- Political Drama & Market Resilience 2:52
- Bear Market Rebound: Why So Fast? 4:05
- Employer Stock Risks: UnitedHealthcare Case 9:01
- AI, Inequality & Market Valuations 14:55
- Caller: Long-Term Care Insurance Dilemma 18:42
- Caller: Rental Property vs. Mortgage Payoff 28:56
- House Call: Financial Freedom & Global Lifestyle 38:07
Bear Market Blunders, Long-Term Care Decisions, and How AI Could Reshape Your Financial Future
On this week’s Money Matters, Scott and Pat break down why the recent bear market recovery was unusually fast—and what that means for investors—while exploring how AI is reshaping how individuals plan and invest. They also highlight the risks of being overly concentrated in employer stock and take real-life listener calls on long-term care insurance, real estate strategy, and achieving financial independence through alternative lifestyles. It’s a well-rounded discussion packed with practical advice on rebalancing, tax strategy, and making smart money decisions in uncertain times.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: That's right. It feels like official summertime now, mid-June, as we're...
Pat: Yes.
Scott: ...kinda kicking through things, and both myself, my co-host here, both financial advisors, certified financial planner, chartered financial consultant. And for years, I said we spend our weekdays meeting with people like yourself, but...
Pat: We don't know you. I don't know whether the people I meet with in the week are like you or not.
Scott: Yeah, and it's not as many weekdays as it once was. [crosstalk 00:00:51]
Pat: We are nearing the twilight of our careers.
Scott: Well, I don't know about the twilight.
Pat: For me...
Scott: That's what the organization says about me anyway.
Pat: Right.
Scott: I don't feel it. Anyway...
Pat: With my private parking, every time I come to work, it's further and further away from the building.
Scott: Private parking. [inaudible 00:01:15] I'm got to start with a [inaudible 00:01:16] story, then we're gonna talk about the markets. We got some calls. This was... God, this must have been 25 years ago. And we were back in Omaha, Nebraska, to visit with somebody. Anyway, there was someone back there we were visiting. And while we were there, we, at the time, we had some business with, I think it was Mutual of Omaha. It was one of their subsidiaries, I believe it was.
Pat: That's correct.
Scott: And so we thought, why don't we go have a stop over there, and meet some of the people in charge of the project? This was a long time ago. The industry's changed quite a bit. And so, it's, like, the middle of winter in Omaha. It's windy. And we go looking for parking, and there's, like, eight parking places right up front by the front door. And it says "Executives only." And Pat says, "Oh, no. That's fine. We'll go ahead and park here. I'm sure the executives would be happy that there's some customers here." And so I'm like, "What?" "Oh, yeah. Just go ahead and pull right in." So, "Okay." So, I pull and I park, we get out, and the security guard comes, [inaudible 00:02:17] run over. "You can't park here," and Pat says, "No, it's okay. It's okay. We're customers. We're customers. It's okay."
Pat: Did we stay parked?
Scott: No, we didn't stay...it didn't work.
Pat: That's, well, kinda shows you my attitude about how important the customer's, clients are, to have business.
Scott: Of course.
Pat: Oh, yeah.
Scott: As Pat has always said too, it's like, the employee of the month? "Go ahead and park there." And any employee of the month would want a customer to park in the front.
Pat: Wouldn't they? Anyway...
Scott: I don't know why I started off on that tangent.
Pat: Oh, but, yeah, it was sort of just tangent. Well, Scott, I gotta tell you. I don't think we were the only ones that said it, that when this bromance between our president and Mr. Elon Musk blows up, it will be a monumental... We talked about it when it first started here on the program, and many, many, I heard it on many, many... But this has been spectacular.
Scott: Well... Well...
Pat: This has just been spectacular. It's hard to...
Scott: It's funny. I think, regardless of where... Unless you are on the extreme fringes of the left or the right, there's a lot of entertainment value in the political environment right now.
Pat: It is so juvenile.
Scott: The last six months, it's been a really fascinating time. And my wife says, "Seems like you're more interested in politics." I was like, "It's just interesting..." I mean, there's so much going on.
Pat: Oh, it's so juvenile. It's just so... You just shake your head and you think, "Wait. What?"
Scott: It's kinda blowing over, though, it seems like.
Pat: Yeah, finally.
Scott: The news cycle moved on.
Pat: Oh, yeah. But then at every [crosstalk 00:03:54] couple days, it pops up. Anyway... [crosstalk 00:03:56] All right. [crosstalk 00:03:58]
Scott: But I was thinking, you know, the financial markets, higher than, what was it? "Liberation Day." They're back higher than they were at "Liberation Day," when the markets tanked. And I was thinking...
Pat: "Liberation Day."
Scott: ...there's been, like, so many news stories that are, like, once in a year, in the last 30 days, it feels like. Anyway. You had "Liberation Day," whatever that was supposed to mean. But there was a lot of fear and panic. The markets essentially went to a bear market. We were intraday 20% down on the S&P 500.
Pat: [inaudible 00:04:35] Like the beginning of COVID.
Scott: Yes. And now it's recovered so quickly.
Pat: That's right.
Scott: And I was thinking about this. Markets have always recovered, and they always will. But typically, bear markets take...the average bear market's about nine months of declines.
Pat: Of going down.
Scott: Down, down, up, down, down, up, down, up, down, down, up, down.
Pat: Before it hits a bottom.
Scott: Nine months.
Pat: And we're using a definition of a bear market.
Scott: Twenty percent [crosstalk 00:05:10]
Pat: But that's not technically the definition, but we're gonna use that.
Scott: It's a made-up definition. It's not like...
Pat: It's... All right.
Scott: ...it's mathematics or science.
Pat: Fair enough.
Scott: But it was so short. And I was thinking... Like, at the start, we're like, "Don't panic. Like, this is gonna... This will too shall pass. We'll hit new highs again." And I don't like being...not proven right, but I guess, kinda proven right so quickly, because there will be a bear market.
Pat: That's long.
Scott: And if you went through this, and it caused a lot of stress and anxiety, maybe you have more in stocks than you should, or need.
Pat: Yes.
Scott: And, if your lifestyle's not dependent upon you having 70% or 80% of your portfolio in equities, and you had a lot of fear and anxiety the last couple months, maybe this is a good opportunity for you to pare back a bit, and diversify away from stocks a bit.
Pat: And rebalance your portfolio.
Scott: And rebalance that portfolio, because...
Pat: And by the way, you should be [crosstalk 00:06:22]
Scott: ...we'll have another downturn.
Pat: People... I think one of the biggest mistakes...one of the biggest mistakes people make in their portfolio, especially in the IRAs and 401(k)s, is that they don't rebalance them on a regular basis. They don't have an investment thesis. And the other is...
Scott: That's because when things are going up, why would I wanna get rid of this fund that's doing so well? Or, this stock is [crosstalk 00:06:46]
Pat: Well, I understand why it's [inaudible 00:06:47] but it's still a mistake. It's still a mistake, even though we know why they do it. Right? Pensions don't do it. Pension plans don't let their portfolios run forever. We don't let our clients' portfolios run forever.
Scott: No, of course not. Of course not.
Pat: Yeah.
Scott: Because we have an investment thesis going into things.
Pat: Correct. And the other is tax, not paying enough attention to tax.
Scott: But, look, there will be another... Like, if you look this last 25 years, two major bear markets, right? The financial crisis.
Pat: Oh, yes.
Scott: Which was mid-2007 to February or March of 2009.
Pat: Nine.
Scott: So, it was a long one...
Pat: Yes.
Scott: ...of new lows, new lows, new lows. Then of course it recovered. And before that was the, in 2000 to 2002, it was 28 months, 29 months? [crosstalk 00:07:45]
Pat: And that's when... When was the bonds? What year was that, where the bonds... Just a terrible [crosstalk 00:07:52]
Scott: '94?
Pat: Yeah, it was '94. Yeah.
Scott: You're dating yourself. [crosstalk 00:07:57] But the time to reduce... Any sort of asset class, you don't wanna sell when it's down. You wanna sell when things are up. Right, that's kinda like...they talk about the first day of finance class.
Pat: But it's hard to do.
Scott: Buy low, sell high. Things are high...expensive. Now is the right time to looking at rebalancing, and having the appropriate portfolio for yourself, if you didn't have it already.
Pat: And, especially, as you said earlier, if you were nervous through this whole thing, and were like...it probably is a good check that you are overweighted equities.
Scott: If you've got enough assets to maintain your lifestyle without that risk. If you find yourself in a situation where you're not gonna be able to meet your cash flow needs the next 20 years without having equities, then you gotta either figure out how to live on less. Either live on less, or live with the volatility. Those are your options.
Pat: Yes. Yes. And get used to inflation. [crosstalk 00:08:59]
Scott: You know, another story in the last couple weeks, Pat, is United Healthcare. That stock.
Pat: Okay.
Scott: Cut in half this year.
Pat: Yes.
Scott: It had been a darling of...you know, essentially, a big roll-up in the healthcare space, right?
Pat: Yes.
Scott: Buying all these hospitals and all these different healthcare providers. And most of the revenue coming from... Government controls medicine. Let's face it. That...
Pat: Yes. And their diagnosis is...I mean, there's scandal all the way around that company now.
Scott: Alleged scandal.
Pat: Okay.
Scott: I mean, it certainly appears that... So, the stock essentially has been cut in half. CEO is out. And I saw some article about, from the employees, and how their stock's down, their 401(k)s down. And as I'm reading this, I thought... There are people whose lives, their lives have been changed as a result of the decline in that stock this year. Their financial futures have been changed. Their retirement plan's been put on hold. Their kids' educations have been changed, because they were overweighted in that one particular stock.
Pat: Okay.
Scott: And the only reason they were, by and large, was because they worked there.
Pat: That was them.
Scott: But we see it...there's other people who [crosstalk 00:10:26]
Pat: Scott, I gotta tell you. This might sound heartless, which, when someone says that, get ready. It won't be 100% heartless. Every time I read an article about, "Oh, what happened to these poor people, because their company that they went..." Look, it was, they have control over most of that.
Scott: You mean it's kinda like when somebody gets stuck in the mountains in a snowstorm, and they're out any food and water, and they were shocked that this happened.
Pat: Yeah, and [crosstalk 00:10:54]
Scott: Uh, you're going in the mountains. There's a storm warning that says to stay home.
Pat: Yeah. And even, look, you and I own a small company. We brought liquidity to our own financial situation by bringing in a third party investor. That was... And people say, "Well, because you were really just wanting to try to grow the company." No, no. No. That would have been nice, and it happened, but the main objective was to diversify away.
Scott: And, but the issue, Pat, we see, every day, our advisors see it every day, someone works for an employer whose stock has done well, and they're...the majority of their worth is tied up in that individual company.
Pat: And it's hard to do.
Scott: And so when I see stuff like a, one of the, I don't know what number United Healthcare is, one of the top 10 or 20 companies in the U.S. I don't know [inaudible 00:11:44]
Pat: It was.
Scott: Maybe it's... But it's a massive, massive company. And you see something like that get...you know, so quickly.
Pat: It happens fast. Well, let's...what was the oil company in...? I mean, we could go through a list of these.
Scott: Yeah, a list of them. Speaking of the oils company, we're in California. I was in... Little side note. I was in Hawaii last week on vacation, with my family. It was great. All four kids were there. My oldest is 29. My son's 27. They were there. My son's girlfriend, my younger girls. We were all together. And we survived the week. No one...
Pat: No... No fighting?
Scott: Well, there was a little. [inaudible 00:12:30] they're siblings and stuff.
Pat: [inaudible 00:12:32]
Scott: And parents get frustrated. Of course, there was some argument. It's part of life. But gas in Hawaii was less expensive than gas in California.
Pat: No.
Scott: I swear to you. I look at this, like, how is it that...
Pat: That's amazing.
Scott: ...an island that has to import all of their gasoline is less expensive than California, which used to be a big oil producer?
Pat: That's amazing.
Scott: And two more refineries are leaving.
Pat: Yes.
Scott: It's just...I just was baffled by it. But the reason I brought that up, the two reasons, I was in...
Pat: To show off that you were in Hawaii.
Scott: Of course.
Pat: Number one.
Scott: Well, I figured you were gonna ask about the tan. I kept waiting for, "Man, Scott, how did you get so tan? You look so tan and rested." But it never came. It's interesting. When I take Uber. I used to be cabs. Now it's [inaudible 00:13:24] the Uber drivers. And I always enjoy, talk when I'm out of town, kinda just getting their perspective on their life and what's going on. And so, this Uber driver... And I like to [crosstalk 00:13:33]
Pat: So, now, what do you, get into a Waymo, and actually, without a driver, and speak to an AI agent?
Scott: I'm afraid I'm going to get torched. Well, that was kind of a different story. So, I'm talking to this Uber driver. He had lived in Hawaii his whole life. He's probably 50 years old or so, and this kinda beat-up Uber he was driving around. And he was telling me, he says, "I can tell that tourism is down from...because of the turmoil in the markets." And we're talking about it, and he says, "My experience has been, it's the high-end hotels do fine regardless." He says, like, "If you go to the high-end hotels right now, they're probably completely booked up, they're crowded, because those people, the fluctuation in the markets don't have as big of impact." But he says, when you take kinda the lower-price condos, those are the ones that take the biggest hit, and he says he's really noticed a difference in the number of people in some of these lower-priced condos, just because...
Pat: That's their indicate... That's his indicator. His market indicator.
Scott: That's his indicator.
Pat: Market indicator. [crosstalk 00:14:46]
Scott: So, we'll change our investment thesis based upon this Uber driver's...
Pat: So, where are you going with this?
Scott: It got me thinking, I was in Hawaii probably 20 years ago. And I read a book at that time. I forget the title of the book, but it was essentially about how the top 10% continue to get wealthier, while the middle has stagnant or decline.
Pat: Yes.
Scott: I read this 20 years ago.
Pat: And it's true today.
Scott: It's maybe more so today.
Pat: And AI is gonna propel this.
Scott: There's, oh, it already has. I mean, you look at the billionaires minted over...
Pat: Understand, Scott. But here's... You know, so I was looking at the... Okay. Finish your story.
Scott: I think I finished my story.
Pat: Okay. I was looking at the price to earnings on the S&P 500.
Scott: It's, like, 21.
Pat: It's relatively high...
Scott: Yeah, it's pretty...
Pat: ...on a historical basis.
Scott: Yes.
Pat: And I was thinking, what's justifying this price to earnings? Because there's something that the investor is saying, "I'm okay with this price to earnings." That's what the investor says. For the risk here, the alternatives are not better elsewhere.
Scott: That's right.
Pat: That's how the markets work. And I was having a conversation with my brother, who was the CEO of a technology company, but he's still pretty involved with them, and he said the AI leaps and bounds that they are doing with their technology... And I look at our own company, and then I talk to other people that are running companies, and I think this is, as a societal issue, this AI is very disturbing. It is going to displace many, many middle-income workers, and even management. But it's gonna be great for the stock market.
Scott: Okay. And it's gonna be great for a lot of individuals, just not all.
Pat: That's right. That's right. It will create a major displacement...
Scott: And I'm not one of those that believe we're gonna see 20% unemployment.
Pat: No, no.
Scott: There might be some short-term disruptions.
Pat: That's right.
Scott: Every new technology, it's always had some disruption, but there's always been new jobs created. I think we'll probably see the same thing. We might go through a bit of a hiccup along the way. But I totally agree with you.
Pat: But I think that the price to earnings ratio is being supported by...
Scott: I totally agree with you.
Pat: ...the economics that are coming.
Scott: I totally agree with you. I'm a late adopter when it comes to technology, personally.
Pat: Yeah.
Scott: Not as a [inaudible 00:17:19] but personally, I'm always a late adopter. I never had a BlackBerry. I just kinda waited, and, you know, I didn't...
Pat: Really?
Scott: Yeah. And so, I'm a bit of a late adopter. But, I mean, I just look at some of the applications, even that we're using here internally at Allworth. And you can look down the road and see how much more efficient...we have 500 employees or 600, somewhere in there, how much more efficient we can become, like, how much growth we can have without adding...
Pat: Oh, that's right.
Scott: ...any back office people.
Pat: That's right.
Scott: And, even our advisors, how much more... You think about technology today, and how much more effective and efficient an advisor is today, versus even five years ago, and then you look five years out. I'm just looking at our own little industry.
Pat: And that's why, actually, I think that this... Normally, at a price to earnings ratio this high, I would be a little bit nervous, I would say.
Scott: I'm always a little bit nervous.
Pat: All right. Well, that's fair. That's fair.
Scott: I'm always a little bit nervous.
Pat: That's fair. That's...
Scott: I can't say I love... Look, I don't like this volatility in the markets any more than the next person.
Pat: Well, that is... But that's the risk premium, so... Anyway.
Scott: That's just what it is.
Pat: We should probably go to some calls, if you'd like to join the show. It's 833-99-WORTH. 833-99-WORTH.
Scott: Yeah. You can also send us an email at questions@moneymatters.com. We're starting off in California. Talk with Stephanie. Stephanie, you're with Allworth's "Money Matters."
Stephanie: Hello. How are you?
Scott: Hi, Stephanie.
Stephanie: Trying to make a decision about long-term care insurance. Our assets seem to be right in that spot where it's not very clear if it's a good idea or not, so, could use some help.
Pat: Oh, this is... These. I hate these questions.
Scott: Well, it's like, you're in California, right? So, it's like, oh, should I buy...like, how do I get fire insurance on my home right now? It's, like, it's so expensive, so... What...how old are you, Stephanie?
Stephanie: So, I'm 57. I'm married. My husband is 65, so the age gap was one consideration...
Scott: Yeah.
Stephanie: ...that I thought might weigh into it. The other factor is, we don't have kids, so I know it's sometimes positioned as a way to protect assets for a guaranteed inheritance, but that's not a priority for us. We're trying to spend all our money.
Pat: Okay.
Scott: Do you have any pension income, guaranteed income, that comes in regardless of what's happening?
Stephanie: You know what? Social Security, at some point, at about $5500 a month, and some small pensions that add another $1500.
Scott: And then, what do you have in retirement savings, as far as IRAs, other, mutual funds, bank accounts?
Stephanie: So, I made a list here. I got preferred comp is at $1.3 million, IRA/401(k) $1.7 million, $70,000 in a Roth. About $100,000 mutual fund, and $500,000 cash. We kinda have that reserved for a retirement home that we're building in Japan.
Pat: Wow. So, you have approximately $3.7 million.
Stephanie: Yes.
Scott: And what was the preferred? What was that?
Pat: Not preferred. You meant deferred comp.
Stephanie: Yeah, deferred comp.
Scott: Okay. I'm like, this is...
Pat: Is it in a 457, or is it from a private company?
Stephanie: It's a private company executive plan.
Pat: Okay. Okay. An executive deferred comp. Okay. $3.7 million. And do you own a mortgage?
Stephanie: House is paid off, $600,000.
Pat: And when you build this home in Japan, will you sell your house in California?
Stephanie: No. No. We'll use it. You know, there's some resident restrictions over there, so [crosstalk 00:21:05]
Scott: And have you priced into some long-term care? Because it's primarily, I'm thinking, you're concerned, primarily, I would guess, is that your husband, something happens to him, it's many years, and it drains your financial assets.
Stephanie: Yes. So, I was looking if there was a strategy, you know, does self-funding makes sense, or is there a strategy with insuring one of us, that might be a little more reasonable, that provides some coverage? I know it's hard to tell who might get [crosstalk 00:21:32]
Pat: So, I would look at...you have...
Scott: Have you shopped it at all?
Stephanie: No.
Pat: Okay. So...
Scott: Do you know if he qualifies for long-term care insurance?
Stephanie: He should qualify.
Scott: Okay.
Stephanie: Yeah, but, I mean, the window is getting [crosstalk 00:21:47]
Scott: Yeah, I get it. Right I understand.
Pat: So, there's... I'd look into it. You can afford it. You can, probably, if...you could go either direction on this.
Scott: Yeah. Here's...
Stephanie: That's why I'm calling [crosstalk 00:21:57]
Scott: Well, here's what you wanna look at. And we don't know the cost, because, I mean, it's... There is 10% of the number of long-term care insurance policies written today than there were 25 years ago.
Pat: Because so many people have exited the market, the insurance companies have exited the market, because they lost so much money on this, for two reasons. One is low interest rates, which is how they reserve. And the other is because of adverse risk selection, oftentimes having to do with massive employer plans.
Scott: So...and the reason there's not many people buying them today, a lot of companies have exited and people go to shop, and they're like, "Oh, my gosh. How much you wanna charge for this? I think I'll just take my own chances." So, that's why I think it'd be important to look at [inaudible 00:22:44] I would look at two different types of policies. One is a standard policy, that has a long, they call it an elimination period. That what they call it?
Pat: Elimination period.
Scott: Yeah. It's, think of it like a deductible on your car. You probably don't have a $250 deductible on your car, would be my guess. You have a higher deductible because you're like, "I'm only gonna wait until something really major." It's the same kind of concept. So, considering that most long-term care needs are shorter... I mean, it's... I think the concern is, like, a 10-year something, right. That's where it's a real problem. Most are shorter. So, if you self-insure for the short, and then say, "Then I want a policy that's gonna pay a lifetime benefit, should something happen, my husband gets Alzheimer's, and lives 15 years with Alzheimer's." [crosstalk 00:23:26]
Pat: So, as an example, I go into a long-term care facility. The insurance doesn't kick in until day 366, or 730.
Scott: Depending long the waiting period is.
Pat: Which is the elimination, or a waiting period. Right? So, I've self-insured myself for a specific period of time, and then after that, and then the insurance company kicks in. The premiums, it pushes the premiums down, because they know, the insurance company knows, that most long-term care stays are less than nine months.
Scott: Less than nine months for men, and less than, whatever the [inaudible 00:24:01] less than two years for women.
Pat: Yes.
Stephanie: Okay.
Scott: So, the second kinda policy you could look at, think of it like a single-payment policy. And this is, they're essentially life insurance policies, like a universal life. I don't know if whole life has it as well. Would imagine. Like, universal life insurance policy, where you put in a chunk of money. Let's call it, maybe it might be $150 grand, $200 grand, depending on how much benefit you wanna buy. And it's in a life insurance policy. If you need long-term care, they essentially start taking money, your money first. And when you've exhausted your dollars, then the insurance kicks in. And if there's never any long-term care needed, then, when someone passes away, there's a death benefit, equal to the amount of the life insurance. The amount you.
Pat: The downside to these is the fact that...
Scott: You have to put the money up.
Pat: ...you put the money in. You're going to have that money tied up forever. Right? Which is [inaudible 00:24:58] I guess it's a downside. Maybe it's not in your situation.
Scott: Can you use IRA dollars to buy that?
Pat: I don't know.
Scott: I don't know either.
Pat: And...but they have plenty of money.
Stephanie: [inaudible 00:25:06]
Pat: You've got that money in the deferred comp, that's actually going to be pushed out when your husband severs employment.
Scott: Is it a 457 plan, or is it a deferred comp from an employer?
Pat: It's an executive deferred comp.
Stephanie: It's on a 10-year annuity pay [crosstalk 00:35:22]
Scott: Ah.
Pat: See? So, that's being paid out. So, you can buy these things, and you have money in a brokerage account, you said, as well, you can buy these things lump-sum. What happens is, my cash never grows in there. So, if I put $150 grand in there...
Scott: Twenty years from now, it's worth $150,000.
Pat: It's worth $150,000.
Scott: Opportunity cost.
Pat: What the insurance company does is actually takes that money, the interest it earns, and uses it to fund their reserve for the long-term care. So, essentially, you're doing exactly what these life insurance policies do, exactly what Scott just described, with the elimination period. The difference is, you know the outcome. The bad things is, most of them are not indexed to inflation either. So, those are the two places you could go. I would probably, in your situation, if I had a choice, I'd probably buy the life insurance policy, if I bought one at all. But you can self-insure.
Scott: But until you know the price...
Pat: You can't make a decision.
Scott: Yeah.
Pat: But you're fine to self-insure. I mean, if your net worth was $2 million higher, I'd say, aw, don't worry about it.
Scott: Yes. Exactly.
Pat: Don't worry about it. If your net worth's $2 million lower, I'd say don't buy it.
Scott: Because you can't afford it.
Pat: Because you can't afford it.
Scott: Yes.
Pat: But that's why I hate these calls, is because you're right...
Stephanie: [inaudible 00:26:44]
Scott: And you...we don't hate the... It's just...
Pat: Well, I don't...
Scott: ...there's certain things in life that are really hard to...
Pat: Yeah.
Scott: That's a really challenge to plan for financially, because the cost can be so great, that it pretty much says, if you wanna put your whole retirement plans on hold, we can get you insurance, so that if you need long-term care, you don't have to worry about anything. But then, you have no quality of life until that point. So you're essentially saying I'm not gonna have any quality of life the rest of my life.
Pat: Which is why I'd actually buy the life insurance one, because I know the outcome and when it comes. The downside is that they have no cost of living adjustment on it. But you've got plenty of money that you could tie it up, and you could reverse it at any time if you wanted to.
Stephanie: Would you do one of these policies on one of us, which is sort of like...
Scott: Yeah. Yeah.
Stephanie: ...making the middle decision, and sort of hedging our bets, but not over [crosstalk 00:27:35]
Pat: [inaudible 00:27:35] him. But some of them will cover both of you as well.
Scott: Yeah, I'd look at that. But I don't see the need for you having long-term care. You've got plenty of assets.
Stephanie: Right. Yeah. Okay. Good.
Scott: All right?
Stephanie: No, that really helps. Thank you for taking the call.
Scott: All right.
Pat: All right.
Scott: Yeah. Glad you called. Wish you well, Stephanie.
Stephanie: Appreciate you guys.
Scott: And [inaudible 00:27:53] that's the only one I've talked to who's saying they're building a vacation home in Japan. That sounds kinda cool.
Stephanie: All right. Well, now it's gonna be pretty amazing, so...
Scott: Oh, good. We'll come visit.
Stephanie: ...for... Okay. You're invited.
Scott: Thanks. Actually, I went to Japan a few years ago, and climbed Mount Fuji with my daughter and a couple friends. I loved Japan. We had a phenomenal experience. The whole...it was just a great experience. I'd like to go back to Japan sometime.
Pat: Okay.
Scott: But I have no intention of building a vacation home.
Pat: How high is Mount Fuji?
Scott: It's, like, 11,000 or 12,000.
Pat: And how long did it take you to climb it? It's not like rock climbing. You're hiking it, correct?
Scott: Yes, you're hiking. Yeah. Well, we started at the base of the mountain, which most people don't.
Pat: Like, the base of the mountain is, like, not at sea level.
Scott: Two thousand feet or something.
Pat: Okay.
Scott: I don't know. It took us, I don't know, 8 or 10 hours or something.
Pat: Sounds miserable.
Scott: It was awesome. I had a great experience.
Pat: That absolutely sounds miserable. [crosstalk 00:28:54]
Scott: We're heading now, talking with Patricia. Patricia, you're with Allworth's "Money Matters."
Patricia: Yes. Hi. Good afternoon. Thanks for taking my call.
Scott: Hi.
Patricia: I'm 52 years old. I have a rental property, and I have my primary residence, and I have an Airbnb. The rental property is really just breaking even over the last 10 years. By the time I pay taxes, insurance, property management fees, HOA, I've just really been breaking even over the last six years. I have my primary residence, with a mortgage balance of $180,000. And then...
Scott: And what's it worth?
Patricia: A million.
Scott: Okay.
Pat: What's the interest rate?
Patricia: 2.5%.
Scott: Wow. 30-year or 15-year?
Patricia: Fifteen.
Scott: Fifteen-year.
Pat: Fifteen?
Patricia: And then I have the rental property. The interest on that is 7%, and I have a balance of $110,000. And the property is worth $330,000, so I kinda look to [crosstalk 00:30:02]
Pat: What did you pay for it?
Patricia: Two hundred thousand.
Pat: How long have you owned it?
Patricia: [inaudible 00:30:08] I paid $180,000.
Scott: Tell us about the Airbnb.
Patricia: The Airbnb takes care of itself and then some. So, the Airbnb, I owe $54,000 on, but the interest on that is also 7%. But it's profitable. I'm turning a profit on it. I'm making about $1,000 a month after all expenses.
Pat: And what's the value of the property?
Patricia: That's worth about $200,000...maybe $250,000. About $250,000.
Pat: And what did you pay for it?
Patricia: $165,000.
Pat: Okay. What's your question for us?
Patricia: So, I had the rental property, the tenants just left, and I'm trying to decide. I also have a vacant land that I purchased, that I want to build another Airbnb on. So, I'm trying to decide if I should sell the rental property, since I'm really not making any money. It's just there building equity, but recently, the area that it's in has become saturated with lots of new homes and rental properties. So, I'm trying to decide if I should sell it and use the money, because when I did all the numbers, at the end, I'm gonna walk away with $296K if I get the asking price. And once I pay off the mortgage out of it, then I'll have $180,000 left, which I can use to pay off my existing mortgage [crosstalk 00:31:38]
Scott: But then you've got your silent partner, the taxman.
Patricia: Yes. Yes. So, and I have no write-offs to my tax except for the rental property. My children are grown. I have no deductibles.
Pat: What's the rest of your financial situation look like?
Scott? Are you working, retired?
Patricia: I'm working. I have no plans to retire. My job, I'm gonna work as long as I can. Maybe not full-time, but I already estimated I need about $60,000 a year to live, and I make about somewhere between $150,000 and $180,000 a year.
Pat: And how much money do you have in savings, brokerage, IRAs, that sort of thing?
Scott: 401(k)?
Patricia: Yeah. All of that, I have about $700,000.
Scott: Have you thought about doing a tax-free exchange with the rental with another, with a better rental that you can Airbnb?
Patricia: [inaudible 00:32:33] what is... I'm sorry. A tax exchange? What is that?
Scott: A tax-free exchange. Yeah.
Patricia: And what is that? I don't know what that is, sorry.
Scott: Well, I always get confused between 1031...
Pat: 1031.
Scott: 1031. For whatever reason, I cannot...
Pat: 1035 [inaudible 00:32:49]
Scott: [crosstalk 00:32:49] 30-some years in this business, and I can never remember which one's 1031, which one's 1035. So, it's called a 1031 tax-free exchange. And this enables you to sell that property, and as long as you buy something similar, like kind property, within, I believe it's six months on both the front and the back, you can defer all of that gain, so you pay no capital gain tax.
Patricia: But I will eventually have to pay the capital gains, right?
Scott: Yeah, but if you can defer the capital gains, you have more capital working for you. So, if the strategy is just to sell the rental, and you net, let's call it $200,000, you're gonna have to pay...
Pat: It's a no-brainer.
Scott: ...almost 30% for capital gain tax.
Patricia: Right.
Scott: Yeah.
Pat: And so, when you said this vacant land, I don't know if it would be there or not there, but I would explore the 1031.
Patricia: Yeah. So, the vacant land is actually out of the country.
Scott: Oh, I wouldn't...yeah, yeah, yeah.
Pat: Okay. Well, then, that's a... Okay. So, a 1031 into an Airbnb. Brilliant.
Scott: The Airbnb is not out of the country, is that right?
Patricia: Yes, it's the vacant... Oh, yes. They are. They both are. Two different countries. They're both out of the [crosstalk 00:34:06]
Pat: No. Wait, wait, wait. Where's the Airbnb?
Patricia: One is in Jamaica, and the other one is, the vacant land is in Costa Rica.
Pat: All right. Well, go fish. I have no idea how it would work there.
Patricia: But if I paid it...
Pat: We have a...
Patricia: If I paid it...
Pat: We... But the...
Scott: You can't. I don't think you can do it. You can't do an exchange...
Pat: Yeah, yeah.
Scott: ...out of the U.S., but so...
Patricia: But I can't...if I sold it and used the money to pay off my existing mortgage of the house I live in, I would still have to pay capital gain?
Scott: Oh, yes.
Pat: Yes, yes, yes.
Scott: Of course.
Pat: Yes, yes, yes.
Patricia: But if I bought another like property with it, I wouldn't have [crosstalk 00:34:41]
Scott: In the U.S.
Pat: In the US.
Scott: If you follow the rules, and use an intermediary to do the 1031 exchange.
Patricia: Okay.
Scott: They're not that complicated. I've done it, personally, and have advised many clients over the years.
Pat: Yeah. But the problem is is that it... Yeah, you'd have to buy an Airbnb in the U.S. The rental property is in the US.
Patricia: Okay, but let's say I'm going to do that, then I wouldn't end up paying off the mortgage, because I'm thinking I could be debt-free.
Scott: You can't pay off the mortgage. You've got that... You've probably $50,000, $60,000 in capital gain tax, maybe more.
Patricia: Oh.
Scott: Maybe not that. What did you pay? $150,000...
Patricia: Well, I was thinking I'd take the money out of my [crosstalk 00:35:18]
Scott: ...and the depreciation, $40,000 to $50,000 in capital gain tax, between Feds and...
Patricia: Yeah, because my interest rate is so low on my present mortgage, I just thought, like, why don't I take the money out [crosstalk 00:35:28]
Scott: Yeah, [crosstalk 00:35:28] I would not pay off that primary mortgage.
Pat: Yeah. Yeah. Don't pay off the primary.
Patricia: Oh, okay, all right.
Pat: All righty?
Patricia: [inaudible 00:35:34] Yes. Okay. Thank you very much. [crosstalk 00:35:36]
Pat: All right. Okay. Appreciate it.
Scott: Yeah.
Pat: Yeah. I was getting confused there.
Scott: Thank you for tracking. I could not imagine having a rental property outside of the United States. Having one in the same town, it could be challenging enough.
Pat: Yeah. And she wants an Airbnb outside the U.S. And by the way, the Airbnb is, you know, it is...it's popular, for many investments. And we... Look, when my family and I travel, we stay in VRBOs, which are...
Scott: Same things.
Pat: Similar. Airbnb, someone could be living in the house.
Scott: Okay, but when you're traveling with your family, you're not looking for a room. You're renting the whole house.
Pat: Correct, correct.
Scott: And sometimes you see the same property listed on both. I've done the same, and I'll look for VRBO, and Airbnb, and rent wherever is cheaper. Because oftentimes they're listed on both.
Pat: That's right. And, oftentimes, they're actually listed on... You and I owned a weekly rental for years and years...
Scott: That's right.
Pat: ...and it would list on all of the things.
Scott: That's right.
Pat: But oftentimes, if it's a condo, let's say, in a Marriott, it will be listed on the Marriott's website as well.
Scott: Yeah. What's your point?
Pat: But, my point being is that what you should worry about, in these particular Airbnbs, is the local legislation around them.
Scott: Oh, yeah.
Pat: So, in South Lake Tahoe, which we are very familiar, both Scott and I are...
Scott: Because it's in our backyard.
Pat: Yes. They put a moratorium on new Airbnbs or VRBOs.
Scott: And, took away the permits for many existing ones.
Pat: But the Airbnbs and the VRBOs, they have lots and lots of risk in them. You have friends that... You read these articles about people, and then you read another article three days later, where people are, like, dying with these [crosstalk 00:37:32]
Scott: I had an acquaintance that didn't have a, was renting his house out, didn't have a permit, wasn't allowed to do it, and he finally got busted on it.
Pat: Did he?
Scott: And he was telling me about all the money he's making on it, and it's this place in Southern California, and I'm looking, I'm like, well...
Pat: Of course, you're...
Scott: ...you're not allowed to do... Like, I'm thinking, how long you think that's gonna go on for?
Pat: Of course you're doing well. It's illegal.
Scott: That's what I thought. There's lots of different things we could talk about that are illegal, where you might make some money.
Pat: Yes. Of course you're doing well. "I rob these banks." Listen, it worked. It worked perfect until the 13th one.
Hey, every once in a while, we like to follow up with calls that we've had in the past, just to... First of all, just out of personal curiosity.
Scott: Yeah.
Pat: Like, where did this go? Was our advice taken? If it was taken, was it taken in whole or part? And we like to call these things "house calls," for whatever reason.
Scott: Yeah.
Pat: But, sounds like a Fuller Brush man. For those people that don't know what a Fuller Brush man is, it's a guy that used to come to your house...
Scott: It's one of those things... You know, it's one of those jobs I thought, "I'd like to do that for a day."
Pat: For a day.
Scott: "Just to try what it's like being a Fuller Brush man."
Pat: It's a different era, but... So, a Fuller Brush man is a man that would come to your house and sell brushes.
Scott: And that sounds quite sexist. It could be a Fuller Brush female.
Pat: Okay. But, very similar to how Amazon works today. But, we like to follow up with these calls. And today, we're gonna talk to Brian.
Scott: That's right. We spoke to Brian last February. And he was in an interesting situation, where you've got a parent is trying to do something, make everything even. And Brian's life was quite... Anyway. Listen to the clip, and then we'll have a conversation with Brian.
Have you owned a home in the past?
Brian: No, I've just rented. Just to keep my housing costs as low as possible, so I can put away... You know, eventually I got to a good emergency savings, and then eventually good 401(k), and by then, houses were rather expensive, and I'm not married, no kids. And then I like...and recently, I like to travel, so I'm out of the country. Could be three to six months a year.
Scott: Ah.
Pat: Ah. That changes things.
Scott: Yeah.
Pat: And so, when you move out of the country, do you keep your rental or do you give it up?
Brian: Last time, I kept it for about three months, but this time I'm thinking it's time to move on anyway, and I'm gonna get rid of it, and be on the road.
Pat: And you're gainfully employed?
Brian: Yes. And I can work remote. And I'm able to kinda do both.
Scott: People just, "How do I get this lifestyle?"
Pat: Oh, no. "Where did I go wrong?"
Scott: I know.
Brian: Yeah, it's not bad.
Pat: So, you sit down on an island, and you actually have, like, a Photoshop bookshelf behind you when there's really a beach?
Scott: And, Brian, you said you're 37?
Pat: Thirty-eight.
Scott: Thirty-eight.
Brian: Thirty-eight.
Scott: And what's your income, ballpark, from your employment?
Brian: $150,000.
Scott: And what do you have saved?
Pat: Everything.
Brian: Everything? $430,000, $300,000 of which is retirement, tax-advantaged, and the rest is money market and index funds, outside of...
Pat: I hear that you don't wanna buy a home.
Scott: Yeah. Why would you wanna buy a home?
Brian: Yeah, I don't. So, it's like, do I convince my dad that this is my strategy? I certainly appreciate the funds, and my thought would be to invest most of the money into a VTI, and maybe take those small chunks of funds...
Scott: Yeah, how old is your dad?
Brian: ...travel. He's 74, and well...they're pretty well-set for their retirement [crosstalk 00:41:20]
Pat: They're not doing this for estate tax purposes then?
Scott: They wanna even out.
Brian: No.
Scott: They've gifted their other two kids.
Pat: Yeah, they're gonna [inaudible 00:41:25] And what do you think of getting a rental home?
Brian: You know, I think it's kind of like, I work in real estate, as an accountant, and it's kind of like chefs and restaurants. They don't cook all day and then go home and make elaborate meals. And I think when I get home, I'm just tired of looking at real estate, and I prefer, you know, my strategy is to focus my time on my career, travel, and then passive investing, versus... And most people I talk to don't like being a landlord.
Scott: Yeah, I don't like being a landlord.
Pat: I can live with it.
Brian: And then the house, and then, I mean, at my index funds, I don't have to put furniture in them.
Scott: No, I get it.
Brian: I don't have to [crosstalk 00:42:04] property tax.
Scott: [crosstalk 00:42:04] So, I'm gonna tell you. So, two days ago, I'm on a walk with my wife, and I said to her... Actually, I'm on a walk with my wife, and I got a text from a property manager. "Can you please call me?" And I, like, "Is the house on fire?" right? And I text back, and the washer was broken, and they thought it's time to get a new washer and dryer.
Pat: Your mutual fund never calls you.
Brian: Right.
Scott: I said to my wife, and it's been a good investment for...but I said to my wife, "I really love equities." And I said, "The one..." this is the conversation we had.
Pat: You had this conversation with your wife on a walk?
Scott: She barely tolerated it, but yes.
Pat: So romantic.
Scott: No, well... And I said that one of the benefits about getting a little older... You're still quite young. You don't really remember... You didn't remember the pain of the financial crisis. One of the benefits of getting older, you've lived through all these cycles, and you see that companies, the values of companies continue to grow. And when you look over the long-term return, you mentioned VTI, the total stock market index, you look at the long-term return of stocks, it's about six to seven percentage points above that of the rate of inflation. It's hard to replicate that in any other asset class.
Pat: It is.
Scott: Real estate rental, anything.
Pat: It is.
Scott: And so... And, it never calls you and says the washer's broken.
Pat: And there's no leverage in there, so the downside risk isn't as great.
Scott: Correct.
Pat: So, just tell your... Yeah.
Scott: I would have a conversation. My... I'd have a conversation with your dad and say, look, my lifestyle is a little unconventional, but I'm happy.
Pat: I'm assuming you're happy.
Scott: I would love to take these dollars and invest them, for the long term, for my own financial security, just like my brother's financial...but in a slightly different way.
Pat: And I'd take it one step further. I would take a clip of this show, and say, "Hey, I talked to these guys that I listen to their podcast, and this is what they said." And quite frankly, your dad may know... And by the way, that's the only way we're gaining listeners, is one at a time. Brian, of these places you've traveled and worked, what was your favorite?
Brian: Oh, recently it would probably be Malaga, Spain, although I almost don't want people to find out about it, but that was really [crosstalk 00:44:39]
Scott: Is, that's the southern tip?
Brian: Yeah, that's in the southern tip. You can take a ferry to Africa, just about. But yeah, great weather. Has the old town, has the beach. [crosstalk 00:44:50]
Scott: I've actually been to Malaga.
Pat: All right. Second favor.
Brian: Second favorite.
Pat: Or where do you plan on going next?
Brian: Lisbon was quite good.
Pat: I like Lisbon.
Brian: Lisbon's a great city.
Scott: I've never been to Lisbon [crosstalk 00:45:01]
Brian: It's a little overcrowded, but it was quite good.
Scott: Yeah, it's got quite the American...
Brian: Next stop's Italy.
Scott: So, Brian, you're with us now, right?
Brian: Yes.
Pat: And are you overseas as we speak?
Brian: I am.
Pat: And out of curiosity, are you comfortable sharing where you're at?
Brian: Sure. I'm in northern Italy and Liguria, in the Italian Riviera, in a small Italian seaside village.
Pat: Yeah.
Scott: That does sound pretty nice.
Pat: I was, actually, I was in Puglia a couple of weeks ago, in what...
Scott: Of course you were.
Pat: [crosstalk 00:45:39] We were... Yeah, but I don't live...
Scott: With the truly.
Pat: I don't live like Brian does. So, anyway, you're, like, a week and a half is all I [crosstalk 00:45:49] once a year. Exactly.
Scott: Exactly. So, I assume you're still gainfully employed?
Brian: I am. [inaudible 00:45:57] And so, I've been here for a month, and it's working out well. And I took your advice, and I...
Pat: Yeah, so how'd it go?
Brian: Yeah, it went good. I simply just shared the podcast with both of my parents, and Dad came around pretty quick, saying, "You know, you're right. This sounds like it's the right thing for you to do, and it's an investment style that works for you, and plus you got your travel lifestyle." And I think he asked, I'll tell you this, that was the first comment. And the second comment was something about, "Are you gonna get the tattoo on your foot?" because I think you guys said something about your son.
Pat: Oh, okay.
Scott: That's...
Brian: [crosstalk 00:46:41] So, the... "Send the tattoo," and [crosstalk 00:46:42]
Scott: Still waiting for [crosstalk 00:46:44] send it, but no, I have not sent it yet.
Pat: So, this is a way that we could gain listeners to the podcast, Scott, is we could have...
Scott: So, did they give you the cash?
Brian: I got $50,000 right before I left, which they had already sort of had in the works. I didn't really know. And then a bit more may come in January, so they can put it in a different tax year. And so I took the $50,000 and I immediately put $15,000 in a total stock market index fund, and then I'm sitting on $35,000, left over from that, because I kind of took... Yeah, I had a lot of changes going on. I was moving out of the apartment. The apartment's gone now. I have no cost back home.
Pat: Oh, good.
Brian: And I know, when you talk to guests and they have... It's not exactly the same, but when someone has an inheritance, you tell them, don't do anything straight away while you're going through some [crosstalk 00:47:44] change or a life change, and so...
Scott: It's a little different... This is a little different situation, though. We don't... I mean...
Brian: A little different, yeah, but... So, I'm sitting on, now... I guess the follow-up question would be, I'm sitting on $100 grand in cash, in a high-yield money market, and I probably just need to pull the trigger, and [crosstalk 00:48:03]
Pat: You know what you need to do. You don't need us to answer the question. You're just nervous about doing it.
Scott: Brian, there's never...it's always hard to invest, because if the markets are up, you're like, "Man, it's on a tear right now. I'm gonna wait until there's a pullback." And when the markets are going down, you're like, "I don't want to invest right now. Things are going down. I'm gonna wait until things are a little lower."
Pat: But you know what to do. You're just nervous about doing it. Just do it.
Brian: Okay.
Scott: Over the long term, it's not gonna make... Look...
Pat: Yeah, it...
Scott: Who knows a year from now?
Pat: Or two years or three years.
Scott: But what we do know is, you're how old?
Pat: Thirty-five?
Scott: Thirty-seven, six? Right?
Brian: Thirty-eight.
Pat: Thirty-eight?
Scott: Okay.
Pat: Yeah, you got a long time. So, just keep whatever liquid cash you need in the high yield, but that should not... Look, you laid out... That call we had a few months ago, you laid out your thesis, and now you've actually veered from it.
Scott: That's right. Human nature.
Pat: Right? You told us what you should do, and then when you actually came time to do it, you didn't do it.
Brian: I parked it, but yeah, now I gotta go [crosstalk 00:49:05]
Pat: Yeah. Go do it. Go do it.
Scott: Because it's not even the whole amount. It's, the majority is coming next year, in the future.
Pat: Yeah. Yeah. So, you know what to do. I have a couple personal questions for you. What...
Brian: Sure.
Pat: After Italy, where? Do you know?
Brian: You know, I have no plan. I just kind of let things evolve or develop, and ask people where to go. I wrote down Puglia when you said it a second ago.
Pat: Yeah.
Brian: And I do have a couple weeks...
Pat: And when you travel like this, do you stay in an Airbnb, or do you rent a room, or...?
Brian: Yeah, I'm in a Airbnb most of the time, and actually made a little deal on this one. I rented it for a week, and then I met the landlord, and then once I tested the internet and I...I had to do a lot of work this week, so I wanted to stay put for a while. And then I offered cash for an extra week, and it was a pretty good price on the cash price.
Pat: Anyway. Thank you for doing this house call to follow up.
Scott: Yeah, appreciate.
Pat: Appreciate it, and continue enjoying... This guy's living life.
Scott: Yeah. And I think there's two... I appreciate the call, Brian. There's a couple takeaways on this. One is, if you're planning on leaving money to your kids, like, it's...the world's different today.
Pat: It is. And sometimes better from a warm hand than a cold heart.
Scott: Okay, Pat.
Pat: I had a client actually say that to me, and they gifted three of his children money.
Scott: Well, Pat, it is getting... I think we're getting close to being done with the program.
Pat: Yeah. We are. But, I'd like to ask the listeners two things. One, if you'd be so kind as to rate us, and maybe even write a review. That would be...
Scott: That's a good one.
Pat: We can't...we're not allowed to say that.
Scott: Oh, or if it's a bad one. Good or bad. We love them all.
Pat: If you could rate us, please. Our marketing keep telling us that, you know, we've got over 100,000 subscribers, and that pretty soon we're gonna hit a tipping point, and something magical is gonna happen in my life because of this.
Scott: After 30 years, it's, we're gonna be overnight successes.
Pat: Right. And then the second thing, if you'd be so kind as to share this with a friend, and see if they enjoy it, and we're trying to build a listenership here, one listener at a time.
Scott: Yeah. And follow us, if you don't follow us. That way, it's dropped into your feed somehow, and...
Pat: That's right.
Scott: And as we're signing off here, Pat, your son got married last weekend, right?
Pat: Yes.
Scott: Everything went well?
Pat: Yes. So glad it's over. It was a beautiful wedding. No fireworks. Everyone seemed to have gotten along, and...
Scott: Nothing weird happened? The bride didn't trip or anything?
Pat: No, no.
Scott: That's probably good.
Pat: It was pretty nice. It was nice, so thank you for asking.
Scott: Congratulations.
Pat: Thanks for asking.
Scott: Hey, we'll see you next week. This has been Scott Hanson and Pat McClain, Allworth "Money Matters."
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: That's right. It feels like official summertime now, mid-June, as we're...
Pat: Yes.
Scott: ...kinda kicking through things, and both myself, my co-host here, both financial advisors, certified financial planner, chartered financial consultant. And for years, I said we spend our weekdays meeting with people like yourself, but...
Pat: We don't know you. I don't know whether the people I meet with in the week are like you or not.
Scott: Yeah, and it's not as many weekdays as it once was. [crosstalk 00:00:51]
Pat: We are nearing the twilight of our careers.
Scott: Well, I don't know about the twilight.
Pat: For me...
Scott: That's what the organization says about me anyway.
Pat: Right.
Scott: I don't feel it. Anyway...
Pat: With my private parking, every time I come to work, it's further and further away from the building.
Scott: Private parking. [inaudible 00:01:15] I'm got to start with a [inaudible 00:01:16] story, then we're gonna talk about the markets. We got some calls. This was... God, this must have been 25 years ago. And we were back in Omaha, Nebraska, to visit with somebody. Anyway, there was someone back there we were visiting. And while we were there, we, at the time, we had some business with, I think it was Mutual of Omaha. It was one of their subsidiaries, I believe it was.
Pat: That's correct.
Scott: And so we thought, why don't we go have a stop over there, and meet some of the people in charge of the project? This was a long time ago. The industry's changed quite a bit. And so, it's, like, the middle of winter in Omaha. It's windy. And we go looking for parking, and there's, like, eight parking places right up front by the front door. And it says "Executives only." And Pat says, "Oh, no. That's fine. We'll go ahead and park here. I'm sure the executives would be happy that there's some customers here." And so I'm like, "What?" "Oh, yeah. Just go ahead and pull right in." So, "Okay." So, I pull and I park, we get out, and the security guard comes, [inaudible 00:02:17] run over. "You can't park here," and Pat says, "No, it's okay. It's okay. We're customers. We're customers. It's okay."
Pat: Did we stay parked?
Scott: No, we didn't stay...it didn't work.
Pat: That's, well, kinda shows you my attitude about how important the customer's, clients are, to have business.
Scott: Of course.
Pat: Oh, yeah.
Scott: As Pat has always said too, it's like, the employee of the month? "Go ahead and park there." And any employee of the month would want a customer to park in the front.
Pat: Wouldn't they? Anyway...
Scott: I don't know why I started off on that tangent.
Pat: Oh, but, yeah, it was sort of just tangent. Well, Scott, I gotta tell you. I don't think we were the only ones that said it, that when this bromance between our president and Mr. Elon Musk blows up, it will be a monumental... We talked about it when it first started here on the program, and many, many, I heard it on many, many... But this has been spectacular.
Scott: Well... Well...
Pat: This has just been spectacular. It's hard to...
Scott: It's funny. I think, regardless of where... Unless you are on the extreme fringes of the left or the right, there's a lot of entertainment value in the political environment right now.
Pat: It is so juvenile.
Scott: The last six months, it's been a really fascinating time. And my wife says, "Seems like you're more interested in politics." I was like, "It's just interesting..." I mean, there's so much going on.
Pat: Oh, it's so juvenile. It's just so... You just shake your head and you think, "Wait. What?"
Scott: It's kinda blowing over, though, it seems like.
Pat: Yeah, finally.
Scott: The news cycle moved on.
Pat: Oh, yeah. But then at every [crosstalk 00:03:54] couple days, it pops up. Anyway... [crosstalk 00:03:56] All right. [crosstalk 00:03:58]
Scott: But I was thinking, you know, the financial markets, higher than, what was it? "Liberation Day." They're back higher than they were at "Liberation Day," when the markets tanked. And I was thinking...
Pat: "Liberation Day."
Scott: ...there's been, like, so many news stories that are, like, once in a year, in the last 30 days, it feels like. Anyway. You had "Liberation Day," whatever that was supposed to mean. But there was a lot of fear and panic. The markets essentially went to a bear market. We were intraday 20% down on the S&P 500.
Pat: [inaudible 00:04:35] Like the beginning of COVID.
Scott: Yes. And now it's recovered so quickly.
Pat: That's right.
Scott: And I was thinking about this. Markets have always recovered, and they always will. But typically, bear markets take...the average bear market's about nine months of declines.
Pat: Of going down.
Scott: Down, down, up, down, down, up, down, up, down, down, up, down.
Pat: Before it hits a bottom.
Scott: Nine months.
Pat: And we're using a definition of a bear market.
Scott: Twenty percent [crosstalk 00:05:10]
Pat: But that's not technically the definition, but we're gonna use that.
Scott: It's a made-up definition. It's not like...
Pat: It's... All right.
Scott: ...it's mathematics or science.
Pat: Fair enough.
Scott: But it was so short. And I was thinking... Like, at the start, we're like, "Don't panic. Like, this is gonna... This will too shall pass. We'll hit new highs again." And I don't like being...not proven right, but I guess, kinda proven right so quickly, because there will be a bear market.
Pat: That's long.
Scott: And if you went through this, and it caused a lot of stress and anxiety, maybe you have more in stocks than you should, or need.
Pat: Yes.
Scott: And, if your lifestyle's not dependent upon you having 70% or 80% of your portfolio in equities, and you had a lot of fear and anxiety the last couple months, maybe this is a good opportunity for you to pare back a bit, and diversify away from stocks a bit.
Pat: And rebalance your portfolio.
Scott: And rebalance that portfolio, because...
Pat: And by the way, you should be [crosstalk 00:06:22]
Scott: ...we'll have another downturn.
Pat: People... I think one of the biggest mistakes...one of the biggest mistakes people make in their portfolio, especially in the IRAs and 401(k)s, is that they don't rebalance them on a regular basis. They don't have an investment thesis. And the other is...
Scott: That's because when things are going up, why would I wanna get rid of this fund that's doing so well? Or, this stock is [crosstalk 00:06:46]
Pat: Well, I understand why it's [inaudible 00:06:47] but it's still a mistake. It's still a mistake, even though we know why they do it. Right? Pensions don't do it. Pension plans don't let their portfolios run forever. We don't let our clients' portfolios run forever.
Scott: No, of course not. Of course not.
Pat: Yeah.
Scott: Because we have an investment thesis going into things.
Pat: Correct. And the other is tax, not paying enough attention to tax.
Scott: But, look, there will be another... Like, if you look this last 25 years, two major bear markets, right? The financial crisis.
Pat: Oh, yes.
Scott: Which was mid-2007 to February or March of 2009.
Pat: Nine.
Scott: So, it was a long one...
Pat: Yes.
Scott: ...of new lows, new lows, new lows. Then of course it recovered. And before that was the, in 2000 to 2002, it was 28 months, 29 months? [crosstalk 00:07:45]
Pat: And that's when... When was the bonds? What year was that, where the bonds... Just a terrible [crosstalk 00:07:52]
Scott: '94?
Pat: Yeah, it was '94. Yeah.
Scott: You're dating yourself. [crosstalk 00:07:57] But the time to reduce... Any sort of asset class, you don't wanna sell when it's down. You wanna sell when things are up. Right, that's kinda like...they talk about the first day of finance class.
Pat: But it's hard to do.
Scott: Buy low, sell high. Things are high...expensive. Now is the right time to looking at rebalancing, and having the appropriate portfolio for yourself, if you didn't have it already.
Pat: And, especially, as you said earlier, if you were nervous through this whole thing, and were like...it probably is a good check that you are overweighted equities.
Scott: If you've got enough assets to maintain your lifestyle without that risk. If you find yourself in a situation where you're not gonna be able to meet your cash flow needs the next 20 years without having equities, then you gotta either figure out how to live on less. Either live on less, or live with the volatility. Those are your options.
Pat: Yes. Yes. And get used to inflation. [crosstalk 00:08:59]
Scott: You know, another story in the last couple weeks, Pat, is United Healthcare. That stock.
Pat: Okay.
Scott: Cut in half this year.
Pat: Yes.
Scott: It had been a darling of...you know, essentially, a big roll-up in the healthcare space, right?
Pat: Yes.
Scott: Buying all these hospitals and all these different healthcare providers. And most of the revenue coming from... Government controls medicine. Let's face it. That...
Pat: Yes. And their diagnosis is...I mean, there's scandal all the way around that company now.
Scott: Alleged scandal.
Pat: Okay.
Scott: I mean, it certainly appears that... So, the stock essentially has been cut in half. CEO is out. And I saw some article about, from the employees, and how their stock's down, their 401(k)s down. And as I'm reading this, I thought... There are people whose lives, their lives have been changed as a result of the decline in that stock this year. Their financial futures have been changed. Their retirement plan's been put on hold. Their kids' educations have been changed, because they were overweighted in that one particular stock.
Pat: Okay.
Scott: And the only reason they were, by and large, was because they worked there.
Pat: That was them.
Scott: But we see it...there's other people who [crosstalk 00:10:26]
Pat: Scott, I gotta tell you. This might sound heartless, which, when someone says that, get ready. It won't be 100% heartless. Every time I read an article about, "Oh, what happened to these poor people, because their company that they went..." Look, it was, they have control over most of that.
Scott: You mean it's kinda like when somebody gets stuck in the mountains in a snowstorm, and they're out any food and water, and they were shocked that this happened.
Pat: Yeah, and [crosstalk 00:10:54]
Scott: Uh, you're going in the mountains. There's a storm warning that says to stay home.
Pat: Yeah. And even, look, you and I own a small company. We brought liquidity to our own financial situation by bringing in a third party investor. That was... And people say, "Well, because you were really just wanting to try to grow the company." No, no. No. That would have been nice, and it happened, but the main objective was to diversify away.
Scott: And, but the issue, Pat, we see, every day, our advisors see it every day, someone works for an employer whose stock has done well, and they're...the majority of their worth is tied up in that individual company.
Pat: And it's hard to do.
Scott: And so when I see stuff like a, one of the, I don't know what number United Healthcare is, one of the top 10 or 20 companies in the U.S. I don't know [inaudible 00:11:44]
Pat: It was.
Scott: Maybe it's... But it's a massive, massive company. And you see something like that get...you know, so quickly.
Pat: It happens fast. Well, let's...what was the oil company in...? I mean, we could go through a list of these.
Scott: Yeah, a list of them. Speaking of the oils company, we're in California. I was in... Little side note. I was in Hawaii last week on vacation, with my family. It was great. All four kids were there. My oldest is 29. My son's 27. They were there. My son's girlfriend, my younger girls. We were all together. And we survived the week. No one...
Pat: No... No fighting?
Scott: Well, there was a little. [inaudible 00:12:30] they're siblings and stuff.
Pat: [inaudible 00:12:32]
Scott: And parents get frustrated. Of course, there was some argument. It's part of life. But gas in Hawaii was less expensive than gas in California.
Pat: No.
Scott: I swear to you. I look at this, like, how is it that...
Pat: That's amazing.
Scott: ...an island that has to import all of their gasoline is less expensive than California, which used to be a big oil producer?
Pat: That's amazing.
Scott: And two more refineries are leaving.
Pat: Yes.
Scott: It's just...I just was baffled by it. But the reason I brought that up, the two reasons, I was in...
Pat: To show off that you were in Hawaii.
Scott: Of course.
Pat: Number one.
Scott: Well, I figured you were gonna ask about the tan. I kept waiting for, "Man, Scott, how did you get so tan? You look so tan and rested." But it never came. It's interesting. When I take Uber. I used to be cabs. Now it's [inaudible 00:13:24] the Uber drivers. And I always enjoy, talk when I'm out of town, kinda just getting their perspective on their life and what's going on. And so, this Uber driver... And I like to [crosstalk 00:13:33]
Pat: So, now, what do you, get into a Waymo, and actually, without a driver, and speak to an AI agent?
Scott: I'm afraid I'm going to get torched. Well, that was kind of a different story. So, I'm talking to this Uber driver. He had lived in Hawaii his whole life. He's probably 50 years old or so, and this kinda beat-up Uber he was driving around. And he was telling me, he says, "I can tell that tourism is down from...because of the turmoil in the markets." And we're talking about it, and he says, "My experience has been, it's the high-end hotels do fine regardless." He says, like, "If you go to the high-end hotels right now, they're probably completely booked up, they're crowded, because those people, the fluctuation in the markets don't have as big of impact." But he says, when you take kinda the lower-price condos, those are the ones that take the biggest hit, and he says he's really noticed a difference in the number of people in some of these lower-priced condos, just because...
Pat: That's their indicate... That's his indicator. His market indicator.
Scott: That's his indicator.
Pat: Market indicator. [crosstalk 00:14:46]
Scott: So, we'll change our investment thesis based upon this Uber driver's...
Pat: So, where are you going with this?
Scott: It got me thinking, I was in Hawaii probably 20 years ago. And I read a book at that time. I forget the title of the book, but it was essentially about how the top 10% continue to get wealthier, while the middle has stagnant or decline.
Pat: Yes.
Scott: I read this 20 years ago.
Pat: And it's true today.
Scott: It's maybe more so today.
Pat: And AI is gonna propel this.
Scott: There's, oh, it already has. I mean, you look at the billionaires minted over...
Pat: Understand, Scott. But here's... You know, so I was looking at the... Okay. Finish your story.
Scott: I think I finished my story.
Pat: Okay. I was looking at the price to earnings on the S&P 500.
Scott: It's, like, 21.
Pat: It's relatively high...
Scott: Yeah, it's pretty...
Pat: ...on a historical basis.
Scott: Yes.
Pat: And I was thinking, what's justifying this price to earnings? Because there's something that the investor is saying, "I'm okay with this price to earnings." That's what the investor says. For the risk here, the alternatives are not better elsewhere.
Scott: That's right.
Pat: That's how the markets work. And I was having a conversation with my brother, who was the CEO of a technology company, but he's still pretty involved with them, and he said the AI leaps and bounds that they are doing with their technology... And I look at our own company, and then I talk to other people that are running companies, and I think this is, as a societal issue, this AI is very disturbing. It is going to displace many, many middle-income workers, and even management. But it's gonna be great for the stock market.
Scott: Okay. And it's gonna be great for a lot of individuals, just not all.
Pat: That's right. That's right. It will create a major displacement...
Scott: And I'm not one of those that believe we're gonna see 20% unemployment.
Pat: No, no.
Scott: There might be some short-term disruptions.
Pat: That's right.
Scott: Every new technology, it's always had some disruption, but there's always been new jobs created. I think we'll probably see the same thing. We might go through a bit of a hiccup along the way. But I totally agree with you.
Pat: But I think that the price to earnings ratio is being supported by...
Scott: I totally agree with you.
Pat: ...the economics that are coming.
Scott: I totally agree with you. I'm a late adopter when it comes to technology, personally.
Pat: Yeah.
Scott: Not as a [inaudible 00:17:19] but personally, I'm always a late adopter. I never had a BlackBerry. I just kinda waited, and, you know, I didn't...
Pat: Really?
Scott: Yeah. And so, I'm a bit of a late adopter. But, I mean, I just look at some of the applications, even that we're using here internally at Allworth. And you can look down the road and see how much more efficient...we have 500 employees or 600, somewhere in there, how much more efficient we can become, like, how much growth we can have without adding...
Pat: Oh, that's right.
Scott: ...any back office people.
Pat: That's right.
Scott: And, even our advisors, how much more... You think about technology today, and how much more effective and efficient an advisor is today, versus even five years ago, and then you look five years out. I'm just looking at our own little industry.
Pat: And that's why, actually, I think that this... Normally, at a price to earnings ratio this high, I would be a little bit nervous, I would say.
Scott: I'm always a little bit nervous.
Pat: All right. Well, that's fair. That's fair.
Scott: I'm always a little bit nervous.
Pat: That's fair. That's...
Scott: I can't say I love... Look, I don't like this volatility in the markets any more than the next person.
Pat: Well, that is... But that's the risk premium, so... Anyway.
Scott: That's just what it is.
Pat: We should probably go to some calls, if you'd like to join the show. It's 833-99-WORTH. 833-99-WORTH.
Scott: Yeah. You can also send us an email at questions@moneymatters.com. We're starting off in California. Talk with Stephanie. Stephanie, you're with Allworth's "Money Matters."
Stephanie: Hello. How are you?
Scott: Hi, Stephanie.
Stephanie: Trying to make a decision about long-term care insurance. Our assets seem to be right in that spot where it's not very clear if it's a good idea or not, so, could use some help.
Pat: Oh, this is... These. I hate these questions.
Scott: Well, it's like, you're in California, right? So, it's like, oh, should I buy...like, how do I get fire insurance on my home right now? It's, like, it's so expensive, so... What...how old are you, Stephanie?
Stephanie: So, I'm 57. I'm married. My husband is 65, so the age gap was one consideration...
Scott: Yeah.
Stephanie: ...that I thought might weigh into it. The other factor is, we don't have kids, so I know it's sometimes positioned as a way to protect assets for a guaranteed inheritance, but that's not a priority for us. We're trying to spend all our money.
Pat: Okay.
Scott: Do you have any pension income, guaranteed income, that comes in regardless of what's happening?
Stephanie: You know what? Social Security, at some point, at about $5500 a month, and some small pensions that add another $1500.
Scott: And then, what do you have in retirement savings, as far as IRAs, other, mutual funds, bank accounts?
Stephanie: So, I made a list here. I got preferred comp is at $1.3 million, IRA/401(k) $1.7 million, $70,000 in a Roth. About $100,000 mutual fund, and $500,000 cash. We kinda have that reserved for a retirement home that we're building in Japan.
Pat: Wow. So, you have approximately $3.7 million.
Stephanie: Yes.
Scott: And what was the preferred? What was that?
Pat: Not preferred. You meant deferred comp.
Stephanie: Yeah, deferred comp.
Scott: Okay. I'm like, this is...
Pat: Is it in a 457, or is it from a private company?
Stephanie: It's a private company executive plan.
Pat: Okay. Okay. An executive deferred comp. Okay. $3.7 million. And do you own a mortgage?
Stephanie: House is paid off, $600,000.
Pat: And when you build this home in Japan, will you sell your house in California?
Stephanie: No. No. We'll use it. You know, there's some resident restrictions over there, so [crosstalk 00:21:05]
Scott: And have you priced into some long-term care? Because it's primarily, I'm thinking, you're concerned, primarily, I would guess, is that your husband, something happens to him, it's many years, and it drains your financial assets.
Stephanie: Yes. So, I was looking if there was a strategy, you know, does self-funding makes sense, or is there a strategy with insuring one of us, that might be a little more reasonable, that provides some coverage? I know it's hard to tell who might get [crosstalk 00:21:32]
Pat: So, I would look at...you have...
Scott: Have you shopped it at all?
Stephanie: No.
Pat: Okay. So...
Scott: Do you know if he qualifies for long-term care insurance?
Stephanie: He should qualify.
Scott: Okay.
Stephanie: Yeah, but, I mean, the window is getting [crosstalk 00:21:47]
Scott: Yeah, I get it. Right I understand.
Pat: So, there's... I'd look into it. You can afford it. You can, probably, if...you could go either direction on this.
Scott: Yeah. Here's...
Stephanie: That's why I'm calling [crosstalk 00:21:57]
Scott: Well, here's what you wanna look at. And we don't know the cost, because, I mean, it's... There is 10% of the number of long-term care insurance policies written today than there were 25 years ago.
Pat: Because so many people have exited the market, the insurance companies have exited the market, because they lost so much money on this, for two reasons. One is low interest rates, which is how they reserve. And the other is because of adverse risk selection, oftentimes having to do with massive employer plans.
Scott: So...and the reason there's not many people buying them today, a lot of companies have exited and people go to shop, and they're like, "Oh, my gosh. How much you wanna charge for this? I think I'll just take my own chances." So, that's why I think it'd be important to look at [inaudible 00:22:44] I would look at two different types of policies. One is a standard policy, that has a long, they call it an elimination period. That what they call it?
Pat: Elimination period.
Scott: Yeah. It's, think of it like a deductible on your car. You probably don't have a $250 deductible on your car, would be my guess. You have a higher deductible because you're like, "I'm only gonna wait until something really major." It's the same kind of concept. So, considering that most long-term care needs are shorter... I mean, it's... I think the concern is, like, a 10-year something, right. That's where it's a real problem. Most are shorter. So, if you self-insure for the short, and then say, "Then I want a policy that's gonna pay a lifetime benefit, should something happen, my husband gets Alzheimer's, and lives 15 years with Alzheimer's." [crosstalk 00:23:26]
Pat: So, as an example, I go into a long-term care facility. The insurance doesn't kick in until day 366, or 730.
Scott: Depending long the waiting period is.
Pat: Which is the elimination, or a waiting period. Right? So, I've self-insured myself for a specific period of time, and then after that, and then the insurance company kicks in. The premiums, it pushes the premiums down, because they know, the insurance company knows, that most long-term care stays are less than nine months.
Scott: Less than nine months for men, and less than, whatever the [inaudible 00:24:01] less than two years for women.
Pat: Yes.
Stephanie: Okay.
Scott: So, the second kinda policy you could look at, think of it like a single-payment policy. And this is, they're essentially life insurance policies, like a universal life. I don't know if whole life has it as well. Would imagine. Like, universal life insurance policy, where you put in a chunk of money. Let's call it, maybe it might be $150 grand, $200 grand, depending on how much benefit you wanna buy. And it's in a life insurance policy. If you need long-term care, they essentially start taking money, your money first. And when you've exhausted your dollars, then the insurance kicks in. And if there's never any long-term care needed, then, when someone passes away, there's a death benefit, equal to the amount of the life insurance. The amount you.
Pat: The downside to these is the fact that...
Scott: You have to put the money up.
Pat: ...you put the money in. You're going to have that money tied up forever. Right? Which is [inaudible 00:24:58] I guess it's a downside. Maybe it's not in your situation.
Scott: Can you use IRA dollars to buy that?
Pat: I don't know.
Scott: I don't know either.
Pat: And...but they have plenty of money.
Stephanie: [inaudible 00:25:06]
Pat: You've got that money in the deferred comp, that's actually going to be pushed out when your husband severs employment.
Scott: Is it a 457 plan, or is it a deferred comp from an employer?
Pat: It's an executive deferred comp.
Stephanie: It's on a 10-year annuity pay [crosstalk 00:35:22]
Scott: Ah.
Pat: See? So, that's being paid out. So, you can buy these things, and you have money in a brokerage account, you said, as well, you can buy these things lump-sum. What happens is, my cash never grows in there. So, if I put $150 grand in there...
Scott: Twenty years from now, it's worth $150,000.
Pat: It's worth $150,000.
Scott: Opportunity cost.
Pat: What the insurance company does is actually takes that money, the interest it earns, and uses it to fund their reserve for the long-term care. So, essentially, you're doing exactly what these life insurance policies do, exactly what Scott just described, with the elimination period. The difference is, you know the outcome. The bad things is, most of them are not indexed to inflation either. So, those are the two places you could go. I would probably, in your situation, if I had a choice, I'd probably buy the life insurance policy, if I bought one at all. But you can self-insure.
Scott: But until you know the price...
Pat: You can't make a decision.
Scott: Yeah.
Pat: But you're fine to self-insure. I mean, if your net worth was $2 million higher, I'd say, aw, don't worry about it.
Scott: Yes. Exactly.
Pat: Don't worry about it. If your net worth's $2 million lower, I'd say don't buy it.
Scott: Because you can't afford it.
Pat: Because you can't afford it.
Scott: Yes.
Pat: But that's why I hate these calls, is because you're right...
Stephanie: [inaudible 00:26:44]
Scott: And you...we don't hate the... It's just...
Pat: Well, I don't...
Scott: ...there's certain things in life that are really hard to...
Pat: Yeah.
Scott: That's a really challenge to plan for financially, because the cost can be so great, that it pretty much says, if you wanna put your whole retirement plans on hold, we can get you insurance, so that if you need long-term care, you don't have to worry about anything. But then, you have no quality of life until that point. So you're essentially saying I'm not gonna have any quality of life the rest of my life.
Pat: Which is why I'd actually buy the life insurance one, because I know the outcome and when it comes. The downside is that they have no cost of living adjustment on it. But you've got plenty of money that you could tie it up, and you could reverse it at any time if you wanted to.
Stephanie: Would you do one of these policies on one of us, which is sort of like...
Scott: Yeah. Yeah.
Stephanie: ...making the middle decision, and sort of hedging our bets, but not over [crosstalk 00:27:35]
Pat: [inaudible 00:27:35] him. But some of them will cover both of you as well.
Scott: Yeah, I'd look at that. But I don't see the need for you having long-term care. You've got plenty of assets.
Stephanie: Right. Yeah. Okay. Good.
Scott: All right?
Stephanie: No, that really helps. Thank you for taking the call.
Scott: All right.
Pat: All right.
Scott: Yeah. Glad you called. Wish you well, Stephanie.
Stephanie: Appreciate you guys.
Scott: And [inaudible 00:27:53] that's the only one I've talked to who's saying they're building a vacation home in Japan. That sounds kinda cool.
Stephanie: All right. Well, now it's gonna be pretty amazing, so...
Scott: Oh, good. We'll come visit.
Stephanie: ...for... Okay. You're invited.
Scott: Thanks. Actually, I went to Japan a few years ago, and climbed Mount Fuji with my daughter and a couple friends. I loved Japan. We had a phenomenal experience. The whole...it was just a great experience. I'd like to go back to Japan sometime.
Pat: Okay.
Scott: But I have no intention of building a vacation home.
Pat: How high is Mount Fuji?
Scott: It's, like, 11,000 or 12,000.
Pat: And how long did it take you to climb it? It's not like rock climbing. You're hiking it, correct?
Scott: Yes, you're hiking. Yeah. Well, we started at the base of the mountain, which most people don't.
Pat: Like, the base of the mountain is, like, not at sea level.
Scott: Two thousand feet or something.
Pat: Okay.
Scott: I don't know. It took us, I don't know, 8 or 10 hours or something.
Pat: Sounds miserable.
Scott: It was awesome. I had a great experience.
Pat: That absolutely sounds miserable. [crosstalk 00:28:54]
Scott: We're heading now, talking with Patricia. Patricia, you're with Allworth's "Money Matters."
Patricia: Yes. Hi. Good afternoon. Thanks for taking my call.
Scott: Hi.
Patricia: I'm 52 years old. I have a rental property, and I have my primary residence, and I have an Airbnb. The rental property is really just breaking even over the last 10 years. By the time I pay taxes, insurance, property management fees, HOA, I've just really been breaking even over the last six years. I have my primary residence, with a mortgage balance of $180,000. And then...
Scott: And what's it worth?
Patricia: A million.
Scott: Okay.
Pat: What's the interest rate?
Patricia: 2.5%.
Scott: Wow. 30-year or 15-year?
Patricia: Fifteen.
Scott: Fifteen-year.
Pat: Fifteen?
Patricia: And then I have the rental property. The interest on that is 7%, and I have a balance of $110,000. And the property is worth $330,000, so I kinda look to [crosstalk 00:30:02]
Pat: What did you pay for it?
Patricia: Two hundred thousand.
Pat: How long have you owned it?
Patricia: [inaudible 00:30:08] I paid $180,000.
Scott: Tell us about the Airbnb.
Patricia: The Airbnb takes care of itself and then some. So, the Airbnb, I owe $54,000 on, but the interest on that is also 7%. But it's profitable. I'm turning a profit on it. I'm making about $1,000 a month after all expenses.
Pat: And what's the value of the property?
Patricia: That's worth about $200,000...maybe $250,000. About $250,000.
Pat: And what did you pay for it?
Patricia: $165,000.
Pat: Okay. What's your question for us?
Patricia: So, I had the rental property, the tenants just left, and I'm trying to decide. I also have a vacant land that I purchased, that I want to build another Airbnb on. So, I'm trying to decide if I should sell the rental property, since I'm really not making any money. It's just there building equity, but recently, the area that it's in has become saturated with lots of new homes and rental properties. So, I'm trying to decide if I should sell it and use the money, because when I did all the numbers, at the end, I'm gonna walk away with $296K if I get the asking price. And once I pay off the mortgage out of it, then I'll have $180,000 left, which I can use to pay off my existing mortgage [crosstalk 00:31:38]
Scott: But then you've got your silent partner, the taxman.
Patricia: Yes. Yes. So, and I have no write-offs to my tax except for the rental property. My children are grown. I have no deductibles.
Pat: What's the rest of your financial situation look like?
Scott? Are you working, retired?
Patricia: I'm working. I have no plans to retire. My job, I'm gonna work as long as I can. Maybe not full-time, but I already estimated I need about $60,000 a year to live, and I make about somewhere between $150,000 and $180,000 a year.
Pat: And how much money do you have in savings, brokerage, IRAs, that sort of thing?
Scott: 401(k)?
Patricia: Yeah. All of that, I have about $700,000.
Scott: Have you thought about doing a tax-free exchange with the rental with another, with a better rental that you can Airbnb?
Patricia: [inaudible 00:32:33] what is... I'm sorry. A tax exchange? What is that?
Scott: A tax-free exchange. Yeah.
Patricia: And what is that? I don't know what that is, sorry.
Scott: Well, I always get confused between 1031...
Pat: 1031.
Scott: 1031. For whatever reason, I cannot...
Pat: 1035 [inaudible 00:32:49]
Scott: [crosstalk 00:32:49] 30-some years in this business, and I can never remember which one's 1031, which one's 1035. So, it's called a 1031 tax-free exchange. And this enables you to sell that property, and as long as you buy something similar, like kind property, within, I believe it's six months on both the front and the back, you can defer all of that gain, so you pay no capital gain tax.
Patricia: But I will eventually have to pay the capital gains, right?
Scott: Yeah, but if you can defer the capital gains, you have more capital working for you. So, if the strategy is just to sell the rental, and you net, let's call it $200,000, you're gonna have to pay...
Pat: It's a no-brainer.
Scott: ...almost 30% for capital gain tax.
Patricia: Right.
Scott: Yeah.
Pat: And so, when you said this vacant land, I don't know if it would be there or not there, but I would explore the 1031.
Patricia: Yeah. So, the vacant land is actually out of the country.
Scott: Oh, I wouldn't...yeah, yeah, yeah.
Pat: Okay. Well, then, that's a... Okay. So, a 1031 into an Airbnb. Brilliant.
Scott: The Airbnb is not out of the country, is that right?
Patricia: Yes, it's the vacant... Oh, yes. They are. They both are. Two different countries. They're both out of the [crosstalk 00:34:06]
Pat: No. Wait, wait, wait. Where's the Airbnb?
Patricia: One is in Jamaica, and the other one is, the vacant land is in Costa Rica.
Pat: All right. Well, go fish. I have no idea how it would work there.
Patricia: But if I paid it...
Pat: We have a...
Patricia: If I paid it...
Pat: We... But the...
Scott: You can't. I don't think you can do it. You can't do an exchange...
Pat: Yeah, yeah.
Scott: ...out of the U.S., but so...
Patricia: But I can't...if I sold it and used the money to pay off my existing mortgage of the house I live in, I would still have to pay capital gain?
Scott: Oh, yes.
Pat: Yes, yes, yes.
Scott: Of course.
Pat: Yes, yes, yes.
Patricia: But if I bought another like property with it, I wouldn't have [crosstalk 00:34:41]
Scott: In the U.S.
Pat: In the US.
Scott: If you follow the rules, and use an intermediary to do the 1031 exchange.
Patricia: Okay.
Scott: They're not that complicated. I've done it, personally, and have advised many clients over the years.
Pat: Yeah. But the problem is is that it... Yeah, you'd have to buy an Airbnb in the U.S. The rental property is in the US.
Patricia: Okay, but let's say I'm going to do that, then I wouldn't end up paying off the mortgage, because I'm thinking I could be debt-free.
Scott: You can't pay off the mortgage. You've got that... You've probably $50,000, $60,000 in capital gain tax, maybe more.
Patricia: Oh.
Scott: Maybe not that. What did you pay? $150,000...
Patricia: Well, I was thinking I'd take the money out of my [crosstalk 00:35:18]
Scott: ...and the depreciation, $40,000 to $50,000 in capital gain tax, between Feds and...
Patricia: Yeah, because my interest rate is so low on my present mortgage, I just thought, like, why don't I take the money out [crosstalk 00:35:28]
Scott: Yeah, [crosstalk 00:35:28] I would not pay off that primary mortgage.
Pat: Yeah. Yeah. Don't pay off the primary.
Patricia: Oh, okay, all right.
Pat: All righty?
Patricia: [inaudible 00:35:34] Yes. Okay. Thank you very much. [crosstalk 00:35:36]
Pat: All right. Okay. Appreciate it.
Scott: Yeah.
Pat: Yeah. I was getting confused there.
Scott: Thank you for tracking. I could not imagine having a rental property outside of the United States. Having one in the same town, it could be challenging enough.
Pat: Yeah. And she wants an Airbnb outside the U.S. And by the way, the Airbnb is, you know, it is...it's popular, for many investments. And we... Look, when my family and I travel, we stay in VRBOs, which are...
Scott: Same things.
Pat: Similar. Airbnb, someone could be living in the house.
Scott: Okay, but when you're traveling with your family, you're not looking for a room. You're renting the whole house.
Pat: Correct, correct.
Scott: And sometimes you see the same property listed on both. I've done the same, and I'll look for VRBO, and Airbnb, and rent wherever is cheaper. Because oftentimes they're listed on both.
Pat: That's right. And, oftentimes, they're actually listed on... You and I owned a weekly rental for years and years...
Scott: That's right.
Pat: ...and it would list on all of the things.
Scott: That's right.
Pat: But oftentimes, if it's a condo, let's say, in a Marriott, it will be listed on the Marriott's website as well.
Scott: Yeah. What's your point?
Pat: But, my point being is that what you should worry about, in these particular Airbnbs, is the local legislation around them.
Scott: Oh, yeah.
Pat: So, in South Lake Tahoe, which we are very familiar, both Scott and I are...
Scott: Because it's in our backyard.
Pat: Yes. They put a moratorium on new Airbnbs or VRBOs.
Scott: And, took away the permits for many existing ones.
Pat: But the Airbnbs and the VRBOs, they have lots and lots of risk in them. You have friends that... You read these articles about people, and then you read another article three days later, where people are, like, dying with these [crosstalk 00:37:32]
Scott: I had an acquaintance that didn't have a, was renting his house out, didn't have a permit, wasn't allowed to do it, and he finally got busted on it.
Pat: Did he?
Scott: And he was telling me about all the money he's making on it, and it's this place in Southern California, and I'm looking, I'm like, well...
Pat: Of course, you're...
Scott: ...you're not allowed to do... Like, I'm thinking, how long you think that's gonna go on for?
Pat: Of course you're doing well. It's illegal.
Scott: That's what I thought. There's lots of different things we could talk about that are illegal, where you might make some money.
Pat: Yes. Of course you're doing well. "I rob these banks." Listen, it worked. It worked perfect until the 13th one.
Hey, every once in a while, we like to follow up with calls that we've had in the past, just to... First of all, just out of personal curiosity.
Scott: Yeah.
Pat: Like, where did this go? Was our advice taken? If it was taken, was it taken in whole or part? And we like to call these things "house calls," for whatever reason.
Scott: Yeah.
Pat: But, sounds like a Fuller Brush man. For those people that don't know what a Fuller Brush man is, it's a guy that used to come to your house...
Scott: It's one of those things... You know, it's one of those jobs I thought, "I'd like to do that for a day."
Pat: For a day.
Scott: "Just to try what it's like being a Fuller Brush man."
Pat: It's a different era, but... So, a Fuller Brush man is a man that would come to your house and sell brushes.
Scott: And that sounds quite sexist. It could be a Fuller Brush female.
Pat: Okay. But, very similar to how Amazon works today. But, we like to follow up with these calls. And today, we're gonna talk to Brian.
Scott: That's right. We spoke to Brian last February. And he was in an interesting situation, where you've got a parent is trying to do something, make everything even. And Brian's life was quite... Anyway. Listen to the clip, and then we'll have a conversation with Brian.
Have you owned a home in the past?
Brian: No, I've just rented. Just to keep my housing costs as low as possible, so I can put away... You know, eventually I got to a good emergency savings, and then eventually good 401(k), and by then, houses were rather expensive, and I'm not married, no kids. And then I like...and recently, I like to travel, so I'm out of the country. Could be three to six months a year.
Scott: Ah.
Pat: Ah. That changes things.
Scott: Yeah.
Pat: And so, when you move out of the country, do you keep your rental or do you give it up?
Brian: Last time, I kept it for about three months, but this time I'm thinking it's time to move on anyway, and I'm gonna get rid of it, and be on the road.
Pat: And you're gainfully employed?
Brian: Yes. And I can work remote. And I'm able to kinda do both.
Scott: People just, "How do I get this lifestyle?"
Pat: Oh, no. "Where did I go wrong?"
Scott: I know.
Brian: Yeah, it's not bad.
Pat: So, you sit down on an island, and you actually have, like, a Photoshop bookshelf behind you when there's really a beach?
Scott: And, Brian, you said you're 37?
Pat: Thirty-eight.
Scott: Thirty-eight.
Brian: Thirty-eight.
Scott: And what's your income, ballpark, from your employment?
Brian: $150,000.
Scott: And what do you have saved?
Pat: Everything.
Brian: Everything? $430,000, $300,000 of which is retirement, tax-advantaged, and the rest is money market and index funds, outside of...
Pat: I hear that you don't wanna buy a home.
Scott: Yeah. Why would you wanna buy a home?
Brian: Yeah, I don't. So, it's like, do I convince my dad that this is my strategy? I certainly appreciate the funds, and my thought would be to invest most of the money into a VTI, and maybe take those small chunks of funds...
Scott: Yeah, how old is your dad?
Brian: ...travel. He's 74, and well...they're pretty well-set for their retirement [crosstalk 00:41:20]
Pat: They're not doing this for estate tax purposes then?
Scott: They wanna even out.
Brian: No.
Scott: They've gifted their other two kids.
Pat: Yeah, they're gonna [inaudible 00:41:25] And what do you think of getting a rental home?
Brian: You know, I think it's kind of like, I work in real estate, as an accountant, and it's kind of like chefs and restaurants. They don't cook all day and then go home and make elaborate meals. And I think when I get home, I'm just tired of looking at real estate, and I prefer, you know, my strategy is to focus my time on my career, travel, and then passive investing, versus... And most people I talk to don't like being a landlord.
Scott: Yeah, I don't like being a landlord.
Pat: I can live with it.
Brian: And then the house, and then, I mean, at my index funds, I don't have to put furniture in them.
Scott: No, I get it.
Brian: I don't have to [crosstalk 00:42:04] property tax.
Scott: [crosstalk 00:42:04] So, I'm gonna tell you. So, two days ago, I'm on a walk with my wife, and I said to her... Actually, I'm on a walk with my wife, and I got a text from a property manager. "Can you please call me?" And I, like, "Is the house on fire?" right? And I text back, and the washer was broken, and they thought it's time to get a new washer and dryer.
Pat: Your mutual fund never calls you.
Brian: Right.
Scott: I said to my wife, and it's been a good investment for...but I said to my wife, "I really love equities." And I said, "The one..." this is the conversation we had.
Pat: You had this conversation with your wife on a walk?
Scott: She barely tolerated it, but yes.
Pat: So romantic.
Scott: No, well... And I said that one of the benefits about getting a little older... You're still quite young. You don't really remember... You didn't remember the pain of the financial crisis. One of the benefits of getting older, you've lived through all these cycles, and you see that companies, the values of companies continue to grow. And when you look over the long-term return, you mentioned VTI, the total stock market index, you look at the long-term return of stocks, it's about six to seven percentage points above that of the rate of inflation. It's hard to replicate that in any other asset class.
Pat: It is.
Scott: Real estate rental, anything.
Pat: It is.
Scott: And so... And, it never calls you and says the washer's broken.
Pat: And there's no leverage in there, so the downside risk isn't as great.
Scott: Correct.
Pat: So, just tell your... Yeah.
Scott: I would have a conversation. My... I'd have a conversation with your dad and say, look, my lifestyle is a little unconventional, but I'm happy.
Pat: I'm assuming you're happy.
Scott: I would love to take these dollars and invest them, for the long term, for my own financial security, just like my brother's financial...but in a slightly different way.
Pat: And I'd take it one step further. I would take a clip of this show, and say, "Hey, I talked to these guys that I listen to their podcast, and this is what they said." And quite frankly, your dad may know... And by the way, that's the only way we're gaining listeners, is one at a time. Brian, of these places you've traveled and worked, what was your favorite?
Brian: Oh, recently it would probably be Malaga, Spain, although I almost don't want people to find out about it, but that was really [crosstalk 00:44:39]
Scott: Is, that's the southern tip?
Brian: Yeah, that's in the southern tip. You can take a ferry to Africa, just about. But yeah, great weather. Has the old town, has the beach. [crosstalk 00:44:50]
Scott: I've actually been to Malaga.
Pat: All right. Second favor.
Brian: Second favorite.
Pat: Or where do you plan on going next?
Brian: Lisbon was quite good.
Pat: I like Lisbon.
Brian: Lisbon's a great city.
Scott: I've never been to Lisbon [crosstalk 00:45:01]
Brian: It's a little overcrowded, but it was quite good.
Scott: Yeah, it's got quite the American...
Brian: Next stop's Italy.
Scott: So, Brian, you're with us now, right?
Brian: Yes.
Pat: And are you overseas as we speak?
Brian: I am.
Pat: And out of curiosity, are you comfortable sharing where you're at?
Brian: Sure. I'm in northern Italy and Liguria, in the Italian Riviera, in a small Italian seaside village.
Pat: Yeah.
Scott: That does sound pretty nice.
Pat: I was, actually, I was in Puglia a couple of weeks ago, in what...
Scott: Of course you were.
Pat: [crosstalk 00:45:39] We were... Yeah, but I don't live...
Scott: With the truly.
Pat: I don't live like Brian does. So, anyway, you're, like, a week and a half is all I [crosstalk 00:45:49] once a year. Exactly.
Scott: Exactly. So, I assume you're still gainfully employed?
Brian: I am. [inaudible 00:45:57] And so, I've been here for a month, and it's working out well. And I took your advice, and I...
Pat: Yeah, so how'd it go?
Brian: Yeah, it went good. I simply just shared the podcast with both of my parents, and Dad came around pretty quick, saying, "You know, you're right. This sounds like it's the right thing for you to do, and it's an investment style that works for you, and plus you got your travel lifestyle." And I think he asked, I'll tell you this, that was the first comment. And the second comment was something about, "Are you gonna get the tattoo on your foot?" because I think you guys said something about your son.
Pat: Oh, okay.
Scott: That's...
Brian: [crosstalk 00:46:41] So, the... "Send the tattoo," and [crosstalk 00:46:42]
Scott: Still waiting for [crosstalk 00:46:44] send it, but no, I have not sent it yet.
Pat: So, this is a way that we could gain listeners to the podcast, Scott, is we could have...
Scott: So, did they give you the cash?
Brian: I got $50,000 right before I left, which they had already sort of had in the works. I didn't really know. And then a bit more may come in January, so they can put it in a different tax year. And so I took the $50,000 and I immediately put $15,000 in a total stock market index fund, and then I'm sitting on $35,000, left over from that, because I kind of took... Yeah, I had a lot of changes going on. I was moving out of the apartment. The apartment's gone now. I have no cost back home.
Pat: Oh, good.
Brian: And I know, when you talk to guests and they have... It's not exactly the same, but when someone has an inheritance, you tell them, don't do anything straight away while you're going through some [crosstalk 00:47:44] change or a life change, and so...
Scott: It's a little different... This is a little different situation, though. We don't... I mean...
Brian: A little different, yeah, but... So, I'm sitting on, now... I guess the follow-up question would be, I'm sitting on $100 grand in cash, in a high-yield money market, and I probably just need to pull the trigger, and [crosstalk 00:48:03]
Pat: You know what you need to do. You don't need us to answer the question. You're just nervous about doing it.
Scott: Brian, there's never...it's always hard to invest, because if the markets are up, you're like, "Man, it's on a tear right now. I'm gonna wait until there's a pullback." And when the markets are going down, you're like, "I don't want to invest right now. Things are going down. I'm gonna wait until things are a little lower."
Pat: But you know what to do. You're just nervous about doing it. Just do it.
Brian: Okay.
Scott: Over the long term, it's not gonna make... Look...
Pat: Yeah, it...
Scott: Who knows a year from now?
Pat: Or two years or three years.
Scott: But what we do know is, you're how old?
Pat: Thirty-five?
Scott: Thirty-seven, six? Right?
Brian: Thirty-eight.
Pat: Thirty-eight?
Scott: Okay.
Pat: Yeah, you got a long time. So, just keep whatever liquid cash you need in the high yield, but that should not... Look, you laid out... That call we had a few months ago, you laid out your thesis, and now you've actually veered from it.
Scott: That's right. Human nature.
Pat: Right? You told us what you should do, and then when you actually came time to do it, you didn't do it.
Brian: I parked it, but yeah, now I gotta go [crosstalk 00:49:05]
Pat: Yeah. Go do it. Go do it.
Scott: Because it's not even the whole amount. It's, the majority is coming next year, in the future.
Pat: Yeah. Yeah. So, you know what to do. I have a couple personal questions for you. What...
Brian: Sure.
Pat: After Italy, where? Do you know?
Brian: You know, I have no plan. I just kind of let things evolve or develop, and ask people where to go. I wrote down Puglia when you said it a second ago.
Pat: Yeah.
Brian: And I do have a couple weeks...
Pat: And when you travel like this, do you stay in an Airbnb, or do you rent a room, or...?
Brian: Yeah, I'm in a Airbnb most of the time, and actually made a little deal on this one. I rented it for a week, and then I met the landlord, and then once I tested the internet and I...I had to do a lot of work this week, so I wanted to stay put for a while. And then I offered cash for an extra week, and it was a pretty good price on the cash price.
Pat: Anyway. Thank you for doing this house call to follow up.
Scott: Yeah, appreciate.
Pat: Appreciate it, and continue enjoying... This guy's living life.
Scott: Yeah. And I think there's two... I appreciate the call, Brian. There's a couple takeaways on this. One is, if you're planning on leaving money to your kids, like, it's...the world's different today.
Pat: It is. And sometimes better from a warm hand than a cold heart.
Scott: Okay, Pat.
Pat: I had a client actually say that to me, and they gifted three of his children money.
Scott: Well, Pat, it is getting... I think we're getting close to being done with the program.
Pat: Yeah. We are. But, I'd like to ask the listeners two things. One, if you'd be so kind as to rate us, and maybe even write a review. That would be...
Scott: That's a good one.
Pat: We can't...we're not allowed to say that.
Scott: Oh, or if it's a bad one. Good or bad. We love them all.
Pat: If you could rate us, please. Our marketing keep telling us that, you know, we've got over 100,000 subscribers, and that pretty soon we're gonna hit a tipping point, and something magical is gonna happen in my life because of this.
Scott: After 30 years, it's, we're gonna be overnight successes.
Pat: Right. And then the second thing, if you'd be so kind as to share this with a friend, and see if they enjoy it, and we're trying to build a listenership here, one listener at a time.
Scott: Yeah. And follow us, if you don't follow us. That way, it's dropped into your feed somehow, and...
Pat: That's right.
Scott: And as we're signing off here, Pat, your son got married last weekend, right?
Pat: Yes.
Scott: Everything went well?
Pat: Yes. So glad it's over. It was a beautiful wedding. No fireworks. Everyone seemed to have gotten along, and...
Scott: Nothing weird happened? The bride didn't trip or anything?
Pat: No, no.
Scott: That's probably good.
Pat: It was pretty nice. It was nice, so thank you for asking.
Scott: Congratulations.
Pat: Thanks for asking.
Scott: Hey, we'll see you next week. This has been Scott Hanson and Pat McClain, Allworth "Money Matters."
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.