Millionaires and Roth Conversions, Midlife Money Moves, and Private 401(k) Investments
On this week’s Money Matters, Scott and Pat tackle real-life financial questions from listeners across the country. From a 74-year-old millionaire navigating Roth conversions and legacy planning, to a military retiree wondering if he’s behind financially—this episode covers the full spectrum of money challenges. Plus, insights on private investments sneaking into 401(k)s and the financial upside of flying business class. Honest, helpful, and always practical.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain.
Scott: Super glad you are joining our program today, as we talk about financial matters.
Pat: Yes. We take calls and try to help people.
Scott: Yeah. And I gotta say, we're in the studio. I just got a text, right before we started recording. My nephew married a girl from Colombia. They actually met, they were in a program where he wanted to learn Spanish and she wanted to learn English.
Pat: Okay.
Scott: And they were matched, and they were doing all these Zoom, or whatever technology they were using, to help teach one another, and fell in love. She moved to the States, they got married, and today she just, I just got a text, she just became a U.S. citizen.
Pat: Oh. Congratulations to our Colombian friend.
Scott: I don't know [inaudible 00:01:16] I was excited. I'm super excited for my nephew [crosstalk 00:01:20]
Pat: How old are they?
Scott: Late 20s?
Pat: And they got married already?
Scott: Yeah. Married. And he's a U.S. citizen. I love that. What a great country.
Pat: It is. Anyway. Have you ever been to Colombia?
Scott: No, but I'd like to go sometime.
Pat: My oldest went a number of times.
Scott: A number of times? What do you mean a number of times?
Pat: He was living in Ecuador, so he would just go there. And he said it was beautiful, although, he did tell me, the third time he was stopped by the police officer one day, because he's a white guy with red hair... So he stands out in Colombia. He said the third time he was stopped driving his car for the shakedown of money, he just told the guy no.
Scott: Oh.
Pat: This was probably 10 years [crosstalk 00:02:08]
Scott: He was in college at the time.
Pat: He was in college. He was studying there for five or six [crosstalk 00:02:11]
Scott: It reminds me of [crosstalk 00:02:12]
Pat: He was studying in Ecuador for [crosstalk 00:02:12]
Scott: It reminds me of [crosstalk 00:02:13]
Pat: But he just, I said, "What do you mean you told him no?" He said "In Spanish, I said to the guy, 'You're number three.' I don't have any more money to give you guys, so you're gonna have to go away."
Scott: That's the kind of normal drill there.
Pat: Well, it was then. I don't know what it's like now.
Scott: [crosstalk 00:02:27]
Scott: Reminded... Years ago, I was doing some financial planning with a couple. Looking through their finance, when they could retire, and we're talking about their three children. And, oh, yeah, [inaudible 00:02:41] just my first child, he's got this great job, and they're saving in their 401(k), and the second child [inaudible 00:02:46] But our middle child...our middle child is just somewhere in Latin America. I'm like, "What do you mean?" Well, he'll take a little job for a month or two to get enough money to travel, and he'll backpack and camp out wherever. And I said, "Wow, interesting. How long has he been doing this?" It's like, three years. It's like, three years he's doing this lifestyle.
Pat: Wow.
Scott: And I remember saying, "Maybe he's got this figured out. We're all sitting here, we're working, worried about work, and worried about our finances. He's just enjoying himself down..." Just, like...
Pat: Maybe. Maybe he's the right one. Well, it depends.
Scott: Maybe not quite.
Pat: Maybe there's a... Maybe...
Scott: You know, there's part of me a little romanticized about it. Wouldn't it be nice to...
Pat: Maybe there's a [crosstalk 00:03:30]
Scott: ...be a minimalist? I'm gonna be a minimalist as soon as I get everything I want.
Pat: Easy enough.
Scott: I'm kidding on that. [crosstalk 00:03:38]
Pat: Perfect. Perfect.
Scott: I don't know why I brought that up.
Pat: Well, that was nice. U.S. citizen. You got another U.S. citizen.
Scott: Just got the text, right as we started. [crosstalk 00:03:46]
Pat: Do they live in California?
Scott: Yeah. Central Coast.
Pat: And do they, both gainfully employed?
Scott: Yeah, they work... He runs his, I think maybe a little hamburger shop that he took over from his father.
Pat: Oh.
Scott: I don't know if he owns...he might own it now. He's bought, I think he just bought a second condo.
Pat: Oh, good for him.
Scott: He's one of those that saves everything, and...
Pat: Oh, good for him.
Scott: ...works nonstop.
Pat: Good for him. Yeah.
Scott: He's got a Colombian wife who's now a U.S. citizen, so...
Pat: Very nice.
Scott: Pretty cool. Pretty cool. Anyway...
Pat: The technology.
Scott: Technology?
Pat: Yeah, this was driven by technology.
Scott: Oh, yeah. How they met each other.
Pat: Yeah, it was technology. And they weren't even trying to meet. They were trying to learn a foreign language.
Scott: And of course, originally, most of the family is like, "What? Who's this? What?" You know? Is this, like, a real thing here? You're like... Apparently is. Now she's a U.S. citizen, and she can vote. All right. Well, I sent her. [crosstalk 00:04:39] I sent her all the things I want her to vote for [crosstalk 00:04:43]
Pat: Is that right?
Scott: I'm gonna send it to her this afternoon.
Pat: Right.
Scott: Here's how I should vote this proposition that's coming up in California. Do it this way, please.
Pat: Before we move on to the bulk of the show, is there any other family members you'd like to discuss? You wanna talk about? Or maybe a pet?
Scott: My...
Pat: Do you still have that little dog?
Scott: What's the... So, the date this is...this airs on the 26th of July. We recorded it ahead of time. So, on this day, I will be in Colorado with my daughter, who's running a ultra marathon, a 100-kilometer trail run. It's supposedly one of the toughest ones in the nation. [crosstalk 00:05:17]
Pat: Are you running it?
Scott: I'm gonna help...I'm crewing for us, so I'll be there at the aid stations, and then I'm running the last 15 miles. She could have a pacer, they call us pacers, the last 15 miles, and I'll bring [crosstalk 00:05:28]
Pat: So, she's running 65 miles?
Scott: Sixty... Yeah, [inaudible 00:05:30] 65. Sixty-two is 100k, but I think this is a 65-mile race, in the mountains. And you call it running. There's so much climbing. You're hiking all the uphills, and she'd practiced in some of the, or trained in some of it, and she said there's one section, like, the steepest mountain she's climbed. It's not roped climbing, but it's so steep that you can't really even run down it. So, it's a slow course.
Pat: Sounds miserable.
Scott: But it's, I'm watching my daughter go through this.
Pat: You used to do that crap.
Scott: Yeah, correct. Yeah, I ran 100-mile or...
Pat: All in one day.
Scott: [crosstalk 00:06:01] years ago. Yeah. And under 24 hours. Western States 100 [crosstalk 00:06:05]
Pat: Because a client recommended it, didn't they?
Scott: No, no, no. I mean, I... My client encouraged me.
Pat: And then met you at the finish line, I remember [crosstalk 00:06:16]
Scott: Was there, yeah.
Pat: That's a good client.
Scott: Super good client. Great guy.
Pat: [inaudible 00:06:21] all the clients should be there to actually cheer you [crosstalk 00:06:23] you do.
Scott: So, that's my... Would you like me to continue with my children?
Pat: No, no. Let's go, to the show.
Scott: It is kinda wild, though. You know, it's funny, as you have kids as become adults, and there's certain qualities and traits that you've passed on that you like in them. And there's certain qualities and traits that you pass on that, "Dang it. I wish they didn't get that part of me."
Pat: Yes. Wait till you get to the generation-skipping qualities and traits. Like, your grandkids.
Scott: You don't have any grandkids yet.
Pat: No, but it will happen.
Scott: Yeah, you've got, your first one just got married, right?
Pat: Yeah, yeah, yeah.
Scott: [inaudible 00:07:01] you.
Pat: Yeah. Getting old.
Scott: All right, let's take some calls. To join us, you can send us a note at questions@moneymatters.com, and we'll schedule time for you to call us while we're in the studio. Again, questions@moneymatters.com, or you can call 833-99-WORTH, and we'll get you scheduled that way as well. We're talking with David in California. David, you're with Allworth's "Money Matters."
David: I'm age 74.
Pat: Okay.
David: And I'm taking RMDs.
Pat: Okay.
David: I've always wanted to have more money in my Roth accounts than my regular accounts.
Pat: Okay.
David: And I'm wondering, am I too old now to consider Roth conversions? I'm retired.
Pat: You're absolutely not too old.
Scott: And you, by the way, you will eventually have more money in your Roths, assuming you continue to live to a ripe old age, because there's no RMD.
Pat: Yeah, right. [crosstalk 00:07:58] So, let's break down, what's your income before RMDs, and what's your income after RMDs?
David: Okay. So, I wanted to have a... I've always nervous about not having enough money. I have some nice pensions now, and I have taxable stocks, to give me an income stream. So, my income is from Social Security, $71,000 a year. It's me and my wife combined, so I'll give you everything combined.
Pat: Okay.
David: And my pensions are $152,000 a year. And then, last year, my taxable stocks and bonds were $194,000. So that gives me about $417,000...
Pat: Okay.
David: ...income. And then my RMD schedule for this year will be $116,000.
Pat: Okay. And tell me about your beneficiaries.
David: Okay. My beneficiary is my wife, and then my three kids are the secondary.
Pat: Okay. Tell me about those kids. Are they in the same tax bracket as you, lower tax bracket [crosstalk 00:09:04]
David: Oh, they're lower. They're a lower tax bracket. They're all... I have eight grandkids, and we all live in Sacramento now. And they are in their... I, actually, as I say, my baby turned 40 this year, and so I can no longer be considered middle age.
Pat: Okay.
Scott: And what's the balance of your retirement accounts here? IRA and your Roth?
David: Let me see. My, the balance of... Where is it? Over here. So, I have. I have $2.9 million in my taxable IRA and 401(k). I have $1.5 million in my Roth IRA and 401(k).
Pat: Okay. And you said 401(k). Do you really have a 401(k)? Are those...?
David: Yes.
Pat: So, you have a 401(k) and an IRA?
David: Yes.
Pat: Okay. Are you still employed?
David: I was in self-employed for years, and then I joined a company, and so I have [crosstalk 00:10:13]
Scott: I think Pat's just wondering why it's not just in an IRA.
David: I, you know, it's, I thought about converting it over. I think, my, the 401(k) was, it, I think it's a little, [inaudible 00:10:28] I remember correctly, it's a little tougher to get it, for lawsuits and things, so it's a little safer in the 401(k), I thought.
Pat: That's right. That's right.
Scott: Okay.
Pat: That's right. That's right.
Scott: Okay. Just, that's your reason.
Pat: That's how OJ Simpson continued to golf in retirement.
David: Yeah.
Pat: Tell me what your brokerage account looks like.
David: The brokerage account, I have... Okay. So, I have... Oh, god, did I break it down? So, where did it go?
Pat: Just the overall account balance.
David: Okay. So, [crosstalk 00:11:02]
Scott: Because he has $194,000 of income.
Pat: That's right.
Scott: Yeah.
Pat: So, it's probably somewhere around [crosstalk 00:11:07] million dollars.
David: Yeah, so I have... Yeah, I have... Oh, shoot. Let me think. I broke it...I have it...I have... Let's see. So, I guess I could take it out. I have $6.3 million in mutual funds, and $1.5 million in stocks, but that's counting the retirement together. I mixed it together, and [crosstalk 00:11:27]
Scott: And you say mutual funds. Are these funds you've had for a long time, that have a lot of gains built up in them?
David: Yeah, yeah. Yeah. A long time.
Pat: Okay, so you've got about...
David: I don't sell any [crosstalk 00:11:36]
Pat: You've got about $4 million dollars in your brokerage.
Scott: Are you having the dividends reinvested, or are you not?
David: The, for the retirement accounts, all the dividends are reinvested. And now, for the taxable accounts, they're all going to cash.
Scott: All right. Perfect. That's what I would recommend as well. And does your wife take an active role in managing these dollars? It sounds like you manage [crosstalk 00:11:58]
David: No, she does not. She does not.
Pat: Okay. This is so ripe for financial planning. Oh, my gosh. This is, like, this is... Have you gifted to your children at all?
David: I've done gifts, as, I mean, you know, down payments for houses.
Pat: But not on a regular basis?
David: Helped...
Pat: Are you doing the annual, on a regular basis?
David: No, no, no, no, no. I do it as needed, so, [crosstalk 00:12:25]
Pat: And you [crosstalk 00:12:26] You haven't used up any part of your unified credit, I assume?
David: No, no, I've not exceeded the amount per year, so no.
Pat: Okay.
Scott: Yeah, I mean, it's...
Pat: Oh, my.
Scott: The biggest issue is you could accumulate a lot of assets that you're not gonna spend. [crosstalk 00:12:41] And so, like, determining what does David and wife need for lifestyle for them for the rest of life, and making sure there's money for, you have long-term care needs and all that other stuff. And then, what's the most effective way to pass along the excess amount?
Pat: So, but your answer to your question that you called about, which is, "Can I do Roth conversions?" The answer is yes, you can do...
Scott: I would not, if I were [crosstalk 00:13:07]
Pat: ...but I would not. You can, but...
David: Yeah, that's what I'm thinking. I'm thinking it just not, it's not gonna be. Because I, my stocks and bonds over the years did so much better than I anticipated. And my income was much higher than I had anticipated it would be when I retire, which is [crosstalk 00:13:24] a tough thing to be.
Scott: And it's higher... The biggest issue, it's high... Well, you're in a [inaudible 00:13:27] well, didn't happen by accident, David.
David: Yeah.
Scott: I'm sure you had some colleagues that also had good incomes, that did not save like you saved, so...
David: Yeah, I had a friend that, when the 2008 crash, got totally out of the market...
Pat: Yes?
David: ...and he's not that rich now.
Scott: No? [crosstalk 00:13:48]
Pat: Yes, yes.
Scott: But here's what you need to think about with... It's not your tax rate so much as what's your kids' tax rate. And if they all had incomes of much greater than... I mean, not that many households have incomes of $417,000, right? So, it would be shocking if any of your kids had that, let alone all three, right?
David: No. They're not.
Scott: Yeah. So, they're gonna be in a lower tax bracket. So your option is, take money now, pay tax at a high tax rate, and a very high tax rate in California, as well. Or, keep as much in tax-deferred as possible, pass it to the kids, let them be taxed at their tax rate. And then, let me take one step further. If you want some portion of this, of your estate to go to charity, you can designate...the best thing to designate would be your taxable IRAs and 401(k)s, and have the rest go to the family.
Pat: Yeah. So, if you're giving money to charity now...
Scott: That can come from your RMD as well.
Pat: They can come from your RMDs.
David: Ah.
Pat: Right?
David: Yes, I didn't think about that.
Pat: Oh. I'm just telling you. You look at this, you're 74. Your net worth is over $10 million. You're funny. It's, you're planning like you're, like it's 1973.
David: Yeah.
Pat: You look at this thing. I could sit down... Am I getting a little bit [crosstalk 00:15:14] talk? I could sit down in less than 10 minutes... It's...
Scott: I know why David has not worked with... Because he's done a good, you've done a great job on it. You understand this stuff extremely well. You've done a good job. Two things to consider. One is Pat's... there's a lot of planning things that you look at here.
Pat: You should be gifting some of this money from your brokerage account to these kids today.
Scott: Well, I don't know about..."should's" a strong [inaudible 00:15:36]
Pat: "Should."
David: Well, yeah. I've thought about that, but, you know, I'm a few years into retirement. I'm just nervous about what I'm gonna need, cost of health care.
Scott: Yeah, I get that. That's why, I think, determine [crosstalk 00:15:49]
David: And, you know, if I give it to the kids, they will probably spend it, and it will not, you know...and then if I need help, they're going, "Well, sorry, Dad. We spent all that money you gave us." [crosstalk 00:15:58]
Pat: That's a lack of confidence in visibility to the future which is causing that behavior.
Scott: That's right. Which is understandable. But I [inaudible 00:16:06] it's getting to a point where you've got a extremely high degree of confidence that you'd be fine, and figuring out what that dollar amount is, would be super helpful. But also, having something in the wings, so that should something happen to you eventually, and it will, it happens to all of us, like, who's gonna help navigate your wife through this process?
Pat: Yeah. If you were no longer here next week, who's gonna step in and do this for your wife?
David: Yeah, I have one of my kids, but I think they will probably get a financial planner to do it, because they're not into it as... This is my hobby.
Pat: You're ready for it, though. [crosstalk 00:16:42] David, you're ready for financial [crosstalk 00:16:43] And by the way, you know why you have so much money is because you worry about it so much. You show me someone that doesn't worry about money, I'll show you someone that doesn't have any.
Scott: It's an interesting dichotomy.
Pat: Right? And you're never, that's never gonna leave you. That will never leave you. But what you can do is get more clarity about what your future, so that you can start implementing financial planning tools that move as much money downstream...
Scott: To wherever you want it to go. The excess. We're talking about the money you're not gonna spend in your lifetime...
Pat: Which is going to be a lot.
Scott: That's right.
Pat: How much are you living on a year?
David: Well, actually, $200k, probably, or [crosstalk 00:17:33] before taxes.
Scott: Yeah. That's why you have [crosstalk 00:17:34]
David: We're doing a lot of traveling.
Pat: Are you are you traveling business class?
David: Yes.
Pat: Thank you.
Scott: I remember years ago, a client told me he started flying business class, and I said, "Really?" Like, he says, "Yeah. Well, it's either I will or my kids will."
David: Yeah, I had a friend's dad, his goal was to make enough money to never have to fly coach. And I flew coach for many years with my kids, and now I go, "No, no. If I'm flying somewhere, it's business class."
Pat: Good for you.
David: I took the family to Kauai for our anniversary present.
Pat: Beautiful.
David: Took the whole family.
Scott: Great.
Pat: Beautiful.
Scott: Great investment.
David: And they flew coach, and my wife and I flew up in the front of the plane.
Scott: Even better.
Pat: Yeah, I've done it so many times. I have done it multiple times.
Scott: No, that's...
Pat: But you [inaudible 00:18:22] great. So, the answer is [crosstalk 00:18:24]
Scott: I would not do the Roth conversion.
Pat: ...don't do the Roth.
Scott: You're in too high of a tax bracket. [crosstalk 00:18:27]
Pat: But take an hour and sit down with an advisor, at least. And bring the child that's gonna take over...
Scott: Or the wife.
Pat: Or the wife, that is gonna take over the assets, so that you get comfortable. But you're missing a couple key things, which are easy, inexpensive, and will only push more money downstream.
Scott: Yeah. But you've done a nice job in saving and investing, obviously, so, appreciate the call, David.
Right now, we're in Illinois, talking with Max. Max, you're with Allworth's "Money Matters."
Max: Hey, guys. How you doing today?
Scott: Good. How are you doing?
Max: Doing good. Woke up this morning, so...
Scott: There we go.
Pat: Right side of the grass. Nice.
Max: Yeah.
Scott: The best day of your life, right here. Okay.
Max: Oh, yeah. Oh, yeah.
Pat: So, what can we do to help?
Max: Well, so, I'm in a bit of a financial predicament, and I'm trying to figure out the best path forward. Trying to maximize income, trying to get my debts paid down, trying to get a house. My daughter's got autism. We're trying to get her a service dog. So we just got a lot of things going on, and I've been trying to develop a strategy that'll work.
Pat: Okay. How old are you?
Max: I am 32.
Pat: And are you married?
Max: Yes. I am married. We have three kids. Our twins are four. Our daughter is two, and then we got a little guy on the way.
Scott: Wow. Good for you.
Max: Thank you.
Pat: And which child has...how old is the child that has autism?
Scott: Two.
Max: That would be my four. It would be my daughter, one of the twins.
Scott: Oh, sorry.
Pat: All right. And how much do you earn?
Max: It really depends. I work construction, and it's seasonal. And then, you know, tariffs and stuff came in, and stuff slowed down. So it really fluctuates between $65,000 and, I'd say between $65,000 and $90,000.
Pat: And does your spouse work outside of the home?
Max: No. No, she takes care of the kids and the house.
Pat: All right. So, what...do you have a specific question for us?
Max: Yeah, I guess, so, I currently owe about $28,000 in legal debt, getting full custody of my kids. And the lawyers are coming after me really hard to pay that off immediately. And my credit score is not good. I had a business that failed, and I financed that all on my own, so there's, like, another $30,000 still have to pay off on that. And so I'm just trying to figure out what would be a good means to try to consolidate... You know, should I just throw my hands up into bankruptcy? You know, I'm just not too sure what [inaudible 00:21:26]
Pat: So, you said that the legal debt was for custody of the children from a previous relationship, I assume.
Max: Yeah, my twins.
Pat: Okay. And do you own any assets?
Max: I had four cars. Two of them just burnt down in a fire, about a month ago, so now we got two cars.
Scott: And were they insured? Did you get a payout?
Max: No. [crosstalk 00:21:51]
Pat: How much money do you have in the bank?
Max: In the bank, like, $5,000 right now. I had to buy another car, so...
Pat: I'd visit with a free legal service.
Max: Okay.
Scott: What's a free legal service?
Pat: I would find a free legal service in your community that specializes in debt resolution or bankruptcy, and I'd start there.
Max: Yeah. Okay.
Pat: That's where I'd start.
Scott: Yeah, because, I mean...
Pat: This is a hole...
Scott: If your income...
Pat: This is...
Scott: You're gonna have a hard time.
Pat: This is a hole that's really, really deep. If you didn't have the children...
Scott: Or the debt...
Pat: Or the... Well, okay, [crosstalk 00:22:29] We had bacon and eggs if we had bacon and had some eggs, right?
Max: Yeah.
Pat: Yeah, I would start...I would go to a free legal... I would see if I could find a free legal... And how big is the community you live in?
Max: Pretty large. I'm in Gurnee, Illinois, so, I don't know what the population is, but, I mean, it's Chicagoland area, so, pretty bit [crosstalk 00:22:55]
Pat: Okay. Yeah, yeah.
Scott: Yeah, yeah.
Pat: So, I would look to free legal resources, and then actually give them a call, and walk through... And then, the autistic child, degree of autism?
Max: [inaudible 00:23:10] level 2 autism, and then diagnosed...it's called GDD, which is just what they call learning disabled before the age of 5.
Pat: And are you getting any state or federal subsidies for your child?
Max: No.
Scott: Or help at all?
Max: Somebody did tell us to apply for social security, because I've got another probably $15,000 worth of medical debt, because pretty much nobody covers developmental care.
Scott: Okay.
Max: And so, we're starting that process.
Pat: Is there any other medical debt, or any other debt that you didn't mention?
Max: No,
Pat: So, you got the legal debt, the business debt, the medical debt.
Max: Yep [crosstalk 00:23:47]
Pat: So, you're 45. You're at $83,000 in debt.
Max: Yeah.
Pat: Yeah. I would go to a free legal. That's where I'd start.
Max: Okay.
Scott: And look into the... You know, every state's different, but I'd look into see what sort of services could be available for your daughter.
Pat: For, in terms of getting paid for care.
Scott: And my guess is Illinois has some pretty generous benefits. We're in California, which has some pretty generous benefits.
Max: Yeah.
Pat: Yeah. And that's where the, you know, there's resources in your community, at your level of income, your level of income with the number of children, that would qualify you for probably many services.
Scott: Yeah.
Pat: And your job is actually to find those.
Max: Yeah. Okay.
Pat: All righty?
Max: All right. Yeah. That's cool.
Pat: Okay. I appreciate the call.
Scott: Yeah. Wish you well, Max.
Max: Thanks, guys. Appreciate it. God bless.
Scott: All right. Yeah, you too. That's a challenging situation he's in there. And [inaudible 00:24:52]
Pat: We, you know, Scott, we had it, when I was board chair of the Sacramento Food Bank, we had this... It was called the nonprofit something, where... We actually had people from 15 or 20 nonprofits, we had a lunch once a month, where we'd have three of them just stand up during the lunch and actually tell what they did, their nonprofits, and the services they offered, in order to create a referral network among the nonprofits.
Scott: I mean, it...
Pat: Because the services were out there. People just didn't know where to go to get them. And so, introducing the other nonprofits to these different services over a multiyear period, and creating these relationships between these people, better served the community.
Scott: You know, what's really interesting, Pat. It is so complicated to navigate some of these services... Then the population that they're trying to serve...
Pat: Yes.
Scott: Like, so, my wife and I adopted two girls from the foster system. Right? So, once a year, I get a form from the State of California...or is it the county? Maybe both. With, asking me... I could barely understand.
Pat: You can't.
Scott: I can barely understand. College-educated, business 30-some years... I have trouble with the forms. And I'm thinking, how in the world does the typical foster family...? [inaudible 00:26:28] I don't even understand some of the stuff that [crosstalk 00:26:31] they're asking. The way the stuff's written, and, like... And I think, you take somebody who...
Pat: It wasn't written for...it wasn't written with the consumer in mind.
Scott: Of the particular population, particularly.
Pat: That's right. They're a consumer.
Scott: Yeah.
Pat: The people that are [crosstalk 00:26:49]
Scott: So it's...
Pat: Yeah.
Scott: Interesting.
Pat: It's a rough... Yeah.
Scott: Interesting predicament.
Pat: But there are many, many services in many communities, even for middle-class and higher net worth, that are either free or discounted when it comes to disabled children.
Scott: That's correct. That is correct. I have a family member with a significant, significant disability. And I'm kind of amazed at the level of support...
Pat: That they receive from the community?
Scott: Yeah. I mean, there's another sibling that was paid to watch the sibling.
Pat: Yeah. Yeah.
Scott: So, there's the... Yeah. If you, in that situation, it probably takes quite a bit of work and research, but if... And I think what you said to Max here is, like, "Your job is to figure out these, go find these things."
Pat: Yeah. Yeah. And unfortunately, bankruptcy is probably going to be the best alternative for him. So...
Scott: Yeah.
Pat: It is what it is.
Scott: Hey, before we go to calls, we [inaudible 00:27:52] We got a couple more calls coming. There's been quite a bit in press lately about private investments coming into your 401(k). So, the 401(k) allowing for things outside of publicly-traded securities or interest-bearing accounts, which is what you have today, right? In 401(k)s. You can invest in...
Pat: So, what would be a private security, Scott?
Scott: Well, for example, a private credit fund.
Pat: Okay.
Scott: Okay. And what this really means is, [inaudible 00:28:29] I was having this discussion the other day with a friend of mine, talking about how the private markets have filled this void that the bank could have filled.
Pat: You know, Scott, you bring up that you talk a lot with your friends about this stuff. Is it the one friend that listens to you constantly, or do you have multiple friends?
Scott: It's not really a friend. It's a random friend.
Pat: Is it? Are you bragging?
Scott: [inaudible 00:28:51] I pretend like I'm talking to a friend. No.
Pat: Is it a chatbot?
Scott: I was having a conversation with, on a bike ride with a friend in the last week or so about these private markets.
Pat: Okay.
Scott: So, we all know how banks work, right? You need to get a loan, you've got a business or whatever, you go to bank, they look at your...and they loan you the money. Today, there are a lot of, let's say, medium-sized businesses that are borrowing money not from the banks, but through these third-party companies that are structured to provide this financing. So, for example, some of... KKR has entered the space. BlackRock has entered the space. And the way these things work, there are private companies that will go out and raise capital from insurance companies, endowments, foundations...
Pat: Pension plans.
Scott: ...wealthy families. So, they raise...
Pat: Sovereign wealth funds.
Scott: Sovereign wealth funds. So, they'll raise X amount of dollars through this, and then people have an opportunity... They'll create these loans.
Pat: Some big pools.
Scott: Big pools. They'll create these loans to XYZ business, that is, maybe couldn't get traditional financing from the bank.
Pat: And many of those businesses are backed by what they call either venture capital or private equity.
Scott: That's correct. So, it's a means to provide the financing. And the interest rates are typically fairly high, because these companies, they're not publicly traded. They're not Microsoft or Apple, that have great credit ratings. They're private companies themselves. So the interest rates are [inaudible 00:30:37] What we're starting to see now, though, is a push for these investment opportunities to more individual investors, in 401(k) plans, even.
Pat: So, not just accredited investors, which is, you can become accredited investor if your income is over a certain level, your net worth is over a certain level, or if you're a professional investor. You can become an accredited investor, and you have access to these, with the assumption being because you're an accredited investor, you understand the risk and the rewards of that particular investment.
Scott: Yeah.
Pat: But they're trying to widen the funnel of who can invest in these.
Scott: Yeah. And so, you're gonna start seeing, in 401(k) plans, in the not-too-distant future, these opportunities to invest in private credit or private equity.
Pat: And they oftentimes will go, be labeled "alternatives." And the alternative is, the word "alternative" means alternative to the public markets.
Scott: That's right. Typically, yes.
Pat: Right.
Scott: This is an area that you need to be very careful in tipping your toe into.
Pat: Scott, I believe that the reason these alternatives, the private credit, the private equity, have become so large is because of the regulatory environment on the public companies.
Scott: And the banking institutions.
Pat: That's right.
Scott: Yeah. So, the regulatory... All the regulation that came down after the financial crisis hamstrung the banks in a lot of different ways.
Pat: That's where the private credit came in to fill that void.
Scott: That's exactly right. I don't even know how small the private credit market was before, but I think it was pretty nascent. And now it's quite mammoth. And there are places for it in people's portfolios, for private equity, private credit, other kinds of funds. There are places. But once you start seeing your 401(k), I'd be kinda careful about it. Just tip-toe into them.
Pat: Correct. Especially these marketplaces that are relatively new. Because a lot of this private credit doesn't have huge histories behind it.
Scott: That's right. We haven't gone through a financial crisis.
Pat: That's right.
Scott: Or a really prolonged downturn.
Pat: So, don't get enamored by the yield, because the yield...
Scott: The yields are gonna look great.
Pat: They're gonna look good. Right? But remember, typically, the higher the yield...
Scott: The greater the risk.
Pat: That's how they, why they have to pay at a higher yield.
Scott: A company wants to go borrow some money, the bank says, "Well, sorry. We can't loan it to you, because, you know, you don't have any real assets to back it. So they go to the private markets, like, "Yeah, we could loan you the money, but it's gonna cost you 12% a year, because..."
Pat: Yeah. And then the private credit company takes a slice of that, and then puts out the yield to you.
Scott: That's right. The company themselves will take a slice, and then they'll charge a fee...
Pat: Yes.
Scott: ...to syndicate all this, put it all together.
Pat: And then... And the idea behind distributing it inside 401(k)s is actually to create a greater funnel. But I believe [crosstalk 00:34:02]
Scott: And there's some regulatory people say, well, this is more democratization, giving people the access to these private markets. I'm like, "How about just loosen the regulations on the public side?" [inaudible 00:34:13] wouldn't it [crosstalk 00:34:13]
Pat: And enforce the ones that were in place. Because the problem with the financial crisis wasn't the lack of regulation, it was the lack of enforcement of the regulation.
Scott: And the government backing of all these loans.
Pat: Loans. Well [inaudible 00:34:28] because they weren't underwriting [inaudible 00:34:29] which is, they weren't underwriting the loans. The government had given up underwriting the loans, which is...
Scott: That's correct. That's correct. It didn't even matter. [crosstalk 00:34:36]
Pat: They didn't even follow their own guidelines. So, but, the pendulum will swing. The pendulum will swing. As they loosen the regulation in the public markets, the public markets will become more vibrant, and then the private markets will shrink.
Scott: Yeah.
Pat: It's just how it's gonna work. I mean, this is the nature of the world.
Scott: That's right. That's not where we are today.
Pat: It's not where we're at today. But this administration has every intention of loosening up on these, the regulatory environment, in many places, way too much. Way, way too much.
Scott: Well, I'm a huge believer in free markets. I actually, the older I get, the more I just think it's a beautiful structure, because it allocates capital to the right places, assuming we all play by the rules...
Pat: Which is...
Scott: ...and we know what the rules are. And if I sit down with my family to play a game of Monopoly, we know what...what are the rules behind the game? There are certain rules. And as long as we all play the rules, that's fine. Someone ends up taking Park Place and Boardwalk... I haven't played Monopoly in a decade or so. But I think most of us have played Monopoly. It's by the rules. It's the same thing with the, in the marketplace. Free markets work great, as long as we all follow the rules...
Pat: Follow the rules.
Scott: ...and follow the rules. Know the rules and follow the rules. And to your point, enforce the rules, and not ignore the rules for several years.
Pat: And why did you use that, Monopoly? That brings back [crosstalk 00:36:06] just so many bad memories.
Scott: You'd hide the $500 bill underneath, you know, so that people think you're broke when you actually have the cash.
Pat: There was never a game that didn't end up in a fistfight with my brothers.
Scott: [inaudible 00:36:19] fist fight.
Pat: No, a fist fight.
Scott: A fist fight?
Pat: Because it came to the rules, and then all of a sudden...
Scott: Someone was trying to cheat.
Pat: Someone's trying to cheat...
Scott: Or you think is cheating.
Pat: ...and then next thing you know, someone's throwing, and then the couple and the neighborhood kids, and...
Scott: Let's talk now with Eric. Eric, you're with Allworth's "Money Matters."
Eric: Hi, Pat and Scott. Thanks for taking my call.
Scott: Yes, sir.
Eric: Got a question on additional mortgage payment. And then also, once I give you all the numbers, just general thoughts on kind of my wife's and I's overall situation.
Scott: All right.
Eric: So, not really your typical client. Don't have a lot of money. I think we started really late in life. Other than a good military pension, I think we're behind, but we're making good choices now.
Pat: Wait. Slow down, Eric. You weren't able to save a lot of money while you were in the military? Am I hearing this right? You weren't making those fat stacks?
Eric: Yeah, a little hard to do, but...
Pat No, I...
Scott: Thank you for your service.
Pat: Thank you. Thank you. Thank you. We get it. We get it.
Eric: Thanks a lot, guys. Yeah, sometimes it's hard to find some extra ends there.
Pat: No kidding.
Eric: But yeah, we overcame some bad decisions. We mostly agree about the future and how to budget our money currently. Like I said, I think I know your answer, because I've heard you talk many times about additional mortgage payments to other listeners, other callers, but still just wanted your thoughts.
Scott: How old are you?
Eric: Wife and I are both 46. Oh, and here you go. I'm gonna try and impress you. I think I got all the numbers ready for you guys.
Pat: Okay, perfect.
Scott: What's the house worth?
Eric: All right. Wife and I are 46. We have one adult kid out of the house.
Scott: Wow. Good for you.
Eric: House is worth $770,000. We have a 30-year fixed mortgage. Current remaining balance is $607,000. Mortgage payment is $3300 a month.
Scott: What's the interest rate?
Eric: 2.125% interest rate.
Pat: 2.25%?
Eric: 2.125%.
Scott: Is that a 15-year mortgage?
Eric: A 30-year. VA.
Pat: Wow. Okay, Okay. Wow.
Eric: [crosstalk 00:38:18]
Scott: I was gonna say, that was the lowest 30-year mortgage I've ever heard.
Pat: That's incredible. All right. We know the answer.
Scott: Do not pay extra payments.
Pat: Don't pay a penny more on this thing. In fact, call them up and see if they'll extend it to 60-year mortgage. Unbelievable.
Eric: Okay, that's exactly what I thought you were gonna say, just because of the cost of money, and, you know, I really am only making, over the course of these additional payments, one additional payment every year. And my wife and I [crosstalk 00:38:46]
Scott: I wouldn't make any additional payments. It's two and a quarter percent. Two and an eighth.
Pat: Yeah. Unbelievable.
Scott: I mean, if you could borrow more money, I'd say borrow more money at two and an eighth.
Pat: Yeah.
Scott: If I could borrow money at two and an eighth, I'd do it all day long.
Pat: If I could borrow money at two and an eighth, I'd retire.
Scott: Borrow a billion at two and a eighth.
Pat: I'd borrow a billion at two and an eighth, and I'd lend it... Almost like banks do. It's weird.
Scott: I mean, but, if, let's say you wanna retire at 65, or whatever the number is, and you might calculate what the balance will be at that time and say, hey, maybe we have a side fund that we set up, which this is a... You still wouldn't wanna pay off the mortgage then.
Pat: Yeah. Yeah.
Scott: But at least something to... So, you've got the cash equivalent, so you can...
Pat: match maturities.
Scott: Yes.
Pat: Okay. So, what's the next...? Give us the rest of the financial situation. We'll give you a little tune-up there.
Eric: I appreciate it, because that's what we're trying to do, is be diverse and efficient, so that we can really make headway smartly. So, salary is $187,000. My military retirement, $4800 a month, and our health insurance comes out of that. I get additional VA disability of $2100 a month. Both of those have cost-of-living adjustments annually.
Scott: Eric, if you...you talk about how you're behind in the game. If you calculated the net present value of that $7,000-dollar, roughly $7,000-dollar-a-month pension, and...
Pat: And part of it tax-free. It's worth millions.
Scott: Massive.
Pat: It's worth millions.
Eric: Yeah. I got $1.6 million over the next 20 years.
Pat: Oh, that's... Got it, got it. You did the math. You did the math. Okay. So you get it. So, when you say you're behind, you're not necessarily behind.
Eric: Well, if it wasn't for the retirement, I'd be freaking out right now, but [crosstalk 00:40:43]
Pat: But if I didn't... [crosstalk 00:40:44] but if I had eggs, I'd have bacon and eggs if I had bacon. It is. It is. It is there. So, okay, so, $84,000 in benefits, veterans benefit, a portion of which is tax-free.
Eric: [inaudible 00:41:00] 401(k) $65k. Have a separate IRA with $18,500. I maxed it out last year, and I'll max it out this year. Separate brokerage account, $28,000, high-interest savings account, money market account, I got $26,000 at 4.25%. I've got two life insurance policies. I'm only the sole income in the house. So, one through work, and another one through insurance company, totaling $3.4 million. I've got two car payments. One of them will be paid off in January, or I might just pay that off early. It just depends. That'll clear up some additional money to put towards retirement savings. And anything outside of [inaudible 00:41:46] that in the budget, I'm putting in about $1900 into emergency savings account.
Pat: And what's the outstanding balance on the car?
Eric: The one car is only about $1300. The other one still has four years, so it's about, like, $40,000, $45,000 [crosstalk 00:42:05]
Scott: Have you been in this ballpark salary area for the last few years?
Eric: Yes. I retired three years ago. And since then, it's, I started at a little bit less, but the last few years [crosstalk 00:42:16]
Scott: Okay. And what were you making before you retired?
Eric: More like $90,000 total, which are military wages.
Scott: Okay, Okay. So, some of this, you're just catching up on some things, right?
Eric: Yeah.
Scott: Yeah, because you [crosstalk 00:42:29]
Eric: [crosstalk 00:42:29] a lot of debt, lot of consumer debt out of the way [crosstalk 00:42:32]
Pat: Okay. Okay.
Scott: You're perfect. Yeah.
Pat: Good for you. You're perfect.
Scott: [crosstalk 00:42:37] So here's what... You're not spending all the money that's coming in now. You have been catching up on some stuff.
Eric: Yeah, my wife likes to spend all the money got coming in, but I gotta make sure to reel that in.
Pat: So, what is the interest rate on the car?
Eric: The one that's left over, I think, is 2.9%, the one I have four years left on. [inaudible 00:42:56] I'm not worried about the one that only has $1300 left [crosstalk 00:42:58]
Scott: Okay. All right.
Eric: That's over in January.
Scott: I would, if I were in your situation, I'd contribute the absolute maximum to the 401(k)...
Pat: And then you would...?
Scott: Pay off the cars.
Pat: But it's 2.9%. It's fixed. So what's the point? He's earning higher than that. And then you would what, Scott? You'd convert that IRA to a Roth. And then you'd make a contribution to the IRA every year, and you can [crosstalk 00:43:20]
Scott: A non-deductible... Convert your... Well, he's got the $18,000 in...
Pat: I know, but he just put those in in the last couple years.
Scott: Oh, you're right.
Pat: So, what you wanna do is...
Eric: [inaudible 00:43:31] that, because I'll probably be in a lower income bracket when I actually retire, retire.
Pat: No, no.
Scott: I don't think so.
Pat: I would...
Eric: [crosstalk 00:43:40] talk to the advisor about when we see one, for sure. I'm writing it down.
Pat: Okay. So, what you wanna do is you wanna convert that existing IRA, for both you and your spouse, into a Roth IRA. And then you wanna actually make that contribution every year, and convert it the very next day. So, you wanna do that so that you can push as much away into savings as you can.
Scott: I mean, you are in such a different financial situation than you've been most of your life, right? You were married relatively young. You had a child. You've raised a child. Child's grown.
Pat: The child's a self-feeder now.
Scott: Yeah. So, I mean, your wife wants to spend... Like, you can afford to spend some now, right? Like, you can afford to, let's do that, whatever you wanna spend the money on. But as long as we're making sure that... Because you're gonna get used to this lifestyle.
Eric: That's what I'm afraid of.
Scott: Yeah. Well...
Eric: I'd rather save it than spend it.
Scott: It'd probably be helpful to do some real planning, and saying, if we wanna retire at 60 or 65 or whatever the number is...
Pat: This is what we need to do.
Scott: Yeah. And that'll say, all right, in addition to the maximizing the 401(k), do we need to save much more? How much more? But given the fact that it's...
Pat: Your new job, will it have a pension when you retire?
Scott: No.
Eric: No, I've got the 401(k) and that's it. No other pensions through the new employer.
Pat: Okay, yeah. So, you wanna maximize the 401(k), and then you wanna make the IRA contributions, non-deductible, and convert them. Go ahead and convert that IRAs, both you and your spouse, immediately, into a Roth. And you wanna be as aggressive as you possibly can.
Scott: And you probably wanna be saving some more.
Pat: And you probably...
Scott: Otherwise... That's, I think doing, really running some numbers, to get it...
Pat: He knows exactly... He's, this guy's super disciplined. He's beating himself up because he was living...
Scott: Yeah, don't beat yourself up. You're in a great position [crosstalk 00:45:27]
Pat: ...he was living a little bit above your means while you were making this salary, but you're not living above your means now. [crosstalk 00:45:32]
Scott: Maximize your 401(k), build up that emergency reserve, call us in a year.
Eric: Yeah, awesome.
Pat: All right?
Scott: You're great [crosstalk 00:45:39] I wouldn't worry about a thing. And you've got tons of life insurance. If something happened to you, you're taking more than good care.
Pat: Yeah. Good job. And make the IRA contributions, convert it to a Roth, and call us in a year, 18 months.
Eric: All right. Sounds good, guys. Appreciate the call.
Scott: [crosstalk 00:45:51]
Pat: Appreciate the call.
Scott: Well, it's been great being with everybody this week, as usual. And again, if you wanna be a caller on our program, send us an email, questions@moneymatters.com. We'll schedule a time for you to talk. And also, please follow our show. So, just hit the follow button if you listen, if you get this on Apple or Spotify, or wherever [crosstalk 00:46:16] you get your... Just hit the follow button, if you wouldn't mind. It will certainly make sure that you get the show.
Pat: Yes. And we would appreciate that. And even, you know, share it with a friend.
Scott: Yeah. We'll see you next week. This has been Scott Hanson, Pat McClain, of Allworth's "Money Matters."
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain.
Scott: Super glad you are joining our program today, as we talk about financial matters.
Pat: Yes. We take calls and try to help people.
Scott: Yeah. And I gotta say, we're in the studio. I just got a text, right before we started recording. My nephew married a girl from Colombia. They actually met, they were in a program where he wanted to learn Spanish and she wanted to learn English.
Pat: Okay.
Scott: And they were matched, and they were doing all these Zoom, or whatever technology they were using, to help teach one another, and fell in love. She moved to the States, they got married, and today she just, I just got a text, she just became a U.S. citizen.
Pat: Oh. Congratulations to our Colombian friend.
Scott: I don't know [inaudible 00:01:16] I was excited. I'm super excited for my nephew [crosstalk 00:01:20]
Pat: How old are they?
Scott: Late 20s?
Pat: And they got married already?
Scott: Yeah. Married. And he's a U.S. citizen. I love that. What a great country.
Pat: It is. Anyway. Have you ever been to Colombia?
Scott: No, but I'd like to go sometime.
Pat: My oldest went a number of times.
Scott: A number of times? What do you mean a number of times?
Pat: He was living in Ecuador, so he would just go there. And he said it was beautiful, although, he did tell me, the third time he was stopped by the police officer one day, because he's a white guy with red hair... So he stands out in Colombia. He said the third time he was stopped driving his car for the shakedown of money, he just told the guy no.
Scott: Oh.
Pat: This was probably 10 years [crosstalk 00:02:08]
Scott: He was in college at the time.
Pat: He was in college. He was studying there for five or six [crosstalk 00:02:11]
Scott: It reminds me of [crosstalk 00:02:12]
Pat: He was studying in Ecuador for [crosstalk 00:02:12]
Scott: It reminds me of [crosstalk 00:02:13]
Pat: But he just, I said, "What do you mean you told him no?" He said "In Spanish, I said to the guy, 'You're number three.' I don't have any more money to give you guys, so you're gonna have to go away."
Scott: That's the kind of normal drill there.
Pat: Well, it was then. I don't know what it's like now.
Scott: [crosstalk 00:02:27]
Scott: Reminded... Years ago, I was doing some financial planning with a couple. Looking through their finance, when they could retire, and we're talking about their three children. And, oh, yeah, [inaudible 00:02:41] just my first child, he's got this great job, and they're saving in their 401(k), and the second child [inaudible 00:02:46] But our middle child...our middle child is just somewhere in Latin America. I'm like, "What do you mean?" Well, he'll take a little job for a month or two to get enough money to travel, and he'll backpack and camp out wherever. And I said, "Wow, interesting. How long has he been doing this?" It's like, three years. It's like, three years he's doing this lifestyle.
Pat: Wow.
Scott: And I remember saying, "Maybe he's got this figured out. We're all sitting here, we're working, worried about work, and worried about our finances. He's just enjoying himself down..." Just, like...
Pat: Maybe. Maybe he's the right one. Well, it depends.
Scott: Maybe not quite.
Pat: Maybe there's a... Maybe...
Scott: You know, there's part of me a little romanticized about it. Wouldn't it be nice to...
Pat: Maybe there's a [crosstalk 00:03:30]
Scott: ...be a minimalist? I'm gonna be a minimalist as soon as I get everything I want.
Pat: Easy enough.
Scott: I'm kidding on that. [crosstalk 00:03:38]
Pat: Perfect. Perfect.
Scott: I don't know why I brought that up.
Pat: Well, that was nice. U.S. citizen. You got another U.S. citizen.
Scott: Just got the text, right as we started. [crosstalk 00:03:46]
Pat: Do they live in California?
Scott: Yeah. Central Coast.
Pat: And do they, both gainfully employed?
Scott: Yeah, they work... He runs his, I think maybe a little hamburger shop that he took over from his father.
Pat: Oh.
Scott: I don't know if he owns...he might own it now. He's bought, I think he just bought a second condo.
Pat: Oh, good for him.
Scott: He's one of those that saves everything, and...
Pat: Oh, good for him.
Scott: ...works nonstop.
Pat: Good for him. Yeah.
Scott: He's got a Colombian wife who's now a U.S. citizen, so...
Pat: Very nice.
Scott: Pretty cool. Pretty cool. Anyway...
Pat: The technology.
Scott: Technology?
Pat: Yeah, this was driven by technology.
Scott: Oh, yeah. How they met each other.
Pat: Yeah, it was technology. And they weren't even trying to meet. They were trying to learn a foreign language.
Scott: And of course, originally, most of the family is like, "What? Who's this? What?" You know? Is this, like, a real thing here? You're like... Apparently is. Now she's a U.S. citizen, and she can vote. All right. Well, I sent her. [crosstalk 00:04:39] I sent her all the things I want her to vote for [crosstalk 00:04:43]
Pat: Is that right?
Scott: I'm gonna send it to her this afternoon.
Pat: Right.
Scott: Here's how I should vote this proposition that's coming up in California. Do it this way, please.
Pat: Before we move on to the bulk of the show, is there any other family members you'd like to discuss? You wanna talk about? Or maybe a pet?
Scott: My...
Pat: Do you still have that little dog?
Scott: What's the... So, the date this is...this airs on the 26th of July. We recorded it ahead of time. So, on this day, I will be in Colorado with my daughter, who's running a ultra marathon, a 100-kilometer trail run. It's supposedly one of the toughest ones in the nation. [crosstalk 00:05:17]
Pat: Are you running it?
Scott: I'm gonna help...I'm crewing for us, so I'll be there at the aid stations, and then I'm running the last 15 miles. She could have a pacer, they call us pacers, the last 15 miles, and I'll bring [crosstalk 00:05:28]
Pat: So, she's running 65 miles?
Scott: Sixty... Yeah, [inaudible 00:05:30] 65. Sixty-two is 100k, but I think this is a 65-mile race, in the mountains. And you call it running. There's so much climbing. You're hiking all the uphills, and she'd practiced in some of the, or trained in some of it, and she said there's one section, like, the steepest mountain she's climbed. It's not roped climbing, but it's so steep that you can't really even run down it. So, it's a slow course.
Pat: Sounds miserable.
Scott: But it's, I'm watching my daughter go through this.
Pat: You used to do that crap.
Scott: Yeah, correct. Yeah, I ran 100-mile or...
Pat: All in one day.
Scott: [crosstalk 00:06:01] years ago. Yeah. And under 24 hours. Western States 100 [crosstalk 00:06:05]
Pat: Because a client recommended it, didn't they?
Scott: No, no, no. I mean, I... My client encouraged me.
Pat: And then met you at the finish line, I remember [crosstalk 00:06:16]
Scott: Was there, yeah.
Pat: That's a good client.
Scott: Super good client. Great guy.
Pat: [inaudible 00:06:21] all the clients should be there to actually cheer you [crosstalk 00:06:23] you do.
Scott: So, that's my... Would you like me to continue with my children?
Pat: No, no. Let's go, to the show.
Scott: It is kinda wild, though. You know, it's funny, as you have kids as become adults, and there's certain qualities and traits that you've passed on that you like in them. And there's certain qualities and traits that you pass on that, "Dang it. I wish they didn't get that part of me."
Pat: Yes. Wait till you get to the generation-skipping qualities and traits. Like, your grandkids.
Scott: You don't have any grandkids yet.
Pat: No, but it will happen.
Scott: Yeah, you've got, your first one just got married, right?
Pat: Yeah, yeah, yeah.
Scott: [inaudible 00:07:01] you.
Pat: Yeah. Getting old.
Scott: All right, let's take some calls. To join us, you can send us a note at questions@moneymatters.com, and we'll schedule time for you to call us while we're in the studio. Again, questions@moneymatters.com, or you can call 833-99-WORTH, and we'll get you scheduled that way as well. We're talking with David in California. David, you're with Allworth's "Money Matters."
David: I'm age 74.
Pat: Okay.
David: And I'm taking RMDs.
Pat: Okay.
David: I've always wanted to have more money in my Roth accounts than my regular accounts.
Pat: Okay.
David: And I'm wondering, am I too old now to consider Roth conversions? I'm retired.
Pat: You're absolutely not too old.
Scott: And you, by the way, you will eventually have more money in your Roths, assuming you continue to live to a ripe old age, because there's no RMD.
Pat: Yeah, right. [crosstalk 00:07:58] So, let's break down, what's your income before RMDs, and what's your income after RMDs?
David: Okay. So, I wanted to have a... I've always nervous about not having enough money. I have some nice pensions now, and I have taxable stocks, to give me an income stream. So, my income is from Social Security, $71,000 a year. It's me and my wife combined, so I'll give you everything combined.
Pat: Okay.
David: And my pensions are $152,000 a year. And then, last year, my taxable stocks and bonds were $194,000. So that gives me about $417,000...
Pat: Okay.
David: ...income. And then my RMD schedule for this year will be $116,000.
Pat: Okay. And tell me about your beneficiaries.
David: Okay. My beneficiary is my wife, and then my three kids are the secondary.
Pat: Okay. Tell me about those kids. Are they in the same tax bracket as you, lower tax bracket [crosstalk 00:09:04]
David: Oh, they're lower. They're a lower tax bracket. They're all... I have eight grandkids, and we all live in Sacramento now. And they are in their... I, actually, as I say, my baby turned 40 this year, and so I can no longer be considered middle age.
Pat: Okay.
Scott: And what's the balance of your retirement accounts here? IRA and your Roth?
David: Let me see. My, the balance of... Where is it? Over here. So, I have. I have $2.9 million in my taxable IRA and 401(k). I have $1.5 million in my Roth IRA and 401(k).
Pat: Okay. And you said 401(k). Do you really have a 401(k)? Are those...?
David: Yes.
Pat: So, you have a 401(k) and an IRA?
David: Yes.
Pat: Okay. Are you still employed?
David: I was in self-employed for years, and then I joined a company, and so I have [crosstalk 00:10:13]
Scott: I think Pat's just wondering why it's not just in an IRA.
David: I, you know, it's, I thought about converting it over. I think, my, the 401(k) was, it, I think it's a little, [inaudible 00:10:28] I remember correctly, it's a little tougher to get it, for lawsuits and things, so it's a little safer in the 401(k), I thought.
Pat: That's right. That's right.
Scott: Okay.
Pat: That's right. That's right.
Scott: Okay. Just, that's your reason.
Pat: That's how OJ Simpson continued to golf in retirement.
David: Yeah.
Pat: Tell me what your brokerage account looks like.
David: The brokerage account, I have... Okay. So, I have... Oh, god, did I break it down? So, where did it go?
Pat: Just the overall account balance.
David: Okay. So, [crosstalk 00:11:02]
Scott: Because he has $194,000 of income.
Pat: That's right.
Scott: Yeah.
Pat: So, it's probably somewhere around [crosstalk 00:11:07] million dollars.
David: Yeah, so I have... Yeah, I have... Oh, shoot. Let me think. I broke it...I have it...I have... Let's see. So, I guess I could take it out. I have $6.3 million in mutual funds, and $1.5 million in stocks, but that's counting the retirement together. I mixed it together, and [crosstalk 00:11:27]
Scott: And you say mutual funds. Are these funds you've had for a long time, that have a lot of gains built up in them?
David: Yeah, yeah. Yeah. A long time.
Pat: Okay, so you've got about...
David: I don't sell any [crosstalk 00:11:36]
Pat: You've got about $4 million dollars in your brokerage.
Scott: Are you having the dividends reinvested, or are you not?
David: The, for the retirement accounts, all the dividends are reinvested. And now, for the taxable accounts, they're all going to cash.
Scott: All right. Perfect. That's what I would recommend as well. And does your wife take an active role in managing these dollars? It sounds like you manage [crosstalk 00:11:58]
David: No, she does not. She does not.
Pat: Okay. This is so ripe for financial planning. Oh, my gosh. This is, like, this is... Have you gifted to your children at all?
David: I've done gifts, as, I mean, you know, down payments for houses.
Pat: But not on a regular basis?
David: Helped...
Pat: Are you doing the annual, on a regular basis?
David: No, no, no, no, no. I do it as needed, so, [crosstalk 00:12:25]
Pat: And you [crosstalk 00:12:26] You haven't used up any part of your unified credit, I assume?
David: No, no, I've not exceeded the amount per year, so no.
Pat: Okay.
Scott: Yeah, I mean, it's...
Pat: Oh, my.
Scott: The biggest issue is you could accumulate a lot of assets that you're not gonna spend. [crosstalk 00:12:41] And so, like, determining what does David and wife need for lifestyle for them for the rest of life, and making sure there's money for, you have long-term care needs and all that other stuff. And then, what's the most effective way to pass along the excess amount?
Pat: So, but your answer to your question that you called about, which is, "Can I do Roth conversions?" The answer is yes, you can do...
Scott: I would not, if I were [crosstalk 00:13:07]
Pat: ...but I would not. You can, but...
David: Yeah, that's what I'm thinking. I'm thinking it just not, it's not gonna be. Because I, my stocks and bonds over the years did so much better than I anticipated. And my income was much higher than I had anticipated it would be when I retire, which is [crosstalk 00:13:24] a tough thing to be.
Scott: And it's higher... The biggest issue, it's high... Well, you're in a [inaudible 00:13:27] well, didn't happen by accident, David.
David: Yeah.
Scott: I'm sure you had some colleagues that also had good incomes, that did not save like you saved, so...
David: Yeah, I had a friend that, when the 2008 crash, got totally out of the market...
Pat: Yes?
David: ...and he's not that rich now.
Scott: No? [crosstalk 00:13:48]
Pat: Yes, yes.
Scott: But here's what you need to think about with... It's not your tax rate so much as what's your kids' tax rate. And if they all had incomes of much greater than... I mean, not that many households have incomes of $417,000, right? So, it would be shocking if any of your kids had that, let alone all three, right?
David: No. They're not.
Scott: Yeah. So, they're gonna be in a lower tax bracket. So your option is, take money now, pay tax at a high tax rate, and a very high tax rate in California, as well. Or, keep as much in tax-deferred as possible, pass it to the kids, let them be taxed at their tax rate. And then, let me take one step further. If you want some portion of this, of your estate to go to charity, you can designate...the best thing to designate would be your taxable IRAs and 401(k)s, and have the rest go to the family.
Pat: Yeah. So, if you're giving money to charity now...
Scott: That can come from your RMD as well.
Pat: They can come from your RMDs.
David: Ah.
Pat: Right?
David: Yes, I didn't think about that.
Pat: Oh. I'm just telling you. You look at this, you're 74. Your net worth is over $10 million. You're funny. It's, you're planning like you're, like it's 1973.
David: Yeah.
Pat: You look at this thing. I could sit down... Am I getting a little bit [crosstalk 00:15:14] talk? I could sit down in less than 10 minutes... It's...
Scott: I know why David has not worked with... Because he's done a good, you've done a great job on it. You understand this stuff extremely well. You've done a good job. Two things to consider. One is Pat's... there's a lot of planning things that you look at here.
Pat: You should be gifting some of this money from your brokerage account to these kids today.
Scott: Well, I don't know about..."should's" a strong [inaudible 00:15:36]
Pat: "Should."
David: Well, yeah. I've thought about that, but, you know, I'm a few years into retirement. I'm just nervous about what I'm gonna need, cost of health care.
Scott: Yeah, I get that. That's why, I think, determine [crosstalk 00:15:49]
David: And, you know, if I give it to the kids, they will probably spend it, and it will not, you know...and then if I need help, they're going, "Well, sorry, Dad. We spent all that money you gave us." [crosstalk 00:15:58]
Pat: That's a lack of confidence in visibility to the future which is causing that behavior.
Scott: That's right. Which is understandable. But I [inaudible 00:16:06] it's getting to a point where you've got a extremely high degree of confidence that you'd be fine, and figuring out what that dollar amount is, would be super helpful. But also, having something in the wings, so that should something happen to you eventually, and it will, it happens to all of us, like, who's gonna help navigate your wife through this process?
Pat: Yeah. If you were no longer here next week, who's gonna step in and do this for your wife?
David: Yeah, I have one of my kids, but I think they will probably get a financial planner to do it, because they're not into it as... This is my hobby.
Pat: You're ready for it, though. [crosstalk 00:16:42] David, you're ready for financial [crosstalk 00:16:43] And by the way, you know why you have so much money is because you worry about it so much. You show me someone that doesn't worry about money, I'll show you someone that doesn't have any.
Scott: It's an interesting dichotomy.
Pat: Right? And you're never, that's never gonna leave you. That will never leave you. But what you can do is get more clarity about what your future, so that you can start implementing financial planning tools that move as much money downstream...
Scott: To wherever you want it to go. The excess. We're talking about the money you're not gonna spend in your lifetime...
Pat: Which is going to be a lot.
Scott: That's right.
Pat: How much are you living on a year?
David: Well, actually, $200k, probably, or [crosstalk 00:17:33] before taxes.
Scott: Yeah. That's why you have [crosstalk 00:17:34]
David: We're doing a lot of traveling.
Pat: Are you are you traveling business class?
David: Yes.
Pat: Thank you.
Scott: I remember years ago, a client told me he started flying business class, and I said, "Really?" Like, he says, "Yeah. Well, it's either I will or my kids will."
David: Yeah, I had a friend's dad, his goal was to make enough money to never have to fly coach. And I flew coach for many years with my kids, and now I go, "No, no. If I'm flying somewhere, it's business class."
Pat: Good for you.
David: I took the family to Kauai for our anniversary present.
Pat: Beautiful.
David: Took the whole family.
Scott: Great.
Pat: Beautiful.
Scott: Great investment.
David: And they flew coach, and my wife and I flew up in the front of the plane.
Scott: Even better.
Pat: Yeah, I've done it so many times. I have done it multiple times.
Scott: No, that's...
Pat: But you [inaudible 00:18:22] great. So, the answer is [crosstalk 00:18:24]
Scott: I would not do the Roth conversion.
Pat: ...don't do the Roth.
Scott: You're in too high of a tax bracket. [crosstalk 00:18:27]
Pat: But take an hour and sit down with an advisor, at least. And bring the child that's gonna take over...
Scott: Or the wife.
Pat: Or the wife, that is gonna take over the assets, so that you get comfortable. But you're missing a couple key things, which are easy, inexpensive, and will only push more money downstream.
Scott: Yeah. But you've done a nice job in saving and investing, obviously, so, appreciate the call, David.
Right now, we're in Illinois, talking with Max. Max, you're with Allworth's "Money Matters."
Max: Hey, guys. How you doing today?
Scott: Good. How are you doing?
Max: Doing good. Woke up this morning, so...
Scott: There we go.
Pat: Right side of the grass. Nice.
Max: Yeah.
Scott: The best day of your life, right here. Okay.
Max: Oh, yeah. Oh, yeah.
Pat: So, what can we do to help?
Max: Well, so, I'm in a bit of a financial predicament, and I'm trying to figure out the best path forward. Trying to maximize income, trying to get my debts paid down, trying to get a house. My daughter's got autism. We're trying to get her a service dog. So we just got a lot of things going on, and I've been trying to develop a strategy that'll work.
Pat: Okay. How old are you?
Max: I am 32.
Pat: And are you married?
Max: Yes. I am married. We have three kids. Our twins are four. Our daughter is two, and then we got a little guy on the way.
Scott: Wow. Good for you.
Max: Thank you.
Pat: And which child has...how old is the child that has autism?
Scott: Two.
Max: That would be my four. It would be my daughter, one of the twins.
Scott: Oh, sorry.
Pat: All right. And how much do you earn?
Max: It really depends. I work construction, and it's seasonal. And then, you know, tariffs and stuff came in, and stuff slowed down. So it really fluctuates between $65,000 and, I'd say between $65,000 and $90,000.
Pat: And does your spouse work outside of the home?
Max: No. No, she takes care of the kids and the house.
Pat: All right. So, what...do you have a specific question for us?
Max: Yeah, I guess, so, I currently owe about $28,000 in legal debt, getting full custody of my kids. And the lawyers are coming after me really hard to pay that off immediately. And my credit score is not good. I had a business that failed, and I financed that all on my own, so there's, like, another $30,000 still have to pay off on that. And so I'm just trying to figure out what would be a good means to try to consolidate... You know, should I just throw my hands up into bankruptcy? You know, I'm just not too sure what [inaudible 00:21:26]
Pat: So, you said that the legal debt was for custody of the children from a previous relationship, I assume.
Max: Yeah, my twins.
Pat: Okay. And do you own any assets?
Max: I had four cars. Two of them just burnt down in a fire, about a month ago, so now we got two cars.
Scott: And were they insured? Did you get a payout?
Max: No. [crosstalk 00:21:51]
Pat: How much money do you have in the bank?
Max: In the bank, like, $5,000 right now. I had to buy another car, so...
Pat: I'd visit with a free legal service.
Max: Okay.
Scott: What's a free legal service?
Pat: I would find a free legal service in your community that specializes in debt resolution or bankruptcy, and I'd start there.
Max: Yeah. Okay.
Pat: That's where I'd start.
Scott: Yeah, because, I mean...
Pat: This is a hole...
Scott: If your income...
Pat: This is...
Scott: You're gonna have a hard time.
Pat: This is a hole that's really, really deep. If you didn't have the children...
Scott: Or the debt...
Pat: Or the... Well, okay, [crosstalk 00:22:29] We had bacon and eggs if we had bacon and had some eggs, right?
Max: Yeah.
Pat: Yeah, I would start...I would go to a free legal... I would see if I could find a free legal... And how big is the community you live in?
Max: Pretty large. I'm in Gurnee, Illinois, so, I don't know what the population is, but, I mean, it's Chicagoland area, so, pretty bit [crosstalk 00:22:55]
Pat: Okay. Yeah, yeah.
Scott: Yeah, yeah.
Pat: So, I would look to free legal resources, and then actually give them a call, and walk through... And then, the autistic child, degree of autism?
Max: [inaudible 00:23:10] level 2 autism, and then diagnosed...it's called GDD, which is just what they call learning disabled before the age of 5.
Pat: And are you getting any state or federal subsidies for your child?
Max: No.
Scott: Or help at all?
Max: Somebody did tell us to apply for social security, because I've got another probably $15,000 worth of medical debt, because pretty much nobody covers developmental care.
Scott: Okay.
Max: And so, we're starting that process.
Pat: Is there any other medical debt, or any other debt that you didn't mention?
Max: No,
Pat: So, you got the legal debt, the business debt, the medical debt.
Max: Yep [crosstalk 00:23:47]
Pat: So, you're 45. You're at $83,000 in debt.
Max: Yeah.
Pat: Yeah. I would go to a free legal. That's where I'd start.
Max: Okay.
Scott: And look into the... You know, every state's different, but I'd look into see what sort of services could be available for your daughter.
Pat: For, in terms of getting paid for care.
Scott: And my guess is Illinois has some pretty generous benefits. We're in California, which has some pretty generous benefits.
Max: Yeah.
Pat: Yeah. And that's where the, you know, there's resources in your community, at your level of income, your level of income with the number of children, that would qualify you for probably many services.
Scott: Yeah.
Pat: And your job is actually to find those.
Max: Yeah. Okay.
Pat: All righty?
Max: All right. Yeah. That's cool.
Pat: Okay. I appreciate the call.
Scott: Yeah. Wish you well, Max.
Max: Thanks, guys. Appreciate it. God bless.
Scott: All right. Yeah, you too. That's a challenging situation he's in there. And [inaudible 00:24:52]
Pat: We, you know, Scott, we had it, when I was board chair of the Sacramento Food Bank, we had this... It was called the nonprofit something, where... We actually had people from 15 or 20 nonprofits, we had a lunch once a month, where we'd have three of them just stand up during the lunch and actually tell what they did, their nonprofits, and the services they offered, in order to create a referral network among the nonprofits.
Scott: I mean, it...
Pat: Because the services were out there. People just didn't know where to go to get them. And so, introducing the other nonprofits to these different services over a multiyear period, and creating these relationships between these people, better served the community.
Scott: You know, what's really interesting, Pat. It is so complicated to navigate some of these services... Then the population that they're trying to serve...
Pat: Yes.
Scott: Like, so, my wife and I adopted two girls from the foster system. Right? So, once a year, I get a form from the State of California...or is it the county? Maybe both. With, asking me... I could barely understand.
Pat: You can't.
Scott: I can barely understand. College-educated, business 30-some years... I have trouble with the forms. And I'm thinking, how in the world does the typical foster family...? [inaudible 00:26:28] I don't even understand some of the stuff that [crosstalk 00:26:31] they're asking. The way the stuff's written, and, like... And I think, you take somebody who...
Pat: It wasn't written for...it wasn't written with the consumer in mind.
Scott: Of the particular population, particularly.
Pat: That's right. They're a consumer.
Scott: Yeah.
Pat: The people that are [crosstalk 00:26:49]
Scott: So it's...
Pat: Yeah.
Scott: Interesting.
Pat: It's a rough... Yeah.
Scott: Interesting predicament.
Pat: But there are many, many services in many communities, even for middle-class and higher net worth, that are either free or discounted when it comes to disabled children.
Scott: That's correct. That is correct. I have a family member with a significant, significant disability. And I'm kind of amazed at the level of support...
Pat: That they receive from the community?
Scott: Yeah. I mean, there's another sibling that was paid to watch the sibling.
Pat: Yeah. Yeah.
Scott: So, there's the... Yeah. If you, in that situation, it probably takes quite a bit of work and research, but if... And I think what you said to Max here is, like, "Your job is to figure out these, go find these things."
Pat: Yeah. Yeah. And unfortunately, bankruptcy is probably going to be the best alternative for him. So...
Scott: Yeah.
Pat: It is what it is.
Scott: Hey, before we go to calls, we [inaudible 00:27:52] We got a couple more calls coming. There's been quite a bit in press lately about private investments coming into your 401(k). So, the 401(k) allowing for things outside of publicly-traded securities or interest-bearing accounts, which is what you have today, right? In 401(k)s. You can invest in...
Pat: So, what would be a private security, Scott?
Scott: Well, for example, a private credit fund.
Pat: Okay.
Scott: Okay. And what this really means is, [inaudible 00:28:29] I was having this discussion the other day with a friend of mine, talking about how the private markets have filled this void that the bank could have filled.
Pat: You know, Scott, you bring up that you talk a lot with your friends about this stuff. Is it the one friend that listens to you constantly, or do you have multiple friends?
Scott: It's not really a friend. It's a random friend.
Pat: Is it? Are you bragging?
Scott: [inaudible 00:28:51] I pretend like I'm talking to a friend. No.
Pat: Is it a chatbot?
Scott: I was having a conversation with, on a bike ride with a friend in the last week or so about these private markets.
Pat: Okay.
Scott: So, we all know how banks work, right? You need to get a loan, you've got a business or whatever, you go to bank, they look at your...and they loan you the money. Today, there are a lot of, let's say, medium-sized businesses that are borrowing money not from the banks, but through these third-party companies that are structured to provide this financing. So, for example, some of... KKR has entered the space. BlackRock has entered the space. And the way these things work, there are private companies that will go out and raise capital from insurance companies, endowments, foundations...
Pat: Pension plans.
Scott: ...wealthy families. So, they raise...
Pat: Sovereign wealth funds.
Scott: Sovereign wealth funds. So, they'll raise X amount of dollars through this, and then people have an opportunity... They'll create these loans.
Pat: Some big pools.
Scott: Big pools. They'll create these loans to XYZ business, that is, maybe couldn't get traditional financing from the bank.
Pat: And many of those businesses are backed by what they call either venture capital or private equity.
Scott: That's correct. So, it's a means to provide the financing. And the interest rates are typically fairly high, because these companies, they're not publicly traded. They're not Microsoft or Apple, that have great credit ratings. They're private companies themselves. So the interest rates are [inaudible 00:30:37] What we're starting to see now, though, is a push for these investment opportunities to more individual investors, in 401(k) plans, even.
Pat: So, not just accredited investors, which is, you can become accredited investor if your income is over a certain level, your net worth is over a certain level, or if you're a professional investor. You can become an accredited investor, and you have access to these, with the assumption being because you're an accredited investor, you understand the risk and the rewards of that particular investment.
Scott: Yeah.
Pat: But they're trying to widen the funnel of who can invest in these.
Scott: Yeah. And so, you're gonna start seeing, in 401(k) plans, in the not-too-distant future, these opportunities to invest in private credit or private equity.
Pat: And they oftentimes will go, be labeled "alternatives." And the alternative is, the word "alternative" means alternative to the public markets.
Scott: That's right. Typically, yes.
Pat: Right.
Scott: This is an area that you need to be very careful in tipping your toe into.
Pat: Scott, I believe that the reason these alternatives, the private credit, the private equity, have become so large is because of the regulatory environment on the public companies.
Scott: And the banking institutions.
Pat: That's right.
Scott: Yeah. So, the regulatory... All the regulation that came down after the financial crisis hamstrung the banks in a lot of different ways.
Pat: That's where the private credit came in to fill that void.
Scott: That's exactly right. I don't even know how small the private credit market was before, but I think it was pretty nascent. And now it's quite mammoth. And there are places for it in people's portfolios, for private equity, private credit, other kinds of funds. There are places. But once you start seeing your 401(k), I'd be kinda careful about it. Just tip-toe into them.
Pat: Correct. Especially these marketplaces that are relatively new. Because a lot of this private credit doesn't have huge histories behind it.
Scott: That's right. We haven't gone through a financial crisis.
Pat: That's right.
Scott: Or a really prolonged downturn.
Pat: So, don't get enamored by the yield, because the yield...
Scott: The yields are gonna look great.
Pat: They're gonna look good. Right? But remember, typically, the higher the yield...
Scott: The greater the risk.
Pat: That's how they, why they have to pay at a higher yield.
Scott: A company wants to go borrow some money, the bank says, "Well, sorry. We can't loan it to you, because, you know, you don't have any real assets to back it. So they go to the private markets, like, "Yeah, we could loan you the money, but it's gonna cost you 12% a year, because..."
Pat: Yeah. And then the private credit company takes a slice of that, and then puts out the yield to you.
Scott: That's right. The company themselves will take a slice, and then they'll charge a fee...
Pat: Yes.
Scott: ...to syndicate all this, put it all together.
Pat: And then... And the idea behind distributing it inside 401(k)s is actually to create a greater funnel. But I believe [crosstalk 00:34:02]
Scott: And there's some regulatory people say, well, this is more democratization, giving people the access to these private markets. I'm like, "How about just loosen the regulations on the public side?" [inaudible 00:34:13] wouldn't it [crosstalk 00:34:13]
Pat: And enforce the ones that were in place. Because the problem with the financial crisis wasn't the lack of regulation, it was the lack of enforcement of the regulation.
Scott: And the government backing of all these loans.
Pat: Loans. Well [inaudible 00:34:28] because they weren't underwriting [inaudible 00:34:29] which is, they weren't underwriting the loans. The government had given up underwriting the loans, which is...
Scott: That's correct. That's correct. It didn't even matter. [crosstalk 00:34:36]
Pat: They didn't even follow their own guidelines. So, but, the pendulum will swing. The pendulum will swing. As they loosen the regulation in the public markets, the public markets will become more vibrant, and then the private markets will shrink.
Scott: Yeah.
Pat: It's just how it's gonna work. I mean, this is the nature of the world.
Scott: That's right. That's not where we are today.
Pat: It's not where we're at today. But this administration has every intention of loosening up on these, the regulatory environment, in many places, way too much. Way, way too much.
Scott: Well, I'm a huge believer in free markets. I actually, the older I get, the more I just think it's a beautiful structure, because it allocates capital to the right places, assuming we all play by the rules...
Pat: Which is...
Scott: ...and we know what the rules are. And if I sit down with my family to play a game of Monopoly, we know what...what are the rules behind the game? There are certain rules. And as long as we all play the rules, that's fine. Someone ends up taking Park Place and Boardwalk... I haven't played Monopoly in a decade or so. But I think most of us have played Monopoly. It's by the rules. It's the same thing with the, in the marketplace. Free markets work great, as long as we all follow the rules...
Pat: Follow the rules.
Scott: ...and follow the rules. Know the rules and follow the rules. And to your point, enforce the rules, and not ignore the rules for several years.
Pat: And why did you use that, Monopoly? That brings back [crosstalk 00:36:06] just so many bad memories.
Scott: You'd hide the $500 bill underneath, you know, so that people think you're broke when you actually have the cash.
Pat: There was never a game that didn't end up in a fistfight with my brothers.
Scott: [inaudible 00:36:19] fist fight.
Pat: No, a fist fight.
Scott: A fist fight?
Pat: Because it came to the rules, and then all of a sudden...
Scott: Someone was trying to cheat.
Pat: Someone's trying to cheat...
Scott: Or you think is cheating.
Pat: ...and then next thing you know, someone's throwing, and then the couple and the neighborhood kids, and...
Scott: Let's talk now with Eric. Eric, you're with Allworth's "Money Matters."
Eric: Hi, Pat and Scott. Thanks for taking my call.
Scott: Yes, sir.
Eric: Got a question on additional mortgage payment. And then also, once I give you all the numbers, just general thoughts on kind of my wife's and I's overall situation.
Scott: All right.
Eric: So, not really your typical client. Don't have a lot of money. I think we started really late in life. Other than a good military pension, I think we're behind, but we're making good choices now.
Pat: Wait. Slow down, Eric. You weren't able to save a lot of money while you were in the military? Am I hearing this right? You weren't making those fat stacks?
Eric: Yeah, a little hard to do, but...
Pat No, I...
Scott: Thank you for your service.
Pat: Thank you. Thank you. Thank you. We get it. We get it.
Eric: Thanks a lot, guys. Yeah, sometimes it's hard to find some extra ends there.
Pat: No kidding.
Eric: But yeah, we overcame some bad decisions. We mostly agree about the future and how to budget our money currently. Like I said, I think I know your answer, because I've heard you talk many times about additional mortgage payments to other listeners, other callers, but still just wanted your thoughts.
Scott: How old are you?
Eric: Wife and I are both 46. Oh, and here you go. I'm gonna try and impress you. I think I got all the numbers ready for you guys.
Pat: Okay, perfect.
Scott: What's the house worth?
Eric: All right. Wife and I are 46. We have one adult kid out of the house.
Scott: Wow. Good for you.
Eric: House is worth $770,000. We have a 30-year fixed mortgage. Current remaining balance is $607,000. Mortgage payment is $3300 a month.
Scott: What's the interest rate?
Eric: 2.125% interest rate.
Pat: 2.25%?
Eric: 2.125%.
Scott: Is that a 15-year mortgage?
Eric: A 30-year. VA.
Pat: Wow. Okay, Okay. Wow.
Eric: [crosstalk 00:38:18]
Scott: I was gonna say, that was the lowest 30-year mortgage I've ever heard.
Pat: That's incredible. All right. We know the answer.
Scott: Do not pay extra payments.
Pat: Don't pay a penny more on this thing. In fact, call them up and see if they'll extend it to 60-year mortgage. Unbelievable.
Eric: Okay, that's exactly what I thought you were gonna say, just because of the cost of money, and, you know, I really am only making, over the course of these additional payments, one additional payment every year. And my wife and I [crosstalk 00:38:46]
Scott: I wouldn't make any additional payments. It's two and a quarter percent. Two and an eighth.
Pat: Yeah. Unbelievable.
Scott: I mean, if you could borrow more money, I'd say borrow more money at two and an eighth.
Pat: Yeah.
Scott: If I could borrow money at two and an eighth, I'd do it all day long.
Pat: If I could borrow money at two and an eighth, I'd retire.
Scott: Borrow a billion at two and a eighth.
Pat: I'd borrow a billion at two and an eighth, and I'd lend it... Almost like banks do. It's weird.
Scott: I mean, but, if, let's say you wanna retire at 65, or whatever the number is, and you might calculate what the balance will be at that time and say, hey, maybe we have a side fund that we set up, which this is a... You still wouldn't wanna pay off the mortgage then.
Pat: Yeah. Yeah.
Scott: But at least something to... So, you've got the cash equivalent, so you can...
Pat: match maturities.
Scott: Yes.
Pat: Okay. So, what's the next...? Give us the rest of the financial situation. We'll give you a little tune-up there.
Eric: I appreciate it, because that's what we're trying to do, is be diverse and efficient, so that we can really make headway smartly. So, salary is $187,000. My military retirement, $4800 a month, and our health insurance comes out of that. I get additional VA disability of $2100 a month. Both of those have cost-of-living adjustments annually.
Scott: Eric, if you...you talk about how you're behind in the game. If you calculated the net present value of that $7,000-dollar, roughly $7,000-dollar-a-month pension, and...
Pat: And part of it tax-free. It's worth millions.
Scott: Massive.
Pat: It's worth millions.
Eric: Yeah. I got $1.6 million over the next 20 years.
Pat: Oh, that's... Got it, got it. You did the math. You did the math. Okay. So you get it. So, when you say you're behind, you're not necessarily behind.
Eric: Well, if it wasn't for the retirement, I'd be freaking out right now, but [crosstalk 00:40:43]
Pat: But if I didn't... [crosstalk 00:40:44] but if I had eggs, I'd have bacon and eggs if I had bacon. It is. It is. It is there. So, okay, so, $84,000 in benefits, veterans benefit, a portion of which is tax-free.
Eric: [inaudible 00:41:00] 401(k) $65k. Have a separate IRA with $18,500. I maxed it out last year, and I'll max it out this year. Separate brokerage account, $28,000, high-interest savings account, money market account, I got $26,000 at 4.25%. I've got two life insurance policies. I'm only the sole income in the house. So, one through work, and another one through insurance company, totaling $3.4 million. I've got two car payments. One of them will be paid off in January, or I might just pay that off early. It just depends. That'll clear up some additional money to put towards retirement savings. And anything outside of [inaudible 00:41:46] that in the budget, I'm putting in about $1900 into emergency savings account.
Pat: And what's the outstanding balance on the car?
Eric: The one car is only about $1300. The other one still has four years, so it's about, like, $40,000, $45,000 [crosstalk 00:42:05]
Scott: Have you been in this ballpark salary area for the last few years?
Eric: Yes. I retired three years ago. And since then, it's, I started at a little bit less, but the last few years [crosstalk 00:42:16]
Scott: Okay. And what were you making before you retired?
Eric: More like $90,000 total, which are military wages.
Scott: Okay, Okay. So, some of this, you're just catching up on some things, right?
Eric: Yeah.
Scott: Yeah, because you [crosstalk 00:42:29]
Eric: [crosstalk 00:42:29] a lot of debt, lot of consumer debt out of the way [crosstalk 00:42:32]
Pat: Okay. Okay.
Scott: You're perfect. Yeah.
Pat: Good for you. You're perfect.
Scott: [crosstalk 00:42:37] So here's what... You're not spending all the money that's coming in now. You have been catching up on some stuff.
Eric: Yeah, my wife likes to spend all the money got coming in, but I gotta make sure to reel that in.
Pat: So, what is the interest rate on the car?
Eric: The one that's left over, I think, is 2.9%, the one I have four years left on. [inaudible 00:42:56] I'm not worried about the one that only has $1300 left [crosstalk 00:42:58]
Scott: Okay. All right.
Eric: That's over in January.
Scott: I would, if I were in your situation, I'd contribute the absolute maximum to the 401(k)...
Pat: And then you would...?
Scott: Pay off the cars.
Pat: But it's 2.9%. It's fixed. So what's the point? He's earning higher than that. And then you would what, Scott? You'd convert that IRA to a Roth. And then you'd make a contribution to the IRA every year, and you can [crosstalk 00:43:20]
Scott: A non-deductible... Convert your... Well, he's got the $18,000 in...
Pat: I know, but he just put those in in the last couple years.
Scott: Oh, you're right.
Pat: So, what you wanna do is...
Eric: [inaudible 00:43:31] that, because I'll probably be in a lower income bracket when I actually retire, retire.
Pat: No, no.
Scott: I don't think so.
Pat: I would...
Eric: [crosstalk 00:43:40] talk to the advisor about when we see one, for sure. I'm writing it down.
Pat: Okay. So, what you wanna do is you wanna convert that existing IRA, for both you and your spouse, into a Roth IRA. And then you wanna actually make that contribution every year, and convert it the very next day. So, you wanna do that so that you can push as much away into savings as you can.
Scott: I mean, you are in such a different financial situation than you've been most of your life, right? You were married relatively young. You had a child. You've raised a child. Child's grown.
Pat: The child's a self-feeder now.
Scott: Yeah. So, I mean, your wife wants to spend... Like, you can afford to spend some now, right? Like, you can afford to, let's do that, whatever you wanna spend the money on. But as long as we're making sure that... Because you're gonna get used to this lifestyle.
Eric: That's what I'm afraid of.
Scott: Yeah. Well...
Eric: I'd rather save it than spend it.
Scott: It'd probably be helpful to do some real planning, and saying, if we wanna retire at 60 or 65 or whatever the number is...
Pat: This is what we need to do.
Scott: Yeah. And that'll say, all right, in addition to the maximizing the 401(k), do we need to save much more? How much more? But given the fact that it's...
Pat: Your new job, will it have a pension when you retire?
Scott: No.
Eric: No, I've got the 401(k) and that's it. No other pensions through the new employer.
Pat: Okay, yeah. So, you wanna maximize the 401(k), and then you wanna make the IRA contributions, non-deductible, and convert them. Go ahead and convert that IRAs, both you and your spouse, immediately, into a Roth. And you wanna be as aggressive as you possibly can.
Scott: And you probably wanna be saving some more.
Pat: And you probably...
Scott: Otherwise... That's, I think doing, really running some numbers, to get it...
Pat: He knows exactly... He's, this guy's super disciplined. He's beating himself up because he was living...
Scott: Yeah, don't beat yourself up. You're in a great position [crosstalk 00:45:27]
Pat: ...he was living a little bit above your means while you were making this salary, but you're not living above your means now. [crosstalk 00:45:32]
Scott: Maximize your 401(k), build up that emergency reserve, call us in a year.
Eric: Yeah, awesome.
Pat: All right?
Scott: You're great [crosstalk 00:45:39] I wouldn't worry about a thing. And you've got tons of life insurance. If something happened to you, you're taking more than good care.
Pat: Yeah. Good job. And make the IRA contributions, convert it to a Roth, and call us in a year, 18 months.
Eric: All right. Sounds good, guys. Appreciate the call.
Scott: [crosstalk 00:45:51]
Pat: Appreciate the call.
Scott: Well, it's been great being with everybody this week, as usual. And again, if you wanna be a caller on our program, send us an email, questions@moneymatters.com. We'll schedule a time for you to talk. And also, please follow our show. So, just hit the follow button if you listen, if you get this on Apple or Spotify, or wherever [crosstalk 00:46:16] you get your... Just hit the follow button, if you wouldn't mind. It will certainly make sure that you get the show.
Pat: Yes. And we would appreciate that. And even, you know, share it with a friend.
Scott: Yeah. We'll see you next week. This has been Scott Hanson, Pat McClain, of Allworth's "Money Matters."
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.