♪ [music] ♪
[00:00:07.225]

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

Welcome to All worth's "Money Matters," Scott Hanson, and Pat McLain. Thanks for being with us.

Pat: That's right. Hope everyone had a great week, a great 4th, all those other things. We've got a great program lined up for you today.

Scott: Or so we believe.

Pat: Well, we enjoy one another when we're in the studio, having conversations about financial matters.

Scott: Yeah, I don't see you as much as I used to.

Pat: When we were a small little company, and we worked in an office right next door all day long...you know, another day in the salt mine.

Scott: Anyway, we are a financial organization, and we talk about finances. This is a financial program.

Pat: Yeah, we'll take your calls.

Scott: And we'll take some calls, and we've got a...

Pat: And answer questions about taxes, 401(k)s, IRAs, insurance...

Scott: I had an interesting meeting this week with... We've got... At Allworth, we're about, our organization's about 400 associates across the U.S., we've got 130 or 140 advisors, something like that. And we have a program where we have an... And I'm actually quite proud of the program we've built over the years, because we have interns that come in from universities, we typically will have a rising senior, so between their junior and senior year, they'll be with us for the summer. If we like them, they tend to...if it works for them, we'll have them up as kind of a part-time internship.

Pat: Well, in their senior year...

Scott: And frankly, I mean, we invest a lot, we invest a lot in these young people, and realizing, selfishly, like, we're going to find some great talent in there to join us afterwards, and then we've got about a five-year career path for people to go on to become a financial advisor, and we've built some great advisors over the years. We've been doing this a long, long time.

So anyway, a brand new intern, and I'm getting to a point of the story here.

Pat: Okay. Thank you.

Scott: I'm not just talking about our company. But anyway, a brand new intern reached out to me and said, hey, can I meet with you for 20 minutes or whatever? So last week I sat down in my office with him, we had a conversation, and young, energetic, a lot of... And first of all, I thought, it takes some pretty big guts to, your first couple of weeks, to reach out to the CEO, or co-CEO, just to reach out to the CEO and say, hey, can I meet with you for a bit? And by the way, he asked if it'd be all right to reach out to Pat, and I'm like, of course Pat would love to talk to you.

Anyway, so he says to me, why did you... Like, he's trying to look at his career path. He's like, I think this is the perfect career for me. Like, why did you choose this career path? So, it got me really thinking about the whole area of financial planning, and I said it's really the combination of the financial markets, which I find fascinating, mathematics, which have always come easy for me, I'm not good at a lot of other things, and the human element, the interactions with people, the guidance of people, kind of the whole psychology behind money management, and budgeting and investing, I said it's fascinating. And I said what I've really enjoyed about its is it's the combination of the individuals, working with these individuals and families, and figuring out we all have our own wiring, our own strengths and weaknesses, and temptations, fears, and it's putting the right kind of plan together for the right individual, that's going to work for them.

Pat: Yes.

Scott: And then guiding them through as life happens, whether it's something happens internally, to a death in the family or whatever, or...

Pat: Which causes, oftentimes [crosstalk 00:03:45.503] well, a financial crisis, but emotional reactions to your financial situation, be it warranted or not warranted.

Scott: Yeah, or the external things that happen.

Pat: That's right.

Scott: And anyway, so we had this conversation, and then I left and I thought, I really am fortunate. This is really an interesting... And to your point, Pat, on how something... I remember years ago I had a client, she'd been a client, my personal client for a number of years, and her spouse had a terminal cancer diagnosis. And they were a couple years away from retirement. Maybe he had just retired, and she had planned on retiring in a couple years. And obviously devastating, right? Totally devastating.

And so, yeah, obviously she was emotional, and came in and had a conversation with me, and trying to, like, figure things out. And then she was always one that's a little bit worried about the economy to begin with. She had her own business, worried about the... And so we had this conversation, and I said, you're worried about the markets...yeah. And she was planning on taking some time off work to care for her husband. I said, you're worried about the markets, I said, why don't we just get out of the markets, and sit in cash, sit and just treasury bills or CDs or whatever? Just...

Pat: For how long?

Scott: And like, she says, well, what happens if I, like... I said, we're talking... Like, this current chapter in front of you, you've got all these fears. You had this future dream in your mind, and it's now shattered, and you have no idea what that's going to look like, and you're not going to know until this chapter....however long this chapter is going to be.

Pat: That's right.

Scott: So we stuck her in cash over that period of time.

Pat: Something that had no volatility.

Scott: and her husband passed away, unfortunately, very devastating. After that, as the time went on, we slowly got back into building her portfolio, and she ended up meeting a new partner, and a bright future again. A very different future, but started having some more clarity on what our future could be, and then her financial plan is very different today than what it was several years ago.

Pat: But the idea of financial planning is that it is based on the person. Right?

Scott: Right, and we're all...

Pat: That's why it's... Like, never use the word...never use the word "always" or "never," right?

Scott: Well, and it's like, and we get it all the time in this industry, hey, where should I invest my money right now?

Pat: How would I know?

Scott: I'm always, look, it's...

Pat: I don't know anything about you.

Scott: I don't have a crystal ball. I can't tell you what's going to perform well over the next 12 years.

Pat: But I don't know anything about the person.

Scott: Right. And so, maybe I just gave an extreme example...

Pat: That's right.

Scott: But we have all these smaller things like that that occur in our life on a regular basis, and those things can dictate our portfolio. Our portfolio construction is not just someone thinking, well what do I think is going to happen in the next five years?

Pat: Yeah, and portfolio construction is based on if you are in a relationship with someone, it is based on both your opinions.

Scott: Oh, 100%.

Pat: Both your opinions. Not the loudest opinion...not the loudest opinion, but both your opinions.

Scott: Well, how many times have you seen someone come and hire a financial advisor because of their spouse?

Pat: Oh, 15%, 20% of the time?

Scott: Yeah. And it's typically as they get closer to retirement, one of the two couples is managing it, and they get...the other one's like, I know you've gotten us to this far, but like, we can't really afford to make a mistake at this point...

Pat: Scott, I had a couple that hired us for exactly... They were tech execs, and he played in this tech, and she made him...she made him come and visit with us. And I managed 80% of their money, and let him mess around with his 20% on the side, just to...like, you'll be fine with this 80%, then 20%... She passed away about six years later, he went exactly back to what he was doing before.

Scott: Really?

Pat: Exactly what he was doing before. And we're like...

Scott: It's a crapshoot then.

Pat: I'm like, you've got to leave us.

Scott: I mean, one of the things we look at is statistical probabilities of outcome, right? We focus a lot on that. And all of our financial planning, and kind of confidence levels, right, and standard deviations, and all that sort of stuff, to get deep into it. But it's... And for most people, they get to a stage in their life, nearing the retirement age, whether they plan on retiring or not, and like, their concern at this point now is, I've amassed enough for a certain lifestyle. I want to have the highest degree of probability that I can ensure this, I can maintain this lifestyle the rest of my life.

Pat: That's right. That's right.

Scott: Right? For the vast majority of people. And so when you move from, like, this broadly diversified portfolio into this I'm going to pick whatever tech stocks, it's a, at this point...

Pat: And they weren't just tech stocks, they were tech stocks you've never heard of. So, anyway...

Scott: Yeah. And who knows how he's done? Maybe he's done well, maybe he hasn't.

Pat: Maybe he hasn't. But we couldn't manage that portfolio. It wasn't comfortable.

Scott: All right, we'd love to take some calls, so that's what we're going to do. To join us, 833-99-WORTH is the number, 833-99-WORTH. And by the way, later in the program, we're going to have Brian James, who's one of our regional advisors, who...talking about individual securities, and just what we were discussing here.

Pat: And your role in, or not, in your portfolio.

Scott: But let's now go to Illinois, and talk with Bruno. Bruno, you're with Allworth's "Money Matters."

Bruno: Yeah, I have a 403(b) plan worth about $480,000, plus I just started collecting Social Security this year, and I'm getting about $1,539 a month, and I have about $42,000 in my bank accounts. And I'm wondering the best strategy to go forward, on looking forward to my retirement.

Pat: How old are you?

Bruno: I'll be 67 in September.

Pat: And when did you quit working? You didn't...or...?

Bruno: About 2021.

Pat: Oh, you have retired then?

Bruno: Yeah.

Pat: And what are you doing as... Well, what was your income prior to retirement?

Bruno: Maybe about $40,000.

Pat: Okay. And what are you living on now?

Bruno: I'm living on those $1,500, $1,539 from Social Security, and from my bank account. But I have very cheap rent, very low market rent, and that's why I get through. I mean, I pay very little.

Scott: And are you in a... Is your rent in such a way that you've got some guarantees it's not going to increase?

Bruno: There are no guarantees. The building could be sold in a month, half a year. There are no guarantees.

Scott: Okay, but do you have rent control where you are today?

Bruno: No, it's not rent control.

Pat: Oh...

Scott: And how much under market are you paying in rent?

Bruno: Okay, well, I'm in Chicago, Albany Park. I'm paying close to $400 a month for a studio.

Scott: Yeah, that's...

Bruno: Studios must be approaching $1,000...

Pat: Okay.

Bruno: ...$900.

Pat: And why do you have this abnormally low monthly rent, relative to the marketplace?

Bruno: I do not understand.

Pat: Okay.

Bruno: The owner who passed away, his son took over the building.

Pat: How long ago?

Bruno: Yeah, he just, he...I don't know why. But he had other buildings that he sold off, but I guess he couldn't sell this building off, so...

Pat: How long ago did the owner pass away?

Bruno: Oh, that was...it would have been late last year.

Pat: Okay.

Scott: Okay, let's... So in kind of planning, I think that we should assume that at some point in time, you'll be paying a market rent.

Bruno: Oh, yeah, I can assume that for sure. Yeah.

Scott: That's why we were digging into that question, because that is an unknown that you need to plan for, that you're going to have to pay market rent at some point in time.

Bruno: Right. Oh, yeah, yeah, I'm aware of that.

Scott: And why did you retire when you did?

Bruno: Well, I was laid off because of COVID.

Scott: Okay.

Bruno: And I never found a job after that, and so I gave up.

Scott: What do you think... Would they hire you back?

Bruno: No.

Scott: Okay. And when you said you're living off the $1,539 a month, plus money from your bank account, how much money from your bank account every month?

Bruno: Well, I'm not...well, it's very little, if any.

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

Bruno: Well, going forward, I have a 403(b) plan I still haven't done much with, and it's worth $480,000. Should I go to an annuity, and then funds, mutual funds, or...?

Scott: Yeah, so...in the portfolio, how is it allocated now?

Bruno: My 403(b?)

Scott: Yes.

Bruno: Well, it's about...I don't know, 80% stocks.

Scott: And are you single, Bruno?

Bruno: I'm single.

Scott: And health-wise, do you think you have a normal life expectancy beyond...you know, you'll live longer than average?

Bruno: I think I do. I think... You know, I have a slight case of COPD, apparently, but it doesn't seem to be doing that much, so I think I'm pretty well...pretty good.

Pat: All right, so here's what I think you should do. Your portfolio is probably a little heavy equity for you right now, if it's 80% stock. I would consider lowering that. And who does the allocation on the portfolio for you? Is it you, or someone else.

Bruno: Well [crosstalk 00:13:36.589] when I say 403(b) plan, it's still with the Fidelity, which is the original...

Pat: Understand. But someone makes the choices inside. They give you a menu of funds to choose from, and then you get to decide what funds to put in the 403(b).

Bruno: Oh. You know, I have never changed them.

Pat: Okay. Okay.

Bruno: Yeah. And I've never rebalanced, either.

Pat: Okay. You need a financial advisor.

Scott: Yeah.

Bruno: [crosstalk 00:14:03.538]

Pat: And look, given your situation, it might make sense to take 20% of that 403(b) and buy an immediate annuity. It may make sense.

Bruno: That's makes sense. Yeah, to amend my [crosstalk 00:14:17.977]

Scott: And if you're a long-term listener, you're probably thinking, this might be the first time I've heard these guys recommend this. But there are...Most financial products, there's a time and place for it.

Bruno: I know, but it's fixed income, and I feel I really have to supplement that Social Security, yeah.

Pat: Oh, understand. Understand. And what happens is it allows you to actually live through market cycles.

Scott: And be a little more aggressive.

Pat: You need a financial advisor.

Bruno: Oh, I know. I know.

Pat: You need to hire one.

Bruno: I'm in the process of doing so.

Scott: Okay, good. Because what... The last thing you want to do is take this entire 403(b,) and buy an immediate annuity. The last thing.

Bruno: Oh.

Pat: Or...

Scott: Or an equity index annuity...

Pat: Or even an annuity with a variable annuity inside of an IRA. But you need to understand what the allocations are. I even think, would you move to another area?

Bruno: Well, if I were to move, I would probably move back to Canada, especially if I want to die somewhere.

Pat: And what's in Canada for you?

Bruno: Friends and family.

Pat: Okay. Okay. Yeah, you need a financial advisor. That is something that you should...

Scott: And to look through, like, if you chose to move back, and unfortunately we don't have a ton of time to sit and have a longer conversation, but if you chose to move back to Canada, what would that mean financially? Maybe it'd be good for you, maybe it wouldn't be good for you. But so you can look at all those different options, and you know, then maybe if there is some sort of work you can do up there to supplement some income for the next few years, that could certainly help you as well. Because you're pretty tight as far as the economics are here, so...

Pat: Yeah, it is tight. That's right.

Scott: Hey, Bruno, so much appreciate the call.

Let's go to Texas, and talk with Nick. Nick, you're with Allworth's "Money Matters."

Nick: Well, I have a question I've been thinking about for a few years now. I've worked for mostly private companies, and recently, over the last three, four years, I've been getting equity and options. And I have kind of a two-part question, first part being, how should I look at that equity and options in context with overall retirement? And then kind of the second part is, like, should I think to diversify the rest of my investments, or should I just, like, kind of look at it as [inaudible 00:16:30.958] to the side?

Scott: How old are you?

Nick: 47.

Pat: And how much money do you have in the money, in the money in these options or the equity that you have? And in the money means...

Scott: That have some value today.

Pat: ...the value today. Not what you hope they will be, but what's the value today between those two?

Nick: So, yeah, one of the companies based on the last, like, 49A, it's about $600,000. And then the other company in options, I would say based on value today would be north of $1 million. It's tough to peg exactly where.

Pat: Got it, got it.

Scott: And the options, do you have the ability to exercise those today?

Nick: No. They're vesting, so as they vest, I can exercise them. But all of it is non-liquid. There's no option to sell any of it, no secondary market, or anything like that.

Scott: Okay.

Pat: Okay. And how much is...do you have outside of these in terms of investments?

Nick: About $500,000 in tax advantage, and about $400,000 in brokerage, so just under $1 million.

Pat: And are these in the tech sector, the options and equity?

Nick: Yeah. Yeah.

Pat: I like the way you're thinking. I use the...I have equity, and...

Scott: Are these two different companies?

Nick: They are.

Scott: Okay.

Pat: Yeah. So, one is...

Scott: One is a previous employer?

Pat: ...a previous employer that you have the equity in, I assume?

Nick: Correct, yeah.

Scott: Restricted shares of a private company.

Nick: Yep.

Scott: And there's no set there's no secondary market for them, because of your restrictions?

Nick: No, there's not. Yeah.

Pat: Well, it's actually very...it's quite impressive that you know the answer to that, quite frankly. I think about... I own part of Allworth, and I have options in Allworth, and I think about it exactly the way you think about it, which is how do these things mix into my overall investable assets? And then, I build the rest of the portfolio around there. So you are highly concentrated in the tech sector, obviously. You could do something in both of these IRAs and the brokerage account to actually mitigate some of that risk, which is called direct indexing. And so, it was rare and very expensive years ago to do direct indexing, but what direct indexing does is you can mimic an underlying index, but exclude either companies or sectors.

So we do it here at Allworth, and if you were sitting in our office, we'd look at this and we'd say, okay, you know, we're going to add this all up, and it's $2.5 million, of which 40%...oh, I'm sorry. I'm sorry, it's...no, no, he's got $500,000 in an IRA, Scott, $400,000 brokerage, right?

Scott: Yeah.

Nick: Yep. Yeah.

Pat: And $1.6 million in equity, right? So, we're at $2.5 million. Scott was making a note there to me. So, it's $2.5 million. I would use direct indexing, and exclude any tech stocks in that direct indexing.

Scott: Yeah, and if not, there's probably an ETF you could use that excludes tech.

Pat: Yes.

Nick: So, but when I think about the, like, on-track, off-track though, should I be thinking of it as kind of the value...? I mean, I know, obviously, it's been very volatile recently, and I think about, like, obviously, the ability to sell at some point, or get value out of it. Should I be thinking about it, and saying, hey, I'm on track because I got $2 million-plus here, or should I be thinking of it as what do I have in my normal [crosstalk 00:20:09.788]

Scott: No, I think...no. Well, I would certainly count these dollars towards your retirement planning.

Pat: Most certainly.

Nick: Okay.

Scott: Now, you might want to...I mean, I don't know how realistic the value is, because it's just someone making up these... I shouldn't say making up.

Nick: Right.

Scott: They're supposed to take their best guess, right? And based on a number of factors that they use, then they'll come up with a valuation. And it, theoretically, should be a true market value. Whether it is or not, that's...

Pat: Yeah, and what they look at is a basket of other stocks, and what they traded for, either non-public or publicly traded stocks. So...

Scott: I would 100% figure that...I mean, I wouldn't discount this, and say it's only going to be like winning the lottery when it comes to the money. I would look at it as at some point in time there will be a liquidity event...

Pat: And you will get that. So, I would look at it as part of the portfolio at the current value, and then I would use direct indexing. I'm not aware of an ETF that actually excludes...

Scott: I don't know, but I wouldn't be...it wouldn't surprise me [crosstalk 00:21:05.716]

Pat: ...it wouldn't surprise me that someone created a product to actually fix this particular situation. And if you can't find an ETF that excludes tech, then you build a direct index of either the total market of the S&P 500...

Scott: Unless these are so esoteric that throwing them into all tech... Because tech can be pretty broad in and of itself.

Nick: Right. Yeah, I mean [crosstalk 00:21:32.073]

Scott: Salesforce is tech, it's very different than Meta...

Pat: That's right.

Nick: Right.

Scott: They're two very different types of companies.

Pat: That's right.

Scott: One's a business solutions company...

Pat: Yeah, and one's a...

Scott: A social media company, advertising.

Pat: But you could build... But even in a direct index, you could actually build... You wouldn't have to exclude [crosstalk 00:21:51.028]

Scott: You can exclude those companies that...yes, that are similar industries.

Pat: Yes. And that's how I would manage it. And I don't know any firm out there that actually allows you to do direct indexing without the use of an advisor. I'm sure there is one out there.

Scott: I don't know. Yeah, there probably is. You could probably do it yourself.

Pat: Yeah, you could probably do it yourself.

Scott: You can do anything yourself.

Pat: Yeah. So, what you want to look at is direct indexing. And you would use the money in the IRA and the money in the brokerage account, and then figure out what sectors...

Scott: Well [crosstalk 00:22:20.667] my guess, given the savings he's got, the complexity he has, he'd be well served by using a quality advisor. But he could probably find a do-it-yourself direct index.

Pat: That's right. Yes, yes, yes. So, the direct indexing is how you want to go. And use an advisor, or find a do-it-yourself, and just figure out what segment of the tech sector these companies represent, which you probably know.

Nick: Okay. All right. Well, I appreciate that. I have one other quick question I'm just curious to get your thoughts on.

Pat: Sure.

Nick: 529 funds, I have a couple of younger kids, and have set those up. I know with the loans being forgiven and everything else, do you guys still think of those as, like, the right vehicle for that [crosstalk 00:23:07.382]

Pat: 100%, yes.

Nick: Yeah, okay.

Scott: Yeah, 100%. Yeah.

Pat: And the loans being forgiven...

Scott: That's if your family qualifies for loans.

Pat: That's right.

Scott: Because you get to a certain level, and you can't...it's based on a parent's income, and...

Pat: That's right. That's right. So, you've got to assume that you're...

Scott: And there's other expenses, too.

Pat: You've got to assume unless your children are some sort of phenomenal sports figures...

Scott: Phenom, yeah.

Pat: ...phenom, or music or something, that you're going to end up paying full boat for [crosstalk 00:23:40.659]

Nick: Well, I think they are, but [inaudible 00:23:42.387] All right...

Scott: Yep, yeah...yeah, you're going to scratch jacks.

Pat: Actually, my last...

Scott: Appreciate the call, Nick.

Pat: We wrote our last college...I say that. We wrote our last college check, and as I'm talking about it, I just remembered my daughter's going to law school. So...

Scott: And my youngest, who's 12, just this morning says, hey, dad, would it be okay if I didn't play competitive volleyball next year? Because she has conflicts with...she's got she's at track at school, and there's other, like, theater stuff she likes to do that she hasn't been able to do because she's playing... So I'm like, well, there goes my volleyball scholarship.

Pat: Oh, is that what you said?

Scott: I didn't tell her...I didn't say that to her. She's 12.

Pat: Does volleyball...what time of year does volleyball play?

Scott: Now. It started... See, I've got allergies. It started, volleyball started back in...right around before December, I believe. But they have these tournaments all over the place.

Pat: Oh, so you travel?

Scott: Las Vegas, Reno...

Pat: Oh, yeah, you said you went to one where thousands of people were in Vegas for a...

Scott: Yeah.

Pat: And Reno, all over.

Scott: Yeah. Vince Vaughn was there, with his family.

Pat: Was he?

Scott: It's funny when you run into, like, a star, someone you've seen so much you feel like you know them, but obviously you don't know them at all. I'm like...I almost said, hey, I know this dude. I almost... And then I'm like, oh, wait, he's a movie guy.

Pat: When my kids were younger, I just...I discouraged them from playing any sport that actually took place during the summer, because I didn't want it to ruin my summer vacations.

Scott: Well, this is during ski season, and I did tell her, I said... I said, actually, that would be fine with me. That means we can go skiing some more on the weekends.

Pat: Oh, that's nice.

Scott: She said, okay, daddy.

Pat: There goes your volleyball scholarship.

Scott: But there goes my volleyball scholarship.

Scott: We're going to take a quick break. Stick around for more Allworth's "Money Matters."

[00:25:35.849]
♪ [music] ♪
[00:25:40.551]

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

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

Pat: And Pat McLain.

Scott: Before we go to the calls, Pat, and we're going to talk to Brian James here in a moment, I want to talk a little bit about an income tax that hits a lot of good savers. And because it was never adjusted for inflation, every year it's impacting more and more people. So, this was the tax, some refer to it as the Obamacare Tax, but it's the Net Investment Income Tax, and it has to do with a tax on investment income if your income exceeds a certain amount. It's not impacted about...well, I shouldn't say it's not impacted. It's not a tax on your wages, it's not a tax on your IRA contributions, it's not a tax on your pensions, it's a tax on other investments you have. So interest you receive, dividends you receive, and it's 3.8$. So, it's not a small tax.

Pat: It's quite large. And the mere fact that it's not adjusted for inflation, you see this in taxes over the years, and legislation that would actually make it... It starts with rich people, and over the years it becomes a tax on the middle class.

Scott: Right. You've heard us talk about this before, yeah. Yeah.

Pat: Right? We saw this with Social Security 20 years ago...

Scott: Yes. Which they also, when they start taxing, they never impacted that for inflation.

Pat: That's right.

Scott: So, 20...

Pat: It was 19...

Scott: No, it was 30-some years ago, Pat, when you...

Pat: Social Security, they decided to tax Social Security at certain income levels.

Scott: Up to 50% of your income. And 30 years ago, it was if you're single and $25,000, or married and $32,000 in your provisional income, your Social Security if going to become taxable. That was 30-some years ago.

Pat: Right? Never adjusted for inflation.

Scott: So that $25,000 would be worth, like, $75,000 today.

Pat: That's right.

Scott: Particularly because inflation was much higher when you go 30... It was more than 30 years ago. Never adjusted for inflation.

Pat: Right? So when they tax the rich, and they don't adjust for inflation, there you go.

Scott: So this, it...this hits when your overall income, if you're single, $200,000, or married, $250,000, when your income exceeds that, you've got this Net Investment Income Tax, 3.8% that is applied to it. And 2013, the first year that this was enacted with Obamacare... Can you believe it's been ten years since Obamacare? It was roughly three million income tax returns were impacted by it. In 2021, over seven million income tax returns.

Pat: Okay, this is the creep. This is the middle class creep.

Scott: If inflation runs at 3%, 20 years from now, in real dollar terms, that $250,000 is going to be worth $125,000, ballpark.

Pat: So this Net Investment Income Tax, when we talk about investment management, we rarely talk about it without the context of tax. Because it's your after-tax return that you get to spend.

Scott: There's a silent partner always there. And we can choose, to some extent, how much and when we pay our silent partner.

Pat: Or if ever.

Scott: Or if ever.

Pat: Because of a step up in basis.

Scott: On death.

Pat: On death.

Scott: We're all going to die, and most of us aren't going to...we can't take this stuff with us. We're all going to leave some behind.

Pat: Yeah. Which always, again, always confuses...

Scott: And if you don't have anything to leave behind, then you probably shouldn't be listening to this conversation because it's not going to make any sense.

Pat: It always confuses me, why they allow that step up in basis.

Scott: But with this, you think things such as, what do you hold...do you hold bonds in a retirement account, or do you hold bonds outside of a retirement account? Do you have dividend-producing stocks in a retirement account, or outside the retirement account? Even if you want to rely upon income from money you have in retirement accounts, would you rather have that income produced inside the retirement account, or outside? And then also, then you start thinking about qualified dividends that are taxed at 15% or 20% depending, as opposed to ordinary income taxes inside of an IRA, so you need to take that into consideration as well. There's a lot of moving parts.

Pat: All over the place.

Scott: And much of it's going to be driven on your income level.

Pat: Today and in the future.

Scott: Today and in the future. So, if you... And that's why we look at people who've done a great job saving in their IRAs, and they've got a couple million or more in their IRA, we start thinking about that requirement on distribution is going to suddenly kick... Suddenly you're going to be paying a 3.8% tax on your dividends that you haven't been paying before.

Pat: Yes. Now, to counter that, Scott, there are plenty of infomercial television and radio programs out there that talk about using life insurance to avoid all this, to avoid the tax.

Scott: Well, if your' never going to spend it...

Pat: It may make sense. But life insurance typically isn't a great vehicle to accumulate money and distribute money in your lifetime, which is how they are touted. Because oftentimes, the cost of the insurance is much higher than the tax you would have had to pay otherwise.

Scott: That's right [crosstalk 00:31:26.505] correct.

Pat: Right? So, the theory sounds great. I mean, I listen to these, and I understand the life insurance, and I'm like, I get it in theory why you can say this, and it sounds great. But you're ignoring a cost associated with either an index annuity, you're missing a step up in basis...

Scott: Look, when there's a need for life insurance, you'd better have life insurance.

Pat: That's right.

Scott: Oftentimes, term insurance... If you need permanent life insurance for a reason, then have permanent life insurance. But I think you're talking about when there's not really that need for that permanent life insurance, and people are using policies to try to...

Pat: To save for retirement, and then generate income in retirement from that. I'm just saying that because you could look at this and say, well, I heard this program on the radio where they talked about how rich people never pay taxes. Well, I'm telling you, that isn't altogether true.

Scott: Yeah. But there's a lot of planning that needs to go about these things. Isn't that a fun topic to have in the middle of the summertime? Oh, well, it does make it all interesting.

Pat: Yeah, and it will change.

Scott: If you think how much taxes have changed over the years, it's much... The tax structure today is much different than it was 20 years ago, 30 years ago.

Pat: Oh...

Scott: All these things like we're just talking about, there'll be new things that'll come up.

Pat: Yeah. Hardly anything ever goes away.

Scott: And we talked about, also about having a diversified tax strategy in your retirement, meaning by that, like you hit retirement, let's say you have $3 million saved for retirement, Family A has $3 million in an IRA, and roughly nothing else saved, someone else has $1.5 million in an IRA, $700,000 and in Roth IRA, $800,000 in a brokerage account...

Pat: That's easier. That's a great tax strategy, actually.

Scott: That's at your...yeah. Something like that, you'd be so much better off in retirement, having a diversified tax strategy.

Pat: Yes.

Scott: Particularly when it's things like you need to go buy a new car, you want to use some money for vacation, you've got to buy a [inaudible 00:33:29.017]

Pat: You can dial in your marginal tax rate year to year.

Scott: And look at things such as the Net Investment Tax a little differently.

Anyway, so hey, we've got Brian James is going to be joining us. Brian is one of our advisors with Allworth, and he's also our regional director. And we were having a conversation with him about individual stocks and that sort of thing, and so we thought we'd have him on for a few minutes. So Brian, thanks for taking some time today.

Brian: Absolutely. Thanks for having me on.

Scott: Yeah. So with stocks, and Pat had mentioned earlier about a client he had that was...that liked to trade tech stocks and stuff, and he ended up...

Pat: Yes. And that hired us, Allworth, the wife essentially hired us, and when she passed away he went exactly back to [crosstalk 00:34:13.972]

Scott: And we all know companies and that have gone out of business, bankrupt, big-name companies, but more stocks have provided losses over the years than gains. Isn't that right?

Brian: Yeah, absolutely, you're right. So, there's a lot of them out there, you know? There are tens of thousands of stocks out there, and any one of them does anything at any given time. We tend to think of the stock market over the long haul as the best place to have investments and to grow your money over time, and there's a whole lot of historical information that says that's the case, but that doesn't mean that every single stock has done the same thing, right?

So we're looking at this study, there's a professor named Hendrik Bessembinder who is an Arizona State School business professor, looked at basically 28,000 stocks that have traded over time, going all the way back to 1926, and believe it or not, the majority of those stocks actually worked to make people poorer. That doesn't make any sense, right? We buy stocks because they go up, and if I buy a whole bunch of them, then I'll be okay, and if I diversify, I'll just own everything under the sun. Isn't that right?

Well, no, that's not the case, because almost two-thirds of stocks over time, going back to 1926, have actually cost people money. That's kind of mind-blowing to me.

Pat: So, that's why, right, so you think about this, and you used the word 28,000, so you think about the stock market as small cap, mid cap, and large cap. Small cap over time, historically, will provide you the greatest rate of return, historically, with the most volatility.

Scott: Yeah...7.2% points above that of the rate of inflation historically, based upon some [inaudible 00:35:55.045] data, and some other data.

Pat: Yeah. But the volatility in it is unbelievable.

Scott: And to your point, Brian, you're saying is that two-thirds of companies would have lost you money. You wouldn't have earned that 7.2%.

Pat: Well, that's easy. All you have to do is buy the third that made money.

Scott: Oh.

Brian: Absolutely. Now remember, when you're talking about small cap, that two-thirds figure off the 28,000 stocks ever traded, that includes large, medium, and small.

Pat: That's right.

Georgie: If we boil that down to just small cap, I can guarantee you it's a lot higher than two-thirds of those small companies that literally went to zero, and don't exist anymore.

Pat: My guess...

Brian: Because there's a reason...that's what makes them a small company, they could go out of business.

Pat: That's... And because of recent phenomenas, like the special purpose acquisition companies, some of them came out as large cap, and quickly became small cap.

Brian: That's the purpose of the special acquisition. Let's acquire a bunch of stuff, call it an acronym, and it's a whole boatload of small companies that maybe weren't that great on their own, but if we mush them all together, we'll make one good one out of it. That's what that tends to be.

Scott: So Brian, you've been an advisor a long time, we've been advisors a long time, right? And we've all had situations where someone comes in to see us, maybe they've been referred to us or whatnot, they're overly concentrated in one or two companies, right? And sometimes it's the employer they work for, over-concentrated, and it's like, you don't understand, Scott, this company... How do you convince those individuals why it makes sense for them to diversify out of that one company?

Brian: Yeah, and that has everything to do with an understanding of market history, and that is a very, very, very common story. And if you've been an advisor long enough, you can look at somebody's portfolio and tell them...and figure out where they live geographically, because it just depends on, you know, big companies you live nearby you may wind up with a lot of exposure to. So, it's just a matter of making sure people...

Scott: Yeah, you're in Cincinnati.

Brian: Yeah. So, that means...

Scott: So, I imagine you've got clients from Procter & Gamble...

Brian: That's exactly who I'm thinking of, Scott, and...

Scott: The majority of their savings is in Procter & Gamble.

Brian: Fantastic company, with a huge long-term history of increasing the dividend, and fantastic stock performance. That doesn't mean, though, that Procter & Gamble never does anything wrong. About once every seven or eight years, Procter & Gamble does something that the market hates.

I go back to the beginning of my career, when they put in a CEO named Durk Jager, and the market instantly hated his ideas. And you can see this on a chart, the stock got cut in half within a matter of months. And this is P&G. But if you had $1 million in the spring, then by the summer you had $500,000 in it, because the market didn't like what he did. Didn't mean they weren't selling soap and all the same other products, but the market did not like what his plans were. That's the risk of any one individual stock.

Now at the same time, if you have a diversified portfolio, that means you've got other things in your portfolio that could be doing great things, right? At this time, you might be...maybe you were a buyer of Apple at the early onset, and you're making money hand over fist. So, that's the whole reason to not have it all in one basket.

Scott: But it seems like even this year, Brian, that most of the gains in the broad stock market have come from a handful of names, a handful of companies.

Brian: But that's true all the time, right? When we talk about the broader market, we're usually referring to the S&P 500, the Standard and Poor's 500, which is nothing more than the 500 largest stocks in the United States. But what a lot of people don't know is that that index is what's called capitalization-weighted. That means the bigger the company is, the more of the index it makes up. It is not...that index itself is not equal weighted. So as you might suspect, companies that didn't exist 20 and 30 years ago, and I'm thinking of all the technology companies, your Googles of the world, your Facebook, so on and so forth, they didn't exist. However, now they are by far the largest companies on the face of the Earth. They have been driving the S&P 500 because of that capitalization-weighted approach. If you look at a capitalization-weighted ETF, SPY is a common one of the S&P 500, their performance is very different than an equal-weighted S&P 500. There's one call that goes under the ticker symbol of RSP, and you can see a significant difference in performance between the two, even though they're the same 500 stocks.

Scott: Well, Ryan, hey, I appreciate you taking some time to give us...remind us all...

Pat: That's interesting. Diversification, diversification, diversification...

Scott: It's not as sexy though, is it, as being able to have a name...

Brian: Sure. It's not fun.

Scott: ...having a name that you can share at a cocktail party.

Brian: I want to share it at a cocktail party. I want to say, hey, look at all this money I made in [crosstalk 00:40:18.104]

Pat: But how...wait, wait, I'm going to stop you for a second.

Scott: Drinking a highball...

Pat: How old are you guys? Do you ever get invited, and someone's saying, hey, join me at my cocktail party?

Scott: No one has a cocktail party.

Pat: What are you guys, what are you just out of "Mad Men?" What...1970? What...? You go to a party, can we...not cocktail parties. Drinking highballs...

Brian: Yeah, drinking Drambuie, and hot stock tips.

Scott: You go to a conference, and they have cocktail hour. You'll see listed on an agenda, "cocktail hour."

Brian: Well, it all happens in internet forum rooms these days [crosstalk 00:40:44.978]

Scott: Yeah, yeah, yeah, right.

Pat: All right. Well, appreciate your time, Brian.

Scott: Appreciate the call-in, Brian. Thanks.

Brian: All right, thanks, guys.

Scott: All right, let's talk to Mike in Maryland. Mike, you're with Allworth's "Money Matters."

Mike: Hello. Thank you for taking my call.

Scott: Thank you.

Mike: So, I'm 33, my wife is 33, we're here in Maryland. I work as a federal officer, but she does insurance for a hospital here. And I was just calling because we recently learned about investing, and I want to get an idea of where we're at, in your opinion.

Pat: Okay. Okay...

Mike: All right, so we have two kids, we own a house. It's about $310,000 left on it, it's worth $400,000. My PSP, I have about $105,000 with Roth, IRA I have about $27,000. My wife, she has a Roth about $25,000, her 401(k) is about $6,000. We have a brokerage account that's about $27,000, and we have two 529s, one with $10,000, and one with $8,000, and then cash, we have about $15,000.

Pat: We just...

Scott: Do you want to change jobs and be a financial planner?

Pat: You just said you just learned about investing...I don't believe... We're both looking at each other like...

Scott: Check, check, check, check, all the things you should be doing.

Pat: Yeah, yeah... By the way, you're 33?

Scott: Yeah, that's perfect.

Pat: And two kids?

Mike: Yes, sir.

Pat: You are a great saver. What's your income for you and your spouse?

Mike: So, my income is $108,000, and my wife, she's about $45,000.

Pat: You're an incredible saver. Okay, what's your question for us?

Scott: What's your mortgage balance?

Pat: He said $310,000, right?

Mike: The mortgage...yes, it's $310,000.

Scott: 30-year fixed, at a 2.7% rate or something?

Mike: It's 2.5%, 30-year fixed, correct.

Pat: Okay, of course it is.

Scott: Of course it is.

Mike: Yeah.

Pat: Okay, so what's your question for us?

Mike: As far as allocations and everything, we're pretty much 80% the total U.S. stock or S&P 500, and then international.

Pat: And the other 20% is international, or the other 20% is what?

Mike: The other 20% is just international [crosstalk 00:42:48.354]

Pat: Okay, so...brilliant. Brilliant. Wouldn't touch that. I think it's a great strategy.

Mike: All right.

Pat: Brilliant. Brilliant. No, there's nothing... Here's the thing. How much life insurance do you have on yourself, and does your spouse have on...?

Mike: So, we recently signed up for a 30-year term life insurance, and it's...the one that I have is $750,000, and the one that my wife has, I believe it's the same, same $750. Besides work. We have it with work, also.

Scott: So I think when this call is over, you should just do the mic drop. Just drop the phone...

Pat: That's right.

Scott: Like, just tell your wife, I called this financial talk show, and they offered me a job.

Pat: They didn't know what to do.

Scott: Right?

Pat: Yep.

Scott: What's your concern? What drove you to make this call?

Mike: So prior to COVID, we sat on cash. That's what we used to do, just saved cash. We didn't really invest any money. And then as soon as COVID hit, that's when we started really learning about it. So I kind of always feel behind, like I should have been doing better, or I'm not hitting the benchmarks I should be hitting for my age.

Scott: Oh, my...

Pat: What?

Mike: It just, I...

Scott: Mike...

Mike: Yeah, and I just want an opinion [crosstalk 00:44:02.549]

Scott: Most people your age have debt up the ying-yang.

Pat: You...

Scott: I'm not kidding.

Pat: Look, and one of the reasons you have this money is because you worry about it. You are...

Mike: Yes [crosstalk 00:44:13.415]

Scott: You're doing everything right.

Pat: Yeah, and I assume you're putting the maximum you can into both the 401(k)s or your PSP, and the Roth IRAs, correct?

Mike: We max out the IRAs and the TSP, but not the 401(k) yet.

Scott: It's fine.

Pat: You're fine. Mic drop.

Scott: Yeah, I don't know what else to tell you.

Mike: Okay. That's good, then.

Scott: I'm dead serious.

Pat: Yeah, nothing [crosstalk 00:44:44.646]

Scott: I mean, 80% total market, 20% international, I think that's great. I mean, if...

Mike: Okay.

Pat: 529 plans, life insurance... You probably need some disability insurance, but you probably get that through your employer.

Scott: You can get it through work, yeah.

Mike: Disability, all right.

Scott: You can get it through work.

Pat: You get it through work. Yeah.

Scott: Yeah.

Mike: And the 529s, those are the only two that has no international. They're just S&P 500.

Pat: I'd be okay with that.

Mike: That's fine? All right.

Scott: Yeah, I would, too.

Pat: I wouldn't worry about it.

Mike: All right, phenomenal. Thank you.

Pat: Yeah...no, no, you're phenomenal. This is...

Mike: Thank you.

Pat: You're 33...you're 33, I can't wait 'til... Call back when you're 55...though I'll be 82...

Mike: All right.

Scott: Well, we'd like...

Pat: I'll be hanging over the microphone, argh...do you remember when I called you 22 years ago? No, perfect. Perfect. Perfect...perfect. Perfect, Mike.

Scott: Yeah. And if you're ever interested in a career change, we've got some great advisors, and you might be able to join the club.

Pat: Yeah.

Scott: Always encouraging, when young people are really responsible financially.

Pat: Yeah, really impressive. Really impressive.

Scott: That's all the time we have, and enjoy the rest of your week.

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