The children by that point, if they're not out of the house, they're close out of the house.
Pat: That's the hope.
Scott: That's right. That's the hope.
Pat: That they become self-feeders at some point in time?
Scott: Yes, and contributing members of society along with that.
Pat: Oh, that too? I'm just worried about myself.
Scott: Not just a self-feeder, but hopefully someone that contributes to others and that benefit to the globe.
Pat: Okay, all right. That was just me thinking out loud.
Scott: But look, if you find yourself in a situation like this, you need to reinvent yourself. Because we've seen...I can't tell you how many times we see people in their 50s lose their job. I mean, I know a bunch of people right now. Intel is...
Pat: Down the street.
Scott: ...a mile and a half from here. At one point there were 7,000 employees. I don't know what there are today.
Pat: Fifteen hundred.
Scott: I know a lot of people in their 50s that were just laid off, took a package, early retirement. I don't know all their financial situations, but I can guarantee you a lot of them are not in the place that they want to be financially. And they have to either reinvent themselves, engage in a new career. But it's a phenomenal time to be self-employed because you can have clients anywhere and do over Zoom. It's not like having to travel out somewhere every week and show up and fly out Sunday night and show up Monday morning somewhere.
Pat: The key is clients.
Scott: Well, that is the key, getting some clients.
Scott: If you could get them anywhere, you should get them. Let's go with that. And it's also an interesting time, Pat, where we've certainly counseled lots of people in their 50s that have hated their job, counting down, I only have seven more years. I'm going to suck it out seven more years. And like, what else would you like to do? I'd actually like to do this sort of thing. Well, then even if it pays less income and maybe instead of planning on retiring seven years, now it's 10 years or 12 years, but doing something you really enjoy. That adds value.
Pat: And then we find those people not in a rush to retire.
Scott: It changes the whole dynamic.
Pat: Certainly. Certainly. It's quite interesting.
Scott: Hey, by the way, if you enjoy...Last weekend, I did this trail run.
Pat: How far?
Scott: Twenty miles.
Pat: What, are you slowing down?
Scott: I somehow got sucked back in.
Pat: Well, 15 years ago, you did the 100-mile...
Scott: Yes, I ran the Western States 100-mile Endurance Run.
Pat: Which is...
Scott: It starts at the base of Squaw Valley, Palisades, excuse me, in the Sierra Nevadas and finishes at...it's about...
Pat: It's all downhill.
Scott: ...17,000 feet of climbing.
Pat: Oh, but it's downhill.
Scott: Well, yeah, but it's about 17,000 feet of climbing, 17,000 or 18,000 feet of climbing. Anyway, I did that years ago.
Pat: Do you find it harder to run downhill or uphill?
Scott: Oh, uphill.
Pat: You do.
Scott: You can't trail run unless you can figure out how to run downhill. Otherwise, you're done.
Pat: You're gonna hurt yourself.
Scott: Because half the time you can kind of coast and recover. You can open it up and you can let the engine kind of recover. Anyway, why am I talking the details?
Pat: You ran 20 miles on a trail.
Scott: I got sucked back in because my daughter is now getting into Ultras. And I ran one with her last May and now I'm signed up. I made the mistake after the race as I'm recovering and I'm signing, committing to this other one that I'm going to do in a couple weeks. So now I'm training for this other 50K.
Pat: The closest I've gotten to an Ultra was a pair of shoes I bought called Ultras, but not actually running. So you're doing a 50K, which is 30...?
Scott: Yeah, 50 kilometers, 31 miles. And trails. But I ran 20 and I remember at the end I was kind of beat up. Like, I'm 58.
Pat: How old's your daughter?
Scott: She's 29.
Pat: And how far will she run?
Scott: She ran 100K last fall and she wants to do a 100-miler. She would like to do the Western States 100, but it's really hard to get into.
Pat: And shes' a sports psychologist.
Scott: She's a sports psychologist.
Pat: Which I just find fascinating. I was talking to my youngest son who went back to school to become a marriage family counselor.
Scott: Oh, nice.
Pat: And I'm like, you should check out what Hanson's daughter's doing. She's a sports psychologist. And so, I;m like...
Scott: Okay,we have time. She was telling us that we need to hire a sports psychologist for our 14-year-old daughter who plays volleyball. Because Ruby, she plays like a travel team, but she's not the best player. She's kind of middle-of-the-pack player and she doesn't really work that hard at it. She could certainly work harder, but I'm thinking...
Pat: Why?
Scott: I'm not gonna...If someone...like, she strives to be an Olympian, great. Then I'll throw all the resources behind her. But if that's not really her passion, why do I want to create it?
Pat: You mean the sports psychologist said that you should hire a sports psychologist. Very similar to how we tell people they should hire a financial advisor.
Scott: Exactly. But not her because it's her sister. How could she...? Anyway, my point of the story, we drove...it was a point to point, we're driving out. This guy Bill comes up and he says, "Oh, Scott, I'm so...I just downloaded your podcast because it just dropped and I was hoping to be able to listen to it this morning on the training run that I'm going on because I love your guys' podcast." And he says, "But it drops at..." I don't even know what time it drops. Whatever time it drops, he was like downloading as he's driving to the trailhead and it's not the greatest service. And he was just really excited that it was fully downloaded so he can listen to us as he does his trail run. And I'm thinking, if I had to listen to us, I don't know what's more painful, a long run or listen to us for hours.
Pat: Or both, do both.
Scott: That's what he was doing.
Scott: Combine the two. Maybe it's like it's a deflection thing. You got such other pain somewhere else, you don't feel...
Pat: So this is a long way to get to the fact that you're trying to promote our podcast.
Scott: That's correct. Okay.
Pat: Well, couldn't you have just said it? Why do we have to go into your friend Bill and this whole running thing? Can't you just say, "Please listen to our podcast or share it with a friend?"
Scott: Share it. We're trying to...it's actually better than...there's way more listeners than we thought when we did some studies, and now we're like, let's see where we can take this thing.
Pat: Look, our marketing people say we could hit the tipping point at some point in time and go viral.
Scott: Maybe it's another 30 years from now. Yeah. So make sure you give us a review and share it with some friends.
Pat: Please.
Scott: Been great having you. This has been Scott Hanson and Pat McClain of Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or a state planning attorney to conduct your own due diligence.
