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

Scott: Welcome to "Allworth's Money Matters." I'm Scott Hanson.

Pat: I'm Pat McLean. Thanks for joining us.

Scott: That's right. Glad to have you with us. Both myself and my co-host here, we're both financial advisors, certified financial planner, charter financial consultant. We spend a lot of our days helping people with their futures, financial futures, and we come here on broadcast on the weekends to be your financial advisors on the air.

Pat: Yes. And 30 years. Really enjoy it. Has it been 30 years? It's always based on the age of your daughter, for some reason I...

Scott: Twenty-nine years. We've been on the show 29 years.

Pat: Okay. And I think it's because we just started the show right before she was born.

Scott: Well, I only remember because I don't know how many listened 29 years ago, but it wasn't a very good show. We tried...

Pat: Well, maybe it's not either today.

Scott: Maybe it's not. But I remember our first, I don't know, it was Christmas time in the year. My daughter was born at Christmas Eve, so I wasn't working a couple days around that, and it's Christmas, I know I'm gonna work Christmas anyway. But you interviewed Santa Claus for the financial planning.

Pat: That's right.

Scott: So, that was kind of our producer at the time thought it'd be a good little...He was one of, like, those morning guys that would call and prank people and stuff like that, and so I think we've progressed a little since then.

Pat: Fortunately, we don't have tape with that.

Scott: Pat's not interviewing Santa Claus on his financial planning needs, what it cost to run the sleigh or whatever. I have no idea.

Pat: How embarrassing.

Scott: Anyway, we enjoy coming here and talking about the financial markets and would love to take your calls if you wanna join us. Questions@moneymatters.com is a good way to reach out to us and schedule a time, or you can call 833-99-WORTH. But before we go to the calls, the markets, the magnificent seven, essentially seven large tech stocks...

Pat: Turned into the fumbling five.

Scott: There was roughly, on Wednesday, almost a trillion dollars of valuation of decline just off those seven companies.

Pat: Yes.

Scott: Almost a trillion dollars. Massive. Wednesday was a pretty significant decline on the Nasdaq, but it was primarily those seven companies, and if you look at, say, the S&P 500 up until a couple weeks ago, almost all the gains came from those companies. And if you've noticed in the last week or two when we're starting to see these magnificent seven...

Pat: They're starting to fall apart.

Scott: Well, they're coming down a lot in price, but we're seeing other areas of the market, these other stocks that have gone nowhere...

Pat: For some time.

Scott: For some time. Yeah. And like small caps all of a sudden...

Pat: Which again, at any one point in time you should be unhappy with about a...

Scott: Some piece of your portfolio. That's right.

Pat: Again, probably about 20 to 30% of the portfolio you should be unhappy with at any point in time.

Scott: And I tell you the danger for individual investors is people monitor their portfolio as they're told they're supposed to, right? Check things. Let's say you're doing it yourself and you're checking it on a quarterly basis. Those areas of the market that have not performed well that current quarter are going to be inside some piece of the portfolio that you own. Maybe it's an ETF, maybe it's an actively managed mutual fund, and let's say you have a mutual fund that specializes in companies outside the magnificent seven, right? That's what they're designed to do. Well, during periods of time when those kind of securities are out of favor, it's going to look like you own something that's a dog.

Pat: Yes. And if you think about growth versus value for years and years and years, how growth outperformed value investments...

Scott: Yeah. When historically that's not...

Pat: That isn't the case.

Scott: Yeah, if you go back long enough. So it's just, I just...

Pat: It's a reminder. But Scott, in saying that, I came across an article that talked about how much cash is in IRAs from people that move their 401(k)s over. They roll their 401(k) over and for whatever reason, cash heavy. Cash heavy. And it's...

Scott: It's rolled into IRAs or rolled into...?

Pat: Rolled into IRAs.

Scott: That's because the default is cash.

Pat: That's because the default is cash, so you have to make this...

Scott: You open up an account at Schwab or Fidelity or Vanguard, a brokerage account, and you transfer a 401(k) plan into that, it's going to drop into an interest bearing account until you make an instruction...

Pat: To invest it.

Scott: Yes.

Pat: And by the way, little secret, what is the best returning asset for a custodian that is actually putting money...If someone put money into your IRA and you are a custodian, where would you want the money to be?

Scott: If your number one concern is your own profit?

Pat: That's right.

Scott: You wanna leave it in cash.

Pat: And why?

Scott: Because you make a spread.

Pat: You make a spread on that.

Scott: Just the same thing when you look at your checking account and they're paying you 0.001% and the bank can earn 5%...

Pat: That's the spread.

Scott: That's the spread.

Pat: And the custodians, it's the same thing. You've dropped money into the account. So, it was mind boggling the amount of time money sits in cash before people invest it or if they invest it at all. And you're not seeing a nudge from the custodians, Charles Schwab, when we talk about their IRA custodians, Charles Schwab, Fidelity...

Scott: Vanguard, the big ones.

Pat: Yeah. There isn't a huge nudge to move those dollars forward in some circumstances, and typically smaller account balance.

Scott: Well, from a financial standpoint, for them out of cash and investing in some very low-cost ETF index fund, it goes backwards for them financially.

Pat: And where this happens is on the smaller account balances. If you roll a million dollars in IRA over to Fidelity and keep it in cash, you're gonna get a phone call. But if you roll $30,000 over...

Scott: Well, because they know that probably it's not gonna stay unless it's...

Pat: It's not gonna stay there. It's not gonna stay in cash. But it was perplexing to me. And these are smaller account balances that actually need it most. Oh, and there's other firms out there, the custodian firms that specialize in essentially...your daughter had one, my son has one. My son has one and he was...

Scott: My son worked for Best Buy in high school selling...

Pat: For how long?

Scott: A year and a half or so selling home entertainment systems.

Pat: And he left his 401(k) behind?

Scott: Yeah. He had a small 401(k), and there's a...I forget the name of the company now. There's a company that specializes in taking small 401(k) balances because the rules are, if it's small enough, the employer can just say, "Hey, send the dollars to an IRA." So, automatically an IRA set up in his name and he gets a little notification saying, "Hey, we've got money here for you. What would you like us to do?"

Pat: That's right. That's right. And most people [crosstalk 00:07:56.340].

Scott: And most people don't do anything.

Pat: Don't do anything. Most people do not do anything.

Scott: Which is that why there's how much money's sitting in cash in these old 401(k)? I saw the headline of the article I'm like, "Yeah, I know exactly why that happens."

Pat: It was a lot. It was a lot.

Scott: But I mean, one of the things, if you work with an independent financial advisor, a firm like Allworth, there's other good firms that are also independent on a...When you hire an advisor on a fee base, you're paying an asset management fee for advice, that advisor, it's not gonna be conflicted like the big Wall Street firms where, "Hey, if we just keep some money in cash, we're gonna earn more money, then put it somewhere..." Whether it's in cash or in the magnificent seven or in ETFs or no load funds or growth funds or value funds, it makes no difference.

Pat: So, Scott, this is what really is the older you are, the less amount of times you actually leave money in cash after one year. So, if you're 60 or older and you've got money in cash, after one year, 25% of those people that started in cash have it in cash. If you're 20 to 29, read your son here, it's about 60%. And those are the people that actually should. It's exactly the opposite. Those are the people that should have 100% of their dollars fully invested in equities.

Scott: Correct. They're in their 20s.

Pat: The smaller accounts.

Scott: And even if you take a small balance, what it can mean between 25 and 65 is tremendous, between leave it in cash and having an investment.

Pat: Correct. So, anyway.

Scott: But people do need to take responsibility for their own futures.

Pat: You've gotta own it.

Scott: I mean, this isn't a socialist country yet. You need to take responsibility for your finances.

Pat: You own it.

Scott: Yes. If you don't, I guess you have Social Security to rely upon.

Pat: No comment.

Scott: There's also an article in this last week on the number of people hitting retirement age with absolutely nothing.

Pat: Is [inaudible 00:10:05.681].

Scott: And it's heartbreaking because there's no...when you're in the end of your career and you don't have the...I mean, you're...

Pat: The assumption is those are not our listeners.

Scott: No, I understand that.

Pat: Although they should be concerned about it because it puts more pressure on social services.

Scott: Our listeners should be concerned?

Pat: Yes.

Scott: Well, we should all be concerned when people aren't saving and investing and taking responsibility for their finances.

Pat: Yes. It puts more pressure on social services.

Scott: Yeah. And, yeah.

Pat: Hey so, before we go to these calls, Canada cut their interest rate this last week.

Scott: Yes.

Pat: The U.S...

Scott: Twice in a row.

Pat: Yes.

Scott: Not twice last week. I mean, they...Yeah. Meaning [crosstalk 00:10:52.318].

Pat: Yeah. I just find it really interesting how slow the Fed's moving on this. Not that it's good or bad. Comment? Just cautious...

Scott: Well, I mean, we just saw the economy grew, what, 2.6% preliminary assets last quarter?

Pat: Yeah.

Scott: Pretty nice growth.

Pat: Yes.

Scott: I mean, well, it's not 4.6%.

Pat: Yeah. So, maybe there's...

Scott: I mean, if you look in the last 15 years, that's almost been a decent growth rate, right?

Pat: Yes.

Scott: So, economy's growing. Employment is still relatively robust, low unemployment numbers.

Pat: Political environment's stable.

Scott: Very stable. There's been almost no news. That was funny. I was thinking the other day, like I've been threatening to do a news fast, just going like a month or two months of no news.

Pat: How could you do that? Do you think you could do that?

Scott: I've heard of people doing it. Just tune it all out. But I thought if you miss the fast like five weeks, I mean, the most interesting times in U.S. politics is in our lifetime. And this is all we got. That's what they call...When I talk to people on either side, of course 90% of people are like, "Really? Really? This is it? This is what?"

Pat: All right. Let's go to the calls.

Scott: Pat, maybe you should run for president. I think it's not too late to somehow be the nominee, just get chosen somehow. Anyway, could you imagine a worst job? The stress. The Air Force 1 is intriguing. The perks. Yeah, I'd kind of like for everyone to stand and them to play a certain song for me every time I walk in the room. The retirements seem pretty comfortable. Yeah, you get nukes fly wherever and you got all the security around you and turn out a book, pay you a fortune to go speak, turn out a book or two. I think this current president, his retirement's gonna look a little different than other...I don't think he's gonna get paid to be on the speaking circuit. Anyway, we don't wanna talk about it. Let's go. Let's go to the calls here. Again, if you wanna be part of "Allworth's Money Matters," send us an email at questions@moneymatters.com. We're talking with Angela. Hi, Angela. You're with "Allworth's Money Matters."

Angela: Hi, how are you today?

Scott: We're great.

Angela: Well, you were talking about Santa Claus earlier and it really made me think about my grandma and the situation I'm in.

Scott: Okay.

Angela: Well, I've recently taken over conservatorship for my grandma, which means she's still alive, but she didn't have a will or a trust or anything put in place and then she got diagnosed with dementia. So, I've had to step up and get a court order to say that I'm the person in charge of her and her assets.

Scott: What was that process like?

Angela: Oh, I felt like I was on the stand, you know? I had to prove myself as a worthy person to step up to the plate to take care of her.

Scott: Did anyone contest it?

Angela: No. No. There's no family left to really contest it. My grandfather's passed, my father's passed, my aunt has passed, so I'm the granddaughter. I'm the only one that can really step up and it was either me or turn her over to the state, which I wasn't gonna [inaudible 00:14:25.228] that happened to my grandma.

Pat: Yeah. A court appointed trustee.

Scott: And did you have to hire an attorney to get this conservatorship?

Angela: Yes, I did. Yes, I did because at first my grandma, because of her dementia, she was really fighting it. Like, "You don't get to tell me what to do and you don't know what you're doing," you know? So, I had to get all of the medical reports from the psychologist, from the doctor saying, "Yeah, she can't...she's hallucinating. She is just not capable of making rash decisions. She is up in the middle of the night." She was going downhill really fast, and so they needed...

Pat: Angela, so thank you for this call. For all of you that are listening...

Scott: I wanted her to tell the story a bit because...

Pat: Everyone that is listening, this could have been avoided when your grandmother, and you know this, Angela, just the rest of the listeners, could have been avoided when your grandmother was of sound mind if she had just done some simple either trust or power of attorney or...

Scott: Power of attorney. A trust, having you as a successor trustee.

Pat: Yes. So, you are the only beneficiary to this estate, is that correct?

Angela: No. No, that's where it gets tricky. So, I am now put in control of $2 million. That's how much money my grandma has, and she spread it out between six different banks. And through those banks, there are 15 different CDs, 3 checking accounts and a savings account. And all of them have different paid on death beneficiaries. Some of them have multiple on one account, and part of the conservatorship is written in that I must honor all of those paid on death beneficiaries. But come on, I don't have time to go around to six different banks and handle all these CDs every time they come due. I'm a normal working person.

Scott: Well, Angela, many financial institutions now have programs where you can have one account and the CDs get...when you exceed a certain limit, they'll invest it in a different bank CD.

Pat: Understood but she has to honor the POD.

Scott: I understand that. But one way to do that is just to calculate out what percentage of this $2 million each person is going to receive, set up one account, and have the beneficiary, so instead of someone's supposed to get 50% of this $100,000 CD, now they're getting 2% or whatever, 2.5% of the overall portfolio. And as long as [crosstalk 00:17:17.216].

Pat: So, you could calculate it.

Angela: Yeah. Oh, yeah. I put it on the spreadsheet. I completely have all of those.

Pat: Okay. So, what's your question for us then?

Angela: So, my question is though, I mean, is that the best way to do it? Because I wanna take all of this money out of all these different places and put it into one place.

Scott: That's correct.

Pat: Yes.

Angela: And somehow honor these paid on death beneficiaries. Some of them are like to her neighbors and friends who help take care of her to keep her at home for so long. So, she is 96 and this all just happened around Christmastime. So, I'm supposed to honor all of those, so do you think that I can, like, liquidate all of that and then and reinvest it with that percentage that you were talking about?

Scott: A hundred percent. I mean, it's just calculating what percentage of the overall...I mean, you can go about it one of two ways. One is calculate it based on a dollar amount today, how much each person's supposed to get dollar amount then back into what percentage that is of the total dollar amount, or you can just do it as a percentage, a calculated percentage-wise...

Pat: Is it, yes.

Scott: But you can certainly have it and you can...

Pat: Well, it would be...Do they all have PODs on them?

Angela: Each one of them does have a POD on them. But some of them, like, have two and there's one that has three.

Pat: Okay. Well, that's easy. It's simple math. I like the idea, Scott, of keeping a spreadsheet and calculating, take all those numbers, right?

Scott: And let's say there's 12 beneficiaries.

Pat: Right? And then each percentage and it adds up to 100, and so that at time of death, you know exactly what percentage of whatever the remaining account is. And then...

Scott: And you could set it all up in a POD in one account.

Pat: And then go to a local...Where are you located?

Angela: I'm located in the Sacramento area.

Pat: Oh, here's what I would do. If you were my neighbor, I'd say, "Angela, call Five Star Bank." It's a local bank. It was locally owned. It's publicly traded now. And ask them about their CD diversification program, and then sit down with them and show them what you want do and then they will actually manage those CDs for you. And so what they do is, in order to get the FDIC, they actually...you give them the $2 million and you're like, "Oh, it's over the $2 million limit...

Scott: $250,000 limit.

Pat: ...or $250,000 limit," and they just send it to Great Northern Bank or Bank of Wisconsin or Florida Bank and they all turn it back and forth so that you get the FDIC, which pretty much negates the idea of FDIC completely, but it negates that FDIC going over the limit, and then you run the spreadsheet. And that's what I would do, and I'd call them. You need a trusted bank, a trusted institution, and look, you can go to a Wells Fargo or you could go to any of those other firms, the big banks. They may or may not take an interest in you, but local banks, I mean, there is a big need for local banks in the economy, especially for businesses. That's what I would do. I would just call Five Star Bank. And that's...

Angela: And you think that this is a better decision than...? I mean, let's be honest because like I said, when you mentioned Santa Claus, I was thinking, "Well, I'm due to inherit a good portion of this," and let's be realistic, you know? I know that I will be, and so how do I maximize that dollar amount? Because I'm pretty sure grandma, she's in a very good place. I have her in a wonderful home. She's being cared for and she's almost even thriving now, if you can imagine that for a 96-year-old. And so, you know, grandma could live another seven, eight years. I mean, she never smoked, she never drank, she never ate a lot of meat. She's in a really good place right now. She's great health. So, you know, should I invest and try to maximize?

Scott: Well, you have a fiduciary responsibility to act in your grandmother's best interest first and foremost.

Angela: Correct. So, maximizing the money for her should she need it. Of course, it's hers. It's hers first and foremost. Yes.

Pat: You could make an argument that 25% or 30% of the portfolio would be in equities.

Scott: Has your grandmother ever invested in anything outside of CDs?

Angela: No, but I don't think she knew how to.

Scott: I mean, here's the risk. You invest somewhere else, right? Like, let's say you take a portion of these dollars, you invest it somewhere else. Grandmother doesn't make it eight years, she makes it eight months. The market's down at the time, and some other beneficiaries say, "Wait. Well, this thing is declined in value."

Pat: But I think you could separate that, Scott, because let's say that the payment on cash...

Scott: How much of all this are you set to inherit?

Angela: A little over half.

Pat: Yeah. So, you could bifurcate those. You could keep those bank CDs on there. It's just an accounting.

Angela: Can I keep the CDs for all the neighbors and friends separately?

Scott: That's right. You certainly could. Yes. Absolutely.

Pat: I don't know how the court would feel about it. I don't know if we're qualified to answer the question.

Scott: Well, yeah. Well, this is getting into legal advice and we're not attorneys.

Pat: This is legal advice.

Scott: If it were me, I wouldn't do it.

Angela: Okay.

Scott: You disagree?

Pat: If it were me, I would do it. I would take $500,000, remember because we're investing on Angela's timeframe.

Scott: Well, when grandma has financial needs, it's important that it's all pro rata to the exact percentages of how things are today.

Pat: It wouldn't be. It wouldn't be. This is why we need an attorney.

Scott: Yeah. Well, here's the challenge. So, Angela takes $500,000, let's say, invest it somewhere. It's fluctuates in value. Grandma needs more money for the care that she's got right now. Money is pulled out of some various accounts.

Pat: It's an accounting issue. That's right. Yeah. Okay. I'm with you, Scott.

Scott: And so suddenly it's six years down the road, grandma dies and one of the beneficiaries says, "Hey, wait a minute. You were not contributing equally to this because you invested..."

Pat: To the benefit of yourself. Yeah. Or for financial benefit.

Scott: The risk is with one of these other beneficiaries coming back to you and saying, "You did not act in a fiduciary manner to grandma, number one, and to the beneficiaries, number two." That's the risk you run into in some of these.

Pat: That's right.

Angela: Okay.

Pat: I'd run it by an attorney.

Angela: Well, the attorney, what she has told me to do, so I had to get the exact amounts of the accounts on the exact day that I took conservatorship, so then I have the inventory. And so she was going to have me invest these through, like, Charles Schwab using my financial advisor and keep each account as is. So, if there's four different beneficiaries of neighbor and friends, there'll be four different accounts and keep every paid on death beneficiary as is. And so like [inaudible 00:25:04.190] just have my name, I would do that one as a separate account [crosstalk 00:25:07.896].

Scott: And then what happens when we need...What income is paying for your grandmother's care?

Angela: There is a checking account that I would be the beneficiary on, but that's her working checking account and that one I've turned into a conservator account and that's the one I'll be working on.

Pat: How much is in it?

Angela: $250,000.

Pat: How much is the care?

Angela: Plus she gets railroad retirement.

Pat: Yeah. How much is the care a year?

Angela: $5,300 a month.

Pat: That's actually not bad.

Angela: Yeah. It's a wonderful place too. It's beautiful, and there's only five residents, so she gets eyes on her all the time. So, what do you think of investing each one exactly as is? So, if there's a total of...

Pat: And how would it be invested?

Angela: Through really safe, like, money market accounts or, like, some other really safer accounts so that I'm not completely being...you know, I don't [crosstalk 00:26:10.902].

Scott: And how are you gonna treat the other beneficiary accounts?

Angela: The same way. Take 'em all, so [crosstalk 00:26:16.217].

Pat: Well then we just said the same thing that...

Scott: Have one account then.

Pat: Yeah, just have one account. I would just do it at a local bank.

Angela: But do it at a local bank?

Pat: Yeah. I would just do it at a local bank.

Scott: And if I were acting as conservatorship and there were other beneficiaries, I would take the path that had the least amount of risk for me.

Pat: What you need to worry about is litigation.

Scott: Litigation. Yeah. Talk to an estate attorney who specializes in litigation. I mean, I know an attorney who does.

Pat: I do.

Scott: It's one of my neighbors. That's what he specializes in.

Pat: Estate litigation.

Scott: Yes. When beneficiaries are fighting one another.

Pat: I agree with Scott. I would just bring it to a local bank and not get too fancy with it.

Scott: I would too. I really would.

Pat: I wouldn't take the risk. She's 96. She's 96.

Scott: All right, Angela.

Pat: Well, listen, a cautionary note for...I can't say how many clients I've had over the years that I've asked and asked and asked, and they don't do a trust until it's imminent. So, appreciate the call, Angela.

Scott: Yeah. And fortunately, I mean, she's 96, sometimes it happened...I had a friend who was 55, 54 when Alzheimer's kicked in and died at 57 or 58. Yeah. Rare, obviously, but I mean, having some documents in place to spare...and frankly, even if a trust was set up, she's still gonna have to deal with these kind of thorny issues.

Pat: It's just easier.

Scott: Infinitely easier, yes. That's for sure. All right, let's continue on here. Let's...

Pat: I don't know if it's finitely easier. That's an exaggeration.

Scott: It didn't take all of her time. It didn't take infinity.

Pat: That's right.

Scott: It probably felt that way. Let's talk with Joan. Joan, you're with "Allworth's Money Matters."

Joan: Hi, how are you?

Scott: Hi, Joan. We're fantastic.

Joan: Great. Well, I have a question about, I am 82 years old and I'm wondering how much money I should have in mutual funds and how much I should keep more liquid at this age. What kind of mutual funds I should have, whether I should have equity or growth or what's going on.

Scott: Do you have a financial advisor you've been working with or you've been doing things on your own or how's this...?

Joan: No. Mostly I've been doing things on my own.

Pat: And how much money are we talking about?

Joan: Well, total of my husband and myself, a little over $400,000.

Pat: And have you ever owned any mutual funds or those types of...?

Joan: Yes. I've got about $91,000 invested in mutuals right now.

Pat: And what kind?

Joan: Well, diversified...All I have is a bunch of ticker symbols, so. I have a Wells Fargo [inaudible 00:29:36.145] I have a Vanguard.

Scott: And how have you picked all these?

Joan: That's a good question. Well, the Invesco Fund I've had since the '90s. That was my first one, but it's changed hands several times, so.

Scott: And is this $91,000 mutual funds, is it held inside of a retirement account, an IRA or it on the...

Joan: No, no. I have a separate IRA.

Scott: Okay. So, it's in a brokerage account.

Joan: Yeah.

Scott: And the income that's coming into the family now, where's that income coming from?

Joan: That's my husband's teacher's retirement. But he's 92 and he is not doing very well so that's the variable. And I won't really have an income other than a very small Social Security [crosstalk 00:30:36.548].

Pat: So, when he elected his pension option, did he take a survivor benefit on it?

Joan: No.

Pat: He took a single life only?

Joan: Yes.

Scott: And is there any whole life insurance or something like that to replace that pension or no?

Joan: Well, I have a whole life policy, yes, $61,500.

Pat: On him?

Joan: Yes.

Scott: And is your home paid off?

Joan: It is, but that's odd because it's a third marriage for both of us and his kids get the house. I can live here until I die if I choose to, but it's a lot of property for me and it's in a fire area and...

Pat: And your insurance premiums are going up.

Joan: Pardon?

Pat: And your insurance premiums are going up?

Joan: Oh, yes. Oh, yes. And it's a whole acre to take care of.

Pat: And he's 92.

Joan: Yes.

Pat: I gotta tell you, I think that you're...I wouldn't put any more money in equities. I would be very, very comfortable with where you're at today.

Joan: Okay.

Scott: Yeah, I think the planning really needs to be when your husband passes, what's life look like for Joan, right? So, you're already looking where you're living now thinking, "I don't think I can take care of this property, nor do I wanna take care of this property," but what you've got going for you is essentially free rent while you're there, assuming that there's a trust set up that states that, versus leaving that place and living somewhere else and then, "How do we pay for that? Do we use a reverse mortgage and use that for a purchase, an original purchase using a reverse mortgage for half the balance at the...?"

Joan: I can't. I wouldn't or/and I can't do that legally [crosstalk 00:32:33.167].

Pat: Oh, no, no. Correct. You can't do it on the existing home, but you could do it on a new purchase. So, how much income comes into the household today?

Joan: Let me see.

Pat: Approximately.

Joan: Probably about $3,500 at tops.

Pat: And if your husband were to pass away, how much income would be coming into the household?

Joan: Under $500. Unless I set up an income from all my funds.

Pat: Okay. Yeah. I'm calculating that as we speak. Yeah, you're...

Scott: Yeah. And I take back the reverse mortgage. You're gonna need more income personally.

Pat: Yes. It wouldn't work. So, you should expect that you're probably going to stay in that house until your dying day, just financially.

Scott: You might be better off hiring a caretaker a day a week, or whatever it is to do...That might be a lot less expensive than you paying rent somewhere.

Pat: So, I would plan on that and then I would keep that 75% of the portfolio approximately, 78% of the portfolio in cash today, because we don't know whether you're gonna need that money tomorrow or next year or the year after that, and what we don't wanna do is to take any more of your portfolio and put it at risk. And so when we talk about risk, there's short-term risk, there's long-term risk, right? And the markets go up and they go down. And we just...

Joan: They certainly do.

Pat: Right? And we don't know whether you're gonna need the money income off this tomorrow or in two years from now and since that's an unknown, to put risk on this portfolio would be dangerous, and first of all...

Scott: From an emotional standpoint, I mean, your husband passes away at the same time the markets are down, I mean, that...

Pat: Yeah. And where do you have the cash invested?

Joan: The cash is in a high yield savings and I have a large CD coming due in October, maturing in October.

Pat: Perfect. Perfect. Perfect. So, the expectation is that you're gonna wanna stay in that house as long as you possibly can.

Scott: Yeah, I agree with Pat because it's free rent. So, if there's some additional cost to maintain it, that cost even on a monthly basis maybe substantially less than you trying to pay rent somewhere.

Joan: I think so, yeah.

Scott: Yeah. All righty.

Joan: Okay. Yeah. That sounds great.

Pat: All right. Appreciate the call, Joan.

Scott: All right, Joan.

Joan: Thank you. Bye.

Scott: I wish you well. Yes. Yeah, that's tricky. Well, I mean, fortunately she's got...

Pat: A life estate.

Scott: A life estate to stay in the house and some of her own savings.

Pat: Yes. Yeah.

Scott: Otherwise there's...yeah.

Pat: I was wondering why took a single life only on his pension, but...

Scott: Well, Pat, a lot of...in the teacher's realm, it's crazy. We will go back to the calls in a second but if public school teachers, they have, instead of a 401(k), most districts have what's called a 403(b). And with a 403(b), the individual owns the retirement plan, not the employer. So like, if you work for a large company, you have a 401(k) plan, the employer sets it up, is responsible for management, it's in a separate trust, money's taken outta your paycheck. Simple. As a teacher, you can invest in a variety of different things, and oftentimes these school districts allow these salespeople to come in, financial advisors. Some are probably really good financial advisors, some aren't such great financial advisors, they're salespeople. And they come in and sell someone on getting their 403(b) set up. But what they also sell is what's called pension maximization.

Pat: Oh. Do you think that was it? It might have been.

Scott: He had a whole life policy.

Pat: Okay. Keep talking, Scott. Explain pension max to us.

Scott: What it is, it says, "Look, you're gonna retire, your pension is gonna be 2 grand a month, but if you want to protect your spouse, you're gonna have to take a reduction so instead of 2 grand, it's $1800 a month. So, instead of doing that, take the 2 grand a month, the full amount, don't have anything go to your spouse, no survivor benefit, but then we can buy a life insurance policy for 175 bucks a month, which is less than the $200 reduction you were gonna have, so why don't we do this and set this thing up."

Pat: And they call it pension max.

Scott: Pension maximization.

Pat: I've never seen it work. I've seen it tried. I've sat down with many of people that had done that after they took the pension and...

Scott: And that would be my suspect that's what happened here. Because he has a whole life insurance of $61,000. How many 92-year-olds have a whole life policy still?

Pat: All right, good enough.

Scott: And the only reason you would need that if it's going to replace an income stream, but that $61,000 is not gonna go very far.

Pat: Not far at all.

Scott: Not replacing that pension.

Pat: Yes. Stay away from these pension max schemes as they were called.

Scott: I've never seen them work.

Pat: I've never seen them work.

Scott: And I've sat aside with widows trying to figure out how we're gonna...

Pat: Where they had selected a...

Scott: I mean, picture a woman, I'm gonna call her Judy. Her husband died. They were sold this pension maximization. The life insurance wasn't nearly enough. She sold her house and bought a mobile home and I was still concerned about how she was gonna make it all work. This was years ago.

Pat: Yeah. Not good. No. By the way, so I sat down with the people that are trying to make this decision about what pension option to select. So, you normally get, like, there could be 2, 3, 10 different options. You get a single life, if you're getting a pension, you could get what's called a joint and survivor where you take 80% and they provide income to your surviving spouse for the rest of their life [crosstalk 00:38:36.126] calculation with popup provisions. As I explained it just last week, it doesn't matter to the plan, the pension administrator which one you take. It is all the same net present value to them.

Scott: Based upon a population that is not medically underwritten.

Pat: Okay. So, that's where it comes into play, which is that it's not medically underwritten.

Scott: Like a life insurance policy would be today.

Pat: So, what it means is if you have a shortened life expectancy, shortened life expectancy, it may drive your decision versus if you believe you have a normal or above normal life expectancy.

Scott: Yeah. If you have terminal cancer and you have three months to live, you're gonna take the maximum survivor benefit.

Pat: Yes. Or a lump sum if they have it.

Scott: Yes. And conversely, if you're the healthiest person ever, you know, to live and your parents live to be 108, and your spouse is ill, then you might choose something different. All right. Let's continue on with calls here. We're talking to Larry. Larry, you're with "Allworth's Money Matters."

Larry: Hello.

Scott: Hey, Larry.

Larry: Fantastic. My name's Larry, as you know, and I just got a couple things. So, we're trying to consider...I've retired. I retired in September of last year. Kind of, you know, we plan to retire but it kind of happened sooner than I thought. So, I have [crosstalk 00:40:12.330].

Scott: How did that happen? Because, I mean, statistically like one out of two people retire earlier than they had planned. What was your situation? I mean, that's just what happens.

Larry: Well, my situation was I had left my first job because I needed to leave. I had 37 years at one company so I really could take a pension. And so I took a pension because I needed to take my mother on in my house and, in fact, I needed to purchase a larger house to accommodate her. So, I took on a second job and so money was good. You know, I actually made more money at the second job than I did at the first, plus I had the pension coming and, you know, we're doing the dance. And then the workload became difficult to manage and watch my mother as she's staying with us in the house, and so we decided that could retire, you know, of course minimize the cash flow, but that we could retire and get done what we needed to get done with my mother.

Scott: Yeah. Well, bless you.

Pat: Very nice, taking care of your mother.

Larry: So, I was 64 at the time, now I'm 65. I just became 65 this month, but it left me with was 401(k) accumulations in both the newest job and the job I retired from. And not just 401(k) but also, you know, we had some IRA money as well. And so I've been told that I need to combine the two 401(k)s and we're talking about $45,000 from one account and $180,000 from another, that I need to combine those two and then do some type of investment strategy with that even, you know, other words, take the 401(k), get rid of it and do something else.

Pat: You mentioned other IRAs. How much do you have in the other IRAs?

Larry: So, I have $120,000 in one IRA. And my wife is still working and she has accumulations in her 401(k) through Vanguard as well.

Scott: You don't have to do anything.

Pat: Yeah. Who told you you had to?

Larry: So, maybe it was one of those financial advisors that...

Scott: Salespeople, yeah. So, you don't have to do...you don't...yeah.

Pat: You don't have to do anything. Now, in saying that, in saying you don't have to do anything, it might be more convenient for you to have all these in one IRA. I could tell you what I would do is I would combine them all into a single IRA just for convenience...

Scott: And easier to manage.

Pat: Much easier to manage.

Scott: And you could set up a monthly income if need be.

Pat: Yeah. And one, you name your beneficiaries, it just makes it cleaner. Now, in saying all that, that's what I would do, but you don't have to do anything. And then I would put an investment thesis together and then operate the portfolio based on that thesis. And when I say the thesis, it's like, when do I need income? How much income do I think I'm going to need? How much exposure do I want to equities or real estate or bonds and cash? And then I would build a portfolio around it.

Larry: Okay.

Pat: So, I would put them all together and now you have an account with approximately $345,000 in it and build the portfolio. The person that said you needed to do this, right, you needed to do this, where were they from?

Larry: They were independent and I've had a couple just before I left the company, before I actually left on the retirement date, I spoke with someone and they were from a...and I can't remember the company's name, but it was an investment firm on the East Coast. But the other two guys who talked to me about it, they were independent investors and, you know, of course they had accounts at both Fidelity and Vanguard, which were annuity accounts, by the way.

Scott: Okay.

Pat: Okay. All right. Well, you don't wanna do that, so don't talk to those people.

Scott: You're not buying an annuity. You don't need an annuity.

Pat: You don't need an annuity. It's additional cost, there's restrictions. It's just...there is a place for annuities in this world, but not for you.

Larry: Now, you mentioned just now monthly...determine, you know, set up my plan and determine when I'm going to need monthly income and, you know, let that kind of help me. So, what type of account would give me monthly income?

Pat: Well, any kind of an account would give you monthly income. The question is how much and when. So...

Scott: How old is your mother?

Larry: She's 91.

Scott: And what's her health like?

Larry: Oh, she's there. Everyone's always amazed that she's so healthy.

Pat: How old was your father when he...?

Larry: Her brother's 102. My dad passed at 70. I think he was 77, so he passed, I think it was probably 13 years ago.

Pat: Are you taking Social Security?

Larry: I started taking Social Security early, but I started taking it, yes, when I retired.

Scott: And does your mother have any assets or any income?

Larry: She does. She has a home, not in this state but in another state and I actually rent it out to someone, and of course she gets my father's retirement as well as Social Security.

Scott: And so are you doing fine without having to take any money from your 401(k)s?

Larry: I am. I actually am at this point, yes.

Pat: When your wife retires, will you be doing fine without having to take money from the 401(k)?

Larry: So, my wife will be 62 this year. Oh, sorry, next year, and if she retires this year because she's wanting to do her own business in that, but if she retires this year or leaves the company, we should be fine for a year and a half to two, depending of course on how the economy moves, right? So, yeah, I think I can be fine because then we'll take her Social Security early too [crosstalk 00:46:36.514].

Scott: And is your home paid off?

Larry: No. So, I had to buy...It would've been, but I had to buy a bigger house to accommodate my mother. I have a five-bedroom house [crosstalk 00:46:47.221].

Scott: And how big is the mortgage?

Larry: Oh, the mortgage is $2000.

Pat: No, what's the amount? The balance due?

Larry: Oh, the amount left on the balance. Okay. I got you. I have $285,000 left, and the house appraises at $630,000.

Pat: Are you gonna stay there?

Larry: So, no. We haven't made up our mind. Let me say that. With all that happened in, what was it, 2021, I believe, where everything escalated in price, I literally could sell the home and buy one smaller for cash.

Pat: Plan on it.

Scott: And the house that your mother lived in...Do you have other siblings? Are there other beneficiaries?

Larry: I have a brother. I have one brother and the way we set it up is the house is still in her name, but when she passes, it automatically transfers to both of us, and I carry 51% of that.

Scott: And what's the value of that home?

Larry: It's not much. It's probably $74,000.

Pat: You need a financial plan. What scared me most in this conversation is you said, "Based upon the economy in the next couple years, we should be fine." That scared me, and the reason is...

Scott: Me too.

Pat: You're 65, right?

Larry: I did that on purpose, yeah.

Pat: Because it really...you're like, whoa, whoa. Because you have to operate your retirement independent of the economy. You have no control over the economy, you only have control over yourself and your investments and what you're gonna spend and where you're gonna live. You need a real fiduciary with a financial planning background to actually run these pro formas for you to say, "Okay. What happens when my wife retires? When should I take, when should she take Social Security? Will we be able to afford to stay in the house?" My guess is that you won't be able to afford to stay in that house with a $2,000 a month payment on it. That would be my guess. But I don't know...

Scott: Unless he used a reverse mortgage, which is the second time I brought it up the show, which I don't talk about very often, but...

Pat: Yeah, but the house you said is too big anyway, so it wouldn't be my first place to go. You need a financial plan. You don't need a...you know, the person that contacted you from back East, my guess it was the custodian for the 401(k) or someone involved with that. That would be my guess.

Larry: Well, actually my manager had a guy who was doing his investment, so he turned me on to him.

Scott: But you don't need an investment. So, Pat's point, like your financial life has changed a lot in the last year or two, right? Dramatically. And you've decided to bring in your mom, which that's a wonderful thing to do. And with everything in life, good things in life, the great things in life cost a great deal, right? There's nothing wonderful in life that just drops in your lap, 99% of the time. Great things in life, great outcomes, takes work, dedication, all those things. Like this is a labor of love that you're doing for your mother. There's obviously a cost in your daily freedom, there's a cost in your finances too. And I think it's important to map all this stuff out. Let's lay it out. Mom lives another 10 years, like how do we cash flow all this? How do we cash flow it so that Larry and your wife can remain retired when your mom eventually passes on?

Pat: So, people have a tendency to wanna start with the investments, but we don't know. I mean, I could throw you a portfolio, I could do this, do that, but unless I actually know what the objective of the portfolio is...

Scott: And when's the chance we may need some of it? Because it might be, you might need more sooner than later.

Larry: I'm following.

Pat: So, you need to find a good financial planner.

Scott: A certified financial planner, someone could do a financial plan before we talk about do we invest in this particular ETF or this annuity or whatever the investment product is, it's really based upon a financial plan, looking at the situation, wife's retiring this fall, your income's gonna be dramatically different than it was when you were both working and you've got your mother living here. What income does she have to help pay for the household expenses and her own personal expenses and all those other things and map all that, and then we can say, "Okay, let's take the 401(k)s and the IRAs, let's put them in one type of portfolio," or, "Let's invest it in these various investments and let's have X dollars a month come into the household to help support," if that's what is needed. But it's the financial plan that helps with that whole thing. So anyway, great talk with you. Great program, Pat, as usual, nice being here with you.

Pat: Yeah. I haven't seen you in a while.

Scott: Certainly appreciate all our listeners. I hope you've enjoyed the program. Enjoy the rest of your week and we'll see you next week.

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