July 15, 2023 - Money Matters Podcast

Why age shouldn’t determine stock allocation, questions about taxes and life insurance, and the vacation home that became an inheritance nightmare.

On this week’s Money Matters, Scott and Pat explain the factors that should dictate how much stock you own. A newly married couple asks whether opening a particular kind of IRA will help them pay less in taxes. A private investigator wants to know whether his old job will keep him from receiving maximum Social Security benefits. Finally, Scott explains why it’s critical to have a well-thought-out inheritance plan.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's CEOs Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here.  You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.

Download and rate our podcast here.


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Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's Money Matters, call now at 833-99-WORTH. That's 833-99-WORTH.

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

Pat: Pat McClain. Thanks for being with us.

Scott: Right. Both myself and my co-host, we're both financial advisors, certified financial planners, charter financial consultants. We spend some of our weekdays with people like yourself, helping them plan their financial future. And I said some because it's summertime, and I think most people have had a little time off here and there. Anyway, we broadcast this program on the weekends for you, to be your financial advisors on the air, help you make some wise choices with your finances...

Pat: That's the hope. That's the hope.

Scott: Yeah...

Pat: Hopefully to give financial stability, peace of mind...

Scott: Making the right kind of investment decisions, which is...

Pat: It's difficult.

Scott: Yep.

Pat: It is...

Scott: You look at all the studies...

Pat: Well, you know, Scott...

Scott: ...of how people underperform in the markets because they get freaked out about things...

Pat: I read an article this week.

Scott: But, like... Oh, go ahead.

Pat: I'm going to bring it up. I'm going to bring it up. It's called America's retirees are investing more like 30-year-olds, and it talks about...

Scott: Crypto? Cash? Day trading?

Pat: No, no, it talks about... No, unfortunately, it doesn't. It talks about how much exposure older people, older being people like myself and older, 55-year-olds, 70% of their portfolios were in stock. Versus in 2011, 38% of... And this is at Vanguard. I'm sorry...yeah, Vanguard's 401(k)s. So, they looked at the age of everyone that...Vanguard has a big 401(k) division, and they know the age of everyone, and they know the asset allocation. And so they looked at this, and those that are 55 years of age held 70% of their portfolios in stock.

Scott: Or over age 55. Yeah.

Pat: Or over age 55. Versus 10 years...in 2011, 38% of those people...

Scott: So, how much of that was based upon the financial crisis? Because we know, Pat, we've seen it firsthand, the mistakes people made during the financial crisis. Which was... Because that was a nasty one, right?

Pat: Okay...

Scott: It was nasty.

Pat: Excellent point. Excellent point.

Scott: Remember, the markets were dropping about a half, and some much worse. So people, at the worst times...

Pat: Took their money out of... That's why people underperform in the markets.

Scott: Right.

Pat: Because they don't...because react to the markets.

Scott: When markets go down, you should increase your allocations, not decrease your allocations. If you believe in the markets over the long term [crosstalk 00:03:16.243]

Pat: Well, if you believe that, that over the long term... And I did, personally, myself, increase my...and with my clients that would allow me to do so, increased their exposure to equity.

Scott: Yeah, so the question I think, Pat, is that are older people holding more stock by and large? Or is it just that... Because we did go through... I mean, we've had two bear markets in the last three years. We had a very short one, caused by the lockdowns...

Pat: Now, I mean, it was like you couldn't even, you could...

Scott: Which we were all wondering if we're going to live or die during that time, so it was a very strange couple of months.

Pat: Yeah, yeah, like if you blinked, you missed it.

Scott: Correct.

Pat: But then last year was...it was rough. Yeah, kind of a nasty one.

Pat: So...

Scott: But the markets, man, they're on a tear this year.

Pat: Yeah, but so you're thinking, okay, this is 2011, so people...this is when the study was compared to, 2011, you're thinking people either didn't...the portfolios had fallen in value, and that's why 38%...

Scott: Ah, good point. Excellent point. I don't know.

Pat: I think that, actually...

Scott: I mean, people own more...by and large, Americans own more stock today than they did 20 years ago, 40 years ago.

Pat: Yeah, yeah, but due to low interest rates over the last, what, how many years, 10 years?

Scott: Yeah, even in the '80s, you could get double digits on a money market.

Pat: Right?

Scott: It was pretty hard to say I'm going to give up this to go to something that who knows what it's going to be worth.

Pat: Yeah.

Scott: I mean, think about that. If you're getting the double digits... Heck, I remember, it wasn't that many... Well, I've been doing this a long time. It was a long time ago. But government bonds were yielding double digits...in my life, my career.

Pat: Yes.

Scott: I mean, it's...

Pat: I think that it doesn't, regardless of your age, your equity exposure...

Scott: It shouldn't have much to do with your age.

Pat: It shouldn't have anything to do with your age.

Scott: And the only thing that age would be, your time horizon, like when you might need some of your money, right? So the theory behind that, Pat, is that you're 40, well, your retirement savings you're not going to touch for 25 years, but now you're 65, and you're still going to, like...well, if a married couple at 65, there's a 50% chance one of them is going to live be alive in their 90s.

Pat: Into their 90s, and...

Scott: So now we've got a 25-year time horizon [inaudible 00:05:36.149]

Pat: Many of my clients, I actually don't invest for them, I invest for their children. Because they know they're not going to spend it in their lifetime. And investments are based on timelines.

Scott: I mean, it's... So you take a 70...let's say a 75-year-old individual, or a couple, let's say, that they have way more than they're ever going to spend.

Pat: Well, yes. Yes.

Scott: Right? Let's say they have $5 million, and they have a modest lifestyle. Quite common, right?

Pat: Yes.

Scott: They have the $5 million because they worked hard, and they saved over the years, and...

Pat: Small business owner, great saver...right?

Scott: Or just a good saver, right?

Pat: A good saver. They don't change, by the way, they don't change their spending habits after they save the money.

Scott: Most people don't.

Pat: It doesn't happen.

Scott: That's right. And so you look at someone like that, you're like, well, we know at least $2 or $3 million is not going to be spent...

Pat: And we, at Allworth, will actually segregate some of those accounts...

Scott: At times, if that's what makes the most sense, to...

Pat: So that we say, look, this has got a 15, 20, 25-year time horizon on this, we're going to go 100% equities, and you're going to ignore it. We'll manage it, but you ignore it.

Scott: And oftentimes, people don't want to give up the assets yet, right? So, it's not like they want to transfer it to their kids yet...

Pat: Yes.

Scott: But they can take on more risk because their time horizon, the money's time horizon is that much longer.

Pat: Well, Scott, I've got to tell you, this week...very surprising, I had a client call me and said I'm going to gift X-amount...a lot of money to his three children. And I said, well, this is kind of, you know...

Scott: Something...something happened in his life.

Pat: He said, he had thought...he said, "Better from a warm hand than a cold body."

Scott: I haven't heard it quite that way.

Pat: I thought, eh, that's interesting.

Scott: Wait, so... I'll tell a story later about an inheritance, and someone saying, "Scott, if you have time, I'll tell you the right way to set up for family inheritance, or the wrong way." It was from a grandchild, a 40-year-old grandchild.

Pat: Who received the inheritance?

Scott: Yeah.

Pat: And they told you the story?

Scott: Yeah, yeah. I'll share it later.

Pat: All right. Well, that's...in the radio business, that's called a teaser.

Scott: Well, it's because we've got to go to calls here, and I don't want to...and poor Lupe, who's been waiting forever, and I don't want to keep her.

Anyway, if you want to join the program, we'd love to take your call. 833-99-WORTH is the way to schedule a call with us, or send us an email at questions@moneymatters.com.

We're talking with Lupe. Lupe, you're with Allworth's Money Matters.

Lupe: Hi.

Scott: Hi.

Lupe: Good morning.

Scott: Yeah.

Lupe: Hi. So, should I just start out and say my situation?

Pat: Please.

Scott: Please.

Lupe: Okay. So my husband and I were married one year, so we did, the first time, our joint taxes this year, and we were just amazed that we paid, like, $31K just in taxes, because it was our first time, you know, filing joint.

Scott: Did you make him pay the tax bill?

Lupe: Excuse me?

Scott: Did you make your husband pay it, instead of you?

Lupe: Well, we both paid it.

Scott: Okay.

Pat: And how old are you?

Lupe: But it was hard writing that check just for taxes. I am 51, he's 59.

Pat: Okay, and you were...you're married one year?

Lupe: Yes, we got married one year ago.

Scott: And 2022 is the first year that you filed married filing joint?

Lupe: Well, this year. This year. We married...this year in May was one year, so this...last year we still filed, you know, separately, because we were together but not married.

Scott: Okay. But you filed this spring for 2022 tax return. Is that correct?

Lupe: Oh, yes, yes, exactly. Correct.

Scott: Got it. Okay.

Pat: Okay. So, and you paid $32,000 in taxes?

Scott: $31,000.

Pat: Oh, sorry.

Lupe: Yes. Yeah. So this year, we're thinking of what should we do? Should we... His idea is buying a property, or a house or duplex, buying just something. And my...another recommendation that was given by our tax accountant was to open up his SEP-IRA, since he's self-employed... I have my 401(k), so I've always been investing since I started work for my 401(k). But yeah, he doesn't have, since he's self-employed, he doesn't have an IRA. So, what, so...

Pat: Does he have any employees?

Lupe: No, not yet. He's thinking of adding myself as an employee.

Scott: And how much was his...how much was your adjusted gross income last year?

Lupe: Oh...

Scott: After his business expenses.

Lupe: Like, close to $200K.

Scott: Okay, so let's say it's $200,000. So if you're looking at ways to reduce your taxes, which is what it sounds like...

Lupe: That's our main goal. We don't want to pay next year again [crosstalk 00:10:39.986]

Scott: So, buying a property is not going to help you one iota. If your income... Once your income is, what, $125,000, Pat? It's somewhere in there...

Pat: Yeah.

Scott: When your income exceeds...I think it's $125,000, somewhere in that neighborhood as a married couple, you start losing your ability to deduct any losses on a rental property. And you might have losses because you would have...let's assume you would have a mortgage, you would have interest expense, and then you could depreciate the property. So it's a technique that could work well for people that aren't in the higher income areas, but once you're in the higher income, you don't lose those losses, they get carried forward, but you don't get any current benefits. It's not going to help your tax bill iota right now.

Pat: So, buying the property... But the SEP-IRA makes a lot of sense.

Lupe: Oh, okay.

Pat: And actually, I would go past the SEP-IRA. There are so many ways you could do it. You could set up a Uni-K which is a self-employed 401(k), which actually, often times has a larger number that you could put in pre-tax, or you could actually set up what's called a defined benefit pension plan. I don't know if you're...

Scott: Of the $200,000, what was from his business, and what was from your income?

Lupe: It was mostly his. I [inaudible 00:11:47.746] I was...last year, I was smart enough to think about taxes, and so I was putting almost 50% of my income into my 401(k) to prevent...you know? Otherwise, we would have had way more, you know, tax bill. So, it was mostly his income. Mostly his income.

Pat: Yeah. So, take your accountant's advice.

Scott: I mean, you could have... You've already filed your tax returns, but I don't know if your accountant suggested that you... I mean, you could, had you not filed your taxes already, you could do a SEP contribution...

Pat: Up until the latest date that you do an extension.

Scott: October 15th. You can on a SEP, can you not? Or is it just a qualified pension plan?

Pat: No, a SEP.

Scott: Okay. And a Uni-K, which needs to be...a solo-K needs to be set up in the calendar year prior.

Pat: But not funded.

Scott: Noy funded.

Lupe: What is a Uni...what is it again? I never heard of [crosstalk 00:12:42.262]

Scott: It's a self-employed... They call them solo-Ks, Uni-Ks, they're self-employed 401(k)s. They just have...

Scott: Very low cost to administer.

Pat: Yeah, they act just like IRAs, you can get them anywhere. I mean...

Scott: And you can put up to $66,000 a year into it, so...

Pat: It's a lot of money that you could put in there.

Scott: If you don't have any employees, it's a good way to...

Lupe: Oh, okay.

Scott: Well, it solves two problems. One, it reduces current taxes, but second, it helps for your retirement. What do you guys have in your combined retirement accounts, your 401(k)s, IRAs, that sort of thing?

Lupe: Not a lot. I have a little bit over $100,000.

Pat: Okay. And can you live on a lower income?

Lupe: Yes, we can. Definitely we can.

Pat: Okay. So, you know...

Scott: I think the most important thing for you guys to do, in my opinion, if you were my family I would say you need to set up a retirement account for your husband, and get serious about saving for retirement.

Pat: Yeah. And by the way, you could have actually funded a SEP for last year, this year. Your accountant should have taken the conversation one step further. Rather than saying, "You should do this...," he should have said, "You should do this now."

Lupe: So, it's too late now?

Pat: Assuming that you could write a check into it. Well, you've already filed your taxes.

Scott: It's too late now, yeah.

Lupe: Mm, okay. So for next year, when do we...when should we do it [crosstalk 00:14:00.957]

Scott: Now.

Pat: Today. Right now.

Scott: Yeah.

Lupe: Right now? Okay.

Pat: This minute, as soon as you get off the phone.

Scott: No, this year, you should start planning on... Like, I don't know if you're paying quarterly taxes, because June 15th...

Lupe: Yes, well, he's... Being self-employed, he has, he's very...

Scott: Diligent about paying his quarterly taxes.

Lupe: He's very disciplined. He always keeps 25%, you know, for taxes, and then the rest he sends to me to put it in our savings account.

Pat: All right, so what you want to do is set up a Uni-K right now, and start funding it on a monthly basis. So that you're not scratching the check at the end of the year into it. You could actually...

Lupe: How do you spell that, Uni-K?

Scott: So, I think Uni-K is...

Pat: Or Solo-k.

Scott: Solo-k.

Pat: Solo-k. I've heard both.

Lupe: Solo...

Scott: I think some company used the Uni-K, and trademarked that name. I think it's the name of a particular product, whereas a Solo-k is the name of the concept.

Pat: I think you're right.

Scott: I might be wrong, but I don't know. You can google either on, you're going to find...

Pat: So, It's a self-employed 401(k).

Lupe: Okay, so...

Pat: And you could actually have the money come right out of your checking account to go into it.

Lupe: Oh, okay. But you said it's a self-adminis-, you...it's not investing...

Scott: No, no, no, it's investing...it's just, it's a low-cost way for a self-employed individual, with no employees, to set up a retirement account. So unlike the burden of a company that's got a bunch of employees that have to hire some folks to run some tests, and do the special tax returns, this doesn't require that. It's a very streamlined plan. It's designed for people with no employees.

Pat: And your accountant mentioned the SEP, which is called a SEP-IRA, which might, which may...

Scott: Accomplish all you need to accomplish here.

Pat: But why would you bother doing the SEP when the limits are higher on the self-employed 401(k), and the administration...

Scott: Which is why I would do the Solo-k before I did a SEP-IRA personally, so...

Pat: Yeah. Yeah, can't do both.

Scott: Yeah, I...

Lupe: Oh...oh, you can't? You have to do one or the other, then? Okay.

Pat: Yeah, that's right. Just do the self-employed 401(k). All righty?

Lupe: Okay.

Scott: Yeah.

Lupe: I was leaning more towards that, and he was insistent on, okay, let's buy a house, and...

Scott: That's not going to help your tax...

Lupe: And he get's in touch with a realtor, and she was like, "Buy, buy, buy!"

Pat: Oh, yeah...yeah, it's not going to help you.

Lupe: [crosstalk 00:16:12.054]

Scott: Do you have cash? Do you have cash set aside to buy a house?

Lupe: Not a lot.

Pat: Okay. Plus, there's more risks in that.

Scott: So now you're talking about going and buying, taking a loan out at a higher interest rate to buy a piece of property at pretty high values today...

Pat: And using leverage.

Scott: And not being able to take advantage...and not getting any tax breaks...yeah.

Pat: Whatsoever today. Once again, your husband was wrong.

Scott: She never saw that until they were married. After a couple of months, it's like, oh, wait a minute, he's human.

Pat: I know. All right, appreciate the call.

Scott: Yeah, glad you called, Lupe.

Pat: Yeah. You wonder...I mean, the SEP-IRAs, there was no Uni-K. I was trying to remember, is it 15, 20 years ago that they actually...

Scott: Yeah, that they came out with them.

Pat: Yes.

Scott: Ten or fifteen years ago, something along those lines.

Pat: Yes.

Scott: Yeah, and they work really well.

Pat: They do.

Scott: By the way, if you are self-employed, there are a lot of options for you in pension plan stuff. And if you are a highly paid professional, let's say you're a dentist, a medical doctor, you're still in your own practice...

Pat: You've got a couple of employees...

Scott: And particularly if you're like in your 50s, or getting close, you can set up these plans that are like a pension plan.

Pat: They're called defined benefit plans.

Scott: Yeah, where you can funnel sometimes a couple hundred grand or more...

Pat: Because they're based on the... You set a number of what the pension is going to pay you at retirement.

Scott: Right. So as an example, let's say you're...

Pat: We've done it with people that have 80% of their income going into these things.

Scott: Yeah, I know.

Pat: It's crazy.

Scott: And you can do it without any employees, too.

Pat: Yes.

Scott: But like, let's say you're 58 years old, and you set up a plan that says I'm going to have a pension...my company's going to pay me a pension, $5,000 a month for the rest of my life, beginning at age 60...and you're 58. Run the numbers, it's like holy crud, we need to put a lot of money into this plan. There are some limits on it, but you can funnel boatloads.

Pat: Massive amounts.

Scott: And then you've got to long-term, like not just tax plan for the current year, but several years out.

Pat: And they're relatively complex.

Scott: And you can do them... But you could use some Roth for some of this portion as well.

Pat: But they're relatively complex. They're relatively complex. Versus an IRA, or a SEP-IRA, or...

Scott: Yeah, you don't want to do it if you're making $72,000 a year.

Pat: Yeah, yeah, if you're making $300,000, $400,000 a year, and you're self-employed, and...

Scott: Or maybe even north of...yeah. Yeah, I'd say that or north of there, then it can make some sense.

Pat: Yeah. Oh, I've seen some, and you just shake your head, you're thinking, wow, this is what...when they talk about loopholes, this is what we're talking about.

Scott: Well, like, I look back... Here's how I view the whole tax code. Like, Congress comes up and makes these silly things, and then every year or two they have another bill that they change and modify this and that, oftentimes they're trying to do little favors to repay for political gifts...but there's the cynic in me.

Pat: Perfect example. My own children, my last child out of my four graduated from college, and there was some money left in the 529 plans. And I know that you can convert these 529 plans into Roth IRAs for the children at some point in time, and I thought to myself, holy smokes, what percentage of the population actually...

Scott: I don't think this was designed for the McClain family.

Pat: Okay, well...but who's it designed for? How many people, their kids finish college and there's money left in the 529, what percentage of the population? And I thought to myself, why did anyone bother putting this in the code for the one, one...

Scott: Yeah, all right, so there's a perfect point, right, Pat?

Pat: Like, why...?

Scott: This is a perfect example.

Pat: And this just came about, was this a year...

Scott: This was last year.

Pat: Yeah.

Scott: Was this a Secure Act 2.0? I think it was part of the Secure Act 2.0.

Pat: Yeah. Who...? When it passed, I thought this is crazy.

Scott: And so, what this provision allows for is that if there's money, excess funds left in a 529 plan, that is not going to be used for education, a portion of that can be converted to...is it an IRA, or a Roth IRA?

Pat: Roth IRA.

Scott: Okay, a Roth IRA, without paying the taxes.

Pat: Without paying the taxes. But the money has to be in there for I think 20 years, and...

Scott: There are some limits on it. And I remember when it came out, we're looking at it like...what? This was clearly a tax gift to the wealthy.

Pat: Oh, there's no question.

Scott: I mean...yeah. Who else is going to benefit by having excess funds in a 529 plan?

Pat: I thought to myself, all the time and energy that went into writing this tax bill, what percentage of the population will actually...is it even 1/100th, if that? If that? Not 1% of the population...

Scott: Because the way it's supposed to be, money that's not used for a 529, for education, which you could always transfer to another beneficiary, so you can do it to a grandkid or whatever...

Pat: That's what I'm doing.

Scott: But if it's not used for education, if you withdraw the funds, any of your deposits come out without any taxes, because they weren't...there's no deduction, but all that growth is supposed to be taxed as ordinary income. So, this was a provision that reduced the tax revenue clearly...

Pat: 100%.

Scott: ...to benefit a very small portion of the population, and 98%, 99% of them would be in the wealthier...

Pat: Anyway, I was going through the 529 plans for my children... My daughter's going to law school.

Scott: And you think there's going to be leftover funds?

Pat: Yeah, there is.

Scott: Oh.

Pat: She got a...

Scott: Oh, she got a good scholarship then?

Pat: Oh, it's unbelievable.

Scott: Oh, really? I'm thinking, you have that much extra money saved for law school? You're like...

Pat: Oh, Scott, it's unbelievable. She's a very good student. Oh, yeah, I was like...she's like, well, this apartment's pretty expensive, and I'm like, it doesn't matter.

Scott: Well, I mean, she served as a teacher [crosstalk 00:22:28.732] for a couple years...

Pat: Oh, yeah, yeah. She got her master's in education, she went to a low-income school, she taught for three years in the lowest-income school, she's going into educational advocacy, and that's why she's going to law school. I mean...

Scott: The kind of people you want to go to law school. She's not going to be a corporate litigator.

Pat: She may. It wouldn't surprise me. It wouldn't surprise me if she changed directions.

Scott: All right...

Pat: All right, let's go.

Scott: ...back to... So, you mentioned loopholes, right? The reality is the tax code is highly complex. And you can choose to ignore it if you'd like, and pay much higher taxes, or you can...you can sit and search and find all of those provisions that can be beneficial to you, and navigate through those provisions, and just have a financial plan to minimize your taxes both this year, and in the years to come.

Pat: Yeah, but you don't know what you don't know. Right? So, you wrote an article this week for...or you write for "Investment News," or...?

Scott: Yeah. Yeah, do you read them?

Pat: I do.

Scott: Oh. Well, thank you.

Pat: I read the one this week, which is, why don't a certain percentage of the population hire financial advisors?

Scott: That's right.

Pat: Right? And you make...

Scott: Because I struggle, because oftentimes I see people, and I'm like, man, had we met you 10 years ago, 5 years ago, 2 years ago, last month, like, the things we could have helped you with.

Pat: Yes.

Scott: Not just the investment side, not just how the portfolio is allocated...

Pat: But how the tax, and how the whole thing fits together.

Scott: How it all fits together. Like this...

Pat: So, my point, so when you were talking about loopholes, right, so Lupe called us for...

Scott: About a loophole.

Pat: ...about a loophole.

Scott: Lupe, loophole.

Pat: But I thought to myself, I read that article and I thought to myself, it is so true, because you don't know what you don't know. And so... But I think the reason people don't hire financial advisors, Scott, is because...

Scott: I gave three or four reasons. I forget what they are now.

Pat: But, and the reason is because there's not a lot of good ones, and you can't tell the difference.

Scott: That's right. Yeah. You can't tell good versus bad.

Pat: You can't tell.

Scott: Even if someone is a certified financial planner, they might just be insurance salespeople that have that designation.

Pat: In disguise.

Scott: And they want to sell insurance for...regardless of what your situation is, they're going to sell you a life insurance product.

Pat: But you can't tell a good tax...you can't tell a good attorney, but you still hire them.

Scott: Well, if they're a reputable firm...

Pat: Okay, that's exactly it. That's exactly it.

Scott: If they're a reputable firm, then you've got a firm that stands behind them.

Pat: Yeah.

Scott: And there's a certain level of education required.

Pat: But I actually, so I read your article in "Investment News" this week, and I thought about this gentleman I sat with 30 years ago, and he said to me, "You know, Pat, I don't really need any advice from anyone. I know exactly what I'm going to do."

Scott: Okay.

Pat: "I'm putting these tax-free bonds in my IRAs so that I don't have to pay taxes."

Scott: And you're thinking, buddy, if there's anyone who needs an advisor, you need an advisor.

Hey, we're going to take a quick break. When we come right back, we'll take some more calls. This is Allworth's Money Matters.

♪ [music] ♪

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

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

Pat: Pat McLean. Thanks for being with us.

Scott: Let's talk. We'll take some calls. Let's go to California, and talk with Bob. Bob, you're with Allworth's Money Matters.

Bob: Hey, good morning. How are you folks?

Pat: Wonderful. How are you doing?

Bob: Good. Hey, I got a question on social security. My wife and I are both retired peace officers from California, in CalPERS, we're both maxed, we both did 30-plus years. I opened a business...we've been retired nine years, and I opened a business immediately upon retirement. We both got into law enforcement, my wife in her early 20s...well, both of us in our early 20s. I'm 60 years old now...

Scott: Did you, Bob, did you dream when you were a young man going into law enforcement, that you'd be in your financial position you're in at this time?

Pat: With a 90% pension of what you were on...

Scott: And a business with extra... I mean, I imagine you are an extremely fit financial situation.

Bob: Yeah, no, yeah, I did.

Scott: Oh, you did imagine that? Good for you.

Pat: Okay, nevermind.

Scott: All right, so what's your...?

Bob: I started investing in a 401(k) with the state, I hired on at 20 years old...

Pat: Wow.

Bob: Met a gentleman my very first day, he showed me...he was six months from retirement...

Pat: And he told you what to do?

Bob: And he showed me what he had done...

Pat: Good for him. Good for you.

Bob: ...and his financials, and he said, "Start with $2,500 a month out of your check, and then put half of your..." you know, your raise, each time we got a raise, put half of it into your 401(k) or 457. And my wife and I did both things, the same thing.

Pat: Good for you. Good for you. So, what's your question for us?

Bob: Well, my question is when I started the business, we both had minimal quarters on social security. I had, like, 12, and my wife had, like, 18 or 19. I started as an LLP, put her as an employee of my business...or excuse me, a partner of my business, paid her to get the 40 quarters, I think she's actually got like 44 quarters.

Pat: Okay.

Bob: I am continuing to work, plan on working for probably...I'll probably work forever. I don't think at this point I'll ever retire completely. We also have a cattle ranch, and are in the cattle business. So between my other private business, and our cattle, like I said, we'll probably stay, you know, forever.

Pat: Okay.

Bob: My question is social security. I mean, I've talked to people, and they've told me that as a CalPERS, we only get 40% of the eligible benefit...that's available through social security.

Scott: Well, yeah, the wind...they call it a windfall elimination provision. Although...

Pat: But it doesn't apply to every CalPERS employee.

Scott: Did you pay into social security as a safety worker? You did, did you not?

Bob: No, I did not. Neither one of us did.

Pat: Okay.

Scott: Oh...okay.

Pat: Okay. All right...

Scott: Okay, so there it does. Yeah, so...

Pat: There you go.

Scott: Yeah. And so, in order to...in order to qualify for Social Security benefits, you need to have 40 quarters. Which isn't necessarily 10 years worth of employment, because you can get four quarters in one quarter by...I forget what the wage is. It's really small. But you've got your 40 quarters, it sounds like both of you have your 40 quarters now, which qualifies you for social security. Now, let's assume you paid into social security your entire career. Social security looks at your entire wages over your lifetime to come up with...to determine how much your monthly allotment should be. Because you've only been paying in the last 10 years, although you might think I've paid a lot into social security, you're not going to get the same benefit as somebody who has contributed in the last 30 years, because you did not contribute for so many years.

So you will be eligible for social security, but not at the full amount. And [crosstalk 00:30:26.146] 40% is probably a pretty good assumption, 30% to 40%.

Bob: That's what guys I've worked with that have...you know, already have their 40 quarters [inaudible 00:30:34.947] but I thought, and then I was told that at some point, when you work long enough and the amount you pay in, they actually don't windfall you, or restrict you...

Scott: That's news to me.

Pat: I don't know that.

Bob: Okay.

Scott: I've never seen that one.

Bob: Because of the CalPERS, that that's what...and public safety [crosstalk 00:30:54.248]

Scott: I mean, yeah, I mean, I guess they were...yeah, it's because...well, it's because you didn't put...you were in a government program, but you did not participate in social security. You did not pay into it during that time, nor did your employer.

Bob: Okay.

Scott: So let's assume they had since the time you were 20, when you first started working, and let's assume you continue to work 'til beyond age 70, which is the maximum date you would want to defer taking social security. Like, if half your career you didn't contribute to social security, and half you did, then you would assume that...you know, roughly half.

Pat: You'd get half. So, are you worried about this?

Bob: No, not at all.

Pat: Okay.

Bob: Just it's kind of a decision factor of how much longer I'm going to work, because of the amount of money I'm paying into FICA out of my private business.

Pat: Okay.

Scott: Well, here's... Yeah, this is an interesting...

Pat: How much money, how much do you make...?

Scott: This is where it gets challenging.

Pat: Wait, wait. How much money do you make in your business?

Bob: Pushing $200,000.

Pat: Okay, and have... Are you paying any of that in dividends? So, there's two things to look at [crosstalk 00:31:56.558]

Scott: What kind of... What's your business?

Pat: Consultant of some sort.

Bob: A private investigator.

Pat: Oh, all right. Well, you don't have any choice. You might have a little bit of a choice...

Scott: And how much is the rest of the family income, pensions and...?

Bob: $180,000, $190,000 a year.

Pat: Okay, so you're not spending all this money you're making?

Bob: No.

Pat: Okay, earlier in the show we talked about...

Scott: [crosstalk 00:32:21.260] cattle ranches and stuff.

Pat: Earlier in the show, we actually talked about defined benefit pension plans, where you could put tons of money in. And the older you are...

Scott: You're the perfect...

Pat: You're the perfect... Like, it was written for you.

Bob: Okay.

Pat: So, a defined benefit pension plan, you could write it...

Scott: Are you putting any of the $200,000 into a SEP-IRA, or...

Pat: Or a self-employed 401(k)?

Bob: Yeah, I have a SEP-IRA, and then we both do personal IRAs every year.

Pat: Yeah...

Bob: So yeah, we do that. I had...I actually, I listened to your first call while I was on the phone...

Scott: Okay.

Bob: ...and heard about that defined, or the solo, the Solo-k, which is [crosstalk 00:32:59.062]

Pat: Yeah, yeah. It's something you may or may not want to do.

Bob: ...as soon as we get off the phone, I'm going to look into it.

Scott: Yeah, how much do you... Even if you did it on a Roth, somewhat on a Roth basis, which might make sense.

Pat: Would make sense. But, and Scott, if he was sitting in the office today, first time with you, what would you recommend? Like, I would look into a defined benefit pension plan.

Scott: Yeah, particularly if you... Oh, yeah, I'd look into all those options.

Pat: And then I'd ask him a bunch of questions about who he's been investigating.

Scott: And are you here to investigate me, or are you really looking for information...?

Pat: What is a private investigator actually does? What do you have...? [crosstalk 00:33:41.514]

Scott: And by the way [crosstalk 00:33:42.327]

Pat: How much money do you have in 401(k)s and IRAs?

Bob: Between us, pushing $2 million.

Pat: All right. And you're how old?

Bob: 60.

Scott: 60.

Pat: Mm, I don't know...I don't know how much more I'd want to put in.

Scott: You can on a Roth basis.

Pat: Yeah, on a Roth basis, that would make sense.

Scott: Because you're...

Bob: I thought I make too much for a Roth.

Pat: No, but you set up a self-employed 401(k), and put it in on a Roth basis.

Scott: Yeah, yeah, yeah. You're talking about Roth IRA, we're talking about Roth...

Pat: See, you're thinking about the IRA, we're talking about Roth 401(k).

Scott: A Roth Solo-k.

Bob: Oh, okay, a Roth Solo-k. Yeah...

Pat: Yeah, 401(k). Because...

Bob: I did a SEP. I started with a SEP, and I put the max of that in my very first year in self-employment.

Scott: It might...yeah.

Pat: I...I don't know if I would have done that.

Scott: I mean, the thing you've got going for you is you've got a nice pension, but it's taxable to you. So when you start having to take money out of your retirement accounts, it's going to be added on top. But like, so now if you're sitting there thinking, I don't know how much more it makes sense for me to continue to work because of the taxes, it always makes sense, because you always get to keep a portion even when your tax bill starts getting high. And you're at a point now when you're essentially in a federal 24% tax bracket, pretty squarely right within there, and state, I think you're 8% or 9%, you're 9%...

Pat: State of California.

Scott: ...State of California, where you reside, about 9%. So, let's call it 33%...

Pat: You still get to keep 67%.

Scott: And then there's FICA on the majority of your income, which is 15.3%...so, that's about half.

Pat: But there's lots of planning opportunities here.

Scott: Yeah. I forgot what your question was.

Pat: I know. Did we answer anything?

Scott: Oh, social security... I think we get excited about... Like, someone comes in without a lot of planning opportunities, it's not that interesting. Someone comes in with lots of planning opportunities, I guess as financial advisors it gets a little more interesting. So, that's awesome.

Pat: Yeah, the social security it is what it is.

Scott: There's nothing you could do to change it.

Pat: Yeah, it is what it is.

Bob: Okay.

Pat: So, don't worry about it.

Scott: There's nothing you could do there.

Pat: And you don't really need it, and if it comes, it's a bonus. And by the way, if I were you, I'd take it...

Scott: Well, he's frustrated. He's paying 15.3% of his income...

Bob: Well, and that's my point exactly, is when you're paying that out, and then I listen to your show, and you're saying...

Scott: You're going to get that back. And don't, but the way, don't...

Bob: ...by 2032, it's going to be gone.

Scott: Don't view... Well, it'll be depleted, and they're going to have to make some changes. Don't view social security as some retirement savings for you. It's not.

Pat: It is for a large percentage of the population, Scott.

Scott: Okay. It...

Pat: You're retiring...

Scott: It's a social retirement program where they confiscate a portion of your dollars, and then they determine how much they're going to pay you when you're old. That's all it is.

Pat: I under-... Look...look, for him it's not retirement savings. But for half the population...

Scott: Then it's a good thing it's in place, because otherwise they would be starving.

Pat: Well, we don't know that either. Otherwise, they might take...

Scott: Other government benefits.

Pat: Or responsibility for their own...

Scott: Okay, well...

Pat: So, no, but in your situation, you should start, by the way, as soon as you're eligible without penalty, you should start social security benefits. Even if you're working.

Bob: Which would be what, 62?

Pat: Oh, no, no, no, because you're still working at that point in time. It'll be 67, at your age.

Bob: Okay.

Pat: Right? But you should sit down with a qualified advisor. You've got tons of planning opportunity. Tons. Because of your income, and your age. Alrighty?

Bob: Okay. Yeah, thank you.

Pat: All right, Bob... Yeah, appreciate it, Bob.

Scott: Good talking with you. And, but that FICA tax, it... Here's what's a real problem. You've got... Well, I'll give you a prime example. I've got a friend of mine, he retired relatively young, his wife has a phenomenal job, so they're at a high income...they're in the top tax brackets. And he was going to start this business, which he knew that would never make that much money, but he was interested in doing it just because it was something that he was interested in doing. And he says, "I started running the numbers, but when I'm already at 50% taxes, tax bracket right now, I'm going to have to pay 15.3%, so now it's 65%," so he's like, "I get to keep .35 cents on the dollar?" He's like, "It's not worth going through the hassle."

Pat: Wait, you just told me...

Scott: Wait for what?

Pat: So, taxation causes changes in behavior? Is that... That's what it's designed for.

Scott: My friend was going to set up...

Pat: I understand.

Scott: He went and he started running the numbers, he was like, what for?

Pat: Scott...

Scott: I get .35 cents on the dollar.

Pat: That...

Scott: This is what, so there's a...there's a marriage...and we had a call earlier, that when they were married their taxes went up, and marriage may or may not have impacted that. But there are clearly times when a married couple, they benefit...

Pat: Should file separately. No?

Scott: Well, maybe, but very rarely. But a lot of times, when it's...you get penalized for being married as well, financially.

Pat: I wish I had a wife that made lots of money. [inaudible 00:39:01.358]

Scott: Oh, I was feeling sorry for him until you [inaudible 00:39:03.680]

Pat: Now that I think about it... All right...

Scott: Let's continue on with a call here. Let's talk to Fred in California. Fred, you're with Allworth's Money Matters.

Fred: Hi, Scott and Pat. How are you doing?

Pat: Hey, Fred.

Fred: Big fan of the show.

Pat: Thank you.

Fred: Good. All right, so my question is, so I have a Prudential variable life insurance that I got in 1993.

Scott: Okay. Wow.

Fred: And the original face amount was $60,000 now, and then the current death benefit is about $70,000, with an annual premium of $432. However, a Prudential representative reached out to do...propose a 1035 exchange.

Scott: Yep.

Fred: From that variable life to a pro-life custom premier, too. So, my question is...

Scott: A custom...?

Fred: ...is this beneficial?

Pat: Okay. What's the cash value in this?

Fred: For the...that one is $150,000. But the 1035 exchange [crosstalk 00:40:05.255]

Scott: No, no, no, your current policy today has a death benefit of $70,000. How much cash is in there, if you were to cash it in today?

Pat: Yeah, it shows a cash value inside of it. How much is in there?

Fred: Oh, I'm not sure. Because I was trying to look at the fine details on that one.

Pat: How much have you been putting in?

Scott: $432 a year.

Fred: $432 a year.

Pat: How old are you?

Fred: I'm 49.

Pat: Do you have children?

Fred: I have three children.

Pat: Do you have other life insurance?

Fred: Yeah, I'm in the military reserves, I have SGLI for $500,000, I have an employer life insurance for $200,000.

Pat: So we've got $700,000, and $70,000 in cash. So, this is...

Scott: A death benefit.

Pat: A death benefit, we have no idea what the cash value is. First of all...

Scott: Probably not a lot. He's putting $400 a year in.

Pat: Yeah. I don't... Without knowing the cash balance, the cash value of the existing policy, it's hard for us to answer the question. But if it's... I don't see how this is going to benefit you, to get into a new contract with new surrender charges.

Scott: I don't either.

Pat: I just can't, I can't even... I can think of a hundred different ways that it would hurt you. I can't think of a single... Can you think of a way that you would justify this?

Scott: If he's...

Pat: Unless he's the life insurance sales guy? Yeah, I wonder why...I question whether you need the policy at all.

Scott: I do, too.

Pat: Whether you should just surrender it, yeah.

Fred: Oh, really? Okay.

Pat: My guess is it doesn't have much cash value in it. My guess is it probably has less than $10,000 in it.

Fred: Wow. Okay.

Pat: You've been putting in...you've been putting in...

Scott: And so, let's assume there's $10,000. What happens, if there's a death benefit of $70,000, and you have a cash value of $10,000, that's a $60,000 difference between those two, that's pure insurance that you're paying for internally with that policy, it's probably the most expensive $60,000 of insurance that you'd get anywhere.

Pat: Yes.

Fred: Wow. Okay.

Pat: So my guess is, and you can call back the show once you get the cash balance, and we'll actually give you the exact number, my guess is that you could actually surrender this thing with probably little or no gain in it so that it's not a taxable event, and just take the money and put it in [crosstalk 00:42:35.587]

Scott: Yeah, you probably don't even need a 1035 exchange on it.

Pat: That's right.

Scott: Let me tell you what happened.

Pat: Well, yeah, you do. Yeah, you do. Yeah, he... Okay, explain how this thing works, Scott.

Scott: So, Pat and I both started out...I think, Pat, you were in 1989, I was 1990 at a large insurance company. We lasted a couple of years, left. Look, there are times... Look, I own a life insurance policy, I own a term policy, and I own a variable life policy.

Pat: I own the same kind of life insurance policy that you have, Fred.

Fred: Okay.

Scott: The challenge with the structure of the industry is that the guy or gal who sold you the policy back in 1993, my guess is they're no longer still with the company, selling policies. Even if they were, they're not getting paid anything by making sure that Fred's policy is doing what Fred needs. So what happens is some agent, probably a younger agent trying to figure out how to survive, they only make commissions when they sell products, finds Fred's little policy and says, oh, here's a guy who's paying $430 a year, he's been paying for 30 years. I bet I can move him to a new policy, get paid a new commission, and find a way to make it sound beneficial to him.

Pat: And start a new surrender [crosstalk 00:43:46.611]

Fred: Yeah, and that's exactly correct. That's exactly correct.

Pat: Yep.

Fred: Because I never had, like, a contact before from a representative until just maybe about a month.

Scott: So if you're a long-term listener, and you're like, why is it that these guys aren't always that excited about insurance, it's because of this. Look, life insurance, when there's a need, you're foolish not to have it.

Pat: That's right.

Scott: You are foolish not to have it.

Pat: And there are times in life where you need...

Scott: Permanent insurance.

Pat: ...permanent insurance.

Scott: Whole life, universal life, there are times when those products make tremendous sense.

Pat: But now is not one of them.

Scott: But the typical middle class individual, who only needs life insurance for a finite period of time, a term, whether you got kids dependent upon them, for the majority of Americans, there's no sense having these kind of policies. And then, when you can't have, actually, an advisor who's looking out for your own best interests, the whole structure is to generate another sale.

Pat: Surrender the contract.

Fred: Okay. Perfect.

Pat: Just surrender it. Yeah, surrender it.

Scott: I think...yeah. Well, if he was your brother, you wouldn't even have had to talk this long, you would have just said, just surrender the [crosstalk 00:44:52.205]

Pat: I actually would have said that. I would have been like, you did what? What...?

Scott: Get rid of that thing.

Pat: Get rid of it. Yeah, just get rid of it. And don't spend the money. You know, put it in Roth, or...

Scott: That $430 a year, have it go somewhere.

Pat: Yeah.

Scott: All right?

Fred: Okay, will do. Perfect. Thank you, Scott and Pat.

Scott: All right. Appreciate the call, Fred.

Pat: Thanks for the call, Fred.

Scott: That's pretty funny, that we guessed exactly what was going on.

Pat: You've seen the movie. You've read the book.

Scott: Oh, I starred in the movie for a couple years out of college.

Pat: [crosstalk 00:45:19.846]

Scott: Actually, I was an extra. Because I didn't really sell much, so... In the movie thing, it would be that guy [inaudible 00:45:29.690]

Pat: I actually sold more in my first year in that business than anyone.

Scott: You did?

Pat: Yeah, I sold my car, I sold my furniture...

Scott: My wedding ring.

Pat: ...I sold everything. Are you making fun of my joke?

Scott: Yeah. It's pretty funny, though.

Hey, I had mentioned earlier in the program, Pat, that...I was going to mention... I've got a friend who comes to me and said, "If you ever want to learn how not to set up things with a family member..."

Pat: Oh, yeah, inheritance.

Scott: An inheritance.

Pat: Okay.

Scott: And it was a vacation home.

Pat: Okay...

Scott: And apparently, it was supposed to...I guess it was in a trust at one point in time, now it's no longer in a trust...

Pat: How many kids in the family?

Scott: Well, these are grandkids. There were six owners.

Pat: Okay.

Scott: And we've seen this a bunch, right? Because...

Pat: I have a friend that three of them inherited a vacation home on the East Coast, and one of them is located on the West Coast.

Scott: Right?

Pat: Right?

Scott: Well, what ended up happening is there's expenses to keep them up, all that stuff, and so apparently, one wanted out, so they went to the rest and said, look, we need to buy this person's way out. And so my friend, like, didn't have the cash to buy the other person out...

Pat: So, that person that wanted out is in?

Scott: No, my friend's out.

Pat: Oh...

Scott: Either come up with the cash...

Pat: Oh.

Scott: And so, I was just having more conversation...

Pat: So, they pushed him out?

Scott: Yes.

Pat: Like if you don't have the money to buy a pro rata share...

Scott: That's what happened. That's what happened.

Pat: ...you're just out?

Scott: My guess is there was no operating agreement...

Pat: That was put in place.

Scott: Right? There's probably no operating agreement, it's just majority rules.

Pat: Period.

Scott: 51% rules. And my guess, and the others just went and said, hey, you've got to come up with this cash, or...

Pat: Like, you've got to come up with $30,000, or you're just out?

Scott: Yeah. More than $30,000.

Pat: And so, whatever... A lot of money.

Scott: Yeah.

Pat: So, he has no economic value in this inheritance whatsoever, or this vacation property?

Scott: Not anymore.

Pat: Wow. That...that has litigation written all over it.

Scott: Well, and it's family.

Pat: Yeah.

Scott: And I said, well, clearly you'll be able to have a chance to use it periodically, and my friend's like, no, that's...I don't think so.

Pat: Holy smokes.

Scott: Right. And so it was one of those things, Pat, and look, we see it all the time, we've been financial advisors for three decades, we see it, right? But it was just a conversation I had with a friend just this last week, and it got me thinking about inheritances, and the right way to structure inheritance, and the wrong way, and really thinking through. Because this was two generations. This was a family vacation home, a nice home...

Pat: Memories.

Scott: ...you can only imagine.

Pat: Now bad memories.

Scott: And some of the division it created within the family... Because the reality is when you go down to particularly your grandchildren level, they're not all going to be in the same place economically.

Pat: Oh, 100%. Not only economically, geographically. Geographically. I have a vacation home. I had the conversations with my children...

Scott: Don't expect to ever receive this?

Pat: No, I said...they said, well, who...where will this go? And I said, it is nothing but an asset. It looks like a brokerage account or an IRA, and it's nothing but an asset. And when...

Scott: Well, you've got four kids, right?

Pat: Four children.

Scott: So go out 25 years, they're not all going to be at the same level economically.

Pat: That's what I said. I said, it is not... If you leave this in a trust that requires it to be in the family, I said what happens if one of...this thing is at Lake Tahoe, what happens if one of you is living in Boston, and the three of you are living within an hour from this thing? But all four of you are responsible for taking care of it? I said, the kid that's living in Boston is going to feel cheated, and it's going to create division in the family. So, it is any...it's an asset, like any other asset. I don't care how many memories you had here.

Scott: It's pretty rare you see these vacation homes adding more value than not when you start going down the generation [crosstalk 00:50:18.658]

Pat: Or anything. Anything. Family home, right? How many times have you seen a family home, where one of the kids, typically the one that's not doing all that well is living in it, and mom and dad die, and that kid thinks he gets to live there, or she gets to live there forever.

Scott: He. I think it's [inaudible 00:50:39.598]

Pat: I said he, she...

Scott: [crosstalk 00:50:42.509] the kid that never grew up.

Pat: ...whatever. Yeah. So, I had this conversation with a client this week. Decent net worth, a number of pieces of real estate, three children. I said, "I want you to sit down with your kids, and explain to them why you own each part of real estate, and what you think should be done with it at your death." And he said, "Well, what do you mean?" I said, "Look, you probably would sell some of that real estate today because it's not a great..."

Scott: But the capital gains.

Pat: But the capital gains. "And you're at the age you don't want to go through a tax-free exchange. But your death is when that real estate should be sold."

Scott: [crosstalk 00:51:27.842] basis, perfect time to...

Pat: Perfect time.

Scott: Yeah.

Anyway, we are approaching the clock, we're about out of time. I wanted to let everyone know, we pre-record these shows during the week so we have a normal...we can have our weekends off, and have a kind of a normal life, which we appreciate. But what we do is on our calls, we will tend to schedule times that we'll take calls. And so we've got a special session, we're going to be sitting in the studio on Thursday, August 3rd, from 3:00 to 5:00 p.m. Pacific time, 9:00 to 8:00 Eastern time, and we're going to be in the studio, just taking calls, so you can call during that time. Or even better, if you want to set up a time ahead of time, schedule a time to have that call, we can have it at that time. So the way to do that, send us an email at questions@moneymatters.com, questions@moneymatters.com, or call 833-99-WORTH. Again that will be Thursday, August 3rd from 3:00 to 5:00 Pacific.

It's been great being with you. This has been Allworth's Money Matters. We'll see you next week.

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