Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

Scott: Welcome to Allworth's "Money Matters." Scott Hanson. Pat McClain. Glad you're with us, both myself and my co-host here, we're both financial advisors, certified financial planner, charter financial consultant. We spend our weekdays with people like yourself and, become your financial advisors on the air as we have our weekend podcast and radio show.

Pat: Yes. We try to help financial stuff.

Scott: Financial stuff and pay attention to what's going on in the markets and, all those sort of things. And, it's been an interesting year with the markets anyway, like, pretty much all the gains in the S&P 500 are coming from a handful of technology companies.

Pat: Just the few.

Scott: And, I think seven or eight. You can think of the names. You take those out and it's flatter down. And, they used to call 'em the fangs, but they've given them a new acronym because some of the companies have actually changed their names. So, Facebook went to Meta and...

Pat: Google went to Alphabet. So strange.




Scott: This is to tell people that, "Well, we changed our name from Hanson McClain to Allworth because we thought the word, Allworth, better reflected what we did, which was dealing with all of people's worth tax...plenty."

Pat: But, from going to Google to Alphabet, they did that a number of years ago. I just didn't. Anyway, that's irrelevant. Different story.

Scott: Doesn't matter. The markets do these things. It's not uncommon for the market being led by a handful of companies. Or, you see a downdraft that's caused by a handful of companies or a certain segment. The mid-cap stocks are doing poorly for a period of time, or the small cap stocks are outperforming. And, the challenge from an individual investor standpoint and, the reason why most investors underperform the indexes over the long term, then there's study after study that show that, right?

The average investor underperformance by quite a large margin, percentage points, not like 2, 3, 4% points, which is a large margin. Doesn't sound like a large margin, but when you underperform by 2, 3, or 4, that could be you're underperforming the market by 20, 30, 40%.

Pat: Yes. It could be substantial. And so, instead of your money doubling every 7 to 10 years, it doubles every 15 to 20 years, or whatever, right? But, the challenge is when investors tend to look at shorter term performance, like if they're gonna, like, "I've got some money to invest somewhere. Like where's the best place?" And, you do some like, what ETFs are performing the best? What not... And, I'm not a short term person, so I'm gonna look the last five years, what's performed the best in the last five years? Well, odds are it's going to be that which has just performed the best, that had the best one year track record as well, right? That's right.

The hot...those things that have just gone up in price.

Scott: What was in vogue because of overall market sentiment, investor sentiment, political sentiment, right? Momentum. Momentum.

Pat: There's always an excuse, right? You flip on the TV at the end of the day and you hear about why the markets went up, or the markets went down. They stick the microphone and a camera on a variety of people and they give some answers. It's just an excuse.

Scott: Well, as I have reminded clients, not hundreds of times, but thousands of times, and they say, "Well, this is doing well. This investment's doing well." And, I like to remind them, the mere fact that we can measure it tells us it did well because you can't measure the future.

So, when they say it's doing well, the mere fact that we actually know performance means that it did well. And, just because in fact it did well, doesn't mean it will continue to do well in future. In fact, there are many that would argue exactly the opposite, both from an emotional, psychological, and statistical that the worst investment, I'm not talking about individual companies, but I'm talking about...

Pat: Broad categories.

Scott: Broad categories. The worst one does...

Pat: Like a small cap value, mid-cap growth.

Scott: ...the greater the probability that it will do well in the future. Things have a tendency to revert back to the mean if you remember your statistics class.

Pat: Yes.

Scott: They go back to the average statistics class or, if you slept through your statistics class.

Pat: Well, I love the statistics. One of my favorite classes.

Scott: I had a statistics class. You know, sometimes in college you'd have like the grad students teaching the class? That's who I had. And, she was a really sweet woman, but, she did not understand statistics.

Pat: Oh, really?

Scott: Yeah. So, I went the first two weeks and then I'm like, "This is a waste of my time." So, I didn't show up for like three weeks until there was an exam. And, I came in for the exam and, I remember the woman said, "Oh, Scott, I'm glad you're okay." I'm like, "What are you talking about?" "Well, I hadn't seen you and I thought maybe something happened to you."

And, I look at her kind of weird.

Pat: Anyway, what happened is you didn't wanna waste your time.

Scott: I had to self-taught stats, which probably means I'm not very proficient at it. But, I do remember mean, media and mode never did quite understand.

Pat: But Scott, quite frankly...

Scott: Refer to the mean.

Pat: ...I liked statistics because it was okay at that point in time, just figuring average was okay. Before, before then I thought being average was a negative thing.

And, then you realize, "Yeah, no, if I'm just average, I'm all right." It's okay to be average because there's a lot of people below average.

Scott: Well, I have a 15 year old and we're talking about college because, she's gonna enter her junior year. And, I had the discussion with her like, "Well, maybe you can get..." And, she has foster care in the background, so we adopted her from the foster system. So, like we had a conversation like, "That's kind of a golden ticket for you." Just less than 3% of kids who had foster in the background ever graduate college.

So, a lot of universities would love to have some, but I said, "You need to be careful that you don't go to a school that too hard." I remember taking our son through a tour of MIT and he's a smart kid, but I'm like, "This is gonna be worse."

Well, not like that. I mean, odds are you're gonna be below average and you could be that there's someone who's bottom of the class, or the bottom 10%, right?

Pat: There is someone lives there.

Scott: Right. "That might be you." What are you gonna become a demotivational coach to your children?

Pat: You're just trying to be realistic.

Scott: I don't think I could survive MIT.

Pat: Oh, of course not.

Scott: I don't have the patience, the temperament.

Pat: Of course not.

Scott: Of course. Of course not, thanks.

I mean, even our industry, at Allworth, we have a lot of CFAs that work for us. Chartered Financial Analysts. It's really rigorous study. I'm a certified financial planner, but it's a different kind of analysis. It's super in depth. It's a lot of people fail. There's three major exams.

Like, you have to put a gun to my head to do that. I just like, I don't have the temperament to, anyway, we're getting off base. One of my sons has, passed the first class, the CFA.

Pat: He's the one that went to UCLA?

Scott: Yeah, sometimes he wants to talk to me about it. I'm like, "Okay buddy. Like, what? How does that work?"

Pat: All right, let's give out the number and do some calls. What do you say, Scott?

Scott: Yeah. 833-99-WORTH if you wanna be part of the program, or if you wanna schedule a time to talk with us, you can just send us an email questions@moneymatters.com. Love to take your call. Let's head to Tennessee. We're talking with Adam. Adam, you're with Allworth's "Money Matters."

Adam: Hey guys. Is everyone okay?

Scott: Yeah, we're fine. How are you?

Adam: I am good. I actually had a question about standard deviation and correlation coefficient but, after that I think I'll move on to something else if that's all right.

Scott: Yeah. Thanks.

Pat: Thank you. Thank you. Thank you.

Adam: Yeah, I'm hoping you guys can help me with this. I need some creative thinking because I'm out of ideas, but I was thinking about trying to do something for my son and, you guys may give me some parenting or behavioral advice here as well. It's your show, so feel free.

But, rather than have him inherit a pile of assets when I'm dead and gone and likely won't even need them anymore, at that point I was thinking about trying to do something to help him now and something like buying him his first home. So, my question for you is looking for ideas on maybe the best way to do that without triggering gift tax and ideally without even using up any of my lifetime estate tax exemption. Although, that may be an impossible puzzle to solve.

Scott: Are you married?

Adam: If you had ideas? Yes, I am.

Scott: And how many children do you have?

Adam: We have two. My son is 21. He'll be graduating from college and getting married around this time next year and daughter is 18 and just going off to school and I would likely be doing the same thing again for her.

Scott: This is easy. And, approximate size of your net worth? Like if we sold everything and put it in...

Adam: About 8 million. A couple million in a paid up home. And, maybe 2.5 in retirement. 3.5 in brokerage accounts.

Scott: A couple million in a home in Tennessee is probably a pretty nice home in Tennessee, I'm guessing.

Adam: Nice home.

Scott: Like a couple million in Northern California might have people shooting up out in front of your lawn. Where in Tennessee is it?

Adam: We're in Williamson County in Franklin. There's a lot of those California people you mentioned living around us now, I suppose.

Scott: I went to Franklin in the midst of the... So in 2020, lockdowns happened in March and we had a dear family friend getting married in May in Tennessee. And, the wedding kept getting smaller and smaller. And, the young woman who's...my wife was like an aunt to her.

She reached out. She would really like you guys to come to the wedding. It's gonna be small, social distance, which was...it was, but I went, so we're coming from California, go to Franklin. There was like no pandemic. This was May of 2020. The doors were wide open. There were no masks.

Pat: Really?




Scott: It was shocking. Is it the end of the Natchez Trace Trail?

Adam: Yes it is. Yep. Natchez Trace is in Williamson County, correct?

Scott: It feels like you're in Napa County or something. It's a nice, it's beautiful. I rode the Natchez Trace on my bicycle. I will not do it again. It was a beautiful ride, but a little long for me. So, this is easy. When you mentioned earlier that you didn't want to use up any certain part of your exemption. Why?

Adam: Only because I'm looking out to the future and assuming that I may actually be one of those folks who could be affected by this when it reverts back to half of where it is today. So, I am not adamantly opposed to you...

Pat: You would rather not.

Adam: Correct. Correct.

Pat: But, what happened? Oh, that's grandfather, but you're not given the full amount, so it won't matter.

Adam: Correct.

Pat: All right. There's a bunch of different ways. There's a bunch of ways...

Adam: Yeah, it's 5 million per person, 14 for a couple, something like that.

Pat: So it is, it's about 14 million and, it's a little less than that. But, right now you could give away for the rest of the listeners, if you are so inclined, or have the means you could give away approximately $27 million.

Scott: A little less than that. Isn't it 11 or, something?

Pat: They just moved it up.

Scott: Whatever. It's all gonna revert back in 2025.

Pat: It's supposed to revert back in 2025. The other way is you can do $17,000 each, both you and your spouse and 34. And you're like, "Well he needs 200 grand or 300 grand." All you do there is you actually just write a note to the child and for gift $34,000 a year.

Adam: Got it.

Scott: But, that's got its own pitfalls, Pat, because you still a family member, you have to, there's a computered interest.

Pat: That's right.

Scott: Whether they pay or not. So, there's a gift of that as though it's not just as simple as going to for gift 34,000 a year, because there's some interest that was given to that.

Pat: That's right. I mean, you have to put together, you have to...

Scott: It might take several years.

Pat: It's gonna take multiple years, but it's gonna achieve the objective.

Scott: But the challenge with that though, if you want to help your son above and beyond that wedding, whatever, that is all tax will get his wedding.

Pat: I don't know why you'd be afraid of using up the unified credit, the exemption amount.

Adam: That is probably where I'll end up. I was just wanting to make sure I wasn't overlooking something more obvious. And the one idea I had is right...is where you guys just went, which is, and actually once he's married, it's not 34 anymore, it's 68. Right?

Scott: That's a different story altogether. You wanna talk about that, about separate property and that's a...

Adam: Oh yes, I understand.

Scott: That is a, you know, this is really interesting, Adam. I'm having this same conversation with one of my children right now. I have four and with my wife, like, "Look, they're gonna inherit this at some point in time. Do I care? I mean, I've been fortunate and I didn't grow up this way, but I'm here now thankfully." And so it's like, "How do we do this?" I tell you, I'm using up part of my exemption. I'm just like flat out because it's easiest. It's...

Pat: And, now your son's not. So, Adam and his wife are already thinking, you probably love the young woman, your son's gonna marry. It's gonna be like another daughter. So, you're asking the economic question. You actually did invite us to opine on these other issues.

Adam: I did.

Pat: No, no, no. Because we've seen it all working with clients for 30 years. We've seen it all. Well, we think we've seen it all. We'll see something new, in the future.

Scott: Because you could look at it and say, "No, we wanna keep this separate property." But, then what kind of animosity might that create with your son's bride? And, now like, "What, I'm not really accepted into the family or, we're not really partners here or this really isn't my home and we didn't buy this together."

Pat: I have a dear friend of mine that his son married this woman, she seemed lovely. He would call her his daughter in love, really affectionate about her and that she had some serious mental issues and they'd had a couple kids together and she like went nuts.

Scott: Oh, that's a shame.

Pat: And, like serious issues. And, he no longer called her the daughter in love. But, it was just one of those things where you...How much money are we talking about?

Adam: Oh, probably a starter home condo. Something around here, 350, 400 maybe.

Scott: So, is your son gainfully employed?

Adam: He will be.

Scott: I'm still baffled that a starter in Tennessee, a starter condo is 350 to 400. Tennessee is one of the hot states the last decade. That's for sure. So there is a combination of things you could do.

And, I would suggest a combination. I would not discourage your son from taking a loan out on the home. I would not pay for it outright. I would make it a large enough down payment, so that he is comfortable in his monthly payment. That's what I would do.

And that way that he's got skin in the game, mom and dad didn't just give this to me, my spouse and maybe a sizable down payment. Like a couple of hundred thousand dollars or $100,000 or maybe you push him to get a little bit more than a starter home. So, he is not actually making the move again. And you say, "Listen son, here's $150,000. Why don't you go out and buy a $500,000 home if you can afford the payments?" But, I wouldn't gift 100% of the whole thing. And, I'd use up my exemption.

Adam: Got it.

Scott: And, by the way...

Adam: I have been and would be continuing to plan on doing some form of annual gift to him beyond this anyway, to help out, help bridge any gaps as these.

Scott: I think that's a great way to look at things, Adam, because, oftentimes you see people that, my guess is you're not...my guess is you've got a good career.

You're not spending your savings, it's just gonna continue to accumulate. You've got enough set aside for retirement should something happen. Like, so you can either continue to save all this to your dying day and then when your kids are...when old and they have already gone through all the struggle of being young then they inherit some money, or you can help them out along the way.

And, I look at my...it's a different era for kids growing up. It's not that easy.

Pat: It's a terrible time to graduate from college. It's an awful time. You went through two years of COVID lockdowns during your college career. If you're graduating right now, which is my youngest just did, I had this conversation with her this weekend. "Look at, you went through two years of COVID lockdown where you were living in LA and you couldn't even go to the beach because they were closed." Well, this isn't Tennessee.

Scott: That's LA County. You could go to Orange County.

Pat: "And, then you graduate into one of the worst job markets for professionals, for professionals."

Scott: Yeah, it's a tough job market.

Pat: So, the other thing I would look at, Adam, is, if it makes sense for you financially carry the paper on the home if the yield is actually better off.

Scott: I wouldn't do that.

Pat: Really?

Scott: No, I'm just thinking like, my daughter's 27, her career's, she's been self-employed. She graduated, she got kicked out of her class during lockdown. She was a sports psychologist, master's in sports psychology. Not a lot of sport jobs. A favorable team. None in the lockdown. She's navigated and created her own little business, and then it's just actually in the last six months, it's really taken off. She's doing well.

And I was having this, actually had this conversation with her just the other day. Like, I'd like to help her at some point in time to buy a house, but I wouldn't wanna carry the paper. I wouldn't want her having to send me the check. I would just assume.

Pat: Oh, I want that because the economics are better for me, for both of us.

Scott: For the next 30 years? You'd rather...

Pat: Oh no, it won't be a 30 year note.

Scott: All right, whatever.

Pat: Anyway, difference of opinion. All right. You're on the right track, Adam.

Adam: Thank you. Appreciate the call.

Pat: Appreciate it. Yeah, thanks. I don't know if we answered his question or, our own questions there, Scott.

Scott: Well, there's no easy answers to any of these, and we all have different families. You have different values and different perspectives. You have different relationships with your children. You have different relationships with all your children. And, there's some people that, I remember my mother-in-law at Christmas time, and if she spent $142 on one of her kids, she had to spend 142 on the next, I mean, like to the penny. Like, she wanted to make sure she never showed favorites. And, other people...Like I...Like I don't even view it that way. Every kid's different. Money's just one thing. There's a lot of different things there. And I don't know.

Pat: Let's continue here. Let's go to Washington, D.C. We're talking with Ken. Ken you're with Allworth's "Money Matters."

Ken: Hi there.

Scott: Hey Ken.

Ken: Thanks for taking the call. I'm wondering what the best way to deal with excess proceeds from the sale of my home especially given that the home I'm moving to, I'm actually assuming a VA loan at 2.25 %.

Scott: Oh, that is...

Ken: I know.

Pat: Do we still have those loans?

Scott: You can assume a VA loan. Were you a, are you a...

Ken: I'm not a veteran. I'm not active military. However, this is a fifth family sale and for one factor, another, my family member won't be looking to use their entitlement.

Scott: Thank you.

Ken: It been very much an asset for me.

Scott: Thank you. Thank you. Wow. And, for the rest of the listeners, what happens is, right now, it is a big thing in the resale market that if you have a low interest assumable loan, and in fact there are websites that are dedicated to houses that are out for sale, that are low interest. And, many of the government backed loans, Fannie Mae, Freddie Max, the Veterans, this is for the rest of the listeners, many of these loans are assumable. And, so each one of 'em has its own pitfalls. And, as what Ken just said, it's okay if the one, he's, because the person that he's assuming it from, if they give up this loan and make it assumable, they are no longer eligible for a Veterans Administration loan if they've given one up. Is that correct, Ken?

Ken: That's correct.

Scott: All Right. And so, you found this one. And so, what we're seeing in the resale market on homes is that these homes that actually have these assumable are getting much higher prices.

Pat: These run the numbers.

Scott: Because the numbers make sense. So anyway, what's your question for us?

Ken: So, just generally, like this is a big chunk. I don't plan on putting any more into the loan than I need to.

Scott: That's right. Not in this market.

Ken: Exactly. And so I'm like, "What's the best way to handle this sum of money?" I already have...

Scott: How old are you?

Ken: I'm 30...I'm gonna be 32 soon.

Scott: What...

Ken: I maxed out all my...Go ahead.

Scott: Oh no, you go, you maxed out your 401(k) and all that other stuff?

Ken: 401(k), backdoor Roth, mega backdoor Roths, 403(b), 457.

Scott: Of course you did. Of course you...

Ken: I'm trying to go through the list.

Scott: Yeah, yeah. Do you have children? You have children?

Ken: I just had a first child and I had the helping of a 529. So I haven't got too much of that.

Scott: How large a mortgage are you gonna have?

Ken: It's about 600,000.

Scott: Okay. And, you've got 500,000 as from the proceeds of the sale of your home?

Ken: Yes.

Scott: And, your career, are you, I mean, pretty confident that things are just gonna continue on, or if not better for the next 10, 20 years?

Ken: I think so, yes.

Scott: And are you able to make the payments pretty easily on this $600,000 loan?

Ken: Yes.

Scott: Okay. Now this is interesting because this is gonna revolve around your risk tolerance. He's 32. This is gonna revolve around your risk tolerance and how patient of an investor are you. So, give us some background markets go up, markets go down, your feeling about that?

Ken: I'm generally just all in. My portfolio is basically 100% like, you know, S&P and then maybe like 80% S&P, 20% small cap. Just keeping it simple.

Scott: What do you think you should do?

Ken: I mean, my thought is just to continue that, right? Like into my after-tax brokerage account at some portion of it, a small percentage of that will go into 529, get the tax benefits. The one thing that I haven't ever done is kind of invest such a large sum at once.

Scott: So, here's a couple things. Yes. So the 529, and you've got an HSA available to you?

Ken: Yes. And, I maxed that out.

Pat: And you're maxing out the HSA.

Scott: What do you have as far as cash or brokerage account now? Assuming this is done, what will you have in cash and brokerage account?

Ken: Oh, if it goes into a brokerage account, then about right now I'm about like 850 in the brokerage account. So, plus the proceeds of, I think.

Scott: You already have...Wait, wait, let's wait. Lemme try. You, already have $850,000 saved in a brokerage account? Not counting the proceeds from your house?

Ken: Yes. Not counting the...

Scott: Was any of this money gifted or inherited?

Ken: I think over the years about like 50 grand or so.

Scott: And, family income approximately?

Ken: It can fluctuate by like 350 to 400.

Scott: You're 100% right on. I agree with you. You know, and if you wanted to, you know, bring it back a little, you could dollar cost average in over the next year, year and a half, two years outta treasuries. Or you could go in 60/40 and let it go. So look, here's how I view things. You're 32, right? Markets are gonna go through their cycles, the ups and downs. If over the next 30 years, the equity markets don't increase, we've got all kinds of other financial problem. There's some risks that are gonna exist regardless. Like our country's been around 250 years, our capitalist society's been there. If there was some massive change, if the dollars no longer has of much value, those things are gonna be really hard for you to diversify away from those, some of things, right?

I mean you could think about history in other countries, that's sort of thing. So, if we set those things aside, like, I mean, if I were in your situation at 32, I would invest all of that in equities.

Pat: Well, that's, yes. And, I would use everything that you just said.

Scott: And I would probably use a direct index approach to this as opposed to an ETS.

Pat: That's right.

Scott: Synthetic index, the technology was made at such, and it's essentially, let's assume it's an S&P 500, but I'd probably go broad on that. But, direct index is, technology is such that it'll build a portfolio with probably 200 or 300 different individual securities. And, because there's no trading costs on a lot of platforms today, the friction that existed a couple years ago doesn't exist today. That's what makes these so interesting now.

And, the advantage with that is you can do some tax lost harvesting using individual securities throughout the year. And then, you've got opportunities if whether you want maybe transfer some funds to your kids at college time or buying house or to charity. You can cherry-pick the top performance...

Pat: And you can mimic that underlying.

Scott: Super close to the return to the...

Pat: You get like a 90% match on.

Scott: Ninety...higher than that, but, yeah.

Pat: On that. Well, the further you get away from it, the harder it's to maintain that. So, I like the way, and if you're worried about markets and you say, "Well, you know," as you said, "I've never invested that much at one point in time." Just cut it up into three different tranches and put it in some now, a third now, a third in six months and a third in 12 months, or a third in 9 months.

Scott: Or, whatever.

Pat: Or whatever it is, but put it on a program that's preset and you're not going to actually change regardless of what the market conditions are.

Scott: Unless you say, if the market falls 20%, I'm gonna go all in or something.

Ken: I'm go and get that next tranche.

Scott: That's right. That's right. But, I like your thinking. That is only designed to reduce risk because markets go up more than they go down historically. That's a risk mitigation tool, but it's risk is perception's reality too.

Ken: One follow-up to your direct indexing. I've been doing all this kind of self-directed and, I imagine, I'm curious, I don't know too much about it. Are there other low-cost ways of accessing direct indexing?

Scott: Oh, yeah. Oh yeah. Yeah. Yes, yes, yes, yes. Yes. I mean, it's relatively new in our industry. Many firms have not adopted it. Even it's...

Pat: The big online brokerage firms have it.

Scott: But it works perfect for new money.

Pat: Correct. It works perfect for new money.

Scott: You don't wanna sell out a bunch of ETFs or mutual funds and pay capital gains to move to a direct index strategy. But, if it was...And it needs to be sizable enough to, there's typically some minimum fees. It's more expensive than ETFs, but oh, you'd do it in a minute with new money, you would don't even think about it.

And it doesn't matter inside of an IRA, it's outside of an IRA and a brokerage account where it really plays a role. And, particularly the younger you are. Perfect. Ken. Obviously, you're a good saver. And I trust you have a bunch of term life insurance on yourself.

Ken: I do. I do. Yes.

Scott: Do you have disability insurance?

Ken: To my new daughter.

Scott: Disability insurance through your employer?

Ken: Yes. Through my employer.

Scott: I'd make sure you got plenty of disability insurance. Buy as much as they'll sell you. All righty.

Ken: Perfect. Helpful. All right. Thank you.

Scott: All right. Keep up the great work.

Pat: Boy, we've got...holy smokes, first two callers, people who are totally responsible.

Scott: Oh my God. Like if this continues like this, we're gonna have to stop this show there. There'll be no one to help.

Pat: I guess we did help them a little bit. No one to help.

Scott: They did call and ask us. Well, I mean this is a...I mean by selection, they tend some of the callers. If you're listening to our podcast, there's probably a chance that you have actually, you've saved a couple. Well, you clearly care about finances, otherwise you wouldn't be listening to the program.

There are certain people out there, there's actually people that are good savers that the whole concept of dealing with money is not comfortable to, they don't enjoy it at all.

They save money because they know it's important, but they don't like dealing with it. You know, those clients.

Pat: Yeah. I'm trying to think, am I one? Some days.

Scott: That's not you. Yeah, right.

Pat: That probably.

Scott: Oh my gosh. You're far from that.

Pat: Well, you know, I need a base for comparison.

Scott: Well, I wouldn't compare the average person to a 30 year veteran financial advisor.

Pat: I'm okay, I'll go with that.

Scott: Who's still actively involved.

Pat: I am, yeah. Yes, yes, yes, yes. I'm meeting with some clients this afternoon. Look forward to it.

Scott: Oh, well, good. Yeah. Okay.

I got a phone call this last week from someone I went to elementary, middle school and high school with, and they are retiring and, they're like, "Hey, can you help me out?" And I thought, "Holy smokes. We're all old now. I went to sixth grade with you and I am almost retiring."

Pat: Yep. Life continues on. Let's keep making some calls here at Allworth's "Money Matters." We're in Texas with Kevin. Kevin, you're with Allworth's "Money Matters."

Kevin: Yes sir. My wife and I, we were due to retire. Well, I'm retiring in August and I'll be 59 and a half. I'm just wanting to know kind of what vehicles to put. I've got about 560 K in the 401(k). And in one 401(k), I have another 401(k) with about 50,000 in. I was just wanting to know what would you recommend to be a better avenue to put that money in so that I don't need it right away because I do have a pension, but I just wanna make sure that, you know, down the road when I do get ready to take it, what would be your...

Scott: Kevin, when do you think you might want some money, or need some money from this 401(k)?

Kevin: Probably not for probably five years.

Scott: And, what would be different in five years if you have, I mean, you've got a pension you said, is the pension...?

Kelvin: I do.

Scott: Is the pension going to replace a good chunk of what your salary's been?

Kevin: It will.

Scott: How much is a percentage?

Kevin: Probably 60%.

Scott: Is your home paid for?

Kevin: It is not. We have a very low mortgage and we have a 2.75% interest rate. So we want to keep it that way.

Scott: And is your spouse good? Does your spouse work?

Kevin: She does work and that's kind of what I'm anticipating. In the next five years, she will be retired as well or she won't earn a retirement, but she also has 401(k)s that we can pull from.

Scott: How much are in her 401(k)s?

Kevin: About a hundred.

Scott: And, how is your 401(k) allocated today?

Kevin: It's very aggressive. I've got a lot into the S&P 500, so that's definitely one thing I need to do is pull back from the aggressive side.

Scott: Maybe, maybe not. And, when you say it like as a percentage of this approximately 610,000, how much is in stocks, or equities?

Kevin: In stock itself?

Scott: Yeah, or equities. The S&P 500.

Kevin: Now the S&P 500, probably, I'm looking at it, it's about 300. Right at 400,000.

Pat: I don't think...

Scott: And where's the rest?

Kevin: The rest, it's in target funds like 2030 target funds.

Scott: So, there's equity in there as well.

Pat: Yeah, there's not much equity in there.

Scott: Target date funds were great when you're younger. Small account balance. I'm not a big fan as you get older just because one, you have no control of the allocation internally. And secondly, when you wanna do a withdrawal, you can't go in and say, "Just gimme the bond or just sell me some small cap." You're stuck kind of selling across the board.

Pat: And then, you said it's in a 2030 fund, so that's pretty much all bonds. Once you hit 59 and a half, there's really no advantage a 401(k) has over an IRA. Matter of fact, one could argue that you're gonna have greater advantages in an IRA rollover because with an IRA, you're investment options are unlimited. You can choose your provider, you can set up things so, you get a monthly check if you want a monthly check when it comes time to be required minimum distributions down the road. It's just a little easier to deal with.

The downside is your cost could be more if you're not great at figuring out those sort of things. And, you could be sold some crappy product by an unscrupulous person, or unsophisticated person, who doesn't know better.

So, you could make some greater investment mistakes on your own then you probably would within your 401(k). If you, before 59 and a half, if you're 55 or, older, when you leave your employer, you can take, you have access to those dollars before 59 and a half. There's nothing magical about 59 and a half any longer, but you're already gonna be 59 and a half as long as you leave them in the 401(k).

Pat: Once you move into IRA.

Scott: But, you're gonna be 59 and a half. So, I actually don't think you're, you're too aggressive at all. And, the reason is, look, you've got that pension coming in, it's gonna replace 60% of your income, you're eligible for social security. And you think how much capital it would take to generate that. That's a lot of money. That is a... think of that as fixed income. That's exactly.

And, then you look at what your Social Security, which you're eligible for at age 62, whether you decide to take it or not, you may actually decide to put that for a little bit and start a distribution from your IRA in order to put off Social Security. But there's lots of factors that go in there. So, I'd roll it over into an IRA.

Pat: Kevin, if you've historically had quite a bit in stocks, if the ups and downs don't bug you because you've got many years to go, right? I would make the argument if you're...Look, the allocations are really based upon two things. One is your time horizon. That is how long before you need the money. Now if you said that you needed a big chunk of this because you wanted to buy a new motor home a year from now, well that's a very short-term time horizon would say, let's make sure we're in something pretty liquid, something stable so that when it's time to buy the motor home, you know, the cash is there.

But, if we're talking about it's not for 5 years before we're gonna start taking some income from it, well now we say, okay, well we're gonna need some money in 5 years, but the majority we're not gonna need for 6 years, 10 years, like 15 years, 20 years long time.

So, that's the first thing, the time horizon. You've got time on your side here. The second is and just as important, it's how much ups and downs you can personally stomach without it driving you nuts. It's always, no one likes when values go down. Right? None of us like it, but it's, if you can withstand those ups and downs, you get compensated handsomely over time, which is what's happened in your 401(k) over a long period of time.

If you can come intellectually to the point saying, I know I don't need the money anytime soon, number one, number two, I know over the long term stocks go up much more than they go down and I've got confidence in the future, then I...then we would recommend remain in a pretty aggressive allocation.

Kevin: Okay. So what do you, and I know this is a like a taboo word, but what do you think about annuities? Are those good?

Scott: You've got one? No, you've got one.

Kevin: Well, that's true. I do, you're right. That is in my pension plan.

Scott: Yeah, you got one in your pension plan that's an annuity. Annuity's the stream of payments. I wouldn't buy a commercial annuity here.

Pat: Not your situation.

Scott: Yeah. It's, you know, and they sell these indexed annuities because they tell you don't need that about the downside. There's a cost to that downside that risk didn't just disappear. When people talk about, well, index annuities give you a downside, you're like, "Yeah, yeah, yeah. They certainly do." But, there's a cost and their cost is that you're gonna cap your returns and it's expensive regardless.

Pat: Lower return over the long term.

Scott: So, assuming the market.

Pat: You have a normal future.

Scott: But, you have no business, you don't need an annuity. There's, it would be silly for you. In fact, I would make the argument that your portfolio, how much will your pension be on a monthly basis?

Kevin: About $3,800.

Scott: Okay. So, can you live comfortably on just that pension?

Pat: With wife working still.

Scott: And, with your wife working?

Kevin: Oh, absolutely.

Pat: I would make the argument that you could push your portfolio even a little bit more aggressive to 75% equities or 80% equities. Because of the size of that pension. If I did a net present value of that stream of payments, of that $3,800 a month based upon your life expectancy, a normal life expectancy between you and your wife, it's in the millions of dollars.

Someone set aside all that money for you to provide a stream of income until you and your wife's, assuming you're taking a joint survivor until you and your wife's final day. How much money would I actually need to set aside in order to actually fund that $3,800 a month? And you're like, well "Geez, Pat." I could do the calcula... My guess is it's 1.6 million. Oh, 3.8%. It's a little higher than that four-point.

Scott: It's about a million bucks. It's about a million dollars.

Pat: So, it's a million dollars.

Scott: It's million bucks.

Pat: So, if you looked at your portfolio and you said, "I've got a million dollars in this bond, which is the annuity, and then I have $500,000 in equities." Now when you look at the overall portfolio, your one-third equities and two-thirds bond.

And so, it's easy to say that and explain it, but psychologically what you have to do is decide that you're gonna live through the ups and downs in the markets and quite frankly at $3,800 a month and when your Social Security kicks in, you'll be fine. You should be 75 to 80% equities in that.

Kevin: That sounds good to me.

Scott: Well you're the one that did it.

Kevin: Well, it's like, it's always been you save, save, save but, then when you get to that point you're like, how do I spend? You know, I mean it's easy to spend, but how do you get your mind wrapped around now I'm not saving anymore. I'm just living with what we've saved. I guess.

Pat: You have just described one of the hardest things that a new retiree goes through. If you question new retirees, like what was the biggest difference in your mental state? One is what did I do with my time and my day? How would...and some people really struggle with it.

And then, the other is I'm having a hard fact getting over the fact that I am no longer actually saving money for retirement. In fact, I might be spending some of it and it's a psychological barrier for many.

I mean I remember working with a guy, he said there's two things that have been really difficult. One Pat is you send me a check every month and I'm not sending someone else a check. And the other is I have been to a grocery store more times in the last 6 months than I have in the last 30 years.

Kevin: That's funny.

Pat: And, he said both of those are troubling. Both of them.

Kevin: Absolutely. I appreciate the insight on the annuity thing because that was one thing I've been hearing a lot about.

Scott: If you had no pension, and frankly if you had a lower risk tolerance, then what appears you've got then maybe, I think we haven't recommended 'em in years just because 20 years ago they were better products than they are today.

Pat: By treasuries. Is that...your risk is that low just by treasuries. Anyway.

Scott: Well that's not a good long-term solution either.

Pat: There is if given the choice between the two.

Scott: Well, I don't know. I'd make an argument that some annuity might be better than the treasury long-term. But, if you're gonna be long-term, then note you don't need the annuity.

Pat: That's right.

Scott: So, anyway. Perfect. Thank you for the call.

Pat: Glad you called Kevin, appreciate it.

Kevin: I appreciate your help. Thank y'all.

Scott: Anyway, wanna let you guys know we've got a virtual investment workshop since the workshop is called The Investment Question. And, we'll be answering the top four investing questions that people like you are thinking about right now.

It's a virtual thing so, you don't have to worry about going in person, but you're gonna learn how to generate income in retirement, how to make the most of cash on hand. Some of the key facts about this Cure Act 2.0 that hedge some changes to retirement stuff and Roth conversions and also some strategies about asset location and diversification and that sort of thing.

So, it's June 20th and 21st at noon and June 24th at 10 a.m. Again, June 20th and 21st at noon. Sorry. These are Pacific Times. And June 24th at 10 a.m. Pacific time. You can sign up at allworthfinancial.com/workshops. Again, allworthfinancial.com/workshops. And, it's been great being with you. We'll see you next week. This has been Allworth's "Money Matters."

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