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

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

Pat: Yeah, Pat McClain. Thanks for joining us.

Scott: That's right. Both myself and my co-host, we're both financial advisors, and we have been practicing advisors for three decades, and come to you on the weekends being your financial advisors on the air. It's always good being in the studio here talking about stuff in financial matters.

Pat: Yeah, little things, big things. I was actually on the phone this morning with a client, and, oh my gosh, 25 years. And the things that clients...some super mundane and some are really, like, life. I'll share it with you, Scott. Eighty-five-year-old couple, maybe 20, 25 years clients, own a couple condos. They're like, "Well, we want to give them to our kids." I'm like, "That's a bad idea." Cost basis, you know, moves with it and...

Scott: Yeah. I mean, the difference is they make a gift now, their low-cost basis, presumably low-cost basis is going to carry over to their kids. If they wait and the first one passes, then the step-up basis, that time they can make it.

Pat: So, I explained that, and then the second question is, "Why do you want to sell these condos? You've owned it forever." And they're like, "Well, we're tired of it." I said, "How tired are you of this?" "Well, we're really kind of tired of having to deal with these." I said, "Okay, these are the alternatives. You can keep it until one of you dies, step up in basis, kids can sell it at that point in time, or you could sell it today, pay the taxes, and just recognize the gain. But moving it to your children does nothing but move the problem downstream. It does nothing for tax purposes." So, at the end of the discussion, they have two condos, selling one, keeping the other. I'm like, "Well, tell me why you want to keep the one. "Well, it's in a nicer neighborhood, and we may want to come back to it." And I thought to myself...And then the other one was, "Where do I sell these two boxes of silver that I've owned for 30 years," right?

But it just reminded me the discussion wasn't only around money, it was around what their objective for the asset was, for the money. And we weren't talking about their investment portfolio or anything we manage for them, we were talking about how this asset, in particular, was affecting their lives, right? And I said to them, you know, "You have enough money to live the rest of your life comfortably. You are 85 and there's plenty of money." And they're like, "Well..." and I love clients like that. "Well, we're not sure." I'm like, "Okay, that's a sure sign that you're going to be fine is when you're still worried about it."

Scott: Well, my 85-year-old mother still saves, right? She hasn't worked in 20 years, but she's saving.

Pat: Yeah. So, it reminded me of what, you know, financial planning is about. It's not just about managing your stock and bond portfolio. It's managing your assets so that they could best achieve your life objectives.

Scott: You know what I find it interesting, Pat, because we both started in the industry roughly around the same time, around 1990, and both have clients for going on 30 years, more than 30, I think some, and those that have been nervous about the markets years ago are still the ones nervous about the markets, right? And those that weren't still are not. And this is after decades, going through the dot-com up and down, going through the financial crisis, right? So, intellectually, they realize that whatever happened in the market is short-term. Last week, the market had a couple nasty days or whatever. Like, it's just short-term and we're going to have down years and everything else. But the people that reacted emotionally 30 years ago are still the ones that react emotionally today.

Pat: Scott, two clients I spoke to this week, one said, "You know, I haven't looked at my statement in over a year." And I'm like, "Wow, well, that's...you might [inaudible 00:04:51] pretty extreme." And then the next day, clients look at their account balance on a daily basis. And I said to the one, "You might want to look at it more often."

Scott: That's right.

Pat: And then the one that looks at it every day, I asked why. And they said, "Well, we don't know." And I said, "Well, how do you feel when you look at it?" And they said, "Well, some days we feel great, and some days we feel poorly." And I thought, there's no way...I could say whatever I want, the behavior on both sides is not going to change.

Scott: No, it...I mean, historically, the stock market goes up 53% of the time on a daily basis. So, roughly half the time. So, half the days are down days, historically.

Pat: Yes. So, they're more happy than not most of the time, 3% of the time.

Scott: Fifty-three percent of the time. I think at this point is probably not actually impacting their moods.

Pat: No, I don't think so. I don't think so.

Scott: Anyway, we've got a great program lined up for you. We will have our discussion amongst ourselves, and hopefully, you can enjoy it. And, of course, take your calls. If you want to join us, the best way to do it is just send us an email and schedule a time. questions@moneymatters.com. Again, questions@moneymatters.com or you can call 833-99-WORTH. And let's start off today with Ray. Ray, you're with Allworth's "Money Matters."

Ray: Hey, guys, thanks for taking the call. I love the show.

Scott: Thank you.

Ray: Yeah, always informative and entertaining, which is...I'm sure it's a hard needle to thread, but thank you.

Scott: Well, thank you.

Ray: Okay. So, my question, I think it's a simple one. We've got some of our assets in a...our low-risk assets in a savings bank that gives 4.5%. And I'm just wondering if you guys have any thoughts on why would we do a CD versus just leaving it in a high-interest savings?

Scott: Are you with a smaller bank, community bank, or something?

Ray: No. No, it's an online one. It's one of those ones...Yeah.

Scott: And because the national banks are still paying point...

Pat: Which is just amazing to me.

Scott: I mean, and you kind of get stuck with the...if your bill pay and stuff is set up at a big bank like mine is, it's like I'm looking at it like, "Is it really that...Interest rates have risen. You can't step a bit more than that?" But if you're getting 4.5% in a savings, I mean, it's...

Pat: So, I'll give you my view of it, right? So, I have low-risk assets, and if you had talked to me three years ago, they were in bank CDs, and even some treasuries, right? And so, at that point in time, the yield on those was high enough to actually go through the hassle of actually moving into a 6, 9, 12...I never went out more than 12 months on...

Scott: As opposed to 0%. You could at least get a percent for whatever it was.

Pat: Yeah, three-quarters of a percent. And I would move it accordingly. And you can do it in a brokerage account, you can actually do it in these online...now they have these portals and online banks where you could actually move it through different banks. Right now, I have no CDs and very little treasuries in my portfolio because the yield difference is minimal. So, when you ask...

Scott: I like treasuries right now. They're yielding over 5% and they're free of state income taxes.

Pat: That's correct. My problem is I don't know exactly when I'm going to actually need the money. So, there's...

Scott: CDs, I don't...

Pat: I wouldn't buy a CD.

Scott: Not in this market. Unless you...I wouldn't buy a CD. Treasuries are yielding higher than most CDs. But if you're at 4.5% in the savings, it's probably not worth the hassle of going somewhere else, unless you're [crosstalk 00:08:58].

Pat: But you could call us back a year from now and our opinion could be completely different. What you're looking for is the low risk, is you want government guarantees on it for whatever that's worth at any point in time, but you want government guarantees on it, and then you want the highest after-tax yield that you could possibly get.

Ray: Yeah. Right. That makes sense. Okay. I mean, the only thing I could think of is, you know, at a certain point, the interest rates will, hopefully, theoretically decline. And you know, if I had a one or a two-year CD, I might, you know, get some leverage off of that. But if they go up...

Pat: They may not decline. Well, that's a completely different question. The question you're actually asking there is, if interest rates decline, what's the best thing to own?

Scott: Yeah, if you're betting that interest rates decline, maybe there's another...I would still think treasuries would be preferable to CDs in this market.

Pat: That's correct. That's correct. And what state do you live in?

Ray: Florida.

Pat: All right. Well then, there's no benefit to treasuries.

Scott: [crosstalk 00:10:00] Then I take some of that back, yeah.

Pat: There's no benefits to treasuries in that state. There are benefits to treasuries in states like New York and California, but where you're at is fine.

Ray: Actually, I was...I don't know, you know, but I was going to say, I think sometimes, you know, the state you live in, you pick on. And I hear you guys on California, but I can tell you living in Florida that the problems aren't the same, but they're just as bad and, you know...

Pat: You have a completely different set of problems, including alligators and weather and insurance issues. I did want to say one thing. On your bank CDs, do you have them less than the FDIC limits or on your savings accounts at $250,000?

Ray: Yeah.

Pat: And are they owned by a trust?

Ray: No.

Pat: Okay. All right. And I'll throw this out to the rest of the listeners, and I've had these discussions with more banks than I could possibly tell you about, which is the FDIC limit is $250,000 per person, except if there's 2 owners on the account, it's $500,000.

Scott: Plus...

Pat: Plus, if it's a trust that owns it, it's the number of owners of the trust times the number of beneficiaries not to exceed four beneficiaries, which means you could get FDIC limits up to $2 million if you own it as a couple in a trust and you have four beneficiaries. If you have three beneficiaries, it's $ 1.5 million. So, back when I was buying CDs, I would buy them in a brokerage account, and for some clients when it was appropriate, and they would always say, "Well, the FDIC limit is $250,000." And you're like, "Well, it's not." But that's for the rest of the listeners.

Scott: And there's also...I appreciate the call. Most...I mean, not most, a lot of financial institutions will have accounts now where they will...when you exceed those limits, it gets brokered amongst...we can do that for clients, it gets brokered amongst a bunch of other CDs so you get that limit that goes far in excess.

Pat: But I don't know why FDIC actually matters anymore because if everything is like First Republic Bank that went under in California, the FDIC just stepped in and backstopped everything.

Scott: Well, it's interesting, my homeowner's insurance policy, California, up for renewal.

Pat: Okay. Did you get it renewed?

Scott: Not one got canceled. I'm on the FAIR Plan.

Pat: Oh, okay.

Scott: I've got a cabin. I don't know why they call it FAIR Plan.

Pat: Well, I know, because it sounds good.

Scott: But anyway, talking to the insurance agent and just in the area it's at, like, I have earthquake covered. And so, she was explaining like, "Here's the limits on the earthquake," like, because there's high deductible. And she said that you can buy some supplemental policy to bridge that gap. It wasn't even that. I said, "If there's this big of an earthquake in that region and tons of homes are..." I said, "But government's going to come in and..." and that's just reality.

Pat: Well, this caller was just from Florida. Those are obviously issues that...Anyway.

Scott: And insurance, like...I think about insurance is you ensure those things that are difficult for you to self-insure.

Pat: Correct.

Scott: Large assets. Home, you want fire insurance.

Pat: Liability for unknown accidents that will occur.

Scott: That's a huge one.

Pat: That's the biggest, probably the biggest one.

Scott: But I'm also a big fan of large deductibles. I think about a homeowner's insurance, I mean, you don't want to have a claim on your homeowner's policy anyway because it stays with it forever and jack your payments up.

Pat: Yeah. So, you've got a claim of $2,500...

Scott: Or 5 grand or 10 grand.

Pat: ...you're like, "I'm not turning this in.

Scott: So, you might as well have a high deductible.

Pat: Yes, because you're probably not going to turn it in anyway.

Scott: Yeah, it'll save a lot doing that. Anyway. Insurance issue is an issue in Florida, it's an issue in lots of different states.

Pat: Part of it is the reinsurance.

Scott: Part of the reinsurance company because they all go back to...

Pat: Yeah. So, there's a layer behind your insurance company, it's called reinsurance, which protects against large claims against an insurance company. And the reinsurance marketplace has become very, very expensive, which actually feeds down into...So catastrophic claims, like, you think about these Paradise fires in California and the big hurricanes and tornadoes, those actually will then leave the insurance company and go to what's called a reinsurer, which these guys, the reinsurers, they either strike gold or they go bust. And right now...

Scott: It's partially that. It's also the regulatory agencies because they limit how much insurance companies can charge, how much the premium is. So, companies are just saying, "Fine, we're not going to write in that state anymore. We're not going to write in those areas. We're just out." So, instead of letting the free market decide...If you're in an area that's prone to hurricanes, obviously, you're going to pay more, or if you're in an area that's prone to wildfires, obviously, you're going to be paying more. But when the states regulate so tightly that most carriers just say, "I'm not even going to bother," then it's...

Pat: It's an issue.

Scott: We don't even know what the fair market price is any longer.

Pat: Excellent point, truly. Like, how does the insurance company actually underwrite risk if they actually underwrite it and then the government says, "No, it can't be like that." And in fact, this is actually how, you know, capital markets, fair markets should work is that, look, if you're going to build your house in the middle of a dense forest...

Scott: Or on the beach where there's hurricanes.

Pat: ...then there's a cost associated with that.

Scott: You should realize there's a chance there's going to be a catastrophic issue and a cost with that. Anyway, I don't know [inaudible 00:16:17.019].

Pat: They call it going bear in Florida, I read an article last week. I think they call it going bear, which is people that own their homes outright just decide to forego the insurance altogether.

Scott: I had that thought on my cabin, just going for...I mean...

Pat: Can you still get liability if you don't get property coverage?

Scott: I don't know but I had to buy a separate liability policy for not very much money, and I'm grateful for the FAIR Plan. It's the taxpayers are subsidizing it, frankly. Every state has their own...most states have their own...

Pat: No one deserves a subsidy from the government more than you, Scott.

Scott: Well, every once in a while, the state...You realize the State of California, the top income tax rate, 13.3%, it's actually higher for working professionals. They raised it this year because state disability insurance is...no, it's 1.1% on payroll. There used to be a cap. Yes, there's a cap in benefits. They eliminated that cap this year. So, you take...let's see, you have a surgeon making $500,000 a year.

Pat: Oh, I did not know this.

Scott: They pay 1.1% on the entire wages. So, 14.4%. That's why I like owning treasuries. So, I don't send it...

Pat: More money to the state.

Scott: ...to the State of California. Anyway, let's go to Baltimore. We're talking with Bill. Bill, you're with Allworth's "Money Matters."

Bill: Hi, Pat and Scott.

Scott: Hi, Bill.

Bill: Yeah, hi. I have some retirement tax optimization questions. Talking about subsidies, you know, I think I was looking at Roth conversions versus taking ACA tax subsidies. If ACA tax subsidies can be worth $20,000 or more per year for a couple, how do you compare taking the subsidies versus doing Roth conversions? You know, if you have the money to pay the tax on a Roth conversion during early retirement, you can control your income.

Pat: And how old are you?

Bill: I'm 60 and my wife is 60.

Pat: And how much money do you have in...?

Scott: Sixty or 50?

Bill: Sixty.

Scott: Okay, you're both 60.

Pat: And how much money do you have...? Give us a breakdown.

Scott: And the ACA is the Affordable Care Act. So, it's going on the exchange and it's the subsidized [crosstalk 00:18:48.649]

Pat: We use this technique often, often. Give us a breakdown of the assets. So, how much are in qualified dollars, non-Roth, IRAs, or 401(k)s?

Scott: And the thing about the ACA, it's based upon your income, not your net worth.

Pat: And actually, it doesn't even take into account cash flow at all. So, oftentimes, we'll actually either take money out of a brokerage account or have people use up some savings or actually take money out of a Roth IRA...

Scott: And it's typically the bridge to Medicare care.

Pat: ...and then you let loose on the other side. So, give us a breakdown of where these dollars are.

Bill: It's about 50% non-qualified and 50% qualified. And the qualified has a small amount of Roth that I've been converting, small amounts, but there's also an inherited IRA, which can't be converted, part of it.

Pat: Okay. And how much is in the inherited IRA?

Bill: It's $300,000.

Pat: Okay. And how much money is in the qualified?

Scott: About $1.4 million.

Pat: And so, $1.4 million in non-qualified.

Scott: On the inherited, did you inherit it recently that needs to be drawn down in 10 years, or did you inherit it a few years ago where you can spread it out over your life expectancy?

Bill: No, the latter. I could spread it out over my life expectancy.

Pat: What's the required minimum distribution on the inherited IRA?

Bill: Oh, it's about $12,000. It's not much.

Pat: This is a perfect situation.

Scott: And then what's your income right now?

Bill: Well, my earned income is zero. I retired about four or five years ago. And so, I have to have the minimum, the 138% of the federal poverty level to even be on the ACA plan. So, I mean, I've had some years where I've made it the minimum, but I've actually done a lot of analysis, former software guy, and it may be prudent to forego some of the subsidies, not all of them. I don't know, that's just my analysis. I've been studying it for a while.

Scott: Well, I mean, it comes down to running the numbers, both this year, next year, but also what it looks like when you have required minimum distributions 12, 13 years out from now.

Bill: Well, look, I'll be...mine is 75, the RMD age. But I guess the goal, if I can consistently stay in the 12%/15% tax bracket, may have to veer slightly out of that in some years, I mean, that I think would be the goal.

Pat: Yes, maybe. So, you're actually working on two windows. One is until you actually qualify for Medicare, right? And then the other is between Medicare and the required minimum distribution age. And those are two different windows that you're going to operate in. So, my guess, and if we ran the numbers, you're not going to do any Roth conversions between now and Medicare. You're going to keep that low income so that you can...

Scott: What are your premiums now for medical?

Bill: Well, like I said, a couple of years ago, it was virtually free, but right now, it's a couple hundred dollars a month.

Scott: So, it's still virtually free. Yeah, it's almost free.

Pat: Yeah. So, my guess, if we did the numbers, is that you're going to keep that low income until you hit Medicare at age 65, and then you're gonna actually leave all that behind you and start a new analysis about what I should do in terms of Roth conversions, and it will be dependent upon life expectancy, what you think your life expectancy is if there's no change in your medical, and you might decide that you're gonna run yourself up into a higher tax bracket prior to required minimum distribution so that you don't go from a 15 to a 31 overnight.

Bill: Right, right. When I looked at it, if I don't start now, I veer out of the 12%/15% tax bracket a bit more than if I forego some of the subsidies. And I guess the other thing is, how do you quantify the widow/widower extra taxes? And I guess you really can't, unless you have a...

Scott: Well, one, I mean, look, when you...and when you start going out 10, 20-plus years, I mean, it gets murky. We don't know what tax law is going to be like.

Pat: It gets murky.

Scott: Maybe the tax rates are lower and we have a value-added tax in this country.

Pat: So, you should be concentrating on two things. One is taking that non-qualified money and making it as possibly tax-efficient as you possibly can.

Scott: Yeah, totally agree with you. So you can control.

Pat: So that you can control all that. So, what happens is...Do you have any bond in your non-qualified account?

Bill: No, no, but I do have cash, and some of the cash is really more for flexibility because we weren't sure about housing and where we were going, you know, some of that. So, I mean, yes, it's not the most tax-efficient. It's going to become more tax-efficient as time goes on. But, no, I don't have any bonds, but I do have a fair amount of cash, which wasn't so bad a few years ago because you weren't making much. But now you make money.

Scott: It's a funny thing. Like, you've got mixed feelings about the higher interest on your cash. You like the interest, but you don't want it to cause your health insurance premiums to go up.

Bill: Well, you know, it's the same. I mean, you pay more on your health insurance, but you get more interest. I mean, it's probably a wash, anyway. But, yeah, I mean it's...you know, I think I'm trying to solve a problem that can't be solved, and we have to...

Pat: Oh, no, no, it could be solved. How much money are you living on a year?

Bill: I mean, basic expenses, between $60,000 and $70,000 a year, and then throw in with $20-plus K for travel.

Pat: Okay. So, take this $100,000 and figure out how much money you need in that non-qualified account and the inherited IRA distribution, and then figure out how to qualify for that ACA as long as you possibly can. And don't worry about the Roth conversions.

Scott: I wouldn't worry about it until...

Pat: I wouldn't even consider the Roth conversions. I'd concentrate all my energy on qualifying for the ACA.

Bill: So, you would take it year by year. And I guess the thing about that way is that, yes, tax projecting and planning is a good thing, but you can't really count on it that far into the future.

Scott: The further you go out, the more murky...You know, it's an unknown.

Pat: Yeah. But you still have 10 years after you actually get to Medicare to actually work with the Roth conversions.

Scott: Is ACA premiums based upon your previous year's income?

Bill: No, it's the current year's estimate. So, you estimate, and then at tax time, they true up, you know, whether you might owe some money if you made more than you stated, or you get refund if you made less than you stated.

Scott: I was [crosstalk 00:26:17].

Pat: If you were sitting with one of our advisors, we would concentrate on the ACA and kick the can on the Roth.

Scott: You can run the numbers, but I...

Pat: I know, they're saving so great. It's unbelievable. Maybe 20 grand a year.

Bill: Yeah, like a few years ago, for a Gold plan, we virtually paid $10 a month.

Pat: As I said earlier to Scott Hanson, no one deserves a subsidy more than you. What was that? Investable asset.

Bill: I live in a fairly high-tax state, but thank God I found...

Scott: I haven't done this in years, but sit down and play Monopoly with my kids. What are the rules of the game, right? These are the rules of the game. We all understand the rules. If you're a wise player, you play to your benefit within the rules. You didn't create...Congress created this mess. You're just being prudent by navigating yourself through this. And anyone who's listening think, "I have a problem with it." When they do their taxes, everyone...

Bill: Yeah, if it's legal. If it's legal, you can do it..

Scott: They created it.

Pat: It's not our opinion to pass moral judgment on these rules as financial advisors. It's our opinion to use the rules to the benefit of our clients. That's what it is. And as long as you're not outside the rules, you're fine. I would concentrate 100% on the ACA and not worry about the Roth until after Medicare.

Bill: Okay, well, thanks for the discussion.

Pat: Yeah, and not only that, our advisors do it all the time.

Scott: It's pretty common because with medical insurance, it's...

Pat: Unbelievably expensive. Well, relative to the benefits you receive, it's probably not that expensive.

Scott: You mean like years ago when the...I'll never forget this a long time ago. His medical insurance...Anyway, thanks for the call, Ray.

Pat: Bill.

Scott: His medical insurance was covered by his company. He was retired. He had free retiree medical insurance, and then they started charging him...I don't know, it was so negligible. And he's complaining on and on about this company screwing him and stuff. And then five minutes later, he's telling me about his knee replacement and how awesome is he's out golfing now. He hadn't been able to golf in a few years and how great his life is now because of his knee replacement. There was a complete disconnect between the benefit of modern medicine and what we can actually do now and the costs. It's like there was no correlation.

Pat: Humans are great, aren't they? How we could segment things in our mind.

Scott: Oh, I do the same thing. We all do. Of course, I know.

Pat: Aren't we great?

Scott: We're all a little crazy, I think. Yeah.

Pat: Well, I mean, if there's a base for comparison, if everyone's a little crazy, then no one's crazy. Think about it.

Scott: Well, then no one's crazy, maybe.

Pat: Let's go.

Scott: But this kind of planning for medical, it's...I mean, a lot of people say they gotta work...people wanna retire young, that's the number one issue. How am I gonna do with medical insurance?

Pat: You think about what it would cost him, $20,000 a year in premium, and he's living on $80,000 now.

Scott: At least $20,000 in premium. Yeah. I mean, I think I look at what my plans cost me. I mean, you could see what the employer has to pay and what I pay and all that and add it all together.

Pat: Runs up.

Scott: Yeah. Let's talk now with Owen. Owen, you're with Allworth's "Money Matters."

Owen: Hi, guys.

Scott: Hi, Owen.

Owen: Hey, thanks for taking my call. I absolutely love your guys's podcast, or I'll call it a podcast, that's how I listen to you.

Scott: Yeah, thank you.

Pat: Thank you.

Owen: You betcha. I got a question about income. So, let me give you a little bit of background, and I can tell you where I'm coming from. So, I'm 59. My wife's 59. She's been a stay-at-home mom for 25 years. So, she hasn't had a working history. I sold a business back in 2022, and I've got that buyer paying me out over 10 years. And what they're doing is they're paying me $210,000 a year. I'm a year and a half in in a 10-year plan. So, I kind of have a fiscal cliff. So, when that payment ends, I got to get used to that income, right?

Scott: Yeah. If you spend the entire $210,000 today, then you're gonna be living on nothing 8 years from now.

Owen: That's right. So, I've done accumulation, accumulation, and I'm close to my trigger number to where I just kind of want to back off of accumulation and convert to income. So, cash is paying pretty good right now, 5.3%, plus or minus, but that's not going to be forever. I'm thinking normal cash after the Fed gets done cutting and hitting their 2% mandate, I think cash will normalize, probably between 3.5% and 4%, just guessing. And I would love to generate between 5% and 6%, somewhere in that range, annually. And to do that outside of where cash is going now, how does one go about doing that? I'm not seeing any bond funds paying anything really over 3% or 4%, unless it's a junk bond.

Pat: Let us follow up with a couple questions. What other assets do you have? Do you have any money in 401(k)s, IRAs, brokerage accounts, anything like that?

Owen: Yes, I've got...Let me do the math here. I've got $6 million in IRA, I've got $500,000 in a Roth, and $500,000 in brokerage.

Scott: You've done a nice job in that IRA at 59.

Owen: Yeah. I had a chance to convert to a Roth when I originally started with that whole mess, but I didn't have two nickels to rub together, so I didn't want to pay the tax payment.

Pat: So, how much cash did you get out of the business up front?

Owen: Nothing.

Pat: Okay. So, it was all on a note?

Owen: It is.

Scott: And what were you earning before that time?

Owen: Oh, I was paying myself around that same out of the business.

Pat: And that's everything, dividends, everything out of the business, earned income, the whole bit?

Owen: Yeah, yeah, yeah. I have no debt.

Pat: How's the IRA invested?

Owen: Well, up until about a month ago, I got about $5 million of it just sitting in cash right now, and I've got the $2 million still in the market.

Pat: And what was it before you set up until a month ago? How has it been invested? You didn't get $6 million...

Scott: By being in cash.

Pat: ...by being in cash.

Owen: No, no. So, my original investment 12 years ago, I just shoved everything into Apple. And up until the end of the year, I realized it's kind of been dead money. So, I made a change and switched it to Nvidia, rode that up until about a month ago, and really lifted it. And I was kind of done playing on that train.

Scott: Okay. All right. So, you do realize you've gotten that...you can either count that as skill or count that as luck if you are...

Owen: That's luck.

Scott: Okay. Even if you are a professional money manager, I would have said that's luck. Okay. So, here's...

Owen: There is always luck.

Scott: But luck counts, too.

Pat: So, look, you're in the final phase, right? You're in a de-accumulation mode, sort of.

Scott: This is going to continue to grow. You're not touching your IRA.

Pat: That's right, that's right. You're not touching your IRA for quite a while. You should manage this money just like a pension fund would, right? So, what is a pension fund? How does a pension fund manage its money? Well, their timeline is...

Scott: In perpetuity.

Pat: ...forever, right? And who are the recipients of their returns? Retirees, right? And what do they try to do? They try to manage the money for long-term benefit without too much volatility year to year because they've got stakeholders that are watching them.

Scott: That's right.

Pat: Right? Because if you talk...

Owen: I like that.

Pat: ...to some pension managers, they're like, "I don't know why I wouldn't have 100% of this stuff in equity," but they have to pay out, and they want a pretty...So, if you look at...

Scott: And they'll get fired in a bear market.

Pat: Yeah. So, if you look at what's called modern portfolio theory and its stock-bond mix, that's what ends...

Scott: With a little bit of real estate, a little bit of alternative, but...

Pat: That's right. That's right. That's how...If you were sitting in my office, I would say, "Okay, Owen, those days of Nvidia and Apple are behind us. We are managing this just like a professional pension plan would. And it's gonna..."

Scott: Yeah, because right now, you went from two major extremes.

Pat: That's right.

Scott: Betting on an individual company to cash, right? There's two major extremes.

Pat: So, when you ask about income, you know, income is derived from three things, right? Interest, dividends, capital gains. Right? And so, people were like, "Well, I just want income." You're like, "You can sell a stock and get income from it. But over the long term, what you want is a relatively stable asset that isn't going to be an Nvidia or an Apple. You're going to manage it like a pension fund. And so, it's going to end up being about 65%, as Scott mentioned, alternatives from real estate.

Scott: Frankly, I don't think you're going to need 5% to 6% of income from these.

Pat: Oh, no. No, no, no.

Scott: Unless you plan on changing your lifestyle.

Pat: Which you might.

Owen: Well, you know, I've driven used cars, changed my oil, did my brakes, put my roof on, I'm done with all that. So, I would love to spend more and actually live life a little bit, unlike what I've been doing for the past 30 years.

Pat: Well, good. So then, let's set an...you have all these choices so you could...if you were sitting down with myself or one of our advisors today, we'd say, "Okay, what...?" Let's give ourselves an after-tax income. Let's say $25,000 a month. In fact, this reminds me of a...I worked with a guy that sold his business and continued to work there, and he was complaining about it constantly. And I said to him, "Here's what I'm gonna do. I'm gonna start sending you $25,000 a month after taxes, $25,000 a month. And the first day you don't feel like going into work for your boss...because you took the check, you sold the business. It's their business now. They could do whatever they want with it. You sold it. You cashed the check." So, I said to him, "I'm gonna start sending you $25,000 a month now to make you comfortable realizing that you have enough money to retire with more income." Your situation is almost identical to his. And I said, "And when you're tired of going in, you don't go in anymore." And six weeks later, he called me, he said, "You know, Pat, I quit going into work." And so...

Scott: That's hilarious.

Pat: ...that's what I would do, is I'd set up $25,000 a month.

Scott: I don't know if it would be quite that much. I would run the numbers, but...

Pat: He's got with that $210,000 annualized coming in from the sale of the business.

Scott: There's a number of ways you can structure this. You want to make sure that when that sun sets in 8 years, you can have an increase, $210 grand to made up.

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

Scott: But one way to do it is do a net present value of that income stream, add it to his other assets...

Pat: And make it a bond.

Scott: ...and say, "What's a 3.5%, 4% distribution rate on that?" Because we need to think about inflation over time, right? Okay?

Owen: Correct.

Scott: You're 59. I was talking to...Oh, [crosstalk 00:38:52].

Pat: Yeah, all right, Well, I'm buying in.

Scott: Oh, lemme write that down. Keep track of inflation.

Pat: I'm buying in. I'm buying in, Scott.

Scott: So, if you manage your portfolio, similar to what Pat was talking about, like a pension plan would, you could draw 3% to 4% a year. As things get more expensive, you can increase that time and time again.

Pat: So, should we explain the net present value of that stream of income, what that means?

Owen: I think I understand that. So, I think my intent between the 5% and 6% net income doesn't mean I was going to withdraw it. I'd like it to create that. And to your point, I'll probably just pull out probably 3% to 4%, somewhere in there, because I'm trying to hedge it by a couple of points for inflation and keep it growing a little bit, but keep it stable and not to where I'm in the market worrying about it anymore.

Scott: Well, you're going to be in the market, whether you want to worry about it or not is a different story.

Pat: Yeah, you're going to be in the market, not the way you historically have been in the market.

Scott: If you're not, then you can't...frankly, I wouldn't take 3% to 4%. I would take something less because inflation is going to erode these dollars without having something to keep pace with.

Pat: So, you're going to manage this like a professional pension would. That's the way you should do this. If you're worried about inflation, which it sounds like you are, then you want to own those things that participate in inflation, which are stocks, right? You know, companies raise prices in order to keep their profits.

Scott: You're not going to have inflation without increasing prices.

Pat: Right? It just flat out. And who raises those prices? Companies. Those greedy corporations. Shrinkflation.

Owen: Do I care for the dividend-paying stock, guys, or do I just pick...?

Pat: No, no, no, no.

Owen: That's irrelevant?

Pat: Yeah. And the reason it's irrelevant is, you know, a company that is paying a dividend is probably not a growth company, it's a value company.

Scott: And one could argue if the company has such great growth prospects, why are they going to be paying dividends? They're going to go out and reinvest it.

Pat: Right? And so, you've seen some growth companies in the last few years actually start paying dividends, which tells you that they're maturing companies...

Scott: Running out of ideas.

Pat: ...and running out of ideas, and that they believe the biggest return to the shareholders were giving back some of the money that they used to invest in their own business.

Scott: That's right. When you think about it from that standpoint. "Wait a minute, I am gonna do my research, I'm gonna pick this company because I believe in the management team, I believe in the strategy, what they've got going to market. So, I'm gonna give them my money to invest, and then wait, they're gonna give it back to me each quarter?" Like, "Wait. Now, why are you sending this money back? No, I chose you." Right? Like, utility companies pay big dividends. Why?

Pat: Well, what else they're gonna...? Yeah.

Scott: Like, what are they going to do? Owen? So, you talked about some things that you used to change your own oil, stuff like that. Now you don't want to do that. You're in a position where you have the luxury of being able to afford a good financial advisor. At a minimum, having a plan with a financial advisor to run through all these, what's it going to look like when you're 69 and 79 and 89, kind of working backwards.

Owen: Every time I talked to a financial advisor in the past, all roads lead to an annuity.

Pat: Well, you're not talking to a financial advisor. You're talking to a...

Owen: I realize that.

Scott: You're talking to salespeople. Right? We're financial advisors. An independent advisor who's a fiduciary, a certified financial planner, someone who's fee-based, not paid by selling products. The last thing you need is an annuity, Owen.

Owen: I know that. That's why I would walk away...

Scott: Given your situation, oh my gosh.

Owen: Yeah, I did walk away from those conversations. That just tells me that they don't have my best interest in...

Pat: Well, they've got someone's interest, but it's not yours.

Owen: That's correct. Do I still pull Social Security at 62 like you guys have recommended?

Pat: I would if I were you.

Scott: I would if I were you.

Owen: Okay, okay.

Pat: They're going to take Social Security away from people, they're not taking it away from people that are living on it.

Owen: That's true.

Pat: That's not how the tax system works, right? And we know that because of the fact that we have a progressive tax system. So, if we have a progressive tax system, why wouldn't we have a progressive safety net system, which we don't?

Scott: Well, we actually do, because...

Pat: Well, kind of. Yes, we do, Scott.

Scott: If you're a top-income earner, let's say you're putting in twice as much as the guy working or the gal working, you don't get twice as much in benefits. Highly skewed to lower income.

Pat: Owen, you are the poster child for a professional, a professional financial advisor, a professional, not a sales guy. Someone that sits down with you and actually conducts a plan, does the analysis, and says, "This is how..." and then you would say to him, "Okay, how did you..." or her, "How did you get there? How did you get there? Tell me your thinking around this. What's it look like? What's it gonna cost to manage? What's my income gonna look like?"

Scott: And then an advisor can also help educate you on why the portfolio is going to be constructed the way it is, can be there when things are going crazy to help guide you through those things when life happens.

Owen: That makes sense. Since I've got such a runway to access these funds, obviously, I've got time, but I'm slowly wanting to drop out of the market so I do have a plan with the remaining money. So, that makes perfect sense [crosstalk 00:44:40].

Pat: Slowly drop out of the market.

Owen: Well, you know, I felt that I've accumulated...you know, like I said...

Pat: Owen, this money's not for you. You're not going to spend this money in your lifetime. Look, you can't force yourself to spend this money in your lifetime. You don't have it in you.

Owen: You're right.

Pat: You just flat out don't have it in you. So, you're managing this into perpetuity. Look, this is generational wealth. This is generational wealth. Your kids' children's children could be going to college on this money. And that's the reality of it. Right? And so, you're going to manage it.

Scott: Protesting, because the fourth generation of inherited money, they always make such wise choices.

Owen: Oh, I know. I'm worried about my kids.

Pat: So, you need estate planning in here, right? You need tax planning. Look, you probably started your business, what, how many years ago?

Owen: 2013.

Scott: Wow. Yeah, that's well-run.

Pat: You did something in the same industry prior to that?

Owen: I did.

Pat: Okay. So, the institutional knowledge that you actually got there, you didn't actually monetize that knowledge until recently.

Scott: But, look, you are at the level you could say, "You know what, I want nothing other than CDs in my portfolio."

Pat: And you'll be fine.

Scott: And if that's the case, then you need to run a financial plan based upon what...I mean, cash, historically, has done about half a percentage point above the rate of inflation over history. So, it means that either you can only spend half a percent a year, or you're going to erode in your principal as far as purchasing power. You would want to run those numbers and see what the cost is by being, as you stated, out of the market.

Pat: Look, he's too smart for that. He's gonna come to the end...

Scott: I understand.

Pat: At the end of this process, you're gonna come up with, you're like, "Okay, this makes sense. I'm gonna manage this so that it can live for 30, 40, 50 years. I'm gonna manage it like a pension fund," and hopefully, your children won't blow it.

Owen: You know, that's interesting because when they do inherit it, they've got a 10-year spend down, right?

Scott: Only in your IRA, yeah.

Pat: Yeah, but it doesn't mean it's a spend down. It just means it needs to be distributed from the IRA.

Owen: Got it.

Pat: It doesn't mean they have to spend it. Look, we have lots of clients that take required minimum distributions that never touch it. We just take the tax out and move it into the brokerage account.

Scott: That's right.

Owen: Right, right. That makes perfect sense.

Pat: So, it's not a spend down. You've got to treat this thing like it's...like this is generational wealth. It needs to be managed like a pension fund with all the analysis and the professionalism that actually goes into managing a pension fund.

Scott: Yeah, that's right. I mean, at this level, I mean, you can...Yeah. Yes, you're right.

Pat: Look, I own a business. Scott and I own a business. We sold most of our business to private equity, right? We both have our own investment thesis for ourselves and our families. That's right, right?

Scott: [crosstalk 00:48:04.904] are different.

Pat: And they're completely different. They are completely...We talk about it, but Scott's got a different view of the world than I do, which is great, right? So, look, and the idea being is I have an investment thesis.

Scott: And as a good advisor, you're not putting your viewpoint, and I'm not putting my viewpoint on a particular client. It's trying to understand what the client is trying to accomplish. So, a good advisor that you'd be working with, Owen, is really trying to figure out what is the purpose of these dollars.

Pat: And I share it with my children. So, my youngest is 24 and my oldest is almost 29. Maybe he's 29 now. I should probably know this.

Scott: He missed his birthday.

Pat: It was yesterday. But I share with them...my wife and I have sat down with the kids, and we're like, "Look, this is the investment thesis. This is how the money is being managed. When you inherit it, this is what we expect from you. And by the way, here's the professional managers that will actually manage the money."

Owen: I like that.

Pat: Right. Which is why you actually want a decent-sized investment advisory firm because you want the money to stay in the same institution. Your financial advisor is not going to be with you forever.

Owen: Correct.

Pat: In fact, it's okay...

Scott: They're going to retire. They're going to die.

Pat: They're going to retire. Yeah, it's okay to actually start with a 50-year-old advisor knowing that they're not going to manage that money forever, but the firm will.

Owen: Right. Okay. No, a good point. I like that.

Pat: Congrats on the sale of the business and congrats on picking the two right stocks.

Scott: No kidding.

Owen: Oh my God, yeah, nerve-racking as hell.

Pat: Well, that's it. You went from one extreme to the next.

Scott: Complete.

Pat: You're like, "Okay. So, when I get on the freeway, here's what I do. I drive at 120 miles an hour or at 10, or I walk."

Scott: That's it.

Pat: Either 110 miles an hour or walking. Nothing in between. No going the speed limit.

Owen: Oh my gosh.

Pat: Just think about institutionally using that analogy because we're gonna beat this one to death.

Owen: That's a great analogy.

Pat: Institutionally managed money is like going the speed limit.

Owen: That's perfect. I like that.

Pat: It's like going the speed limit. That's what it is.

Owen: Well put. You guys are so good on explaining stuff. I love listening to what you guys have to offer. [crosstalk 00:50:19]

Pat: Well, thank you, too kind. Thank you.

Scott: Thank you, Owen.

Pat: And to you and to others as well, if you would go on to your...self-promotion here, if you would go on to give us a rating, write a review, we can't tell you whether it should be negative or positive...

Scott: On our podcast.

Pat: ...and share it with a friend, and our marketing people tell us at some point in time, we're going to...What do they call it? Turning point?

Scott: I don't know.

Pat: Break through the barrier?

Scott: Reality, Pat. We've been doing this...Oh, and by the way, we appreciate the call. We've been doing the show 29 years, right? Yeah, it's been 29 years. I think if we were gonna blow up, it would've happened by now.

Pat: We haven't become a national success.

Scott: That's correct. We've got, you know...I don't know.

Pat: The show hasn't become a national success.

Scott: What are we? We're 50,000 downloads or...? Something like that. We have quite a few, but it's not like we've got...

Pat: I'm not...You know, I don't know who.

Scott: I don't know.

Pat: You can't compare yourself to anyone now because it's either on the right or the left. There's no one in the middle. You can't say...

Scott: Like Suze Orman, well, there's one thing, or Dave...

Together: Ramsey.

Pat: Well there's another.

Scott: Both very prominent.

Pat: But you can't say either Sean Hannity, or you can't...

Scott: Rachel Maddow?

Pat: Yeah, you can't...Right or left, we can't compare ourselves to anyone. We're just two simple guys.

Scott: We might when the microphone turns off.

Pat: Well, this was an interesting week with Trump. I figured people are hearing about the Trump stuff everywhere else. We don't need to be talking about that on this program. And frankly, like we mentioned before, a good advisor is there to help you articulate what's important to you, really help them figure out like, "What's the purpose of these dollars that you've accumulated at this point in your life? How are they designed to accomplish your objectives?" Maybe your objective is, "I'm going to fly first class when I go to Europe or South..." wherever you're going to travel.

Scott: Well, on an annual basis.

Pat: Or maybe it's to give money to charity, or maybe it's whatever it is. I mean, it's your life. It's an asset that a good advisor will actually help you form a life and investment thesis around.

Scott: Yeah. And whether you are on the far right or the far left, it should not matter, they should be there to...

Pat: Yeah, politics should not enter the investment conversation.

Scott: That is correct. Anyway, it's been great being here with you. We do this program every week. And, I know, we're not on too many terrestrial radios any longer. So, I would encourage you, even if you're listening to the radio, start listening to us via podcast. Wherever you get your podcasts, you can find us. And we've got great tools and resources on our website, allworthfinancial.com. If you haven't been there for a while, I encourage you to do so. We'll see you next week. It's been great. This has been Scott Hanson and Pat McClain of Allworth's "Money Matters."

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