July 22, 2023 - Money Matters Podcast

Why some shouldn’t make extra mortgage payments, a question about a 529 plan, and how much Apple stock did you say you have?

On this week’s Money Matters, Scott and Pat help a Colorado caller understand why she should avoid making extra payments on her home. Then, a father from California asks what will happen to his 529 plan now that his daughter thinks college isn’t the answer. Plus, Allworth partner advisor Chris Giordano joins Scott and Pat to explain how he dealt with a couple who had half of their net worth tied up in Apple stock.

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.


Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investment, 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.

Scott: Glad you are with us today.

Pat: Yeah, we are.

Scott: Mid-July. I always find summertime as an interesting time. I'm not as productive work-wise typically in the summer as I am at other periods of time.

Pat: I've never given it any thought.

Scott: Well, it's because you're not very productive most of the year, Pat.

Pat: Good point. Maybe.

Scott: No, it's always a good time to spend with the C-suite family and that sort of thing. But anyway, we are brought here in the studio, putting together a program here.

Pat: Working.

Scott: Yes, and having a good time doing it. Looking forward to taking calls as we talk about financial matters, because both myself and my co-host are both financial advisors. To join the program, 833-99-WORTH is the number, or you can send us an email, questions@moneymattters.com. You know, it's interesting, I was thinking just as we're doing the open, how things have changed over the years, right? So we've been doing this program 28 years, and historically, it was just radio, because podcasts didn't exist. Now, we have more podcast listeners. But radio, there's a certain format, right? You're supposed to get a little lead-in thing, you pitch a couple of stories you're going to be talking about, stand-up teases, or whatever. That's how it's all supposed to be. And then you think about a lot of these podcasts, like, Joe Rogan was one of the pioneers of, like, a long-format podcast.

Pat: Yeah, with not any sort of time limit on it.

Scott: There is no open, right? It's like, half the time, his guests don't even know the show started. They just flip on the record and start having a conversation. There's no, like, "I'm Joe Rogan, and I do this broad..." It's things that just changed quite a bit.

Pat: Yes.

Scott: So from now on we're just going to start talking.

Pat: Then we're just like, "Hey."

Scott: And we're going to have a lot of MMA fighters on as guests.

Pat: Do you listen to Joe Rogan?

Scott: I listen.

Pat: What are your favorite podcasts?

Scott: I listen to Joe Rogan, 1 out of 20 episodes, if I find the guest interesting.

Pat: What are the podcasts you listen to on a regular basis? Like, if you go back to the last five days...

Scott: Well, some I'm not going to say because I don't want to make this about anything political.

Pat: Okay. We're going to go. All right. So you listen to the QAnon.

Scott: "Hidden Brain" is one of my favorites.

Pat: Excellent. Excellent.

Scott: Think of that, something that doesn't have... You know what I like, "Honestly with Bari Weiss." She's very interesting.

Pat: The podcast is called Honestly.

Scott: Honestly.

Pat: Okay. I've never listened to it.

Scott: Bari Weiss was a New York Times columnist and has since moved on. She's Jewish, she's lesbian, and she's conservative. And she has a variety of topics, and I just find...

Pat: It's called Honestly.

Scott: Honestly. And she has great topics.

Pat: I'm going to write that down.

Scott: She has great topics, and I... It's funny because I was listening to her the other day, and I thought, "I think I'm trying to be a little diverse." I want to make sure that I'm not, like, in some echo chamber.

Pat: We're going to have to get a new set of friends.

Scott: Politically. Anyway. And then I listen to...

Pat: Do you listen to "99% Invisible?"

Scott: I listen to MarketWatch sometimes. What's 99% Invisible?

Pat: It's bizarre subjects about why things exist.

Scott: No.

Pat: "The Wall Street Journal?"

Scott: The topics, it's on my feed there.

Pat: Okay.

Scott: And they got one called "Bad Bets," but they haven't had a new series yet.

Pat: Yes, correct, correct. I like the Bad Bets.

Scott: And I also listen to, what's his name, Malcolm Gladwell. His "Revisionist History," about to come up with new episodes in August. I'm hoping he's back to where he used this in the early days.

Pat: I read all his books.

Scott: Yeah, I've read all his books too.

Pat: Yeah, so.

Scott: Anyway.

Pat: All right.

Scott: I don't want to have this conversation.

Pat: Well, I was interested. I was interested. I asked.

Scott: Yeah.

Pat: To see...

Scott: Wall Street Journal got those 15-minute ones.

Pat: I listen to every one of them.

Scott: You're kidding.

Pat: Every one of them. Like, they just did a three-part series on Marvel movies. I've never seen a Marvel movie.

Scott: Yes, you have. Never ever?

Pat: Never. I've never seen "Star Wars." Me and three other people in the United States.

Scott: That's not a Marvel movie.

Pat: I'm into the sci-fi. I'm not into sci-fi even a little.

Scott: Apparently not. I don't like Marvel movies myself.

Pat: I've never seen one.

Scott: I've seen one or two with my son, because I'm a loving father, and as a child, I thought I would do the things that my son was interested in. That's just how I approach the world. You never watch, like, one of those stupid movies with your boys?

Pat: No, because, apparently, I'm not a loving father.

Scott: Well, they had other brothers to watch them with, I suppose.

Pat: Listen, I remember, when my kids were little, I got in trouble for this. I gave them walkie-talkies. They're like four and five.

Scott: And you sat them in the movie theater?

Pat: And I went and watched a completely different movie. Everyone's happy. "Son, if there's a problem, push this button and talk to me." Before cellphones, I, like, gave them a walkie-talkie. And then we tested it.

Scott: That's hilarious.

Pat: So I was in the other...you know, they have the multiplex where there's, like, eight. So I'm sitting in the other one. And so we get home, my wife's like, "How was the movie?" And the kids started talking about it, and I had nothing to add.

Scott: Yeah. Moms don't like those sort of behaviors.

Pat: And then they said, "Well, Dad didn't see it."

Scott: Mom just figures the kids are going to get abducted or something as Dad is not close watching.

Pat: They were like five, six. Look, quite frankly, there's a 50% chance they could have ended up in a better home.

Scott: Probably greater than that.

Pat: All right, let's go to our radio show.

Scott: [crosstalk 00:06:25] because we're way off topic, but we're enjoying or something. Anyway, let's go to Colorado and talk with Anita [SP]. Anita, you're with Allworth's Money Matters.

Anita: Hi.

Scott: Hi, Anita.

Anita: Yeah. So my question has to do with paying extra payments on our monthly mortgage...

Scott: Okay.

Anita: ...to whittle down, you know, the principal.

Scott: Yep, all right.

Anita: And so my question is, I know this is a good thing, but is it always a good thing, say, for instance, in very heavy financial situations where you have children in college, a wedding in the family, you know, multiple things going on? And so...

Pat: Well, it's not always a good thing, by the way. It's not always a good thing.

Scott: No.

Pat: In fact...

Anita: Okay.

Pat: ...I can make the argument now for a large percentage of the people that have mortgages that they should pay as little as possible because the cost of money is actually lower than what they could yield in a like-kind risk investment. So, how much do you...how old are you?

Scott: How old are you?

Anita: Fifty-three.

Pat: And how much do you owe on the home?

Anita: Okay. So we had our house paid off when we were living at our last location, and we moved two years ago. So we bought a house, and the cost of living was much higher here. So our mortgage at the beginning was at 425, which I know is very high. But we have paid it down now to 390.

Scott: When you sold your house, did you roll over all of the proceeds, or did you take some and do other things?

Anita: No, we rolled over the whole thing.

Scott: Okay.

Pat: And did you move...were you in Colorado before or just moved to a completely different area code?

Anita: No, we were in Illinois.

Pat: Okay.

Anita: The cost of housing went down there a little bit. We still made more off our house than we paid for it. But, yeah. And then housing here is almost twice what it was there.

Pat: And is your spouse the same age?

Anita: Yes, he is.

Pat: What's the interest rate on the mortgage?

Anita: We did get a great interest rate. It's at 3.25.

Pat: And how much money do you have in the bank?

Anita: Oh, you know what, I honestly couldn't tell you that right now.

Pat: Like, 50,000, 10,000, 400,000, just ballpark.

Anita: I would say we're probably around, like, 20.

Pat: Okay. And do you have money saved for retirement?

Anita: We do, yes.

Pat: I don't think you should be paying down this mortgage at all.

Anita: Okay.

Pat: I think you should probably die with this mortgage.

Anita: Okay.

Pat: In this current economic environment, assuming this isn't one large assumption...

Scott: This is I'm making this assumption.

Pat: ...that the money that you would have applied to the mortgage gets saved and invested.

Scott: And not spent.

Anita: Okay.

Pat: And not spent.

Anita: Right, right.

Pat: Because you can go right now and buy six-month treasuries. So we're talking like-kind risk. You could buy six-month treasuries as of close-of-market, when I look at it...

Scott: Whenever.

Pat: ...yesterday, that yield 5.5%.

Anita: Wow, okay.

Pat: Right? So you can make the argument that, in fact, you should not pay anything down there, and that difference you would actually put in...

Scott: Until the point when interest rates are lower.

Pat: At which point we could have a different conversation.

Scott: And that would be with no risk, whatsoever. And, Pat, it's put it in a high-yield savings account, as an example.

Pat: That's right. You could buy a high-yield savings account, FDIC-insured, same risk as paying down the mortgage, sample, not complex.

Scott: But the challenge that Anita has is not...it's that she's just paying extra. And does she have kids? How old are your kids?

Anita: Well, we have four of them. So we had two in college, one now graduated, but she's getting married next year, and then we have two other children in private Christian education that we're paying tuition for as well. So, yeah.

Pat: And what's your family income?

Anita: A hundred and forty thousand.

Scott: Well, I mean, here's...the decision you've made, whether you've realized this or not, which is not necessarily a bad decision, is that you are...these years that other people in their 50s might be hunkering down and saving for retirement so they can retire a little younger, or at least have that ability, you are using those dollars to help your kids get launched in life in the way that you think is best for them, right? So that's both private education for your high-schoolers and then the college. And there's nothing wrong with that as long as you're wide-eyed about that and realize that it's kind of your job, not to put your kids in private school. No, to raise good children is kind of your...

Pat: Well, hopefully, you take that responsibility seriously when you have kids. Many people don't, which is why we have issues. But that is kind of... And, no, most certainly, there is that added expense to send the kids to private Christian school.

Scott: Yes.

Pat: But as long as you...

Scott: What do you have saved for retirement?

Anita: You know, I don't actually know, but my husband, yes.

Scott: What's your house worth?

Anita: It's worth 725.

Scott: And you have no idea where you're going to be long-term because it's probably dependent on where your kids are going to be long-term.

Pat: Yeah. So don't pay... So your question was, "Should we pay down the mortgage?" And the answer is absolutely not.

Anita: Okay, okay.

Scott: No, I wouldn't. No, no, no, I wouldn't recommend paying down.

Pat: Now, had you called us two years ago, we might have a different answer. But then the equivalent investments, we're paying zero.

Scott: I mean, we have no idea what you have saved for retirement. So if you have nothing saved for retirement, then we're a little concerned what happens if one of you has a health issue and cannot work and then is forced to retire.

Anita: Correct, yes.

Pat: But you should have some term life insurance on each other, you and your husband.

Anita: Yes, we do. Yeah, yeah. And I know he has a good retirement fund. He's been working at the same company for over 20 years. So I just don't know what that number is because I don't really pay attention.

Scott: Okay. All right. Well, the answer to your question is do not pay down the mortgage. It wouldn't be a bad idea to do some retirement projections to see just where you're going to be 10 years out on the path you're at just to make sure. Again, I have no idea what you're saving. But in an ideal world, you get to retire with your home paid off, regardless of what interest rates are. You're changing your tune. Anita, appreciate the call. You're changing your tune on this.

Pat: Well, I had this conversation with a friend of mine this week. Was it a friend, my brother? He could be both.

Scott: Depends on the day.

Pat: But if you can't get to retirement...

Scott: Yes, then stretch it out, as long as...

Pat: ...as long as you can. Right? So that it's a cash flow issue.

Scott: I can't tell you how many times over the years, as a financial advisor, someone nearing retirement, I said, "Look, you're 65. Right now, you're working to get your house paid off when you're 74."

Pat: What for?

Scott: I can't even know if you're going to be alive at 74.

Pat: That's right.

Scott: I mean...

Pat: Realistically.

Scott: Let's focus on cash flow in retirement, particularly in your younger years of retirement.

Pat: But you do want to try to get your house paid off by the time you retire. But if you can't...

Scott: In a perfect situation.

Pat: In a perfect situation. Because money not going out is exactly the same as money coming in.

Scott: But we're in a unique environment now where we went through a period of ultra-low interest rates, where mortgages were almost free, I mean, it's what it felt like, it's super-low interest rates, and now you can get high-interest rates on...and matter of fact, the highest interest rates on short-term money, not even long-term money. So...

Pat: Yeah. A negative yield curve.

Scott: So instead of paying extra on your mortgage, you'd be much better off saying, "I'm just going to take those dollars. Instead of paying down my 2.75% interest rate mortgage, I'm going to put it in this 5% savings account. And at the time when that 5% savings account is paying less than 2.75, then I'll take that cash and throw it against the mortgage."

Pat: Exactly. I did have a question for you.

Scott: Being a little rudimentary. Basics.

Pat: Like, I was thinking about this on my drive-in. What did you think about the inflation numbers? Did you believe them?

Scott: Yeah, it came out a week or so ago at 3%.

Pat: Yeah.

Scott: The markets seem to believe them.

Pat: The markets did. I had a hard time with it.

Scott: What do you mean?

Pat: Just I'm not seeing it. I think inflation is higher than that. But it's what they include and exclude that...

Scott: Yeah, the whole CPI numbers.

Pat: And I do live in California, so.

Scott: Well, you realize that gas taxes increase to around 3% on July 1st in California. And the voters have proved that.

Pat: Yeah. Don't get me started.

Scott: I think you had touched your mic off. I got you.

Pat: Yeah. Don't get me started.

Scott: But the structure of California... Never mind. Okay.

Pat: I can see the look on his face.

Scott: Let's talk to Craig. Craig, you're with Allworth's Money Matters.

Craig: Yes, just a quick question. When my daughter was born, I started a 529 plan and did it as long as I had that current job that I had, and it's more than doubled since then. But after this gap year, which seems to have turned into a permanent gap, after high school, and she has current no inclination to keep going to school, how long can that 529 plan hold, or is there an age limit on that?

Pat: Well, there's two answers here. One is they just passed a legislation...was it this last...?

Scott: Yeah, recently, last few months.

Pat: That allows you to convert for not the owner but the beneficiary, your daughter, into a Roth IRA. But I don't think they've written...it hasn't started yet.

Scott: Yeah, I think you're right. It's going to get phased in in the next...

Pat: Yeah, it's supposed to be phased in in the next year or two.

Scott: But setting that aside, you can hold this indefinitely.

Pat: Correct. That's what I was going to say.

Scott: You can wait. And if she never goes to college and you got a grandkid, you can change the beneficiary to the grandkid.

Pat: I have money in 529 for a couple of my kids that have graduated from college, and we're not doing anything with them. We're just keeping them invested the way they're invested, and I have no idea whether I'm going to turn them over to grandkids or nephews or convert to a Roth IRA, or whatever. But I don't worry about it at all.

Craig: Okay. So I don't have to...I mean, it can just stay indefinitely. And then, if she has kids, it can go to her kids or...

Scott: That's right.

Craig: ...her cousins, I guess.

Scott: Yeah, cousins.

Pat: Or, you know, we watch to see what this legislation...it's passed, but they haven't written how it's actually done yet. You can convert it to her Roth IRA at some point in time, but we don't know how to do that as of yet, because it hasn't actually... They just passed it in the legislation, but they haven't written the rules around it.

Craig: Okay. And then, because between that and then I had the post-11 GI Bill, and I think there's a time limit on that that she has to go to school by. But I guess she'd check with the VA for that thing.

Pat: I wouldn't even know where to begin there. And how long has the gap year turned into?

Craig: Well, we're going on two.

Pat: Okay. Is she having fun?

Craig: She said she is. I worry about her, but she doesn't.

Scott: And you have other kids, or is she your only child?

Craig: No, she's my only child.

Pat: You know, actually, I wouldn't touch that thing for five or six years even if I could, because she may change her mind. It took me six years to get a bachelor's degree.

Scott: It did me as well.

Pat: Right? And quite frankly, I had a blast, and it's turned out okay.

Scott: Right?

Pat: So I wouldn't worry about it. The GI Bill is something completely different. But even then, you're not going to force her to go to college.

Scott: How much is in the 529?

Craig: Well, I've put 20,000. It's up to 80 now.

Pat: Perfect.

Scott: Oh, more than double. You said it doubled. More than double. It's quadrupled.

Craig: Yeah, it's more than doubled.

Pat: Yeah, just leave it alone.

Craig: All right. Well, thank you very much. I was just getting worried, like, how long can this keep going?

Scott: Indefinitely. And it's a nice tax-deferred account right now.

Pat: Yes.

Scott: And by the way, for the rest of us listening, like, this is the power of long-term compounding, right? Twenty thousand went to 80,000 through...and when did you put this in? Do you recall, Craig?

Craig: I started when she was born, she was born in 2003, and I stopped investing in 2011.

Pat: Eight years.

Scott: So through the great financial crisis.

Craig: Yep, I just kept...I said, "What the heck, you know? Keep putting it in there. She's not graduated yet."

Pat: Was it about $200 a month is what you've put in for 8 years?

Craig: Three hundred.

Pat: Okay.

Craig: Yeah.

Pat: Perfect, yeah. Perfect.

Scott: Leaving it alone and let the markets do what the markets are going to do. And they always recover and go back to new highs. So, anyway, appreciate the call, Craig. I know you've been following this, some of those crypto stuff more closely than I have. I was a little late. After the whole FTX thing, which I was fascinated with for a while, that Sam Bankman-Fried or whatever strange dude.

Pat: SBF.

Scott: Does anyone call him SBF anymore?

Pat: No. They call him... I assume they're going to call him convicted.

Scott: A convict.

Pat: Yeah. So, what's going on in the crypto? And if you've listened to our show at any period of time, we have been saying this for years. This thing will come to a screeching halt once it's regulated, once the regulators...

Scott: That's what we're seeing.

Pat: And they called it security. They called it security. It is traded. What's backing it is...

Scott: Well, they said...I mean, these companies said they're not actual securities. So, therefore, we're exempt from securities laws.

Pat: That's what their argument was.

Scott: And the securities laws go back really back to 1933, and there's rules from 1933 that are still in place today, 90 years later.

Pat: Yes. In fact, in our industry, I had to take ongoing education, and they're citing the rule of 1941, the Securities Exchange Act of 1934.

Scott: '40, I think, wasn't it? The '40 Act.

Pat: It was the '40 Act.

Scott: Creating the mutual fund. Whatever. Anyway. So a lot of old regulations. So these people in a lot of these crypto companies said, "This doesn't really apply to us. It doesn't apply to us. It's not a security."

Pat: And there's two regulators that have been arguing over who should be regulating it, the Securities and Exchange Commission and the Commodities Future Trading Commission. The crypto people want the Commodity Futures Trading Commission to actually regulate them because they have more lax regulation than the Securities and Exchange Commission, right? They're saying, "Hey, if we're going to be looked at by anyone, we'd prefer it to be you guys because you're a little softer." But the SEC seems to be winning this battle and saying, "No, no, this is a security. It's traded on an exchange. Whether you call it an exchange or not an exchange, it's an exchange." And, you know, these crypto coins come and go like night and day. I mean, your neighbor had one, didn't he?

Scott: Yeah.

Pat: Are we allowed to talk about it?

Scott: I don't know.

Pat: Okay.

Scott: Well, he approached me, like, three years ago on this thing. And professionally, I had no background in any of this stuff. I said, "Look, I don't care how great it is or not great. Like, I'm a financial advisor. I have a fiduciary responsibility to my clients. Like, this is not an area I'm going to dabble in even if... It's just I'm not going to dabble in. I don't care what the upside is."

Pat: Not with your money and certainly not with a client.

Scott: Clearly, not with any client's money, yeah.

Pat: Yes, correct.

Scott: And it went from nothing to up quite a bit, back to below nothing.

Pat: Yes. So again, the reason we bring this up, we see this come and go all the time as the hot, new.

Scott: What's happening now is the regulators are going after some of these founders and operators.

Pat: They're suing them.

Scott: And arresting. There was a guy a couple...a week and a half or so ago, this Celsius...

Pat: Yeah, Alex Mashinsky.

Scott: CEO of Celsius, they lent cryptos. They arrested him, and then he got sued for...the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Federal Trade Commission, they all ganged up on him. And I don't know. I mean, maybe he's completely innocent and everything they did was up and up.

Pat: But these two, just anytime something hot, shiny...

Scott: Celsius held more than 13 billion of investors' crypto balances.

Pat: Isn't that crazy that you would give your money, that you would just say, "Oh, this looks good. I'll just put my money here?" He seems like a nice enough guy.

Scott: With no background.

Pat: Nothing.

Scott: What protections are there in place?

Pat: Nothing.

Scott: What happens if you go...look, things are structured. Should Allworth go bankrupt, our clients' assets are all held separately and are all fine.

Pat: That's right.

Scott: It's irrelevant what happens. These things weren't structured.

Pat: He seems like a nice tough guy. I'll put...I'm giving a million bucks in there.

Scott: He seems like a nice guy. It's the whole crypto thing. You don't hear people talking about it quite so much anymore though, do you?

Pat: Yes, which is good thing. And you don't hear about special purpose acquisition companies.

Scott: Except the ones that are going bankrupt.

Pat: Oh, watch. It continues.

Scott: Anyway, we're taking a quick break. And when we come back, we'll take some more calls. And, yeah, anyway, this is Allworth's Money Matters.

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

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

Pat: Pat McClain.

Scott: Hey, before we continue on here, I want to let you all know that we...our calls that you hear from our callers, it's not happening live because we're not in the studio at 10 a.m. Pacific on Saturdays when this broadcasts in radio, because we record them during the week.

Pat: Yes.

Scott: And so, periodically, we'll have a time, we'll come in the studio just for a couple of hours with nothing but the intent of taking calls. And so if you'd like to...

Pat: And some of them actually get on the air, and some don't.

Scott: Most get on the air, 98% of them get on the air. To be totally transparent, we screen. If your situation sounds like totally uninteresting to most people, we're probably not going to take your call.

Pat: Yeah. Or if it doesn't apply, if it applies to 0.0003% of the population...

Scott: Unless it's a super interesting story.

Pat: To us.

Scott: Correct. We're the ones who decide. Actually, we have our producers. But, anyway. So we're going to be in the studio for two hours, Thursday, August the 3rd, from 3:00 to 5:00 Pacific, we'll be sitting in the studio. Okay. So Thursday, August 3rd, 3:00 to 5:00 Pacific. And if you'd like to schedule a time to ask your question, you can do it one of two ways. Send us an email at questions@moneymatters.com, questions@moneymatters.com, or you can call 833-99-WORTH.

Pat: At any time.

Scott: Anytime. Hey, we're going to talk now a Money Matters client story, and we've got roughly 100 advisors in different parts of the country. We've got thousands of clients that we've served over the years and we continue to serve. All kinds of different unique situations we've handled with over the years. And I recently had an interaction with a California couple that we wanted to chat about.

Pat: And so we've asked our advisor out of the San Francisco Bay Area to join us, Chris Giordano.

Scott: Yeah. And by the way, this couple was not compensated in any way for the story we're about to tell. I think that's, like, a legal requirement we have to say, there's no compensation. And by the way, just to be clear, we're not going to compensate our clients for these stories.

Pat: Why would we pay them?

Scott: I don't know. Anyway. Chris, welcome to Allworth's Money Matters.

Chris: Hi, good morning. How are you?

Scott: Good. How are you doing, Chris?

Chris: I'm good. Thank you.

Scott: And, Chris, you are in our Los Gatos office, right?

Chris: That's correct.

Scott: And Los Gatos is a great little town in Silicon Valley, the southern part of Silicon Valley. Is that what you would call it?

Chris: Yeah, I think that's exactly what I would call it.

Scott: Just over the hill from Santa Cruz.

Chris: That's right.

Scott: But the Bay Area is a big place, a lot of towns kind of blended in with one another. Los Gatos has very much its own kind of town feel. So Chris is a partner with Allworth, and when I first met Chris, I felt like he's almost like the mayor of the town. Because you're, like, third generation of Los Gatos, are you not?

Chris: Well, I think, technically, I'm second generation.

Scott: Okay.

Chris: My grandparents emigrated here from Italy. So, yeah, I think that's second, right?

Pat: And were they farmers?

Chris: Well, not exactly. My grandfather was the town gardener.

Scott: We got the story all wrong. "I'm not Italian, actually."

Pat: "It wasn't me. It was my cousin." So, what do they do? What do they do when they emigrated from Italy?

Chris: Yeah. So my grandfather came here under sort of a servitude in a way that he had to work off, and he was a gardener here in the town for many years. And then he started a business where he would sell fruits and vegetables door to door out of, you know, an old truck that he had. And he just worked his way up and became very successful as an immigrant.

Pat: Wow. To continue the story, and then what did your mother and father...did they work in Los Gatos as well?

Chris: Yeah. My entire family is here in this town. I've got a big extended Italian family, and everybody lives here. We're very close. We do a lot together. My father was the oldest of three brothers. He was the first one to go to college, and he was a commercial claims adjuster for Allstate Insurance for his career.

Pat: Well, that's...

Scott: I just found, Chris got a really interesting story, and if you've ever been to Los Gatos, it's just a really cute kind of self-contained town.

Pat: But we...

Scott: That's not why we invited Chris.

Pat: We are interested. But you had a client story you wanted to share with us.

Chris: Well, I do. So you alluded to the fact that, technically, we're in Silicon Valley, which is, you know, a part of the Bay Area that a lot of tech innovation happens, and a lot of the tech companies that everybody is familiar with are located here. So we have a lot of clients who have done very, very well with some of these stocks, Apple, Google, Facebook, you know, all the stuff that everybody knows. And I wanted to share a story about one of my clients. Their name is Glen and Yolanda. They are terrific clients. They've been clients of mine for quite a while. But Yolanda worked at Apple for many, many years and accumulated a significant amount of Apple stock. And she accumulated so much that it ended up representing over half of their liquid net worth, which, as you know, as advisors, you know, we look at that and think about that as a concentrated position that has its own sort of element of risk. You've got too much money in one single stock.

Pat: Regardless of how well it has done. But it makes it even more difficult, because psychology, the better it is done, the harder it is to get rid of.

Chris: Well, right. So, you know, the challenge for us, I think, is, as advisors, we want to give prudent advice, and that prudent advice is to diversify a concentrated position because of the risk that it represents. At the same time, for me, personally, it's always a little bit of a slippery slope to recommend to somebody that they trim a position like that and then that investment just keeps doing better and better and better.

Pat: Yes.

Scott: That's right.

Chris: And, you know, so...

Pat: And then you're wrong.

Chris: Well, right. Now, fortunately, for Glen and Yolanda, they had the right stock. I mean, Apple has just been a terrific stock for a long time, and it continues to be a terrific stock. But I have other clients who owned significant amounts of Snowflake or Facebook or Google or Amazon or PayPal, and you know, the story is different with many of those companies. They have not played out the same way as Apple. So there's definitely some validity to being prudent and not having a concentrated position.

Scott: Agreed.

Chris: Yeah. So what happened was Glen and Yolanda got to the point where they were in growth mode. You know, they were working, and they were still accumulating assets and planning for retirement. We've done lots and lots of financial planning for them, lots of cash flow modeling, and it got to the point where they retired and transitioned from this what I call growth mode to more of an income mode or a protection mode or just a different phase in their life where they were ready to trim some of the Apple and diversify it.

Scott: And people hit those positions in life where, at this point, their number one concern is about not going backwards. They're more concerned about...

Pat: Not being poor.

Scott: Yeah, than about being wealthier.

Chris: Yeah, I think that's exactly correct. I mean, they have plenty of money. Financially, they're going to be comfortable for the rest of their lives.

Pat: And then some.

Chris: Exactly. There's just this emotional attachment to a stock like this that has been so good to them for so many years.

Pat: So, how did you trim that position?

Chris: Well, so that's a great question. We were able to go into one of the IRAs that Yolanda has, which had a significant amount of Apple, and essentially, sell it off and cut their overall position by half. We trimmed it down to a third. And then we took that money in the IRA and diversified it into a completely different strategy that was an income-generating strategy so that they have this passive income that they can use in the future coming off this account if they choose to.

Pat: And so, did you have money outside the IRAs in this Apple stock as well?

Chris: That's correct. So even after trimming, there was still about a third of their liquid net worth in Apple, and what's happened this year, because Apple has done so well, is that third has now grown to roughly 40%. So we still have this issue where they have too much and we'll have to trim some more in the future.

Pat: And will you do that in the brokerage account or the money outside the IRAs? Is there anything left inside the IRA? And tell us why you chose the IRA to trim the position versus money outside the IRA and the Apple.

Chris: Well, yeah. So, again, as I mentioned, there's some emotional attachment to the stock, but getting past that, the IRA is really...it was the best place to go to sell Apple because there's no tax consequence of selling the Apple in an IRA. The Apple that's held outside of the IRA is going to have capital gains associated with it, and there's a tax element. So it just made sense to start with the IRA money. That was kind of the path of least resistance, if you will.

Pat: And under current tax law, there's so much benefit of actually doing that, because there's three things. One, at death, it gets a step up in basis and the tax is completely wiped away.

Scott: For money outside of retirement accounts.

Pat: Outside of retirement accounts. The other is it's the perfect asset to give to a charity if you're [inaudible 00:36:42].

Scott: Or a child.

Pat: Or a child, and that was the third, or a child, assuming that they're in a different tax situation, a lower tax situation. So the placement of the asset is every bit as important as the asset itself. Correct?

Chris: Correct. That's exactly correct. We want to be thoughtful about our advice, and you know, it certainly made sense to start with the IRA. It was a no-brainer. And now, we will gradually go back to the non-IRA money, the Apple, and work to reduce that position going forward gradually over time.

Pat: Yeah.

Scott: And there will be a time when Apple is not a leader in the marketplace. None of us can see it now, but no company lasts forever.

Pat: That's right.

Chris: That's true.

Pat: We can't see it though.

Scott: You can't see it, but no company lasts forever.

Pat: Yes.

Scott: Think of big brand names years ago that don't exist today.

Pat: Yeah. Montgomery Ward.

Chris: Well, yeah. But like I said earlier, it's always tough, you know, to be the guy, right? "Hey, here's what I'm recommending you do, and it's the right thing." But if the particular stock continues to go up and up, it can be a little bit bittersweet to be recommending to a client that they get out of it.

Scott: That's right. That is right. And so, as long as...you know.

Pat: That doesn't mean you...you have to face it head-on with the client, right? You're like, "Hey, I could be wrong here, but we're not doing it because we think we have a position on whether we think the stock is going to do good or poorly. It's because the risk associated with your stage in life isn't worth taking, right?" And you mentioned Snowflake, right? What a great example.

Scott: What's Snowflake?

Pat: That's exactly it, Scott.

Scott: What is Snowflake?

Pat: It was a high-flying stock for a relatively short period of time.

Chris: That's right. It went crazy. And then it completely fell apart.

Pat: For a relatively short period of time, it was the stock. I mean, it was so short that you can't even...you're in the industry and you can't even remember. What did they do?

Chris: It still exists. It's still a very good company. It just got, you know, way ahead of itself.

Scott: The stock price.

Chris: Yeah, the stock price.

Pat: Yeah. What does Snowflake do? Was it a server form or something like that? Well, what did they do, or what do they do?

Chris: Yeah, we call it storage.

Pat: Okay, there we go.

Scott: We call it storage. Hey, Chris, thanks for taking some time to be with us.

Pat: Appreciate it.

Chris: You're welcome.

Pat: Thanks for being part of the team.

Chris: Have a good day.

Scott: Yeah, yeah.

Chris: Thank you.

Scott: And if you find yourself in Los Gatos, go pay a friendly visit to Chris because he's a...

Pat: Yeah. It's like he's the unofficial mayor.

Scott: Well, there's a bunch of them now, these Giordanos. There's firefighters and police officers. Like, you can't...you live in the town, I don't think you can escape a Giordano.

Pat: You're like, "Do you know Giordano?" And you're like, "Which one?"

Scott: Unfortunately, yes. No, all right.

Pat: All right.

Scott: But it is interesting. When someone works for a company whose stock has done well, it can be a real challenge to get them to diversify. And, look, when you're young and still in accumulation mode, you can afford to take those risks.

Pat: Scott, do you remember 25, 30 years ago, we used to work with, still work with a lot of people that retired from the phone company, Pacific Bell, and it turned into AT&T, and then SBC, where they had all this AirTouch stock. Do you remember this? And the thing went wild for a period of time.

Scott: Then it became Vodafone.

Pat: And then it fell by 95%. Do you remember this?

Scott: I don't remember a 95% decline in value on that particular company.

Pat: I might be mistaken, but there was...

Scott: There were plenty of companies...

Pat: ...that fell by 90...

Scott: One of the benefits of being in this industry a long time is you've personally lived through a lot of these ups and downs, and you've had clients who argued with you about certain things. Actually, I don't argue a long time, but I'm trying...look, part of a good advisor is going... They're going to work on their communication skills to try to get you to do the right thing.

Pat: That's right. And I would say, "Look, we know that this is a concentrated position, we know that there's too much risk here for your portfolio, let's sell half of it," and then we're both right.

Scott: That's often a good place to go. Because if you do half, it goes up, like, "Well, glad I kept half." If it goes down, "I'm glad we sold half."

Pat: Right?

Scott: You're in the middle.

Pat: We're both right.

Scott: And we're talking with Pete. Pete, you're with Allworth's Money Matters.

Pete: Hi, guys. I love your show. I actually plan my Saturdays just to be able to listen to your show.

Scott: Well, that is both very complimentary and a little bit sad.

Pete: You guys need to do a two-hour show.

Pat: We used to, actually.

Scott: Yeah, we barely held our attention for the hour.

Pat: We even tried three hours once. Remember? It lasted, like, four weeks. Anyway, what can we do to help?

Pete: Okay. My question is, are exchange-traded REITs and preferred stock dividends traded as qualified dividends for tax purposes?

Scott: REITs would not be because they're passed through entities. There's no double taxation on REIT dividends. And preferreds, I would think they're taxed...that's an easy one to kind of look up. So the REITs are a no. REITs are no because they're not...a REIT doesn't have to pay taxes as a REIT.

Pat: As long as it distributes...

Scott: Like, 90-somewhat%.

Pat: ...97% of it, income. But we'll look up the other one because...

Scott: I'm sure I knew the answer one day.

Pat: We did. We're young.

Pete: Well, the reason I'm asking, because I'm an old guy, and I just want to stay educated on this stuff.

Pat: Got it. Are you in these funds now?

Pete: No.

Pat: And you're thinking of going in.

Pete: Possibly.

Pat: And why?

Pete: For tax purposes, the wife is going to retire next year. I'm trying to tell her to hold it off.

Pat: Okay.

Pete: But if we could get under the 12% tax brackets, and it's a qualified dividend...

Pat: Yeah, most preferred dividends are qualified dividends.

Pete: Okay.

Pat: Most. And do you have money in IRAs? I know you didn't call for that question, but when you mentioned that 12%, getting the income under 12%, do you have money in IRAs?

Pete: The wife does.

Pat: How much does she have?

Pete: Roughly 375,000.

Pat: Okay. And what will your income in retirement be?

Pete: Right now, I'm retired, and between Social Security and pensions, I get about 55 grand a year. She's still working. She makes about 65 grand a year. But when she retires, all she'll have is Social Security.

Pat: Okay. All right. I was just thinking whether rough conversions would make sense or not, but it's not going to make any difference at all. But no, that is the answer to your question. Most preferreds do qualify, and the REITs do not, yeah.

Scott: Appreciate the call, Pete. We are just about out of time, and it's always great being with you, as usual. By the way, if you find this podcast helpful, useful, entertaining, whatever, a couple of things. One, share it with a friend. Forward this on to a friend and say, "Hey, give these guys a shot. They're pretty good." And second, wherever you get the podcast, whether it's through Apple or someone else, do give us a review, if you would.

Pat: And that would be kind of you. It would help us.

Scott: It might help us. But we'd appreciate it. Anyway, we're out of time. We broadcast the same place every week. We'll see you next week. This has been Allworth's Money Matters.

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