Bitcoin at 60? Bold Moves, Roth Rules, and the Wild World of ETFs
On this week’s Money Matters, Scott and Pat tackle a range of topics, from a wild retirement strategy involving Bitcoin to the often-misunderstood five-year Roth IRA rule. They also dive into the explosion of Exchange-Traded Funds (ETFs), the downside of complicated income products, and a heartwarming yet hilarious look into redecorating empty-nest bedrooms. With over three million downloads, we thank our dedicated listeners—especially those who keep us humble and laughing!
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.
Scott H.: Hey, it's Scott Hanson here. I hope you're having a great Fourth of July weekend. I know we are. We're away, but we have a great show prepared for you. We're gonna talk about maximizing retirement income. Plus, we'll explore some Roth conversions, and of course, we'll answer your calls. And just as a reminder, if you'd like some advice from us, some free advice, reach out to us at questions@moneymatters.com, or you can call 833-99-WORTH. We'll schedule time for you to talk with us on air. Happy Fourth of July weekend.
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 H.: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott H.: [inaudible 00:00:57] talk about financial stuff. Do we need to put the intro every time?
Pat: You know, I figure...
Scott H.: Okay. Huh?
Pat: I'm not changing.
Scott H.: Anyway, we got a good program here. By the way, before we start, we'd looked at some stats. We've been doing this program for almost 30 years, on the radio, primarily, for decades, and then now podcasts, and we just, last year, hit our 3 millionth download.
Pat: Wow. Wake the kids, call the neighbors.
Scott H.: According to Buzzsprout, we are the top 1% of all podcasts for downloads, and according to Listen Notes, we're the top 0.5% for popularity, out of 3.5 million podcasts.
Pat: And I saw my income go nowhere because of this. I didn't get a raise. How is this benefiting me, Scott?
Scott H.: This is supposed to be for the listeners, the 100,000 engaged listeners.
Pat: I'm relatively coin-fed, okay, so I'm gonna ask for a raise.
Scott H.: Why don't you do that? Ask for a raise.
Pat: [inaudible 00:02:00]
Scott H.: Who do you ask?
Pat: How do I ask?
Scott H.: I don't know who you could ask. You're the founder of the firm.
Pat: I know. It sounded like the right thing to say. But now that I think about it... Okay, well, that's nice. Half a percent...
Scott H.: Look, I understand that anybody can start a podcast out of their bedroom.
Pat: Oh, yeah, there's probably millions.
Scott H.: There's 3.5 million globally, according to Listen Notes.
Pat: Globally.
Scott H.: There's probably more than that, though, that don't even know how to get on the platforms. Right?
Pat: There's, like... Yeah.
Scott H.: There's so many podcasts.
Pat: There's so many podcasts. Oh, there's so many. But...
Scott H.: Anyway, glad you're listening to this podcast.
Pat: And what's your favorite podcast?
Scott H.: Well, let's get to the... It's irrelevant.
Pat: No, it's not.
Scott H.: I don't have a favorite. They tend to bounce around.
Pat: Okay.
Scott H.: I listen to, "Honestly," almost...typically, the same day it comes out.
Pat: Do you?
Scott H.: I like [inaudible 00:02:56] I like that [crosstalk 00:02:57]
Pat: And that's with...?
Scott H.: Bari Weiss. Free Press.
Pat: I have listened to that a couple times.
Scott H.: And I've been listening to "Built to Sell."
Pat: Oh, I love that.
Scott H.: About companies that...
Pat: Yeah.
Scott H.: ...sold...people's, founders that sell the business [crosstalk 00:03:14]
Pat: And it's kind of like a, kind of like, "How I Built That." It's very similar to that.
Scott H.: But the opposite. How I sold that, yeah. Anyway.
Pat: Anyway. Let's go.
Scott H.: Yeah. So...
Pat: And by the way, just remind me, so, I wanted to come back to this, about these. You talk about podcasts in the world, 3.5 million. They're doing the same thing with exchange traded funds.
Scott H.: There's so many of them?
Pat: There's so many of them. There's so many of them now. Right? And five years ago, there were almost none. But now they're, like, every flavor. One that just tracks Nvidia stock.
Scott H.: And they're not necessarily good or bad. It's dependent how they're used, like most financial tools.
Pat: That is right. So I'm gonna talk a little bit about the proliferation of exchange traded funds. And it always reminds me of... I met this guy at a conference, [inaudible 00:04:03] years ago. This old, grizzly veteran of the financial services industry. And he said, "Pat, remember, when the ducks quack, feed them." And I'm like, "Well, what does that mean?" and he goes, "If the clients want something, you give it to them, regardless whether it's good for them or not."
Scott H.: Was he serious?
Pat: He was 100% serious. And he sounded just like that. I'm like, "What?" He goes, "When the ducks quack, feed them." Which was, if the clients are asking for something, if it's good for them or not, you give it to them, because you can make money on it. And when I read this article about exchange traded funds...
Scott H.: You thought of that guy?
Pat: I thought exactly of this grizzly old...
Scott H.: And we'll talk about those.
Pat: And we'll talk... Please don't... Because...
Scott H.: No, we won't forget.
Pat: Don't forget.
Scott H.: All right.
Pat: Please.
Scott H.: I'm looking forward to it. Now I don't know if I can concentrate, because I can't wait for this conversation.
Pat: Now you're making fun of me.
Scott H.: All right. Let's take some calls.
Pat: It's not hard.
Scott H.: It is not hard. If you wanna be part of the program, you've got a question for us... And we love taking calls on just about anything financially related. Particularly those that... Particularly those that have saved well, and are looking at how to maximize what they've got, both for themselves and for others. So, you can send us an email at questions@moneymatters.com, and we'll get you scheduled to be on the program. Or you can call 833-99-WORTH, and we'll schedule you to get on the program. We're gonna start off here in New Hampshire, with George. George, you're with Allworth's "Money Matters."
George: Hey, guys. How you doing?
Scott H.: We're great.
George: Anyway, yes. My question is more for my ex-brother-in-law instead of myself. My ex-brother-in-law, he is 60. He's never married. He has no children. He, a smart guy. Has a really good job in accounting. Ten or so years ago, his parents passed away, and he lives in his parents' house, which he co-owns with his three siblings. He also bought a house of his own about 15 years ago. It's now worth $500,000, and he has 50% equity in it.
Pat: Okay.
George: He rents that out for about $2,000 a month.
Pat: Okay.
George: And the big question comes, is that he would like to take that house that he bought, sell it, and convert it to Bitcoin. And I've kinda talked to him a little bit, because Bitcoin is very volatile, obviously, very speculative. And the thinking being that as you get older, you probably don't want such a high percentage of your portfolio into something that risky. Right, but his side of the story is that Bitcoin has doubled every year for the past four years.
Pat: Okay.
George: Which may be true. Right? That may be true. But if you look [crosstalk 00:06:52]
Pat: Well, it wasn't a straight line, but keep going.
George: Yes. Yeah, yeah, yeah. Exactly. Like, if you look back on history, right, there's a lot of things like, tulips and Beanie Babies had a good couple years [crosstalk 00:07:03] back in the day.
Scott H.: That's right. That's exactly right. And I'm sure we can... There's other assets that are up 100x over that period of time [crosstalk 00:07:07] but yes...
Pat: Okay...
Scott H.: ...that's a popular one.
Pat: ...so...
Scott H.: And it's a big one.
Pat: And what did you tell him to do?
George: I think...
Pat: Well, first of all, did he come to you for advice? Or did he just tell you he was doing this?
George: No, no, no. He didn't come to me for advice. No. It's something I just happened to find out, and try to...you know. It's one of those things where, try to talk him out of it, but Bitcoin could go up 20x, and then I'm on the hot seat.
Pat: Does he... I'm asking this seriously. Are there any other mental issues? Truly. What would cause someone to actually act in this manner? No sane 60-year-old...
Scott H.: Is gonna take that big of... I don't know what he has in savings, but does he have a lot in other assets?
Pat: Like, is this [crosstalk 00:07:56]
Scott H.: I mean, if he had 10 million bucks sitting in other assets...
Pat: You'd be like, "Oh, go for it."
Scott H.: Okay.
Pat: Yeah, it's 2.5% of my portfolio?
Scott H.: I'm sick of dealing with this rental. I'm gonna take my $250 grand out of that, and I wanna buy Bitcoin. Fine. If you had 10 million bucks.
Pat: If you have a million dollars...
Scott H.: Then it's insane.
George: Yeah, he...okay. Yes, that was kind of my point of view. I think he should... Especially, I mean, at any age, you should diversify, but especially as you get closer to retirement, right?
Pat: Yeah, and as a percentage of the portfolio. I mean, Scott and I were just talking before the show about bad investments we have made.
Scott H.: We were. Yes. Right? We were.
Pat: That we have made, right? And then...
Scott H.: Not everything works out.
Pat: And then we reminded ourselves, but many great...
Scott H.: Almost all [crosstalk 00:08:39] Yes.
Pat: Great, great investments. But...right? Because, fact, we're human with our own emotions, we have a tendency to dwell on the losses. What percentage of your portfolio do you think this is? Is it little or big to him, or...?
George: I would say it's at... I don't know, but I would say it's at least, I don't know, 20%, 30%, if I had to guess, but I don't really know.
Pat: If we gave you the right answer, what would you do with it?
George: Oh, I'm gonna send him this podcast, so he can hear.
Pat: Well, it's crazy. It makes no sense.
Scott H.: It's pure speculation.
Pat: Why Bitcoin? What's wrong with Nvidia?
Scott H.: What about Dogecoin?
Pat: Yeah, Doge. Why are we stopping at Bitcoin?
George: Yeah, that, exactly. Like, if you were to take even the volatility of Bitcoin out of it, I think if you were to put, you know, as a 60-year-old, if you were to put a large percentage of your portfolio on any one stock...
Scott H.: It would be foolish too.
George: ...your retirement quality of life is gonna be completely tailored to that one investment.
Pat: George, if he was my relative, and he shared this with me, I would say to him, "You're out of your mind. That's just stupid." And then I would leave the conversation there.
Scott H.: And, you can't live with me.
Pat: That's... Fair enough. And I would leave the [crosstalk 00:09:59]
Scott H.: And I'll say, I have had that conversation with many people. They wanna do something. It's like, look, if it doesn't work out, if that's what you wanna do, if you wanna follow...if, instead of taking my advice, if you wanna do that, that's fine. Just remember, you can't live with me.
Pat: We have fired clients over...
Scott H.: Absolutely.
Pat: They're telling us they're gonna do something, and I'm like...
Scott H.: What's the point?
Pat: ..."Well, I'm not gonna be party to this."
Scott H.: No, because you know how it's gonna end up.
Pat: I'm not... And maybe it ends up great. Maybe he's 100% right. Maybe he is the most brilliant guy in the room, and it goes up by tenfold. And now his $250 grand, would be less than $250,000 after taxes, it's probably $200,000, it turns into $2 million. Is his life better? Is he happier? I don't know.
Scott H.: What if it goes to zero?
Pat: But what if it goes to zero? What do you tell that story... Tell the story about the guy with the fishing boat. I love that story.
Scott H.: I love it too. That's why I've told this. This was in the dot com era.
Pat: So, '98?
Scott H.: Probably '99, maybe early 2000s. Maybe early 2000s.
Pat: Okay.
Scott H.: And a client called me up and he says, "Scott, I'm thinking about taking half my portfolio and putting it in the cubes." Right?
Pat: Was the NASDAQ.
Scott H.: That's QQQ. All tech. This was... It had had a huge run-up. Just like your ex-brother-in-law saying, "Here's how great it's done the last four years." NASDAQ had been on fire. It was up 85% in the year 1999. And so I said... Let's call him Bill. I said, "Bill..." And Bill had a house in Northern California. And he had a house up on the coast in Washington.
Pat: I thought it was in Alaska.
Scott H.: I changed the...
Pat: It was Alaska. It was Homer.
Scott H.: I'm trying to keep a little anonymity here.
Pat: Okay. All right.
Scott H.: So, let's say it's not Homer.
Pat: I'm not [inaudible 00:11:49]
Scott H.: I'm trying to change a little of the facts here. I should have changed Bill's name to something different while I was at it. So, [crosstalk 00:11:59]
Pat: His name was Frederico.
Scott H.: So, he spent the majority of his time in his cabin on the water, out...and is fishing. He fished all the time. He loved it. He had a fishing boat. And he called. He wanted to make this move. And he says, "What do you think about it?" And I said, "Well..."
Pat: Half of his portfolio, all tech.
Scott H.: Half of his portfolio.
Pat: And he was living off...
Scott H.: All tech stocks.
Pat: Yeah, and he was living off the portfolio.
Scott H.: Correct. He was retired. And I said, "Well, here's the thing, Bill." I said, "If you're right, we can trade in that fishing boat for a bigger fishing boat, with more electronics and all the goodies on it. But if we're wrong, the fishing boat's gone, and probably the cabin as well."
Pat: All right. So, now you did...
Scott H.: So, I framed it back to what... This is not just numbers on a statement, right?
Pat: This is life. This is lifestyle.
Scott H.: This is how it translates.
Pat: Yeah, no one's gonna starve in America, unless you're mentally ill or have no access to it, but, it's lifestyle.
Scott H.: What do these dollars actually mean? And so, the concern that you have, George, obviously, that we have, with this 60-year-old male that if he probably doesn't have much in savings, and he takes his one asset he does have and puts it in Bitcoin...
Pat: Yes.
Scott H.: I would just tell him, "You can't live with me."
Pat: Yeah. And it's your ex-brother-in-law, which I think is interesting, in and of itself. Yeah. I mean, it's asinine. I think people...
Scott H.: Am I allowed to say that?
Pat: Yes.
Scott H.: It's crazy. It's all about probabilities of outcome. And particularly as we get older, we don't have the time to make it back up.
Pat: Yeah, if he was 30, I'd go for it.
Scott H.: Whatever. It's not gonna make it...
Pat: Yeah. And again, you can't live with me.
Scott H.: But it's coming back to, like, what happens in the best-case scenarios, but what are the worst-case scenarios here? Like, when we do financial plans with people, we look at what happens if the day after you retire, we go through another financial crisis?
Pat: So, probabilities of success or failure.
Scott H.: Correct. And most people are much more concerned about maintaining their lifestyle than they are about becoming wealthier. And if you do something that's suddenly gonna have a 60% chance that your lifestyle's gonna go backwards, most people are like, "Hm, I'm not gonna take that."
Pat: That's right. Unless... Right? And it all gets down to what percentage of his portfolio is this. But you're right. You know exactly... And you're gonna send him this podcast?
George: Oh, yes.
Pat: That's all we need, is another negative review.
Scott H.: All right. Appreciate the call, George.
Pat: [inaudible 00:14:38]
George: All right. Thanks, guys.
Scott H.: Yeah. Is...
Pat: So, Scott, you talk about "you can't live with me." So, you know, many of the listeners know I have four children. They were home for Christmas. And my wife and my only daughter were going to each one of the kids' bedrooms, and they wanna redecorate them for some reason. I'm like...
Scott H.: Redecorate them how?
Pat: That's what I said.
Scott H.: Who wants to redecorate them?
Pat: My wife and my daughter are like, "We're gonna move some furniture out of this thing and repaint the walls and the whole bit," and I go, "What do...?" The kids are gone. They only come home for, like, a week a year.
Scott H.: Well, does it still look like they live there?
Pat: Yes.
Scott H.: Oh, well, I can understand your wife and...
Pat: Really?
Scott H.: Yes.
Pat: I just shut the door. I just shut the door. It's fine. They just, the door. It's closed. [inaudible 00:15:20] have anything to do with it. So, the end of the story. So, there's this, like, kind of a futon thing in my son's room, and it's like this, I don't know what it is. Starts with a P or whatever. So, my wife...
Scott H.: What?
Pat: It's a chair. It's a chair thing, right? So, my wife actually, she says, "Okay, can you help move this thing out in the garage, and then get rid of it?" And so I said to my daughter, I go, "I don't know [inaudible 00:15:46] get rid of it." "I'm gonna put it on Facebook, and just send it out, like, here, it's yours. Come into my house and pick it up." So, we took pictures of it. And me sitting in it, I was modeling for it, which just created a whole new list of just people making fun of me on the internet. But my son responds, "Oh, this is a great way to find out you're changing my room." He saw that we're giving away his furniture from his bedroom, and he responded on Facebook. "What happened? Why are you doing this to me? My room."
Scott H.: How old's your son?
Pat: Twenty-three or 24?
Scott H.: So, I had a good friend of mine... I'm gonna give his real name. There's no anonymity in this one. Mark Holloway, his dad passed away, and I went down to San Diego to go to his funeral. And so I went, and I saw the family home.
Pat: Okay.
Scott H.: Mark is 60.
Pat: Okay, all right. I know where this is [inaudible 00:16:40]
Scott H.: The room he shared with his brother had not changed since they went off to college.
Pat: Little League trophies?
Scott H.: I kid you not. The trophies, ribbons from the track. I laughed so hard. I got such a kick out of it. The room, it was like a museum from his teenage years. Had not changed.
Pat: What's wrong with that?
Scott H.: Well, I guess his mom didn't have any problem with it. She enjoyed it, apparently. She would probably go in there from time to time...
Pat: Apparently [crosstalk 00:17:11]
Scott H.: ...and think about the good old days.
Pat: Were they?
Scott H.: I don't... I guess. If they were bad, she would have... Maybe that's why I changed my kids' rooms. [crosstalk 00:17:19] The day they leave, remodel, repaint.
Pat: That's, like, they're out. They're in the car, driving away. You're waving. You run back in the house, you start stripping the room?
Scott H.: We're gonna go back to calls here in a minute. [crosstalk 00:17:35] I remember my oldest daughter was in high school.
Pat: All right, this is a financial show though, right?
Scott H.: My oldest daughter, when she was in high school, she wanted to paint her bedroom.
Pat: Okay.
Scott H.: And she was, like, 15 or 16.
Pat: The young Jessica.
Scott H.: She was young then. Yeah, she was 15 or 16. So I thought, be a nice thing for father-daughter time together.
Pat: Oh, to paint?
Scott H.: Yeah. So...
Pat: What's wrong with you?
Scott H.: Her ceiling had a little different shape to it than...it wasn't flat. So, the corners and stuff, we spent, like, three days, maybe not full days, but three days painting. When she moved out, I'm like, "I gotta change this thing," because it looked horrible. And I hired a painter. He nailed, blew the thing out in, like, three hours. I had to hire a painter the first time, because I couldn't get the lines good enough. I get someone to come make it look decent. Anyway.
Pat: All right. Let's go to the calls.
Scott H.: Enough of life stories.
Pat: Oh, my gosh. That, actually... Well, it's nice seeing you again, Scott. We haven't talked in a couple weeks. It's really kinda fun. Kinda miss you a little bit. I'm not...not enough that we're gonna actually start spending time together. We...so, Scott and I stepped down as CEOs. We don't really interact much anymore.
Scott H.: No, we don't interact much anymore.
Pat: Yeah. We used to talk twice a day.
Scott H.: Oh, oftentimes, I'd get a call from Pat at, like, 7:01 in the morning.
Pat: Because you told me not to call before 7:00.
Scott H.: So, I could tell, uh-oh. Pat's been awake since 3:30, and mulling on something. There's something in the business has been bugging him since 3:30 in the morning.
Pat: Oh, my gosh. I don't miss that at all.
Scott H.: All right. Let's go back to the calls here.
Pat: I don't miss it even a little.
Scott H.: Now you're just doing the stuff you like to do.
Pat: That's right. A hundred percent.
Scott H.: [crosstalk 00:19:07]
Pat: Like, I go out to lunch with clients now. I've never gone to...
Scott H.: [crosstalk 00:19:11] people.
Pat: I've never gone out to lunch with clients in my whole career. And I go out to lunch with clients. We're not in a hurry to go anywhere. They're retired. I still kinda have a job.
Scott H.: "When do you need to be back at the office, Pat?" No rush.
Pat: I don't even pretend.
Scott H.: You want a dessert? I heard the flan's good.
Pat: Oh, listen, it's Tuesday. You know movies are half price?
Scott H.: All right. We're gonna start... I talked at the beginning of the program, all these engaged listeners.
Pat: That's all changed now.
Scott H.: The numbers are going down.
Pat: We obviously have decided [inaudible 00:19:50]
Scott H.: All right. We're in Ohio, talking with Scott. Scott, you're with Allworth's "Money Matters."
Scott: Yeah. Hi, Scott. Hi, Pat.
Pat: Hi.
Scott H.: Hi.
Scott: I wanna let you two know that I am a avid listener of your Saturday morning podcast, for many years. And during that time, I have managed to pick up a few financial nuggets along the way. So, I thank the two of you for that.
Scott H.: Thank you.
Pat: [crosstalk 00:20:18] probably a mistake, but...
Scott: No, no. It's been very helpful.
Pat: What can we do to help today?
Scott: Okay. So, I'm a firm believer of the Roth IRA...well, the Roth accounts, whether it be through my company, initially, Roth 401(k), to now, in retirement, my Roth IRA. And during the last few years, I've done Roth conversions. I've contributed to my Roth IRA account. And the five-year rule gets thrown in my face all the time. So, what I'm wanting to ask is...
Pat: When you say that it gets thrown in your face, other people tell you about the five-year rule?
Scott: Well, yeah, they tell me about the five-year rule, what that consists of. So, my question does center around the five-year rule item.
Scott H.: Okay.
Pat: Okay.
Scott: So...
Scott H.: And then I'm gonna tell you why it doesn't pertain to you. But go ahead.
Pat: Yes.
Scott: Okay. Well, hopefully not. So, the five-year rule, I know it only pertains to earnings, and not what I contribute. So, who keeps track of when the five-year rule ends?
Scott H.: Nobody.
Pat: That's brilliant. That is the best question we've had in a long time.
Scott H.: Nobody.
Pat: No one.
Scott: Well, I've asked that question of many financial, and I never get a response. I never get an answer. So...
Pat: Look, a lot of the tax code is voluntary compliance.
Scott H.: That's right.
Pat: A lot of the tax code. 529 plans, right? Have you ever seen anyone audited on a 529 plan?
Scott H.: Never.
Pat: Have you ever seen anyone audited in a Roth five-year rule?
Scott H.: No. Never.
Pat: Never.
Scott H.: Well, then, it's very rare someone takes money out within that five-year [crosstalk 00:21:59]
Pat: That's right.
Scott H.: Particularly someone who really loves Roths, a firm believer in the Roth.
Pat: Yeah, which is the last dollar to be spent. But your question is actually, it's a brilliant question.
Scott H.: Because...so, there are some laws that get passed, regulations, that require financial companies to do certain things.
Pat: Reporting of income.
Scott H.: Reporting of income. How much dividends, and what transactions occurred in your account last year.
Scott: Okay, but... Okay, so...
Scott H.: And required minimum distributions. What is the requirement of distribution?
Pat: But none that are required on a Roth.
Scott: Really? I thought they required it as, going through a financial institution, they are required at the end of year to provide a form telling you what you have contributed to your Roth IRA...
Scott H.: That's right.
Pat: That's right.
Scott: ...or a traditional IRA [crosstalk 00:22:47]
Scott H.: But there's nothing to say that... When was the first account opened? When was the first Roth contribution made?
Scott: Yeah.
Scott H.: There's no requirement on that.
Pat: There's no requirement for that, to the financial institution to report that.
Scott H.: Otherwise, yours might say, "Oh, first contribution made in 2006."
Scott: Yes. Yes. So, when I convert from a traditional IRA, maybe in stocks, and go over to my Roth IRA, keep it in stocks, and then I sell the stocks in my Roth IRA, and do something else, I lose track of what I'm doing. So, you're telling me I don't have to worry about the five-year rule?
Scott H.: [crosstalk 00:23:25]
Pat: Have you taken money out of the Roths?
Scott: I have not.
Scott H.: Okay...
Scott: No, I [crosstalk 00:23:29] plan on taking money out of the Roths for many, many years.
Scott H.: Okay. So, it'll be more than five years since the time you made your first contribution, or the time you made your first rollover. I mean, so, your conversion.
Scott: [crosstalk 00:23:38] Okay. So, it's really not applicable to me, but it could be applicable to somebody else [crosstalk 00:23:44]
Pat: All right. But the reality is, normally, when people use Roths, they use it to feather income for tax...
Scott H.: They're volunteering, paying additional taxes today that they don't have to pay, right?
Pat: Right. Because they...
Scott H.: Because they could have made a pre-tax contribution, or they didn't have to do the conversion. So, these are people that are planning their finances, stating to the IRS, look, I'm gonna send you money today, in exchange for the promise that Congress made, but let's hope they're gonna be good on that promise when I pull my money out 20 or 30 years down the road.
Pat: Right? So, your point is well taken, but it just, it doesn't happen in reality. When you see people take money out of a Roth, what they're doing is they're trying to keep the... They need X income, and they're trying to keep themselves below a marginal tax bracket.
Scott: Yeah. I agree.
Pat: But the reality is, most of the people that have money in Roths also have money in a brokerage account.
Scott: Of course. Of course.
Pat: Right?
Scott: Absolutely. Yeah.
Scott H.: [crosstalk 00:24:47]
Pat: I can't think of when I've had money come out of a client's Roth account. I cannot. Can you?
Scott H.: Yeah, I had someone do it against my recommendation.
Pat: Oh. I can't...
Scott H.: And by the way, you mentioned sometimes we fire clients. That's one I fired.
Pat: Yeah.
Scott H.: [crosstalk 00:24:59] I think about it.
Pat: They just [crosstalk 00:25:03]
Scott H.: I think I fired three clients in my career. That was one of them.
Pat: Because they're not taking... You know they're doing harmful stuff to themselves.
Scott H.: What's the point? I don't need...
Pat: Yeah.
Scott H.: I think I...I don't need... I mean.
Pat: Oh, don't say that. We like clients.
Scott H.: I love clients.
Pat: Okay.
Scott H.: I don't love clients that don't take my advice, that do things contrary to my advice.
Pat: That are gonna... Harmful to themselves, yeah.
Scott H.: What's the point? Why... Don't use me. I mean...
Pat: But, yeah. So, your point is well-taken. But it doesn't... It's not real. It just doesn't happen. I wouldn't [crosstalk 00:25:33]
Scott H.: You don't have to... Scott, you're [inaudible 00:25:35]
Scott: So, if I were to ask an IRS agent, he'd tell me something differently then. Right?
Pat: Why would you be talking to an IRS agent?
Scott: No, I won't. No, no, I don't. No. I...
Scott H.: He might not even know what you're talking about.
Pat: Yeah.
Scott: [crosstalk 00:25:47]
Pat: I mean, out of all the things that they look for tax compliance, that's... Because it generates... By the way, what's the point of it? I mean...
Scott: [inaudible 00:25:56]
Scott H.: They would just assume you'd pull money back out of your Roth and put it in a taxable somewhere else.
Pat: Yeah, but the [crosstalk 00:26:02]
Scott: I would think so.
Pat: But what's the point? Think about this, Scott. What's the point of it? What was the five...what's the point of the five-year rule? Think about... I never understood why it matters.
Scott: Yeah, it didn't make, doesn't make any sense to me. So...
Scott H.: I mean, I understand the 59 and a half.
Scott: Yeah.
Pat: Well, I don't understand why it's 59 and a half. [crosstalk 00:26:21] a round number.
Scott H.: Yeah, but I understand older age.
Pat: Yes, that you have to start withdrawing. And the required minimum distribution's at age, what, 73, 74, 75.
Scott H.: But that doesn't apply to Roth.
Pat: Yeah, yeah. [inaudible 00:26:30] Anyway, I'm just gonna... Scott, we shouldn't... Let's find other things to think about.
Scott H.: Yeah. Is that... Scott, you are a blessed man, if, in your financial life, this is the one thing that you have to worry about. Everything else is so great.
Scott: Well, I [crosstalk 00:26:46] okay?
Pat: What was that? What did you say?
Scott: I do sleep well at night, so I'll just put the five-year rule [crosstalk 00:26:55]
Scott H.: And you're never gonna have to... It's never going to be an issue for you.
Pat: All right. And do us a favor.
Scott: Yes, sir.
Pat: Share this podcast with your friends...
Scott: I will.
Pat: ...especially since you are one of the main attractions. You are the star of the show at this point.
Scott H.: That's right. [crosstalk 00:27:09]
Pat: And so, if you could share it with your friend...
Scott: Well, my name's Scott and I, and, of course, we got Scott on the podcast too, but...
Pat: Yeah. But we're trying to [crosstalk 00:27:17]
Scott H.: [crosstalk 00:27:17] named Scott, it's always someone between age 50 and 68. How old are you, Scott?
Scott: I'm 70.
Scott H.: Oh, I missed it by two years.
Scott: But I act like I'm 50, though.
Scott H.: Okay.
Scott: I act like I'm 50.
Scott H.: I got it.
Pat: All right. Appreciate the call.
Scott H.: Yeah, thanks for calling, Scott.
Scott: Thank you, sir. [crosstalk 00:27:31] gentlemen. See you.
Scott H.: So, on the Roth, the majority, well, roughly half Americans pay no income tax, right? Because the standard, you get a standard deductions.
Pat: Yes.
Scott H.: No income tax. So, those people, if they're saving money in their 401(k) or IRAs, it should clearly be in the Roth.
Pat: That's correct.
Scott H.: They're either in a 0% tax bracket, or a very...10% or 12% tax bracket. It's only, I think, 15% or 18% of taxpayers are in a tax rate lower, I mean, higher than that 12%, that first bracket.
Pat: Say that number again.
Scott H.: It's like 18% of taxpayers.
Pat: Of taxpayers. So...
Scott H.: I think half of the revenue comes [crosstalk 00:28:14] from the 1%.
Pat: Yeah. So, that would be 60% of the population is at below that bracket?
Scott H.: No, like 80%. Eighty percent of Americans should be using a Roth 401(k).
Pat: Okay. All right.
Scott H.: There's no question to even ask. Like, this should be Roth.
Pat: But the reality is, those people don't [crosstalk 00:28:34]
Scott H.: [crosstalk 00:28:34] calling us.
Pat: And, they don't have any money to save. Is it... They're living... It was... Like, growing up, my mom used to say, "Oh, we should have bought that." You know, "We should have bought that property down the street," like, "20 years ago." I'm like, "With what? Where were you gonna get this magical money that we were, all of a sudden become a land baron?"
Scott H.: [inaudible 00:28:58] a couple years ago, I was up in Tahoe, and there was this one area of Tahoe, lots were sold there, $300 a piece in, like, 1930-something.
Pat: Okay.
Scott H.: And someone said, [inaudible 00:29:07] I'm like, "Who had $300 in 1930s?"
Pat: Rich people. [crosstalk 00:29:12] Okay. So, the point being, the Roths.
Scott H.: But if you're in a higher tax bracket, then you gotta really look at it. Do you wanna do a pre-tax or a post-tax? And if you're gonna convert, how much do you convert?
Pat: And when?
Scott H.: And so, myself, I mean, it's the beginning of the year. I went on to my own 401(k), because the contribution limits increased this year, to increase what's going in. And I am on... I do before tax. And I thought about doing Roth.
Pat: And?
Scott H.: I went before tax.
Pat: Because?
Scott H.: There's a chance federal income tax rates will go higher.
Pat: Okay.
Scott H.: I mean, there's, clearly, that can happen.
Pat: And?
Scott H.: And...
Pat: I'm interested in this. This is...
Scott H.: There's also a chance that maybe there's a complete reform in taxes, and there's, we now have a national sales tax, with a lower flat tax rate. That's in the realm of possibilities.
Pat: Okay.
Scott H.: There's also a possibility I don't stay in California the rest of my life.
Pat: That's probably the biggest one. Do you really think that we'd go to a flat tax, or a VAT tax?
Scott H.: And there's also I, probably not gonna spend [crosstalk 00:30:26]
Pat: Some of it's gonna go to charity.
Scott H.: Yes.
Pat: Right.
Scott H.: So, with all those factors, I went... And I don't like the way California spends money, so I'd just as soon take a pre-tax.
Pat: Why would you say that? They just laid 22 miles of the high-speed rail. They've been working it on for...
Scott H.: Twenty years, $100 billion dollars.
Pat: Twenty-two miles. Come on, Scott. It's 22 miles. You could... It's a long way, 22 miles.
Scott H.: Twenty-six billion dollars on homelessness.
Pat: Holy smokes. So, back to that. The tax... Do you think that we would ever go to a flat tax? I just can't see it, because it's not...
Scott H.: Politically?
Pat: It's not progress... We have a very progressive tax system.
Scott H.: Right. That's why half of Americans don't pay any income tax. Now, they'll pay payroll tax. They'll pay Social Security...
Pat: Understand...
Scott H.: ...from which they'll get a benefit from.
Pat: Yeah. But, so, if you went to a flat tax, would that not be considered a regressive tax?
Scott H.: Well, it wouldn't be...
Pat: A sales tax.
Scott H.: Right. It's, by very nature, a sales tax would clearly be regressive.
Pat: Yes.
Scott H.: Because higher-income people don't consume all their income.
Pat: That's right. Yes.
Scott H.: And to your point, if... Your mom's saying, "I wish we had have bought that property," it was... There was nothing... I mean... There's barely...like, which bill do we pay this week?
Pat: Oh, yeah.
Scott H.: I always got a kick out of that.
Pat: Never said anything, though, because I love my mom dearly. Didn't wanna upset her. But I always thought, [inaudible 00:31:44] I grew up in this house. I don't think there was money splashing around.
Scott H.: It is clearly possible that tax rates are lower, and we have a national sales tax, value-added tax. I mean, the EU's got it.
Pat: Yes.
Scott H.: What is it, 17%, 22%? Somewhere in...
Pat: But they have a progressive tax rate as well. They have both.
Scott H.: Yeah, but a lot of countries are lower than ours now.
Pat: All right. Well [crosstalk 00:32:11]
Scott H.: I mean, I think part of it, when you're considering things like Roth, and it's...
Pat: You've gotta take legislation into account. You have to recognize that.
Scott H.: That's right. You're betting...you are betting that the tax code's not gonna be dramatically different, and that your withdrawals will be tax-free.
Pat: That's correct. Right?
Scott H.: So, it wasn't that... When I started in this industry, in 1990, there used to be an excise tax.
Pat: On pensions, wasn't it?
Scott H.: On 401(k)s of greater than...was it $750,000?
Pat: Yeah. What was...there was a name for it.
Scott H.: It was a 15% excise tax.
Pat: Yeah, what was the name for it? There was a name for it. There was a NAICS code.
Scott H.: Don't remember the name. I remember a number, but I don't remember names. But there was an excise tax.
Pat: I remember this.
Scott H.: If you had a lump sum larger than...
Pat: Yes.
Scott H.: I think it was $750,000 wasn't it?
Pat: Yes, yes, yes. Yeah.
Scott H.: There was an excise tax.
Pat: We were retiring...
Scott H.: So, put that in today's dollars, that'd be like 2 million bucks, 2.5 million bucks. There was an excise tax.
Pat: Yeah. So, the money would go into an IRA, but you still had to pay a tax on that transfer.
Scott H.: You paid an extra tax for doing a good job saving.
Pat: Yes, yes.
Scott H.: So, even when you're looking at Roth conversion, some of those things, like...
Pat: Just don't buy in 100%.
Scott H.: That's right. You wanna diversify your tax strategy the same way you think about diversifying your investments.
Pat: Yeah. You know, I was talking to a friend the other day. It's like, it just blows my mind that we get people to qualify for the Obamacare insurance that are worth millions and millions of dollars. These clients are worth millions and millions of dollars. And they get this...
Scott H.: Subsidized...
Pat: ...health insurance because of how we negotiate through the maze.
Scott H.: That's because it's not based upon assets. It's based upon...
Pat: [inaudible 00:33:56] you just find that a little bit crazy?
Scott H.: There's lots of crazy things.
Pat: I don't know. I just always... I just find it just... And I participate in it. I'm helping them.
Scott H.: I had a conversation over the holidays with a family member that was... There was, the discussion on lifting the cap for social security taxes on wages.
Pat: Okay.
Scott H.: Right? So, what is it $170 grand a year, somewhere in there, where you pay social security taxes up to that point of your wages. Above that, there's no tax...
Pat: Yeah, and on both sides. And then Medicare goes unlimited [crosstalk 00:34:29]
Scott H.: Medicare goes unlimited, yeah.
Pat: On earned income.
Scott H.: Correct. On, yeah, wage-type income.
Pat: Yes.
Scott H.: And... Or self-employed income. And so, I was talking to this person, they thought, well, it would seem to be fair that there shouldn't be that cap on there.
Pat: Why? That's what you said.
Scott H.: Well, no, I said... Here's the challenge. When we've got the top tax rate at 37%, plus we've got the 3.8% excess tax...
Pat: I don't... Whatever that... Yeah.
Scott H.: Which is 0.9% above the Medicare tax on... So, let's call it 40%. I'm a resident of California. The top rate there is 13.3%. So, now we're at 53%.
Pat: And, you don't get to deduct state against federal anymore.
Scott H.: That's right. And so...and it's, you pay both sides. So, the employer pays half, you pay half. So, now we're...
Pat: So, now you're at 65%?
Scott H.: Right. So, I said to him, I said the challenge with this...
Pat: Sixty-five percent at the marginal rate.
Scott H.: Yeah. So... And the people who are having these tax problems are the ones, typically, business owners that have been successful, they build businesses, and this. I said, if we adopted this, what's gonna happen is a business person will say, "Do I wanna take the risk to grow my business?"
Pat: It slows innovation.
Scott H.: Because someone's like, "If I lose, no one's gonna bail me out. It's all on me. I can't deduct a capital loss." Except [crosstalk 00:35:58]
Pat: Against income.
Scott H.: Right. So, I'm stuck... No one's gonna bail me out of my capital loss.
Pat: Yeah.
Scott H.: And if I do extremely well, they're only gonna keep 35 cents on the dollar.
Pat: But you could carry that capital loss, $3,000 a year, forever, so you got that going for you. But you can't inherit it. You cannot inherit a capital loss.
Scott H.: Yeah. [crosstalk 00:36:16]
Pat: Because it will be a debt. Right?
Scott H.: Yeah. Yeah.
Pat: It's pretty disappointing.
Scott H.: Well, hopefully you don't have a lot of losses.
Pat: I don't. It's theoretical.
Scott H.: Yeah. I mean, the... You want gains.
Pat: So, what did [crosstalk 00:36:29] how did the argument...
Scott H.: I don't know. That was a [crosstalk 00:36:31]
Pat: And that was it? And you're like...
Scott H.: I said, "Get the hell out of my house."
Pat: "...can you pass me the mashed potatoes? And what is that Jell-O thing?"
Scott H.: It was a good conversation. It was just...
Pat: Are those marshmallows in the Jell-O?
Scott H.: You have those too.
Pat: Oh, my god. All right. Let's go. Let's move.
Scott H.: Yeah. So, right now we're gonna hear a client story from Victoria Bogner. In addition to being a certified financial planner, she's our financial analyst, which is a very rigorous...
Pat: Oh, it's really hard. Yeah. And you work out of what office?
Victoria: I work out of the Lawrence, Kansas office.
Pat: Which is?
Victoria: Which is just west of Kansas City.
Pat: So, share with us the story.
Victoria: Okay. I had a really interesting case.
Scott H.: By the way, and I looked at this. I looked at the notes beforehand of that. Well, this is a good story. This is a...
Victoria: Oh, good. Good. Yeah. It's interesting because I think it impacts more people than people realize. So, I had a prospect come in a few years ago, and among other things, she had an old variable annuity. And this variable annuity had a guaranteed income benefit. So, for folks listening, there are products out there that you can purchase. You stick a chunk of money in, and it's invested in the market. It goes up and down, depending on how you invested it. But then you also can have a provision attached called a guaranteed income benefit. And it's a separate number. It goes up by some amount every year, regardless of what your contract value does. And then later in life, you can draw an income amount off of this guaranteed income benefit number. And the idea is that it's an upgrade from the old idea of annuitizing a contract. You don't really do that anymore. Nowadays, people turn on this income benefit, and it gives them this income for life, even if the contract value goes to zero. But if you pass away and there's anything left in the contract, it goes to your beneficiaries. So, it sounds [crosstalk 00:38:31]
Scott H.: And every contract's a little different, right?
Victoria: It's a... Yes.
Scott H.: Even an insurance company might have 20 different flavors of this. As the years go by...
Victoria: Absolutely.
Scott H.: ...they're underwriting... It's insurance, right? So, they underwrite it and they go, "Oh, there's a risk here that we didn't see." And "Uh-oh, there's this... People found this loophole that they're taking advantage of. We didn't calculate this."
Victoria: That's right. So, even if you have a contract that has the same name as your neighbor, but you took it out a year later...
Scott H.: That's right. It could be very different.
Victoria: ...it could be totally different.
Scott H.: That's exactly right.
Victoria: So, with this [crosstalk 00:38:59]
Scott H.: And by the way, full disclosure, there were some products in the early 2000s that were just mispriced.
Pat: Oh, my gosh. That was great.
Victoria: Oh, so mispriced.
Pat: They had these 6% guaranteed minimum.
Scott H.: And, you had full discretion on how to invest your dollars.
Pat: It was crazy.
Scott H.: And so we utilized them quite a bit then, but [crosstalk 00:39:16] anymore.
Pat: But they didn't... They actually were mispriced.
Victoria: They wised up.
Pat: Yeah, and they...the insurance companies...
Scott H.: And then, now they try to buy their way out of the contract. [crosstalk 00:39:24]
Pat: They offer more money than their contracts are worth.
Victoria: Yeah, you get a letter in the mail, "Hey, can we buy you out of this contract, please? We're losing money on you."
Pat: Okay, so continue with your...
Victoria: So, with... Right. So, with this particular situation... And by the way, the caveat to these products is they're very expensive, right? They can be upwards of 4% or more, when you add up all the fees.
Scott H.: [crosstalk 00:39:45] Yeah. Yep.
Victoria: And the catch is, that fee is assessed on the guaranteed value, and then it's taken out of the contract value. So, if you think about it...
Pat: Which means that the contract is gonna collapse quickly.
Victoria: Exactly. So, if you think about it, if your guaranteed value is twice as much as your contract value, that's not a 4% fee, it's an 8% fee. And that's really hard to overcome. So, this prospect, who is now a client, she was just seeing her contract value go down each year. Her contract value was about half a million dollars. Her guarantee was $800,000.
[crosstalk 00:40:18]
Scott H.: Did she have it poorly invested in there, or... How [crosstalk 00:40:22]
Victoria: Oh, yeah. So, it was a variable annuity, but she had it invested in conservative and fixed, inside the annuity, with whoever sold her this product.
Pat: Which is exactly the opposite, because if you have those guarantees, you go 100%.
Scott H.: You're buying insurance on your portfolio, yeah.
Victoria: You go 100%.
Pat: Yeah, equity [crosstalk 00:40:37]
Victoria: Yeah, you go as far into equities as you possibly can, right?
Pat: Yes.
Victoria: So, this was just mismanaged from the start.
Pat: So, she brings this to you and says, "This is terrible," and you look at it and you say, "Wow, this is awesome?"
Victoria: Well, this is the interesting situation. She didn't need the income. She wanted the flexibility of having control of that money. So, it's an IRA annuity. Her plan was, "I'm just gonna get rid of this thing, roll the money into my other IRA, and wash my hands of it."
Scott H.: And that's probably why she came in. "Hey, Vicki, I wanna get rid of this. Can I transfer this to you?"
Victoria: Correct. And I said...
Scott H.: And most advisors would say, "Yes. Sign here."
Victoria: Yep.
Scott H.: "Transfer the account."
Victoria: Yep. "Open up a brokerage IRA with me. We'll move it over. I'll manage it. End of story."
Scott H.: Yeah. Just give them a little back slap on the way out, and... Yeah.
Victoria: But I said, "No..." Yeah. Yeah. Win-win for everybody, right? Well, what I said was, "Okay, hang on. You've had this contract a long time. Give me the actual contract, so I can read through it and just make sure we're not missing anything." So, I got this old, dusty tome of a contract, riveting reading, let me tell you. And inside that contract was one line that made all the difference. And that line was, "Withdrawals from the contract value decrease the guaranteed benefit dollar for dollar."
Scott H.: Not percentage-wise.
Victoria: Not proportionally...
Pat: Awesome.
Victoria: ...which most contracts are.
Pat: Awesome. Unbelievable.
Victoria: I know. So, [crosstalk 00:42:02]
Pat: And there was no cap on how much you could take out?
Victoria: No. No cap. So, I call the annuity company, with the client, verify that this is accurate. So, what we do, instead of her taking half a million and just moving it to an IRA and calling it a day, we moved $475,000, so 95% of the contract, over to her IRA. So, $475,000 goes to the IRA. Her benefit went down, from $800,000 to $325,000.
Pat: Holy smokes.
Victoria: She was 65, so 5%, we turned on the income of 5% for life. So, she got over $16,000 a year of income, on top of getting to roll out $475,000.
Scott H.: Oh, my gosh.
Pat: Holy smokes.
Victoria: Yes.
Pat: My gosh.
Victoria: So, if she lives another 30 years, that's almost half a million dollars of extra income she would have not had.
Pat: Oh, wow.
Victoria: So...
Pat: Look, we've... This is an extreme example.
Scott H.: This is an extreme example.
Victoria: It is. [crosstalk 00:43:00]
Scott H.: But I utilize something similar. This is an insurance company based out of Los Angeles.
Pat: Yeah, but they had the death benefits. Yeah.
Scott H.: It was dollar for dollar, not pro rata.
Pat: Yes.
Victoria: Yep. Yeah, some companies did it like that.
Pat: And life insurance, but... So, what happens when they... Well you don't have to worry about [crosstalk 00:43:16]
Scott H.: And it only works, it works for those people that invest, and then there's a downturn in the market quickly thereafter, or, like this person, it was just horribly invested. I mean, it was just mismanaged...
Victoria: Yes, exactly.
Pat: So...
Victoria: She kinda had her cake and ate it too, because she got the contract value, most of it, and this income stream for the rest of her life.
Scott H.: [crosstalk 00:43:32] life would have been better for her had it been properly allocated from day one, but...
Pat: That's incredible.
Victoria: Correct.
Pat: And I assume that she was happy with this decision.
Victoria: Oh, very happy. Well, and the lesson is, twofold, A, if you have one of these products, don't rely on the annuity company to see you through to what your best-case scenario is. They are not sitting on your side of the desk. They're not your friend. You call them, they're just gonna say, "Turn on the income, or move it out. Those are your two options," right? [crosstalk 00:44:02]
Pat: "And don't bring it to a financial advisor."
Victoria: So, you've gotta have a financial advisor. Yeah.
Pat: Yeah. Well, don't bring it to a financial advisor that just says, "Yes...
Scott H.: That's gonna sell annuities.
Pat: "...we're gonna just transfer this."
Victoria: Right. Right. You wanna have a fiduciary... Please call Allworth. [crosstalk 00:44:18] If you have an old, crusty annuity that you don't know [crosstalk 00:44:22]
Scott H.: Annuity or life insurance product.
Victoria: ...and you don't understand, call us.
Pat: Or life insurance policy.
Scott H.: Because there's some of those old life insurance policies...
Victoria: Or a life insurance policy.
Scott H.: ...don't...that make sense to get rid of either.
Pat: Yes.
Victoria: Right. And they can be so complex, and you really gotta dig into that contract to understand the ins and outs.
Pat: Yeah. I just did it with the client. He came to me, $2 million face value, life insurance, and we lowered the face value down.
Scott H.: Universal life [crosstalk 00:44:48]
Pat: Universal life. We lowered... It was variable universal life. We lowered the face value down, so it would accumulate more. And then we named all his kids as the beneficiary, and moved his wife off, so that...for estate tax purposes.
Scott H.: And there's no premiums payment anymore?
Pat: No. None. And the thing just, it... Yeah. But you see it all the time, right?
Scott H.: It's these old contracts.
Victoria: Yeah.
Pat: Vicki?
Scott H.: I see it all the time.
Victoria: And normal people don't realize that there are these options out there, that they can do with these products. And calling the annuity company, they're not gonna tell you. So, you have to have somebody who knows what they're talking about, knows what they're doing, who is sitting on your side of the desk, to help you navigate that.
Scott H.: Yeah. And it's primarily these older contracts, because the insurance companies got wise.
Victoria: They got wise to it. Yeah.
Scott H.: This is a really stupid mistake on their end.
Pat: Yes. So...
Victoria: Yeah.
Scott H.: Yeah, I remember years ago, a product that we used, you were allowed to manage your funds by yourself. There was, I don't know, 30 different investment options.
Pat: It was crazy.
Scott H.: You could make changes every day. You could make the worst decisions possible, and the insurance company was on the hook.
Pat: It was crazy.
Scott H.: There was no restrictions whatsoever.
Pat: We used them back in the day. It didn't last long. That was the insurance companies [crosstalk 00:45:55]
Scott H.: No. But I remember, Vicki, we had a call with the chief actuary of this insurance company, not gonna say the name, years ago. Because we looked at this, like, this is too good to be true.
Pat: We said, "This can't happen. This is wrong."
Scott H.: And we got, after the call, we looked at each other like, "They don't really understand this, do they?"
Pat: Or they weren't interested in the long-term viability of the company. They understood it.
Victoria: Yes. Yeah.
Scott H.: Yeah, you got a point.
Pat: Right? They understood it.
Victoria: Yeah, especially those contracts that came out in 2008 after the crash, and everyone was clamoring to get into a guaranteed annuity.
Scott H.: That's right.
Pat: And then the insurance companies were battling for market share.
Victoria: That's right. Yeah. So, they were saying, "Yeah, we'll give you a guaranteed 7% compounding return on your guaranteed income benefit.
Pat: Crazy. Vicki, as always, thank you for being on the show, and thank you for being part of the Allworth team. You're a valued and appreciated coworker.
Victoria: Yes. Thank you so much. I appreciate you guys.
Pat: Before we go, I had mentioned these ETFs, and we're not gonna have time to talk about it.
Scott H.: Yes, we are.
Pat: Oh, okay. We'll talk about it. So, the U.S.-based electronic exchange traded funds, right? Exchange traded funds, ETFs, surpassed a trillion dollars in inflows. Not...
Scott H.: Yeah, I saw that. Last year, right?
Pat: Not... That means new money coming in, a trillion dollars, right? And so, now they make so many flavors of them. And this one...
Scott H.: Well, because it's the modern-day mutual fund.
Pat: That's right. And there's some tax strategies...
Scott H.: And by the way, if you own an old mutual fund, particularly if it's outside of a retirement account, you're probably best just keeping that old mutual fund, because there's no sense incurring [crosstalk 00:47:29]
Pat: But not reinvesting dividends [inaudible 00:47:31]
Scott H.: No.
Pat: Yeah. Many people actually have it automatically triggered to reinvest dividends.
Scott H.: If it's outside of a retirement account, I would not do that.
Pat: Yeah. That is [inaudible 00:47:39] But, so...
Scott H.: Most of the time, right?
Pat: My favorite was this one called the simplified enhanced income ETF, which should just ring all kinds of bells.
Scott H.: Simplified?
Pat: Enhanced income ETF, right?
Scott H.: It sounds like people sitting around in a conference room in the afternoon, coming up with a name.
Pat: "Hey, we're gonna call it the..."
Scott H.: Simplified and enhanced.
Pat: It trades under the ticker HIGH, H-I-G-H. Good for them for getting that ticker. I would have thought that was taken. So, it is a simplified enhanced income. So, basically, what this thing is supposed to do is kinda act like a treasury.
Scott H.: You know, the challenge... Here's the problem with this, right? I don't even know what the product is yet. Right? You're gonna tell us.
Pat: Yeah.
Scott H.: But here's why I get... Why you mentioned, "When the ducks quack, feed them," right?
Pat: Exactly.
Scott H.: Because sometimes... You hear callers on this program. Someone's going to retirement. They're looking for a high-income strategy, because they need income in retirement. They've been investing in their 401(k) for years, but now it's time for income. They go doing some research. They start Googling around, and they see the [crosstalk 00:48:48] Even the ticker symbol's "HIGH."
Pat: Yeah. How could you go wrong with a simplified enhanced income portfolio?
Scott H.: It's simplified. Just what you were hoping for. You don't want a complex investment strategy. It's enhanced and simple.
Pat: You're like the marketing team. A plus. A plus on the marketing team over there, for their simplified enhanced. So, what it's supposed to do is kinda act as a treasury, but a little bit better, since the symbol is HIGH. So, in addition to buying short-term paper, HIGH buys and sells calls and puts and options to generate income. Oftentimes, they use this as kind of a, to make more fluid the volatility. They even traded options on MicroStrategy.
Scott H.: MicroStrategy?
Pat: They were trading [crosstalk 00:49:41]
Scott H.: By the way, if you're not familiar with MicroStrategy, they're... [crosstalk 00:49:45]
Pat: [crosstalk 00:49:45] strategy.
Scott H.: It's leveraged Bitcoin. They own Bitcoin. That's all they do.
Pat: Yes.
Scott H.: And it's worth about double what the underlying assets are.
Pat: Which is... By the way, I have a friend that has been doing put options on it, thinking it's gonna fall.
Scott H.: No, no, no, no. A bull market can last much longer than you're liquid.
Pat: I said to him, I said, "It makes sense, and at one point in time..."
Scott H.: It could be eight years.
Pat: I said, "One point in time, you will be right."
Scott H.: I had put options on Countrywide.
Pat: Oh, I remember that. I lost money on that.
Scott H.: You did too?
Pat: Yes. I was convinced they were gonna go out of business...
Scott H.: They did.
Pat: ...and they did. Just...
Scott H.: Just years longer.
Pat: ...not in time. Not in time.
Scott H.: Not in time.
Pat: So, they traded MicroStrategy's, they did put options. They [inaudible 00:50:26] options on this thing, right? And this is in an income fund. This is in an income fund, that is doing puts and calls.
Scott H.: And you read... And it says the majority of their...is in investment-grade securities.
Pat: Yes.
Scott H.: How did it do?
Pat: And so, their year, they ended up with a return of 1.5%. And the thing that they were trying to do a little bit better from would be, like, a Bloomberg SPDR. B-I-L, BIL. Right, which is a 1 to 3-month Treasury. Returned 5.2%.
Scott H.: So, treasuries were 5%.
Pat: And this thing was supposed to be a little bit better than treasuries. And the return for 2024 was...
Scott H.: How much in assets did that find? Did the article say that?
Pat: It didn't say. But the thing that... It's, the article goes on and continues, and talks about...
Scott H.: Just because [crosstalk 00:51:16] ETF doesn't mean it's a good investment.
Pat: ...is that they're rolling out these ETFs constantly, like, daily, new ETFs.
Scott H.: Well, because it used to be, when they first came out, they were all passive. They were all indexed.
Pat: That's right. That's right.
Scott H.: They're not any longer.
Pat: Well, because technology allows you to price all day long.
Scott H.: That's right.
Pat: Right? And that's really what an ETF did for the mutual fund industry, is it allowed you to buy somewhere to in the middle of the day, rather than it, open or close. But it just reminded me, as I said earlier about "when the ducks quack feed them." And look, these firms, they're designed to sell you stuff. Right? They want client... We want client...
Scott H.: Yeah. So, mean, Victoria Bogner...
Pat: We want clients.
Scott H.: I mean, Victoria said, she talked about fiduciary. She mentioned that word a few times. A product manufacturer's not a fiduciary.
Pat: That's right. They don't care.
Scott H.: They may care.
Pat: Okay. Fair enough.
Scott H.: But their job is not to do what's in your best interest.
Pat: Well, look, and the products are not either good or bad...
Scott H.: It depends how they're used.
Pat: It's how they're used, right?
Scott H.: That one might not be too great.
Pat: I'm gonna go with that. I'm gonna go with [crosstalk 00:52:26]
Scott H.: Well, you're buying put options on... I mean, you're taking...
Pat: In MicroStrategies in an income fund? Like, if I came to you and said, "Let's create an income fund, and oh, by the way, we're gonna do options on MicroStrategies..."
Scott H.: Which is essentially on crypto.
Pat: What you're trying to do is enhance your return.
Scott H.: We're gonna use crypto to enhance your return.
Pat: Well, not only are we using...
Scott H.: We're betting against...
Pat: ...a financial instrument to enhance the return, we're gonna do it in a company that's highly leveraged against a speculative asset to begin with. You're like, "Okay. Where's..." "When you go across this tightrope, let's get rid of the net."
Scott H.: All right. Hey, as we wrap up this program, if you haven't given us a review or rating, please do. So, if you're listening to on your Apple thing or Spotify. Where do you listen to your podcasts?
Pat: Spotify.
Scott H.: I do Spotify as well. But I think more people... I looked...because I looked that we have a lot of ratings on Apple, but not as many on... I don't care where you... Give us a review.
Pat: [inaudible 00:53:26] stop for a second. Have you read any?
Scott H.: No, I don't [inaudible 00:53:28]
Pat: You've never read reviews of the show?
Scott H.: I [inaudible 00:53:32] I make... Not that I recall.
Pat: Okay.
Scott H.: I don't spend any time. I have zero interest. I do look at the stars, if we had bad, if it was a bunch of bad ratings, I'd wanna know why, but it's good. I think we're 4.9 or something. I don't know. [crosstalk 00:53:45]
Pat: Okay. Higher than my Uber rating. Do you ever check your Uber rating?
Scott H.: Let me finish this.
Pat: Okay.
Scott H.: So, before we talk about it... Yes, I do, because I don't wanna be a jerk.
Pat: Okay.
Scott H.: I wanna be perceived... And we Uber quite a bit, because we travel for work, and it's actually a very efficient way to get around town when you...instead of going and renting a car.
Pat: I'm gonna tell a story about getting in the wrong Uber.
Scott H.: Okay. Real quick, though, so... Give us a rating.
Pat: There we go.
Scott H.: [inaudible 00:54:18]
Pat: I got in an Uber, and I'm almost at the destination, and then the guy realizes, and I realize...
Scott H.: You're kidding.
Pat: No. And...
Scott H.: Don't you check the license plate?
Pat: I didn't that time.
Scott H.: In some states, you're not required to have a front license plate. And I'm thinking if you're an Uber driver, you should have a front license plate, because you're sitting there, and here comes his car, and there's, like, there's no license plate.
Pat: It was like... And the difference of the car was that...they were both Toyotas on the thing...
Scott H.: Yeah, yeah, yeah.
Pat: Yeah, and it was dark out. And I get in the car, and we're almost to the destination. We both realize we're... And the guy, he said, "I'm turning around." I said, "No, we're less than three minutes away. You're not bringing me back 15 minutes." He said, "Well, you're in the wrong Uber." I said, "I know I am, and it's bad for you, too, and it's bad for me. But it makes no sense for you to turn around." And he said, "How am I gonna get paid?" And I said, "I will pay you."
Scott H.: Here's some cash.
Pat: Here's some cash. "But we're not turning around now." And now, I check.
Scott H.: That's interesting. Like, what if he would insisted on you turning around? You have... I would imagine he has to let a passenger out, or she has to let a passenger out, if you want out of the car.
Pat: I was not getting out of that car. I mean, where I would have not... Know it's a business [crosstalk 00:55:29]
Scott H.: You couldn't force the person to go where you wanted to go.
Pat: Okay. Fair enough. I would have had to go back.
Scott H.: You throw a little cash, and they go where you want them to go. That's the way it is in their business.
Pat: That's what he's there for.
Scott H.: A couple dollars, they're gonna drive you to [crosstalk 00:55:42]
Pat: I said, "I'll take care of you," and he said, "How much?" Good for you.
Scott H.: Good for him. Yeah. All right. We'll see you guys again 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.
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 H.: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott H.: [inaudible 00:00:57] talk about financial stuff. Do we need to put the intro every time?
Pat: You know, I figure...
Scott H.: Okay. Huh?
Pat: I'm not changing.
Scott H.: Anyway, we got a good program here. By the way, before we start, we'd looked at some stats. We've been doing this program for almost 30 years, on the radio, primarily, for decades, and then now podcasts, and we just, last year, hit our 3 millionth download.
Pat: Wow. Wake the kids, call the neighbors.
Scott H.: According to Buzzsprout, we are the top 1% of all podcasts for downloads, and according to Listen Notes, we're the top 0.5% for popularity, out of 3.5 million podcasts.
Pat: And I saw my income go nowhere because of this. I didn't get a raise. How is this benefiting me, Scott?
Scott H.: This is supposed to be for the listeners, the 100,000 engaged listeners.
Pat: I'm relatively coin-fed, okay, so I'm gonna ask for a raise.
Scott H.: Why don't you do that? Ask for a raise.
Pat: [inaudible 00:02:00]
Scott H.: Who do you ask?
Pat: How do I ask?
Scott H.: I don't know who you could ask. You're the founder of the firm.
Pat: I know. It sounded like the right thing to say. But now that I think about it... Okay, well, that's nice. Half a percent...
Scott H.: Look, I understand that anybody can start a podcast out of their bedroom.
Pat: Oh, yeah, there's probably millions.
Scott H.: There's 3.5 million globally, according to Listen Notes.
Pat: Globally.
Scott H.: There's probably more than that, though, that don't even know how to get on the platforms. Right?
Pat: There's, like... Yeah.
Scott H.: There's so many podcasts.
Pat: There's so many podcasts. Oh, there's so many. But...
Scott H.: Anyway, glad you're listening to this podcast.
Pat: And what's your favorite podcast?
Scott H.: Well, let's get to the... It's irrelevant.
Pat: No, it's not.
Scott H.: I don't have a favorite. They tend to bounce around.
Pat: Okay.
Scott H.: I listen to, "Honestly," almost...typically, the same day it comes out.
Pat: Do you?
Scott H.: I like [inaudible 00:02:56] I like that [crosstalk 00:02:57]
Pat: And that's with...?
Scott H.: Bari Weiss. Free Press.
Pat: I have listened to that a couple times.
Scott H.: And I've been listening to "Built to Sell."
Pat: Oh, I love that.
Scott H.: About companies that...
Pat: Yeah.
Scott H.: ...sold...people's, founders that sell the business [crosstalk 00:03:14]
Pat: And it's kind of like a, kind of like, "How I Built That." It's very similar to that.
Scott H.: But the opposite. How I sold that, yeah. Anyway.
Pat: Anyway. Let's go.
Scott H.: Yeah. So...
Pat: And by the way, just remind me, so, I wanted to come back to this, about these. You talk about podcasts in the world, 3.5 million. They're doing the same thing with exchange traded funds.
Scott H.: There's so many of them?
Pat: There's so many of them. There's so many of them now. Right? And five years ago, there were almost none. But now they're, like, every flavor. One that just tracks Nvidia stock.
Scott H.: And they're not necessarily good or bad. It's dependent how they're used, like most financial tools.
Pat: That is right. So I'm gonna talk a little bit about the proliferation of exchange traded funds. And it always reminds me of... I met this guy at a conference, [inaudible 00:04:03] years ago. This old, grizzly veteran of the financial services industry. And he said, "Pat, remember, when the ducks quack, feed them." And I'm like, "Well, what does that mean?" and he goes, "If the clients want something, you give it to them, regardless whether it's good for them or not."
Scott H.: Was he serious?
Pat: He was 100% serious. And he sounded just like that. I'm like, "What?" He goes, "When the ducks quack, feed them." Which was, if the clients are asking for something, if it's good for them or not, you give it to them, because you can make money on it. And when I read this article about exchange traded funds...
Scott H.: You thought of that guy?
Pat: I thought exactly of this grizzly old...
Scott H.: And we'll talk about those.
Pat: And we'll talk... Please don't... Because...
Scott H.: No, we won't forget.
Pat: Don't forget.
Scott H.: All right.
Pat: Please.
Scott H.: I'm looking forward to it. Now I don't know if I can concentrate, because I can't wait for this conversation.
Pat: Now you're making fun of me.
Scott H.: All right. Let's take some calls.
Pat: It's not hard.
Scott H.: It is not hard. If you wanna be part of the program, you've got a question for us... And we love taking calls on just about anything financially related. Particularly those that... Particularly those that have saved well, and are looking at how to maximize what they've got, both for themselves and for others. So, you can send us an email at questions@moneymatters.com, and we'll get you scheduled to be on the program. Or you can call 833-99-WORTH, and we'll schedule you to get on the program. We're gonna start off here in New Hampshire, with George. George, you're with Allworth's "Money Matters."
George: Hey, guys. How you doing?
Scott H.: We're great.
George: Anyway, yes. My question is more for my ex-brother-in-law instead of myself. My ex-brother-in-law, he is 60. He's never married. He has no children. He, a smart guy. Has a really good job in accounting. Ten or so years ago, his parents passed away, and he lives in his parents' house, which he co-owns with his three siblings. He also bought a house of his own about 15 years ago. It's now worth $500,000, and he has 50% equity in it.
Pat: Okay.
George: He rents that out for about $2,000 a month.
Pat: Okay.
George: And the big question comes, is that he would like to take that house that he bought, sell it, and convert it to Bitcoin. And I've kinda talked to him a little bit, because Bitcoin is very volatile, obviously, very speculative. And the thinking being that as you get older, you probably don't want such a high percentage of your portfolio into something that risky. Right, but his side of the story is that Bitcoin has doubled every year for the past four years.
Pat: Okay.
George: Which may be true. Right? That may be true. But if you look [crosstalk 00:06:52]
Pat: Well, it wasn't a straight line, but keep going.
George: Yes. Yeah, yeah, yeah. Exactly. Like, if you look back on history, right, there's a lot of things like, tulips and Beanie Babies had a good couple years [crosstalk 00:07:03] back in the day.
Scott H.: That's right. That's exactly right. And I'm sure we can... There's other assets that are up 100x over that period of time [crosstalk 00:07:07] but yes...
Pat: Okay...
Scott H.: ...that's a popular one.
Pat: ...so...
Scott H.: And it's a big one.
Pat: And what did you tell him to do?
George: I think...
Pat: Well, first of all, did he come to you for advice? Or did he just tell you he was doing this?
George: No, no, no. He didn't come to me for advice. No. It's something I just happened to find out, and try to...you know. It's one of those things where, try to talk him out of it, but Bitcoin could go up 20x, and then I'm on the hot seat.
Pat: Does he... I'm asking this seriously. Are there any other mental issues? Truly. What would cause someone to actually act in this manner? No sane 60-year-old...
Scott H.: Is gonna take that big of... I don't know what he has in savings, but does he have a lot in other assets?
Pat: Like, is this [crosstalk 00:07:56]
Scott H.: I mean, if he had 10 million bucks sitting in other assets...
Pat: You'd be like, "Oh, go for it."
Scott H.: Okay.
Pat: Yeah, it's 2.5% of my portfolio?
Scott H.: I'm sick of dealing with this rental. I'm gonna take my $250 grand out of that, and I wanna buy Bitcoin. Fine. If you had 10 million bucks.
Pat: If you have a million dollars...
Scott H.: Then it's insane.
George: Yeah, he...okay. Yes, that was kind of my point of view. I think he should... Especially, I mean, at any age, you should diversify, but especially as you get closer to retirement, right?
Pat: Yeah, and as a percentage of the portfolio. I mean, Scott and I were just talking before the show about bad investments we have made.
Scott H.: We were. Yes. Right? We were.
Pat: That we have made, right? And then...
Scott H.: Not everything works out.
Pat: And then we reminded ourselves, but many great...
Scott H.: Almost all [crosstalk 00:08:39] Yes.
Pat: Great, great investments. But...right? Because, fact, we're human with our own emotions, we have a tendency to dwell on the losses. What percentage of your portfolio do you think this is? Is it little or big to him, or...?
George: I would say it's at... I don't know, but I would say it's at least, I don't know, 20%, 30%, if I had to guess, but I don't really know.
Pat: If we gave you the right answer, what would you do with it?
George: Oh, I'm gonna send him this podcast, so he can hear.
Pat: Well, it's crazy. It makes no sense.
Scott H.: It's pure speculation.
Pat: Why Bitcoin? What's wrong with Nvidia?
Scott H.: What about Dogecoin?
Pat: Yeah, Doge. Why are we stopping at Bitcoin?
George: Yeah, that, exactly. Like, if you were to take even the volatility of Bitcoin out of it, I think if you were to put, you know, as a 60-year-old, if you were to put a large percentage of your portfolio on any one stock...
Scott H.: It would be foolish too.
George: ...your retirement quality of life is gonna be completely tailored to that one investment.
Pat: George, if he was my relative, and he shared this with me, I would say to him, "You're out of your mind. That's just stupid." And then I would leave the conversation there.
Scott H.: And, you can't live with me.
Pat: That's... Fair enough. And I would leave the [crosstalk 00:09:59]
Scott H.: And I'll say, I have had that conversation with many people. They wanna do something. It's like, look, if it doesn't work out, if that's what you wanna do, if you wanna follow...if, instead of taking my advice, if you wanna do that, that's fine. Just remember, you can't live with me.
Pat: We have fired clients over...
Scott H.: Absolutely.
Pat: They're telling us they're gonna do something, and I'm like...
Scott H.: What's the point?
Pat: ..."Well, I'm not gonna be party to this."
Scott H.: No, because you know how it's gonna end up.
Pat: I'm not... And maybe it ends up great. Maybe he's 100% right. Maybe he is the most brilliant guy in the room, and it goes up by tenfold. And now his $250 grand, would be less than $250,000 after taxes, it's probably $200,000, it turns into $2 million. Is his life better? Is he happier? I don't know.
Scott H.: What if it goes to zero?
Pat: But what if it goes to zero? What do you tell that story... Tell the story about the guy with the fishing boat. I love that story.
Scott H.: I love it too. That's why I've told this. This was in the dot com era.
Pat: So, '98?
Scott H.: Probably '99, maybe early 2000s. Maybe early 2000s.
Pat: Okay.
Scott H.: And a client called me up and he says, "Scott, I'm thinking about taking half my portfolio and putting it in the cubes." Right?
Pat: Was the NASDAQ.
Scott H.: That's QQQ. All tech. This was... It had had a huge run-up. Just like your ex-brother-in-law saying, "Here's how great it's done the last four years." NASDAQ had been on fire. It was up 85% in the year 1999. And so I said... Let's call him Bill. I said, "Bill..." And Bill had a house in Northern California. And he had a house up on the coast in Washington.
Pat: I thought it was in Alaska.
Scott H.: I changed the...
Pat: It was Alaska. It was Homer.
Scott H.: I'm trying to keep a little anonymity here.
Pat: Okay. All right.
Scott H.: So, let's say it's not Homer.
Pat: I'm not [inaudible 00:11:49]
Scott H.: I'm trying to change a little of the facts here. I should have changed Bill's name to something different while I was at it. So, [crosstalk 00:11:59]
Pat: His name was Frederico.
Scott H.: So, he spent the majority of his time in his cabin on the water, out...and is fishing. He fished all the time. He loved it. He had a fishing boat. And he called. He wanted to make this move. And he says, "What do you think about it?" And I said, "Well..."
Pat: Half of his portfolio, all tech.
Scott H.: Half of his portfolio.
Pat: And he was living off...
Scott H.: All tech stocks.
Pat: Yeah, and he was living off the portfolio.
Scott H.: Correct. He was retired. And I said, "Well, here's the thing, Bill." I said, "If you're right, we can trade in that fishing boat for a bigger fishing boat, with more electronics and all the goodies on it. But if we're wrong, the fishing boat's gone, and probably the cabin as well."
Pat: All right. So, now you did...
Scott H.: So, I framed it back to what... This is not just numbers on a statement, right?
Pat: This is life. This is lifestyle.
Scott H.: This is how it translates.
Pat: Yeah, no one's gonna starve in America, unless you're mentally ill or have no access to it, but, it's lifestyle.
Scott H.: What do these dollars actually mean? And so, the concern that you have, George, obviously, that we have, with this 60-year-old male that if he probably doesn't have much in savings, and he takes his one asset he does have and puts it in Bitcoin...
Pat: Yes.
Scott H.: I would just tell him, "You can't live with me."
Pat: Yeah. And it's your ex-brother-in-law, which I think is interesting, in and of itself. Yeah. I mean, it's asinine. I think people...
Scott H.: Am I allowed to say that?
Pat: Yes.
Scott H.: It's crazy. It's all about probabilities of outcome. And particularly as we get older, we don't have the time to make it back up.
Pat: Yeah, if he was 30, I'd go for it.
Scott H.: Whatever. It's not gonna make it...
Pat: Yeah. And again, you can't live with me.
Scott H.: But it's coming back to, like, what happens in the best-case scenarios, but what are the worst-case scenarios here? Like, when we do financial plans with people, we look at what happens if the day after you retire, we go through another financial crisis?
Pat: So, probabilities of success or failure.
Scott H.: Correct. And most people are much more concerned about maintaining their lifestyle than they are about becoming wealthier. And if you do something that's suddenly gonna have a 60% chance that your lifestyle's gonna go backwards, most people are like, "Hm, I'm not gonna take that."
Pat: That's right. Unless... Right? And it all gets down to what percentage of his portfolio is this. But you're right. You know exactly... And you're gonna send him this podcast?
George: Oh, yes.
Pat: That's all we need, is another negative review.
Scott H.: All right. Appreciate the call, George.
Pat: [inaudible 00:14:38]
George: All right. Thanks, guys.
Scott H.: Yeah. Is...
Pat: So, Scott, you talk about "you can't live with me." So, you know, many of the listeners know I have four children. They were home for Christmas. And my wife and my only daughter were going to each one of the kids' bedrooms, and they wanna redecorate them for some reason. I'm like...
Scott H.: Redecorate them how?
Pat: That's what I said.
Scott H.: Who wants to redecorate them?
Pat: My wife and my daughter are like, "We're gonna move some furniture out of this thing and repaint the walls and the whole bit," and I go, "What do...?" The kids are gone. They only come home for, like, a week a year.
Scott H.: Well, does it still look like they live there?
Pat: Yes.
Scott H.: Oh, well, I can understand your wife and...
Pat: Really?
Scott H.: Yes.
Pat: I just shut the door. I just shut the door. It's fine. They just, the door. It's closed. [inaudible 00:15:20] have anything to do with it. So, the end of the story. So, there's this, like, kind of a futon thing in my son's room, and it's like this, I don't know what it is. Starts with a P or whatever. So, my wife...
Scott H.: What?
Pat: It's a chair. It's a chair thing, right? So, my wife actually, she says, "Okay, can you help move this thing out in the garage, and then get rid of it?" And so I said to my daughter, I go, "I don't know [inaudible 00:15:46] get rid of it." "I'm gonna put it on Facebook, and just send it out, like, here, it's yours. Come into my house and pick it up." So, we took pictures of it. And me sitting in it, I was modeling for it, which just created a whole new list of just people making fun of me on the internet. But my son responds, "Oh, this is a great way to find out you're changing my room." He saw that we're giving away his furniture from his bedroom, and he responded on Facebook. "What happened? Why are you doing this to me? My room."
Scott H.: How old's your son?
Pat: Twenty-three or 24?
Scott H.: So, I had a good friend of mine... I'm gonna give his real name. There's no anonymity in this one. Mark Holloway, his dad passed away, and I went down to San Diego to go to his funeral. And so I went, and I saw the family home.
Pat: Okay.
Scott H.: Mark is 60.
Pat: Okay, all right. I know where this is [inaudible 00:16:40]
Scott H.: The room he shared with his brother had not changed since they went off to college.
Pat: Little League trophies?
Scott H.: I kid you not. The trophies, ribbons from the track. I laughed so hard. I got such a kick out of it. The room, it was like a museum from his teenage years. Had not changed.
Pat: What's wrong with that?
Scott H.: Well, I guess his mom didn't have any problem with it. She enjoyed it, apparently. She would probably go in there from time to time...
Pat: Apparently [crosstalk 00:17:11]
Scott H.: ...and think about the good old days.
Pat: Were they?
Scott H.: I don't... I guess. If they were bad, she would have... Maybe that's why I changed my kids' rooms. [crosstalk 00:17:19] The day they leave, remodel, repaint.
Pat: That's, like, they're out. They're in the car, driving away. You're waving. You run back in the house, you start stripping the room?
Scott H.: We're gonna go back to calls here in a minute. [crosstalk 00:17:35] I remember my oldest daughter was in high school.
Pat: All right, this is a financial show though, right?
Scott H.: My oldest daughter, when she was in high school, she wanted to paint her bedroom.
Pat: Okay.
Scott H.: And she was, like, 15 or 16.
Pat: The young Jessica.
Scott H.: She was young then. Yeah, she was 15 or 16. So I thought, be a nice thing for father-daughter time together.
Pat: Oh, to paint?
Scott H.: Yeah. So...
Pat: What's wrong with you?
Scott H.: Her ceiling had a little different shape to it than...it wasn't flat. So, the corners and stuff, we spent, like, three days, maybe not full days, but three days painting. When she moved out, I'm like, "I gotta change this thing," because it looked horrible. And I hired a painter. He nailed, blew the thing out in, like, three hours. I had to hire a painter the first time, because I couldn't get the lines good enough. I get someone to come make it look decent. Anyway.
Pat: All right. Let's go to the calls.
Scott H.: Enough of life stories.
Pat: Oh, my gosh. That, actually... Well, it's nice seeing you again, Scott. We haven't talked in a couple weeks. It's really kinda fun. Kinda miss you a little bit. I'm not...not enough that we're gonna actually start spending time together. We...so, Scott and I stepped down as CEOs. We don't really interact much anymore.
Scott H.: No, we don't interact much anymore.
Pat: Yeah. We used to talk twice a day.
Scott H.: Oh, oftentimes, I'd get a call from Pat at, like, 7:01 in the morning.
Pat: Because you told me not to call before 7:00.
Scott H.: So, I could tell, uh-oh. Pat's been awake since 3:30, and mulling on something. There's something in the business has been bugging him since 3:30 in the morning.
Pat: Oh, my gosh. I don't miss that at all.
Scott H.: All right. Let's go back to the calls here.
Pat: I don't miss it even a little.
Scott H.: Now you're just doing the stuff you like to do.
Pat: That's right. A hundred percent.
Scott H.: [crosstalk 00:19:07]
Pat: Like, I go out to lunch with clients now. I've never gone to...
Scott H.: [crosstalk 00:19:11] people.
Pat: I've never gone out to lunch with clients in my whole career. And I go out to lunch with clients. We're not in a hurry to go anywhere. They're retired. I still kinda have a job.
Scott H.: "When do you need to be back at the office, Pat?" No rush.
Pat: I don't even pretend.
Scott H.: You want a dessert? I heard the flan's good.
Pat: Oh, listen, it's Tuesday. You know movies are half price?
Scott H.: All right. We're gonna start... I talked at the beginning of the program, all these engaged listeners.
Pat: That's all changed now.
Scott H.: The numbers are going down.
Pat: We obviously have decided [inaudible 00:19:50]
Scott H.: All right. We're in Ohio, talking with Scott. Scott, you're with Allworth's "Money Matters."
Scott: Yeah. Hi, Scott. Hi, Pat.
Pat: Hi.
Scott H.: Hi.
Scott: I wanna let you two know that I am a avid listener of your Saturday morning podcast, for many years. And during that time, I have managed to pick up a few financial nuggets along the way. So, I thank the two of you for that.
Scott H.: Thank you.
Pat: [crosstalk 00:20:18] probably a mistake, but...
Scott: No, no. It's been very helpful.
Pat: What can we do to help today?
Scott: Okay. So, I'm a firm believer of the Roth IRA...well, the Roth accounts, whether it be through my company, initially, Roth 401(k), to now, in retirement, my Roth IRA. And during the last few years, I've done Roth conversions. I've contributed to my Roth IRA account. And the five-year rule gets thrown in my face all the time. So, what I'm wanting to ask is...
Pat: When you say that it gets thrown in your face, other people tell you about the five-year rule?
Scott: Well, yeah, they tell me about the five-year rule, what that consists of. So, my question does center around the five-year rule item.
Scott H.: Okay.
Pat: Okay.
Scott: So...
Scott H.: And then I'm gonna tell you why it doesn't pertain to you. But go ahead.
Pat: Yes.
Scott: Okay. Well, hopefully not. So, the five-year rule, I know it only pertains to earnings, and not what I contribute. So, who keeps track of when the five-year rule ends?
Scott H.: Nobody.
Pat: That's brilliant. That is the best question we've had in a long time.
Scott H.: Nobody.
Pat: No one.
Scott: Well, I've asked that question of many financial, and I never get a response. I never get an answer. So...
Pat: Look, a lot of the tax code is voluntary compliance.
Scott H.: That's right.
Pat: A lot of the tax code. 529 plans, right? Have you ever seen anyone audited on a 529 plan?
Scott H.: Never.
Pat: Have you ever seen anyone audited in a Roth five-year rule?
Scott H.: No. Never.
Pat: Never.
Scott H.: Well, then, it's very rare someone takes money out within that five-year [crosstalk 00:21:59]
Pat: That's right.
Scott H.: Particularly someone who really loves Roths, a firm believer in the Roth.
Pat: Yeah, which is the last dollar to be spent. But your question is actually, it's a brilliant question.
Scott H.: Because...so, there are some laws that get passed, regulations, that require financial companies to do certain things.
Pat: Reporting of income.
Scott H.: Reporting of income. How much dividends, and what transactions occurred in your account last year.
Scott: Okay, but... Okay, so...
Scott H.: And required minimum distributions. What is the requirement of distribution?
Pat: But none that are required on a Roth.
Scott: Really? I thought they required it as, going through a financial institution, they are required at the end of year to provide a form telling you what you have contributed to your Roth IRA...
Scott H.: That's right.
Pat: That's right.
Scott: ...or a traditional IRA [crosstalk 00:22:47]
Scott H.: But there's nothing to say that... When was the first account opened? When was the first Roth contribution made?
Scott: Yeah.
Scott H.: There's no requirement on that.
Pat: There's no requirement for that, to the financial institution to report that.
Scott H.: Otherwise, yours might say, "Oh, first contribution made in 2006."
Scott: Yes. Yes. So, when I convert from a traditional IRA, maybe in stocks, and go over to my Roth IRA, keep it in stocks, and then I sell the stocks in my Roth IRA, and do something else, I lose track of what I'm doing. So, you're telling me I don't have to worry about the five-year rule?
Scott H.: [crosstalk 00:23:25]
Pat: Have you taken money out of the Roths?
Scott: I have not.
Scott H.: Okay...
Scott: No, I [crosstalk 00:23:29] plan on taking money out of the Roths for many, many years.
Scott H.: Okay. So, it'll be more than five years since the time you made your first contribution, or the time you made your first rollover. I mean, so, your conversion.
Scott: [crosstalk 00:23:38] Okay. So, it's really not applicable to me, but it could be applicable to somebody else [crosstalk 00:23:44]
Pat: All right. But the reality is, normally, when people use Roths, they use it to feather income for tax...
Scott H.: They're volunteering, paying additional taxes today that they don't have to pay, right?
Pat: Right. Because they...
Scott H.: Because they could have made a pre-tax contribution, or they didn't have to do the conversion. So, these are people that are planning their finances, stating to the IRS, look, I'm gonna send you money today, in exchange for the promise that Congress made, but let's hope they're gonna be good on that promise when I pull my money out 20 or 30 years down the road.
Pat: Right? So, your point is well taken, but it just, it doesn't happen in reality. When you see people take money out of a Roth, what they're doing is they're trying to keep the... They need X income, and they're trying to keep themselves below a marginal tax bracket.
Scott: Yeah. I agree.
Pat: But the reality is, most of the people that have money in Roths also have money in a brokerage account.
Scott: Of course. Of course.
Pat: Right?
Scott: Absolutely. Yeah.
Scott H.: [crosstalk 00:24:47]
Pat: I can't think of when I've had money come out of a client's Roth account. I cannot. Can you?
Scott H.: Yeah, I had someone do it against my recommendation.
Pat: Oh. I can't...
Scott H.: And by the way, you mentioned sometimes we fire clients. That's one I fired.
Pat: Yeah.
Scott H.: [crosstalk 00:24:59] I think about it.
Pat: They just [crosstalk 00:25:03]
Scott H.: I think I fired three clients in my career. That was one of them.
Pat: Because they're not taking... You know they're doing harmful stuff to themselves.
Scott H.: What's the point? I don't need...
Pat: Yeah.
Scott H.: I think I...I don't need... I mean.
Pat: Oh, don't say that. We like clients.
Scott H.: I love clients.
Pat: Okay.
Scott H.: I don't love clients that don't take my advice, that do things contrary to my advice.
Pat: That are gonna... Harmful to themselves, yeah.
Scott H.: What's the point? Why... Don't use me. I mean...
Pat: But, yeah. So, your point is well-taken. But it doesn't... It's not real. It just doesn't happen. I wouldn't [crosstalk 00:25:33]
Scott H.: You don't have to... Scott, you're [inaudible 00:25:35]
Scott: So, if I were to ask an IRS agent, he'd tell me something differently then. Right?
Pat: Why would you be talking to an IRS agent?
Scott: No, I won't. No, no, I don't. No. I...
Scott H.: He might not even know what you're talking about.
Pat: Yeah.
Scott: [crosstalk 00:25:47]
Pat: I mean, out of all the things that they look for tax compliance, that's... Because it generates... By the way, what's the point of it? I mean...
Scott: [inaudible 00:25:56]
Scott H.: They would just assume you'd pull money back out of your Roth and put it in a taxable somewhere else.
Pat: Yeah, but the [crosstalk 00:26:02]
Scott: I would think so.
Pat: But what's the point? Think about this, Scott. What's the point of it? What was the five...what's the point of the five-year rule? Think about... I never understood why it matters.
Scott: Yeah, it didn't make, doesn't make any sense to me. So...
Scott H.: I mean, I understand the 59 and a half.
Scott: Yeah.
Pat: Well, I don't understand why it's 59 and a half. [crosstalk 00:26:21] a round number.
Scott H.: Yeah, but I understand older age.
Pat: Yes, that you have to start withdrawing. And the required minimum distribution's at age, what, 73, 74, 75.
Scott H.: But that doesn't apply to Roth.
Pat: Yeah, yeah. [inaudible 00:26:30] Anyway, I'm just gonna... Scott, we shouldn't... Let's find other things to think about.
Scott H.: Yeah. Is that... Scott, you are a blessed man, if, in your financial life, this is the one thing that you have to worry about. Everything else is so great.
Scott: Well, I [crosstalk 00:26:46] okay?
Pat: What was that? What did you say?
Scott: I do sleep well at night, so I'll just put the five-year rule [crosstalk 00:26:55]
Scott H.: And you're never gonna have to... It's never going to be an issue for you.
Pat: All right. And do us a favor.
Scott: Yes, sir.
Pat: Share this podcast with your friends...
Scott: I will.
Pat: ...especially since you are one of the main attractions. You are the star of the show at this point.
Scott H.: That's right. [crosstalk 00:27:09]
Pat: And so, if you could share it with your friend...
Scott: Well, my name's Scott and I, and, of course, we got Scott on the podcast too, but...
Pat: Yeah. But we're trying to [crosstalk 00:27:17]
Scott H.: [crosstalk 00:27:17] named Scott, it's always someone between age 50 and 68. How old are you, Scott?
Scott: I'm 70.
Scott H.: Oh, I missed it by two years.
Scott: But I act like I'm 50, though.
Scott H.: Okay.
Scott: I act like I'm 50.
Scott H.: I got it.
Pat: All right. Appreciate the call.
Scott H.: Yeah, thanks for calling, Scott.
Scott: Thank you, sir. [crosstalk 00:27:31] gentlemen. See you.
Scott H.: So, on the Roth, the majority, well, roughly half Americans pay no income tax, right? Because the standard, you get a standard deductions.
Pat: Yes.
Scott H.: No income tax. So, those people, if they're saving money in their 401(k) or IRAs, it should clearly be in the Roth.
Pat: That's correct.
Scott H.: They're either in a 0% tax bracket, or a very...10% or 12% tax bracket. It's only, I think, 15% or 18% of taxpayers are in a tax rate lower, I mean, higher than that 12%, that first bracket.
Pat: Say that number again.
Scott H.: It's like 18% of taxpayers.
Pat: Of taxpayers. So...
Scott H.: I think half of the revenue comes [crosstalk 00:28:14] from the 1%.
Pat: Yeah. So, that would be 60% of the population is at below that bracket?
Scott H.: No, like 80%. Eighty percent of Americans should be using a Roth 401(k).
Pat: Okay. All right.
Scott H.: There's no question to even ask. Like, this should be Roth.
Pat: But the reality is, those people don't [crosstalk 00:28:34]
Scott H.: [crosstalk 00:28:34] calling us.
Pat: And, they don't have any money to save. Is it... They're living... It was... Like, growing up, my mom used to say, "Oh, we should have bought that." You know, "We should have bought that property down the street," like, "20 years ago." I'm like, "With what? Where were you gonna get this magical money that we were, all of a sudden become a land baron?"
Scott H.: [inaudible 00:28:58] a couple years ago, I was up in Tahoe, and there was this one area of Tahoe, lots were sold there, $300 a piece in, like, 1930-something.
Pat: Okay.
Scott H.: And someone said, [inaudible 00:29:07] I'm like, "Who had $300 in 1930s?"
Pat: Rich people. [crosstalk 00:29:12] Okay. So, the point being, the Roths.
Scott H.: But if you're in a higher tax bracket, then you gotta really look at it. Do you wanna do a pre-tax or a post-tax? And if you're gonna convert, how much do you convert?
Pat: And when?
Scott H.: And so, myself, I mean, it's the beginning of the year. I went on to my own 401(k), because the contribution limits increased this year, to increase what's going in. And I am on... I do before tax. And I thought about doing Roth.
Pat: And?
Scott H.: I went before tax.
Pat: Because?
Scott H.: There's a chance federal income tax rates will go higher.
Pat: Okay.
Scott H.: I mean, there's, clearly, that can happen.
Pat: And?
Scott H.: And...
Pat: I'm interested in this. This is...
Scott H.: There's also a chance that maybe there's a complete reform in taxes, and there's, we now have a national sales tax, with a lower flat tax rate. That's in the realm of possibilities.
Pat: Okay.
Scott H.: There's also a possibility I don't stay in California the rest of my life.
Pat: That's probably the biggest one. Do you really think that we'd go to a flat tax, or a VAT tax?
Scott H.: And there's also I, probably not gonna spend [crosstalk 00:30:26]
Pat: Some of it's gonna go to charity.
Scott H.: Yes.
Pat: Right.
Scott H.: So, with all those factors, I went... And I don't like the way California spends money, so I'd just as soon take a pre-tax.
Pat: Why would you say that? They just laid 22 miles of the high-speed rail. They've been working it on for...
Scott H.: Twenty years, $100 billion dollars.
Pat: Twenty-two miles. Come on, Scott. It's 22 miles. You could... It's a long way, 22 miles.
Scott H.: Twenty-six billion dollars on homelessness.
Pat: Holy smokes. So, back to that. The tax... Do you think that we would ever go to a flat tax? I just can't see it, because it's not...
Scott H.: Politically?
Pat: It's not progress... We have a very progressive tax system.
Scott H.: Right. That's why half of Americans don't pay any income tax. Now, they'll pay payroll tax. They'll pay Social Security...
Pat: Understand...
Scott H.: ...from which they'll get a benefit from.
Pat: Yeah. But, so, if you went to a flat tax, would that not be considered a regressive tax?
Scott H.: Well, it wouldn't be...
Pat: A sales tax.
Scott H.: Right. It's, by very nature, a sales tax would clearly be regressive.
Pat: Yes.
Scott H.: Because higher-income people don't consume all their income.
Pat: That's right. Yes.
Scott H.: And to your point, if... Your mom's saying, "I wish we had have bought that property," it was... There was nothing... I mean... There's barely...like, which bill do we pay this week?
Pat: Oh, yeah.
Scott H.: I always got a kick out of that.
Pat: Never said anything, though, because I love my mom dearly. Didn't wanna upset her. But I always thought, [inaudible 00:31:44] I grew up in this house. I don't think there was money splashing around.
Scott H.: It is clearly possible that tax rates are lower, and we have a national sales tax, value-added tax. I mean, the EU's got it.
Pat: Yes.
Scott H.: What is it, 17%, 22%? Somewhere in...
Pat: But they have a progressive tax rate as well. They have both.
Scott H.: Yeah, but a lot of countries are lower than ours now.
Pat: All right. Well [crosstalk 00:32:11]
Scott H.: I mean, I think part of it, when you're considering things like Roth, and it's...
Pat: You've gotta take legislation into account. You have to recognize that.
Scott H.: That's right. You're betting...you are betting that the tax code's not gonna be dramatically different, and that your withdrawals will be tax-free.
Pat: That's correct. Right?
Scott H.: So, it wasn't that... When I started in this industry, in 1990, there used to be an excise tax.
Pat: On pensions, wasn't it?
Scott H.: On 401(k)s of greater than...was it $750,000?
Pat: Yeah. What was...there was a name for it.
Scott H.: It was a 15% excise tax.
Pat: Yeah, what was the name for it? There was a name for it. There was a NAICS code.
Scott H.: Don't remember the name. I remember a number, but I don't remember names. But there was an excise tax.
Pat: I remember this.
Scott H.: If you had a lump sum larger than...
Pat: Yes.
Scott H.: I think it was $750,000 wasn't it?
Pat: Yes, yes, yes. Yeah.
Scott H.: There was an excise tax.
Pat: We were retiring...
Scott H.: So, put that in today's dollars, that'd be like 2 million bucks, 2.5 million bucks. There was an excise tax.
Pat: Yeah. So, the money would go into an IRA, but you still had to pay a tax on that transfer.
Scott H.: You paid an extra tax for doing a good job saving.
Pat: Yes, yes.
Scott H.: So, even when you're looking at Roth conversion, some of those things, like...
Pat: Just don't buy in 100%.
Scott H.: That's right. You wanna diversify your tax strategy the same way you think about diversifying your investments.
Pat: Yeah. You know, I was talking to a friend the other day. It's like, it just blows my mind that we get people to qualify for the Obamacare insurance that are worth millions and millions of dollars. These clients are worth millions and millions of dollars. And they get this...
Scott H.: Subsidized...
Pat: ...health insurance because of how we negotiate through the maze.
Scott H.: That's because it's not based upon assets. It's based upon...
Pat: [inaudible 00:33:56] you just find that a little bit crazy?
Scott H.: There's lots of crazy things.
Pat: I don't know. I just always... I just find it just... And I participate in it. I'm helping them.
Scott H.: I had a conversation over the holidays with a family member that was... There was, the discussion on lifting the cap for social security taxes on wages.
Pat: Okay.
Scott H.: Right? So, what is it $170 grand a year, somewhere in there, where you pay social security taxes up to that point of your wages. Above that, there's no tax...
Pat: Yeah, and on both sides. And then Medicare goes unlimited [crosstalk 00:34:29]
Scott H.: Medicare goes unlimited, yeah.
Pat: On earned income.
Scott H.: Correct. On, yeah, wage-type income.
Pat: Yes.
Scott H.: And... Or self-employed income. And so, I was talking to this person, they thought, well, it would seem to be fair that there shouldn't be that cap on there.
Pat: Why? That's what you said.
Scott H.: Well, no, I said... Here's the challenge. When we've got the top tax rate at 37%, plus we've got the 3.8% excess tax...
Pat: I don't... Whatever that... Yeah.
Scott H.: Which is 0.9% above the Medicare tax on... So, let's call it 40%. I'm a resident of California. The top rate there is 13.3%. So, now we're at 53%.
Pat: And, you don't get to deduct state against federal anymore.
Scott H.: That's right. And so...and it's, you pay both sides. So, the employer pays half, you pay half. So, now we're...
Pat: So, now you're at 65%?
Scott H.: Right. So, I said to him, I said the challenge with this...
Pat: Sixty-five percent at the marginal rate.
Scott H.: Yeah. So... And the people who are having these tax problems are the ones, typically, business owners that have been successful, they build businesses, and this. I said, if we adopted this, what's gonna happen is a business person will say, "Do I wanna take the risk to grow my business?"
Pat: It slows innovation.
Scott H.: Because someone's like, "If I lose, no one's gonna bail me out. It's all on me. I can't deduct a capital loss." Except [crosstalk 00:35:58]
Pat: Against income.
Scott H.: Right. So, I'm stuck... No one's gonna bail me out of my capital loss.
Pat: Yeah.
Scott H.: And if I do extremely well, they're only gonna keep 35 cents on the dollar.
Pat: But you could carry that capital loss, $3,000 a year, forever, so you got that going for you. But you can't inherit it. You cannot inherit a capital loss.
Scott H.: Yeah. [crosstalk 00:36:16]
Pat: Because it will be a debt. Right?
Scott H.: Yeah. Yeah.
Pat: It's pretty disappointing.
Scott H.: Well, hopefully you don't have a lot of losses.
Pat: I don't. It's theoretical.
Scott H.: Yeah. I mean, the... You want gains.
Pat: So, what did [crosstalk 00:36:29] how did the argument...
Scott H.: I don't know. That was a [crosstalk 00:36:31]
Pat: And that was it? And you're like...
Scott H.: I said, "Get the hell out of my house."
Pat: "...can you pass me the mashed potatoes? And what is that Jell-O thing?"
Scott H.: It was a good conversation. It was just...
Pat: Are those marshmallows in the Jell-O?
Scott H.: You have those too.
Pat: Oh, my god. All right. Let's go. Let's move.
Scott H.: Yeah. So, right now we're gonna hear a client story from Victoria Bogner. In addition to being a certified financial planner, she's our financial analyst, which is a very rigorous...
Pat: Oh, it's really hard. Yeah. And you work out of what office?
Victoria: I work out of the Lawrence, Kansas office.
Pat: Which is?
Victoria: Which is just west of Kansas City.
Pat: So, share with us the story.
Victoria: Okay. I had a really interesting case.
Scott H.: By the way, and I looked at this. I looked at the notes beforehand of that. Well, this is a good story. This is a...
Victoria: Oh, good. Good. Yeah. It's interesting because I think it impacts more people than people realize. So, I had a prospect come in a few years ago, and among other things, she had an old variable annuity. And this variable annuity had a guaranteed income benefit. So, for folks listening, there are products out there that you can purchase. You stick a chunk of money in, and it's invested in the market. It goes up and down, depending on how you invested it. But then you also can have a provision attached called a guaranteed income benefit. And it's a separate number. It goes up by some amount every year, regardless of what your contract value does. And then later in life, you can draw an income amount off of this guaranteed income benefit number. And the idea is that it's an upgrade from the old idea of annuitizing a contract. You don't really do that anymore. Nowadays, people turn on this income benefit, and it gives them this income for life, even if the contract value goes to zero. But if you pass away and there's anything left in the contract, it goes to your beneficiaries. So, it sounds [crosstalk 00:38:31]
Scott H.: And every contract's a little different, right?
Victoria: It's a... Yes.
Scott H.: Even an insurance company might have 20 different flavors of this. As the years go by...
Victoria: Absolutely.
Scott H.: ...they're underwriting... It's insurance, right? So, they underwrite it and they go, "Oh, there's a risk here that we didn't see." And "Uh-oh, there's this... People found this loophole that they're taking advantage of. We didn't calculate this."
Victoria: That's right. So, even if you have a contract that has the same name as your neighbor, but you took it out a year later...
Scott H.: That's right. It could be very different.
Victoria: ...it could be totally different.
Scott H.: That's exactly right.
Victoria: So, with this [crosstalk 00:38:59]
Scott H.: And by the way, full disclosure, there were some products in the early 2000s that were just mispriced.
Pat: Oh, my gosh. That was great.
Victoria: Oh, so mispriced.
Pat: They had these 6% guaranteed minimum.
Scott H.: And, you had full discretion on how to invest your dollars.
Pat: It was crazy.
Scott H.: And so we utilized them quite a bit then, but [crosstalk 00:39:16] anymore.
Pat: But they didn't... They actually were mispriced.
Victoria: They wised up.
Pat: Yeah, and they...the insurance companies...
Scott H.: And then, now they try to buy their way out of the contract. [crosstalk 00:39:24]
Pat: They offer more money than their contracts are worth.
Victoria: Yeah, you get a letter in the mail, "Hey, can we buy you out of this contract, please? We're losing money on you."
Pat: Okay, so continue with your...
Victoria: So, with... Right. So, with this particular situation... And by the way, the caveat to these products is they're very expensive, right? They can be upwards of 4% or more, when you add up all the fees.
Scott H.: [crosstalk 00:39:45] Yeah. Yep.
Victoria: And the catch is, that fee is assessed on the guaranteed value, and then it's taken out of the contract value. So, if you think about it...
Pat: Which means that the contract is gonna collapse quickly.
Victoria: Exactly. So, if you think about it, if your guaranteed value is twice as much as your contract value, that's not a 4% fee, it's an 8% fee. And that's really hard to overcome. So, this prospect, who is now a client, she was just seeing her contract value go down each year. Her contract value was about half a million dollars. Her guarantee was $800,000.
[crosstalk 00:40:18]
Scott H.: Did she have it poorly invested in there, or... How [crosstalk 00:40:22]
Victoria: Oh, yeah. So, it was a variable annuity, but she had it invested in conservative and fixed, inside the annuity, with whoever sold her this product.
Pat: Which is exactly the opposite, because if you have those guarantees, you go 100%.
Scott H.: You're buying insurance on your portfolio, yeah.
Victoria: You go 100%.
Pat: Yeah, equity [crosstalk 00:40:37]
Victoria: Yeah, you go as far into equities as you possibly can, right?
Pat: Yes.
Victoria: So, this was just mismanaged from the start.
Pat: So, she brings this to you and says, "This is terrible," and you look at it and you say, "Wow, this is awesome?"
Victoria: Well, this is the interesting situation. She didn't need the income. She wanted the flexibility of having control of that money. So, it's an IRA annuity. Her plan was, "I'm just gonna get rid of this thing, roll the money into my other IRA, and wash my hands of it."
Scott H.: And that's probably why she came in. "Hey, Vicki, I wanna get rid of this. Can I transfer this to you?"
Victoria: Correct. And I said...
Scott H.: And most advisors would say, "Yes. Sign here."
Victoria: Yep.
Scott H.: "Transfer the account."
Victoria: Yep. "Open up a brokerage IRA with me. We'll move it over. I'll manage it. End of story."
Scott H.: Yeah. Just give them a little back slap on the way out, and... Yeah.
Victoria: But I said, "No..." Yeah. Yeah. Win-win for everybody, right? Well, what I said was, "Okay, hang on. You've had this contract a long time. Give me the actual contract, so I can read through it and just make sure we're not missing anything." So, I got this old, dusty tome of a contract, riveting reading, let me tell you. And inside that contract was one line that made all the difference. And that line was, "Withdrawals from the contract value decrease the guaranteed benefit dollar for dollar."
Scott H.: Not percentage-wise.
Victoria: Not proportionally...
Pat: Awesome.
Victoria: ...which most contracts are.
Pat: Awesome. Unbelievable.
Victoria: I know. So, [crosstalk 00:42:02]
Pat: And there was no cap on how much you could take out?
Victoria: No. No cap. So, I call the annuity company, with the client, verify that this is accurate. So, what we do, instead of her taking half a million and just moving it to an IRA and calling it a day, we moved $475,000, so 95% of the contract, over to her IRA. So, $475,000 goes to the IRA. Her benefit went down, from $800,000 to $325,000.
Pat: Holy smokes.
Victoria: She was 65, so 5%, we turned on the income of 5% for life. So, she got over $16,000 a year of income, on top of getting to roll out $475,000.
Scott H.: Oh, my gosh.
Pat: Holy smokes.
Victoria: Yes.
Pat: My gosh.
Victoria: So, if she lives another 30 years, that's almost half a million dollars of extra income she would have not had.
Pat: Oh, wow.
Victoria: So...
Pat: Look, we've... This is an extreme example.
Scott H.: This is an extreme example.
Victoria: It is. [crosstalk 00:43:00]
Scott H.: But I utilize something similar. This is an insurance company based out of Los Angeles.
Pat: Yeah, but they had the death benefits. Yeah.
Scott H.: It was dollar for dollar, not pro rata.
Pat: Yes.
Victoria: Yep. Yeah, some companies did it like that.
Pat: And life insurance, but... So, what happens when they... Well you don't have to worry about [crosstalk 00:43:16]
Scott H.: And it only works, it works for those people that invest, and then there's a downturn in the market quickly thereafter, or, like this person, it was just horribly invested. I mean, it was just mismanaged...
Victoria: Yes, exactly.
Pat: So...
Victoria: She kinda had her cake and ate it too, because she got the contract value, most of it, and this income stream for the rest of her life.
Scott H.: [crosstalk 00:43:32] life would have been better for her had it been properly allocated from day one, but...
Pat: That's incredible.
Victoria: Correct.
Pat: And I assume that she was happy with this decision.
Victoria: Oh, very happy. Well, and the lesson is, twofold, A, if you have one of these products, don't rely on the annuity company to see you through to what your best-case scenario is. They are not sitting on your side of the desk. They're not your friend. You call them, they're just gonna say, "Turn on the income, or move it out. Those are your two options," right? [crosstalk 00:44:02]
Pat: "And don't bring it to a financial advisor."
Victoria: So, you've gotta have a financial advisor. Yeah.
Pat: Yeah. Well, don't bring it to a financial advisor that just says, "Yes...
Scott H.: That's gonna sell annuities.
Pat: "...we're gonna just transfer this."
Victoria: Right. Right. You wanna have a fiduciary... Please call Allworth. [crosstalk 00:44:18] If you have an old, crusty annuity that you don't know [crosstalk 00:44:22]
Scott H.: Annuity or life insurance product.
Victoria: ...and you don't understand, call us.
Pat: Or life insurance policy.
Scott H.: Because there's some of those old life insurance policies...
Victoria: Or a life insurance policy.
Scott H.: ...don't...that make sense to get rid of either.
Pat: Yes.
Victoria: Right. And they can be so complex, and you really gotta dig into that contract to understand the ins and outs.
Pat: Yeah. I just did it with the client. He came to me, $2 million face value, life insurance, and we lowered the face value down.
Scott H.: Universal life [crosstalk 00:44:48]
Pat: Universal life. We lowered... It was variable universal life. We lowered the face value down, so it would accumulate more. And then we named all his kids as the beneficiary, and moved his wife off, so that...for estate tax purposes.
Scott H.: And there's no premiums payment anymore?
Pat: No. None. And the thing just, it... Yeah. But you see it all the time, right?
Scott H.: It's these old contracts.
Victoria: Yeah.
Pat: Vicki?
Scott H.: I see it all the time.
Victoria: And normal people don't realize that there are these options out there, that they can do with these products. And calling the annuity company, they're not gonna tell you. So, you have to have somebody who knows what they're talking about, knows what they're doing, who is sitting on your side of the desk, to help you navigate that.
Scott H.: Yeah. And it's primarily these older contracts, because the insurance companies got wise.
Victoria: They got wise to it. Yeah.
Scott H.: This is a really stupid mistake on their end.
Pat: Yes. So...
Victoria: Yeah.
Scott H.: Yeah, I remember years ago, a product that we used, you were allowed to manage your funds by yourself. There was, I don't know, 30 different investment options.
Pat: It was crazy.
Scott H.: You could make changes every day. You could make the worst decisions possible, and the insurance company was on the hook.
Pat: It was crazy.
Scott H.: There was no restrictions whatsoever.
Pat: We used them back in the day. It didn't last long. That was the insurance companies [crosstalk 00:45:55]
Scott H.: No. But I remember, Vicki, we had a call with the chief actuary of this insurance company, not gonna say the name, years ago. Because we looked at this, like, this is too good to be true.
Pat: We said, "This can't happen. This is wrong."
Scott H.: And we got, after the call, we looked at each other like, "They don't really understand this, do they?"
Pat: Or they weren't interested in the long-term viability of the company. They understood it.
Victoria: Yes. Yeah.
Scott H.: Yeah, you got a point.
Pat: Right? They understood it.
Victoria: Yeah, especially those contracts that came out in 2008 after the crash, and everyone was clamoring to get into a guaranteed annuity.
Scott H.: That's right.
Pat: And then the insurance companies were battling for market share.
Victoria: That's right. Yeah. So, they were saying, "Yeah, we'll give you a guaranteed 7% compounding return on your guaranteed income benefit.
Pat: Crazy. Vicki, as always, thank you for being on the show, and thank you for being part of the Allworth team. You're a valued and appreciated coworker.
Victoria: Yes. Thank you so much. I appreciate you guys.
Pat: Before we go, I had mentioned these ETFs, and we're not gonna have time to talk about it.
Scott H.: Yes, we are.
Pat: Oh, okay. We'll talk about it. So, the U.S.-based electronic exchange traded funds, right? Exchange traded funds, ETFs, surpassed a trillion dollars in inflows. Not...
Scott H.: Yeah, I saw that. Last year, right?
Pat: Not... That means new money coming in, a trillion dollars, right? And so, now they make so many flavors of them. And this one...
Scott H.: Well, because it's the modern-day mutual fund.
Pat: That's right. And there's some tax strategies...
Scott H.: And by the way, if you own an old mutual fund, particularly if it's outside of a retirement account, you're probably best just keeping that old mutual fund, because there's no sense incurring [crosstalk 00:47:29]
Pat: But not reinvesting dividends [inaudible 00:47:31]
Scott H.: No.
Pat: Yeah. Many people actually have it automatically triggered to reinvest dividends.
Scott H.: If it's outside of a retirement account, I would not do that.
Pat: Yeah. That is [inaudible 00:47:39] But, so...
Scott H.: Most of the time, right?
Pat: My favorite was this one called the simplified enhanced income ETF, which should just ring all kinds of bells.
Scott H.: Simplified?
Pat: Enhanced income ETF, right?
Scott H.: It sounds like people sitting around in a conference room in the afternoon, coming up with a name.
Pat: "Hey, we're gonna call it the..."
Scott H.: Simplified and enhanced.
Pat: It trades under the ticker HIGH, H-I-G-H. Good for them for getting that ticker. I would have thought that was taken. So, it is a simplified enhanced income. So, basically, what this thing is supposed to do is kinda act like a treasury.
Scott H.: You know, the challenge... Here's the problem with this, right? I don't even know what the product is yet. Right? You're gonna tell us.
Pat: Yeah.
Scott H.: But here's why I get... Why you mentioned, "When the ducks quack, feed them," right?
Pat: Exactly.
Scott H.: Because sometimes... You hear callers on this program. Someone's going to retirement. They're looking for a high-income strategy, because they need income in retirement. They've been investing in their 401(k) for years, but now it's time for income. They go doing some research. They start Googling around, and they see the [crosstalk 00:48:48] Even the ticker symbol's "HIGH."
Pat: Yeah. How could you go wrong with a simplified enhanced income portfolio?
Scott H.: It's simplified. Just what you were hoping for. You don't want a complex investment strategy. It's enhanced and simple.
Pat: You're like the marketing team. A plus. A plus on the marketing team over there, for their simplified enhanced. So, what it's supposed to do is kinda act as a treasury, but a little bit better, since the symbol is HIGH. So, in addition to buying short-term paper, HIGH buys and sells calls and puts and options to generate income. Oftentimes, they use this as kind of a, to make more fluid the volatility. They even traded options on MicroStrategy.
Scott H.: MicroStrategy?
Pat: They were trading [crosstalk 00:49:41]
Scott H.: By the way, if you're not familiar with MicroStrategy, they're... [crosstalk 00:49:45]
Pat: [crosstalk 00:49:45] strategy.
Scott H.: It's leveraged Bitcoin. They own Bitcoin. That's all they do.
Pat: Yes.
Scott H.: And it's worth about double what the underlying assets are.
Pat: Which is... By the way, I have a friend that has been doing put options on it, thinking it's gonna fall.
Scott H.: No, no, no, no. A bull market can last much longer than you're liquid.
Pat: I said to him, I said, "It makes sense, and at one point in time..."
Scott H.: It could be eight years.
Pat: I said, "One point in time, you will be right."
Scott H.: I had put options on Countrywide.
Pat: Oh, I remember that. I lost money on that.
Scott H.: You did too?
Pat: Yes. I was convinced they were gonna go out of business...
Scott H.: They did.
Pat: ...and they did. Just...
Scott H.: Just years longer.
Pat: ...not in time. Not in time.
Scott H.: Not in time.
Pat: So, they traded MicroStrategy's, they did put options. They [inaudible 00:50:26] options on this thing, right? And this is in an income fund. This is in an income fund, that is doing puts and calls.
Scott H.: And you read... And it says the majority of their...is in investment-grade securities.
Pat: Yes.
Scott H.: How did it do?
Pat: And so, their year, they ended up with a return of 1.5%. And the thing that they were trying to do a little bit better from would be, like, a Bloomberg SPDR. B-I-L, BIL. Right, which is a 1 to 3-month Treasury. Returned 5.2%.
Scott H.: So, treasuries were 5%.
Pat: And this thing was supposed to be a little bit better than treasuries. And the return for 2024 was...
Scott H.: How much in assets did that find? Did the article say that?
Pat: It didn't say. But the thing that... It's, the article goes on and continues, and talks about...
Scott H.: Just because [crosstalk 00:51:16] ETF doesn't mean it's a good investment.
Pat: ...is that they're rolling out these ETFs constantly, like, daily, new ETFs.
Scott H.: Well, because it used to be, when they first came out, they were all passive. They were all indexed.
Pat: That's right. That's right.
Scott H.: They're not any longer.
Pat: Well, because technology allows you to price all day long.
Scott H.: That's right.
Pat: Right? And that's really what an ETF did for the mutual fund industry, is it allowed you to buy somewhere to in the middle of the day, rather than it, open or close. But it just reminded me, as I said earlier about "when the ducks quack feed them." And look, these firms, they're designed to sell you stuff. Right? They want client... We want client...
Scott H.: Yeah. So, mean, Victoria Bogner...
Pat: We want clients.
Scott H.: I mean, Victoria said, she talked about fiduciary. She mentioned that word a few times. A product manufacturer's not a fiduciary.
Pat: That's right. They don't care.
Scott H.: They may care.
Pat: Okay. Fair enough.
Scott H.: But their job is not to do what's in your best interest.
Pat: Well, look, and the products are not either good or bad...
Scott H.: It depends how they're used.
Pat: It's how they're used, right?
Scott H.: That one might not be too great.
Pat: I'm gonna go with that. I'm gonna go with [crosstalk 00:52:26]
Scott H.: Well, you're buying put options on... I mean, you're taking...
Pat: In MicroStrategies in an income fund? Like, if I came to you and said, "Let's create an income fund, and oh, by the way, we're gonna do options on MicroStrategies..."
Scott H.: Which is essentially on crypto.
Pat: What you're trying to do is enhance your return.
Scott H.: We're gonna use crypto to enhance your return.
Pat: Well, not only are we using...
Scott H.: We're betting against...
Pat: ...a financial instrument to enhance the return, we're gonna do it in a company that's highly leveraged against a speculative asset to begin with. You're like, "Okay. Where's..." "When you go across this tightrope, let's get rid of the net."
Scott H.: All right. Hey, as we wrap up this program, if you haven't given us a review or rating, please do. So, if you're listening to on your Apple thing or Spotify. Where do you listen to your podcasts?
Pat: Spotify.
Scott H.: I do Spotify as well. But I think more people... I looked...because I looked that we have a lot of ratings on Apple, but not as many on... I don't care where you... Give us a review.
Pat: [inaudible 00:53:26] stop for a second. Have you read any?
Scott H.: No, I don't [inaudible 00:53:28]
Pat: You've never read reviews of the show?
Scott H.: I [inaudible 00:53:32] I make... Not that I recall.
Pat: Okay.
Scott H.: I don't spend any time. I have zero interest. I do look at the stars, if we had bad, if it was a bunch of bad ratings, I'd wanna know why, but it's good. I think we're 4.9 or something. I don't know. [crosstalk 00:53:45]
Pat: Okay. Higher than my Uber rating. Do you ever check your Uber rating?
Scott H.: Let me finish this.
Pat: Okay.
Scott H.: So, before we talk about it... Yes, I do, because I don't wanna be a jerk.
Pat: Okay.
Scott H.: I wanna be perceived... And we Uber quite a bit, because we travel for work, and it's actually a very efficient way to get around town when you...instead of going and renting a car.
Pat: I'm gonna tell a story about getting in the wrong Uber.
Scott H.: Okay. Real quick, though, so... Give us a rating.
Pat: There we go.
Scott H.: [inaudible 00:54:18]
Pat: I got in an Uber, and I'm almost at the destination, and then the guy realizes, and I realize...
Scott H.: You're kidding.
Pat: No. And...
Scott H.: Don't you check the license plate?
Pat: I didn't that time.
Scott H.: In some states, you're not required to have a front license plate. And I'm thinking if you're an Uber driver, you should have a front license plate, because you're sitting there, and here comes his car, and there's, like, there's no license plate.
Pat: It was like... And the difference of the car was that...they were both Toyotas on the thing...
Scott H.: Yeah, yeah, yeah.
Pat: Yeah, and it was dark out. And I get in the car, and we're almost to the destination. We both realize we're... And the guy, he said, "I'm turning around." I said, "No, we're less than three minutes away. You're not bringing me back 15 minutes." He said, "Well, you're in the wrong Uber." I said, "I know I am, and it's bad for you, too, and it's bad for me. But it makes no sense for you to turn around." And he said, "How am I gonna get paid?" And I said, "I will pay you."
Scott H.: Here's some cash.
Pat: Here's some cash. "But we're not turning around now." And now, I check.
Scott H.: That's interesting. Like, what if he would insisted on you turning around? You have... I would imagine he has to let a passenger out, or she has to let a passenger out, if you want out of the car.
Pat: I was not getting out of that car. I mean, where I would have not... Know it's a business [crosstalk 00:55:29]
Scott H.: You couldn't force the person to go where you wanted to go.
Pat: Okay. Fair enough. I would have had to go back.
Scott H.: You throw a little cash, and they go where you want them to go. That's the way it is in their business.
Pat: That's what he's there for.
Scott H.: A couple dollars, they're gonna drive you to [crosstalk 00:55:42]
Pat: I said, "I'll take care of you," and he said, "How much?" Good for you.
Scott H.: Good for him. Yeah. All right. We'll see you guys again 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.