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

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

Pat: Pat McClain. Thanks for joining us.

Scott: That's right. We've got a good show today because...Well, we always have a good show. But in addition to taking calls, which we'll do...

Pat: Wait, Scott, I'm gonna correct you right there. You might think we always have a good show, but I read the reviews and people have some opinions that would say something else.

Scott: I was sharing my opinion.

Pat: Okay. Thank you.

Scott: Am I not entitled to my opinion?

Pat: Thank you. Yes.

Scott: And I have a microphone?

Pat: That's right. [crosstalk 00:01:01]

Scott: And people can choose to tune this...stop listening.

Pat: That's okay.

Scott: I do read the reviews and...

Pat: Do you have 'em in front of you? What does that [crosstalk 00:01:08]...?

Scott: No, I don't have...I did ask our marketing people if I could read the negative reviews out loud on the program and they said no.

Pat: Why no?

Scott: They said it wouldn't add to the value...

Pat: [crosstalk 00:01:22]

Scott: ...of this show, but I don't know, every once in a while just read negative...

Pat: [crosstalk 00:01:27] there's some crazy people out there too.

Scott: That's right. Some of the things they say are like, really, you're bothered by that?

Pat: Yes.

Scott: And one of 'em is that we interrupt each other too often. Like, well, we get excited about this.

Pat: I know. I mean, we've had complaints to program managers on radio stations because...which was our predominant form of communication up until the advent of the podcast, complaining that we talked chit-chat too much and talk about our personal lives more than we should. But then you talk to other people, that's what they enjoy about the program, how we intersperse it all.

Scott: Maybe I'll do a special podcast...

Pat: And by the way, before we get to this, just, I have two teenage girls in my...It's like an alien invade.

Scott: I don't know where this is going. I just started thinking about my personal life. Our personal life? [inaudible 00:02:20]

Pat: I've got two aliens in my house. You never know who you're gonna get. Maybe it's the sweet girl, maybe it's this alien, what inside the brain?

Scott: What age are they?

Pat: Sixteen and 13. Scott, what were you like at 16?

Scott: I know.

Pat: Was that the purple hair phase?

Scott: That might have been...I didn't have purple hair. I had blue-black hair. Maybe that was 18...17, maybe.

Pat: When did you get the piercings? Didn't you have an earring at some point in time?

Scott: I went to church camp in high school, I came home with pierced ear. My mom was really happy. I came home...

Pat: Church camp?

Scott: I came home.

Pat: I'm just glad they...

Scott: [crosstalk 00:02:55]

Pat: ...didn't have a tattoo place there.

Scott: Maybe I was 15. I came home and I had an earring in my ear. The guy in my cabin pierced me. Stuck, like, an orange or something behind the ear and just shoved the earring in.

Pat: And what kind of earring was it?

Scott: I don't know, some fake diamond or something.

Pat: A beer cap?

Scott: That was the middle of the '80s. Guys were starting to have piercings that...

Pat: Okay. All right. So I'm just...

Scott: [crosstalk 00:03:17]

Pat: The reason I ask this question is just to give you a point of reference that you were an alien at someone's house at some point in time. You were an alien as well.

Scott: Like this sort of thing?

Pat: Yes.

Scott: How disappointed my mother was?

Pat: Yes.

Scott: What a good boy Scott is. I sent him to a church camp. I almost got kicked out of one, one year too, but that's another story. And I come home and my mom was so angry. She says, "I am not gonna speak to you as long as you have that earring in." And I thought I just died and went to heaven. My mom didn't speak to me for a week and a half. She thought it was a punishment. I'm a 15-year-old kid. What 15-year-old kid wants to hear from their mom?

Pat: Okay. I was drinking water right there I almost lost it. So you've got these...

Scott: This has nothing to do with [crosstalk 00:04:02]...

Pat: ...few beautiful daughters there. But they're...Anyway.

Scott: [inaudible 00:04:07]

Pat: Is there anything else...

Scott: There's our interjection on that...

Pat: Is there anything else you need to get off your chest before we actually...

Scott: So...

Pat: ...go onto real stuff?

Scott: ...we may have some comments of, like, "That story's hilarious. It reminds me of my kid."

Pat: That's correct.

Scott: Or there might be someone like, "You guys are idiots. Why don't you talk about the financial markets instead of hearing about...I don't want to care about Scott's earring when he was 15."

Pat: I do.

Scott: By the way, the hole has never closed up. I'm 57. I can still stick an earring in.

Pat: Have you?

Scott: Every five years or something just outta curiosity. I don't wear it anywhere.

Pat: I'd like to...

Scott: Not that there's anything wrong with...I don't care less about it.

Pat: I'd like to see that.

Scott: An earring?

Pat: Yes, I would find that quite...

Scott: Like a big diamond?

Pat: Yeah, like a loop, like a big loop.

Scott: I always find it a little perplexing, like, in the industry we're in, we tend to dress fairly conservative, look fairly conservative. Every once in a while you seen an advisor though, that...like, a guy with a earring or just something a little different. And I'm thinking there's certain people that are just gonna be automatically turned off by you being...

Pat: And maybe their self-confidence is so much...Anyway.

Scott: Anyway, enough of that.

Pat: We're gonna take calls in a little bit here, but before we start there are big tax changes coming regardless of who wins the presidential election.

Scott: Why do you say that?

Pat: Because, let's just describe what's happening. So it's the 2026 sunset of the Tax Cuts Act. These are the Trump tax cuts that he put into office when, believe it was his first two years. It was the Tax Cuts and Jobs Act of...

Scott: Of 2017.

Pat: ...2017.

Scott: But they're sunsetting, automatically.

Pat: In 2025...at the end of 2025.

Scott: Yeah, so for '26 and beyond, it's gonna revert back unless Congress acts. And they can't just put in...cut taxes without having some offsetting reduction...

Pat: Increase in...

Scott: ...something.

Pat: Decrease in spending. Which is why they make these things temporary, by the way.

Scott: Yeah. So anyway, we're having a special guest join us to talk about this. We're joined with Blake Davilar [SP]. And Blake is in our Tucson, Arizona office. He's a certified financial planner. And he started as a young age. I think he started even as a college intern, fell in love with the industry, got all kinds of education, and he's a really sharp guy, young man in our Tucson office. So, Blake, thanks for joining us.

Blake: Yeah, you bet, guys. Thanks for having me on.

Pat: So maybe give us a little background of, like, what were these changes that happened in the Tax Cuts and Jobs Act of 2017, and why should we be worried about them expiring?

Blake: Yeah, thanks for having me on again. And this is one of our favorite topics, often overlooked, the tax planning conversation. Typically, clients are well aware of what taxes they paid last year, and especially around April 15th they're very aware of what taxes they owe. However, we really try to put our thinking cap on and look forward into the future of what the total tax picture looks like, maybe over somebody's retirement looking at 5, 10, 15 years down the road. And of course, we're not in the business of predicting what's gonna happen with future tax rates, but we do know that taxes are pretty darn low today, thanks to the Tax Cuts and Jobs Act back in 2017. To summarize, that act passed, pretty much lowered brackets across the board for everybody. You know, percentages came down, most people now are in the 12%, the 22%, the 24%, the 32% bracket. So those percentages, those different brackets all came down, which helped save [crosstalk 00:08:11]...

Pat: And the percentages...so, like, the average Americans, the typical Americans in a 15% tax bracket or lower, that 15% went to 12%, so a pretty significant cut for the typical Americans.

Blake: Yes, indeed. And, you know, the standard deduction was doubled. And it's estimated out there in the, you know, IRS and different publications that about 80% roughly of Americans saw a tax decrease as a result of this 2017 act. And in order to get that passed through Congress, there had to be some strings attached, like you gentlemen were mentioning a little while ago. And one of those strings attached was that this has an expiration date. And that is coming up at the end of next year, which sounds scary. And, of course, we have an election between now and then. So what we know is that, hey, taxes in 2024 and what we think might be in 2026 are as low as they've been in 50-plus years. And, you know, in all likelihood, they're probably only gonna go higher. Can't say that's for sure, but it sure seems likely with this deficit. So there are some planning opportunities here.

Scott: So you said 2026, so these expire at the end of 2025?

Blake: Correct.

Scott: Okay. All right. So the idea behind this, the one actually that I spent time on with my clients, anyone with significant net worth is this estate tax exemption. And they're like, "Well, what's the big deal?" This number is the highest number that you could pass on tax-free to you heirs either while you're living or when you're dead that we've probably seen in...

Pat: Who knows?

Scott: Who knows? When we first started in the business, what was it?

Pat: $600,000?

Scott: $600,000. And today it's almost $14 million per individual. And so what happens with that, Blake, at the end of 2025?

Blake: Yeah, things stay as they're projected to go. It's gonna drop to about $7 million. So it'd be cut in half just about per person.

Pat: So a married couple would be $14 million?

Scott: But it could go lower.

Blake: Could always go lower.

Scott: It could go lower. These will expire. That absolutely is going to happen.

Pat: And which would mean a tax increase for roughly 80% of the Americans who received the tax decrease in the past, right?

Scott: That's a great way of looking at it, here comes a tax increase.

Pat: Well, that's what's gonna happen.

Scott: So what do you do in that time period? How do you take advantage of this?

Blake: Well, tax rates are on sale is another way to think about this today and next year. So filling up those lower brackets. If you find yourself in the 12% bracket, why not pay taxes today at a 12% rate when we are pretty confident it's gonna go to at least 15% in a couple of years? So locking in today's low tax rates through strategies like Roth conversions or looking at accelerating some income from different sources and different accounts, etc. at today's low rates, which of course is counter to what most accountants and CPAs out there will tell you. But it's just smart tax planning to look at Roth conversion specifically. And what we care about as planners is our clients paying taxes at their lowest rate. So that in most cases, 12% is a pretty darn low tax rate, even 22% and 24%. You know, we do a lot of tax planning and those types of brackets as well to look at some of those strategies.

Scott: My guess is nothing's gonna be solved in 2025, it's gonna spill into '26 before Congress finally gets something passed through. My guess is, at a minimum, there's not gonna be a lot of damage to lower income or the typical American family.

Pat: I would agree with that. Maybe a little bit. Maybe a little tax increase, but not much. What I don't know about is those top brackets. There's already talk about...I mean, Biden wants the capital gain tax rates to go up to the 39.6%.

Scott: Same as ordinary income.

Pat: Yeah. So the question is, is the fix that Congress is going to do at the time going to really hammer higher income tax? And to the point of the state tax, it could go lower. As part of a negotiations it could be that let's bring the state tax exemption back to $5 million or $4 million or $3 million.

Scott: That's right.

Pat: Or $2 million. It wasn't that long ago, it was...

Scott: It wasn't that long ago. And dead people very rarely complain. That's just the reality. Blake, when I talk to my clients about the estate tax, what I tell them is, "Look, you need to work with an attorney to actually set this up, but you don't have to fill in the number yet. You don't have to fill in the number." And it doesn't mean...So if you've got a net worth of $5 million or $6 million, you may wanna get some of that outta your estate while you're alive and through an outright gift, you just give it to, you know, your heirs while you're alive so you get that out of your estate, you use part of it, or you could use the all sorts of trust. But if you're gonna use a trust, you wanna engage an attorney now.

Blake: Yes.

Scott: Right?

Blake: I'm guessing their line at their office is gonna start forming as we get closer to the end of 2025.

Pat: I think the bigger issue I've heard from attorneys is the appraisers, not like a home appraiser, but like...

Scott: Business.

Pat: ...business appraisals.

Blake: Yeah.

Scott: Right? So let's say you're a family business, this is where it's really challenging, right? You've got a family business, maybe it's multi-generational family business, your kids are working in the business, the plan is for the business to continue, but the business of itself is worth quite a bit based upon its revenue and income. It could be that in the family, there's not tons of excess cash sitting around. But suddenly, if we go to where the exemption's way below the business value, when Mom and Dad pass away...

Pat: You've gotta...

Scott: ...those estate taxes are gonna be due.

Pat: You've gotta scratch a check where it may make sense for you to actually give away part of the business no, while these numbers are...

Scott: That's right.

Pat: ...really high, right? And these are rich people problems, by the way. These are 100% rich people problems.

Scott: Well, you still wanna be a good steward of the assets you've got.

Pat: Correct. There's no question. So I have had clients that are on the fence, and when they know that they're actually never gonna run outta money in their current lifestyle, this is when they start gifting. And sometimes it takes a couple of years of you saying, "Look, this is..." You know, as long as you have got enough to cover for long-term care, as you age, your disposable income actually goes up because of the fact that you're not...I've got clients in their 80s and they're like, "We're not traveling anymore. We're done. We can't do it. We're not...

Scott: Or...

Pat: ...consuming as much."

Scott: ...it's not so glamorous...

Pat: Yeah.

Scott: ...in the airport, getting on the plane.

Pat: "We're not consuming as much. We're not buying new cars, we're not...And that's where the gifting really, really comes in. Even, you know, for people that have estates of $3 million, $4 million, $5 million, well below this limit. But Scott, I have no idea where this is gonna go. Not a clue. Nor does anyone else.

Scott: So some people listening to this, like, "My net's worth $3 million, so I'm not gonna worry about this," which is probably safe. And I don't know, there was the automatic spousal exemption. I don't know, was that part of the tax act?

Pat: I don't remember.

Scott: It used to be you had to fund a bypass trust, you had to have it structured in a trust ahead of time.

Pat: I don't know the answer to that.

Scott: I don't know the answer to that.

Pat: It's worth looking into though.

Scott: But how about on required minimum distributions, Blake, like, what are the implications here with this?

Blake: Sure. Well, you know that this is another tax act, the SECURE 2.0, which increased the age to 73 now for those RMDs and it's set to go up by a couple of more years here in the future. But markets have been pretty good, IRA balances, 401(k)s, those types of assets have appreciated nicely the last 5, 10 years. And clients that are approaching age 73, so maybe they're in their late 60s, early 70s now, and they're looking at that RMD projection and going, "Wow, like, you know, I've saved all this money in a 401(k)," you know, like you said, they might have a net worth around 3 million bucks and all of a sudden that first year RMD might be up around, you know, $75,000, $100,000, couple hundred thousand dollars depending on your balance there and those pre-tax accounts. And it makes a whole lot of sense to look at doing some of those conversions now, especially while tax rates are low to lock in the lower rate, you know, have a little tax-free Roth that's growing for the next 5, 10, 15 years for your estate and for your family and etc. And that really helps save on taxes come age 73 when, likely for those clients, tax rates will be higher, right? So...

Scott: And Blake, is this the kind of planning that you've been doing with your clients?

Blake: Yes, sir, pretty much daily around here.

Scott: So the interesting thing, after the election, we will have better visibility. But you said that you don't think Congress will...We don't know.

Pat: We don't know.

Blake: I usually take the under on a Congress passing clause.

Scott: But look, going through the planning and if the rates stay the same, you still haven't lost anything.

Blake: Yeah, exactly.

Scott: Right? There's no downside to actually going through the process. There's absolutely no downside.

Pat: Quite a few people are still gonna wanna do some Roth conversion this year...

Scott: Well, there's no question.

Pat: ...or maybe even take a distribution...

Scott: There's no question.

Pat: ...or maybe take a charitable distribution from your retirement account at the age [crosstalk 00:18:42].

Scott: So Blake, let me ask you personal question. How old are you?

Blake: I am about to turn 29 here in about a week.

Scott: So you started as advisor when you were 21, 22?

Blake: As an intern when I was 19 years old.

Pat: Nice.

Scott: And so I had some friends...

Pat: And you work really closely with Brian Murphy? And how old's Brian?

Scott: Brian is 66.

Pat: It's pretty common with our...

Scott: [crosstalk 00:19:12]

Pat: ...structure at Allworth is we've got...

Scott: Senior advisors.

Pat: Yeah, I'll share this once we're...

Scott: Okay. Well, anyway, Blake, thank you for joining the show. I appreciate you, and thanks for being a team member at Allworth.

Pat: You're great. We Appreciate it.

Blake: Thanks, guys. Have a good day.

Scott: Yeah, appreciate it.

Pat: Thanks.

Scott: So last Friday of the date I'm recording, last Friday I went to a retirement party of one of our advisors. And so I went there and talked to...They had an open house for a few hours, people can come, and it was really nice. They had a big, giant card, everyone signing the card and taking photos and whatever, nice little party. But I'm talking to his clients, the ones that he'd been working with for years. They all loved him, of course, that's why they were at the party. Maybe not all his clients, but the ones who showed up obviously loved him and, "It's such a bummer he's retiring," which I understand from their perspective, but the reality is your advisor you're working with now will either die or retire at some point in time.

Pat: This is correct.

Scott: We all know that.

Pat: This is correct.

Scott: Which is, like, one of the reasons, like, in our organization we make sure we've got a team of younger advisors to maintain that continuity.

Pat: Which many of them start as interns in college. There's a path, right? There's a path for two reasons. One is we get to see what they're like and they get to see what we're like, and then whoever makes the cut, they work through the system. A younger advisor teamed with the wisdom of older advisors is really what you want. You want the energy and the wisdom.

Scott: Yeah, that's right.

Pat: But it's hard to get it all from the same person, right, because when I was 29, I didn't have a lot of wisdom. I did understand the rules and how to navigate 'em, but maybe I wasn't great at explaining it or didn't exude enough confidence, whatever. But the wisdom of the older advisors, it's invaluable. So I had friends of mine...

Scott: Well, a good firm like Allworth, I know how Allworth works pretty well, I don't know about how all firms, but we are very much team-focused.

Pat: And you want it to be.

Scott: Our advisors run ideas by other advisors and...

Pat: Yeah, it's collaborative. So enough about that.

Scott: I remember, Pat, when I was maybe a couple years outta college and hunting for clients, you know, it's really hard when you're just trying to start, at least back in those days. And it was a family friend that I was meeting with and obviously I'm trying to convince them that they should hire me. And he says, "I'm so glad you're young." And I kinda looked at him strange and he said, "My dentist retired, my CPA died, my doctor retired." He says, "At least I know that you're gonna be around until my dying day." He liked the fact that I was young. So at that point on, whenever I was talking to a potential client, "Let me explain why it's so beneficial...

Pat: Why I'm young.

Scott ...to me.

Pat: Why it's young.

Scott: Anyway. But we love having our young youthful advisors with us helping us out. Look, this tax act, it's a big deal. But to your point, like, come November, post-November, if we have a Democrat president and Democrat controlling the Congress, we could probably assume, like, taxes for particularly the high end are going up.

Pat: Yes. And then the estate tax exemption...

Scott: Going up.

Pat: ...is coming down.

Scott: Yeah, the exemption's coming down, which means that...And the rate of estate tax is gonna revert back to a much higher rate...

Pat: Which is higher.

Scott: ...which is 55% or something? It's 40%...

Pat: It's a big number.

Scott: It's a big number.

Pat: It's a big, big number.

Scott: Oh no, it's massive.

Pat: Yes. Yes.

Scott: And if we see a Republican...

Pat: House.

Scott: ...president and Republican control both sides of Congress, you could probably assume that they're gonna be...

Pat: Extended. But if there's a mix? Who knows.

Scott: Yeah, it's pretty...

Pat: But there's no downside in it. There's no downside.

Scott: Into what?

Pat: In going through the planning and the Roth conversions or even setting up...

Scott: Well, some of it just makes sense regardless.

Pat: Yeah, there's no downside. That's the whole point. There's a lot of upside, but no downside in going through the process.

Scott: So unless you take time on something that doesn't...You spend a lot of time, that is a downside. I mean, I could plan, like, how would I respond if a missile lands in my next door neighbor's house?

Pat: But if you go through the planning, you're going to use some or all of it.

Scott: It just reminds me back when COVID was first starting to become like, "Well, this might have an implication on us all." And I remember we had a meeting with our chief technology officer four days before the lockdown.

Pat: That's right.

Scott: So we're in California, Santa Clara County, which is Silicon Valley, first county in the country to lock down. We were pretty close...

Pat: And we had offices down there.

Scott: Correct. And so our chief technology officer, he was one of the kind of early...

Pat: He thought...

Scott: ...early on what?

Pat: He thought that this thing was gonna [crosstalk 00:24:33.442]

Scott: So I remember this...I remember we had a meeting and we're talking about...And he's going through all these different possibilities. And I said, "Addy [SP], we can't make plans on 15 different possibilities." I said, "Why don't we just discuss worst-case scenario, should that ever come to that? What's the worst case scenario?" "Well, worst case scenario is lockdown, like, they're doing [crosstalk 00:24:51]."

Pat: A complete lockdown.

Scott: I said, "Okay, then maybe let's plan what might happen."

Pat: And he did.

Scott: Well, it was four days later, we had the lockdowns.

Pat: Yeah, and what we did was we were able to get it so everyone could work remotely within. And the problem, as soon as that hit, then many businesses responded. We actually had the equipment that we could go remote.

Scott: Yeah, we used...

Pat: Anyway.

Scott: ...outside servers and everything else.

Pat: Let's go to the calls, Scott. By the way, if you want to join us, you can join us at questions@moneymatters.com. Send us an email, questions@moneymatters.com. We're talking with John in California. John, you're with Allworth's "Money Matters."

John: So I had sent in a question about, I'm holding about 40% of my nest egg portfolio in cash that's paying 5% in a money market account.

Pat: Okay.

John: And I just wanted to get your guys' take on how smart is that relative to the idea that if and when we have a market downturn, I'll have some cash to be able to deploy when prices are low?

Scott: Got it. And how old are you?

John: I'm 62.

Scott: And how long has this money been in cash?

John: About a year.

Scott: And what was it in before?

John: A whole mix of stocks and ETFs and it was pretty well-diversified.

Pat: And why did you increase your cash exposure?

Scott: Like, what happened a year ago that told you that the market was gonna fall and that you should have money in cash?

John: That's not an easy question to answer. Try to give it some background. So I took an early retirement four years ago, right before COVID. My wife and I have a pretty nice nest egg, and I decided that I was gonna do some trading and investing in the stock market rather than commuting to Sacramento for a regular job for the next 10 years. So I've spent the last four years doing a lot of swing trading, option trading, using about a third of my portfolio for my trading account, and the rest of the stuff is just the same kind of, you know, incredibly diversified stocks and funds. I've been moving a lot more of it into sort of, like, dividend-producing items to increase our income. I collected Social Security just recently. My wife is on Social Security. We both have a pension. We have guaranteed lifetime medical care through my career with the state. And so our income is solid. We have a nice nest egg. I'm making money.

Scott: Okay. So what a year ago told you that the markets were gonna go into turmoil and that you should move 40% to cash?

John: Well...

Scott: There was something...

John: ...[crosstalk 00:28:09] thousand dollars...

Scott: How much?

John: I had a couple hundred thousand dollars that I inherited from my...when she passed. And so I took that and some other money and I just decided that with the rates the way they are on cash, I'll just collect that 5% and then I may have an opportunity in the next couple years. You know, if I had had this cash before COVID hit, I could have made a killing.

Pat: I know. But if I had bacon, I could had bacon and eggs if I had eggs.

John: Right.

Pat: Right? So we could make up every scenario in the world that says that this had happened, this is what I would've done.

Scott: The reality, John, I'm gonna be very blunt with you, is you sold out a year ago, 40% of your portfolio and missed out a tremendous run. And the way the stock market gains work, it's these short periods of times with the massive run-ups, it's not like every month it's gonna, I mean...

Pat: But in saying that, Scott, in his defense, he said he's got a nice state pension and Social Security and he doesn't really need this money. Is that correct? Is that what I heard from you? That if this...

John: Yes.

Pat: ...money all went away, you'd be fine.

John: You mean the cash?

Pat: These investments...You have enough Social Security and pension income coming in that if all this money that you're trading in and moving around in the markets went away, you'd be fine. Is that what you told me? I didn't say...

John: In general...

Pat: ...whether you'd be happy, I said you'd be fine.

John: Yeah, so in a general sense, I think the answer is yes, but I'm not sure I fully...

Pat: Okay.

John: Are you saying that if all my investments went to zero...

Pat: That's right.

John: ...my pension and Social Security would pay my...?

Pat: That's right.

John: [crosstalk 00:29:57] your question?

Pat: That was my question.

John: Okay. So, I mean, I guess I would be able to scrape by, probably, but I don't think that $1 million worth of assets is going to zero.

Pat: Okay. Well, listen, the way you're managing it, it could.

John: Yeah, I guess I don't see it that way.

Pat: Okay. Well, look, so you get a pension from the State of California, are you secure that...are you pretty confident that that pension is well-invested and will provide income until your dying day?

John: I'll receive it for the rest of my life, I believe.

Scott: Your pension from the State of California is managed by California Public Employee Retirement System.

Pat: Can you imagine if you found out that CalPERS had 40% of the portfolio sitting in cash?

Scott: And that they were trading options on the large portion of it? My point being is this is retirement...

John: I did it [crosstalk 00:30:52]...

Pat: This is retirement income.

John: I did it.

Pat: You're not treating it as such. You're not managing this money in a professional, responsible manner. That's just the reality. Would you hire me...you come into my office and you say, "Pat, here's my million dollars, what are you gonna do with it?" And I say, "Well, listen, John, here's what we're gonna do. We're gonna do some options and put in some calls and this on the market, you know, because I read some stuff. And by the way, when we just for some reason decide that the market possibly overvalued, we're gonna move a bunch of it to cash and including new money that comes in and we're just gonna wait for a buying opportunity at some point in time." Would you hire me?

John: Probably not.

Pat: All right. There's your answer. That's what you just did. And so my point being is that, look, if you're gonna manage it yourself, you're gonna have to take responsibility and act professional about this. And professionals aren't just doing wild...Excuse my language. Am I allowed to say that?

Scott: I think you are now, I don't know.

Pat: Things with their portfolio, 100% serious. So why don't you do this, read up a little bit...if you wanna manage it yourself, which sounds like you do, read up a little bit about how professional pension funds manage money, professional pension funds. And less than, you know, you get a check every month from the largest pension plan in the United States, if not the world, California Public Employee Retirement System. And they don't have 40% in their cash. Everyone on their board of directors, including their chief investment officer, would lose their job if at any point in time their portfolio was 40% in cash. So your question to us is, you're hoping that we would justify this 40% in cash? I can't. I can't even justify...

John: And that's fine. I appreciate your opinion.

Pat: Thank you.

John: I'm happy to receive the 5% that I'm getting. I'm doing reasonably well with this, you know, crazy idea I had where I can generate some profits by trading the markets on my own...

Pat: Relative to what?

John: I've learned a lot over the last four years, you know, and so I'm averaging about $3k a month in gross profits on my trading account.

Pat: Off of how big of an account? It's irrelevant. We...

John: $250,000.

Pat: ...understand. Okay. All right. Well, okay. Well, then continue forward. We wish you well.

John: And we have solid income sources.

Pat: Perfect. Well, sounds like you're fine.

John: And the 5% on cash is a nice payment.

Pat: Perfect. So we gave you...

John: [crosstalk 00:33:50] So that was why I asked the question.

Pat: Perfect. Sounds great. We wish you well.

John: All right. Thank you.

Pat: We do appreciate the call. Yeah, thanks, John. Do appreciate the call. One of the reasons on options. Options are a zero sum game. Really no different than the way blackjack works at the casinos, right? I think we all understand you sit at the table long enough.

Scott: Well, they're less than zero because there's friction in the trade.

Pat: That's correct. And the house gets a little bit...It's the same thing that happens in the options market. So if I am writing a put, someone else is buying it on the other side, we both can't be right.

Scott: That's correct. If I make a dollar, the other person loses a dollar.

Pat: Yes.

Scott: Then some because there's some...

Pat: There's some transaction...

Scott: ...transaction cost.

Pat: The transaction cost.

Scott: Which is very different than if Pat and I have decided let's go both buy this individual stock of a company...

Pat: We're not betting, we could both win.

Scott: We could both win.

Pat: We could both lose.

Scott: And we can both lose. And sometimes when people do trades, if you're in a time where the market goes up...I'll give you a prime example. 1999, the Nasdaq was up 85% that year. You remember that, right?

Pat: Yes.

Scott: And I remember...

Pat: It was a terrible time.

Scott: I remember a guy coming in and he was bragging about how he was day trading. That's when day trading really kind of took off, day trading and how he made, like, 75% previous year in the market.

Pat: Okay.

Scott: All tech stocks.You can see exactly where I'm going?

Pat: Yes.

Scott: Bragging about how well he did. I said, "You could have just bought the index and you would've done better." But he thought he did great.

Pat: That's why I said, relative to what?

Scott: Right. What happens when the markets go the other direction?

Pat: Yeah, I think we know the answer there. Anyway. We're now talking with Debra. Debra, you're with Allworth's "Money Matters."

Debra: I have a twofold question in reference to stocks.

Pat: Okay.

Debra: Not a particular stock, but my financial situation is very good. I don't have any debts or financial concerns. I have a pension, I manage a portfolio, which is about 100% equity with some treasury bills and I bills. But what I'm interested to know is what percent of a portfolio is appropriate to be dedicated in a specific stock? And related to that, does that answer differ based on the value of the portfolio, and if so, how?

Pat: That, you answered the question for us by that last statement you made. So imagine this, I'm worth a billion dollars. All right? Let's say I'm worth...

Scott: No, you're not.

Pat: I'm not, but let's say I'm worth a billion dollars and $500 million of it is tied up in...

Scott: Your company.

Pat: ...the company I started that is now publicly traded, which is how I became a billionaire. And $100 million is tied up in my palatial estate on the shores of Lake Tahoe in Incline Village on Billionaires Row. And the other $400 million is in a diversified portfolio. Is that $500 million too much in that particular company stock?

Scott: Half your portfolio? Not necessarily.

Pat: Yeah, because I'm worth a billion dollars...

Scott: You can afford to lose it.

Pat: If I'm worth a million dollars...

Scott: Then it's a different story.

Debra: Right.

Pat: And so from a mathematical standpoint, it's about 16 to 20 stocks to diversify away from one...That's assuming you're also diversifying on industries. But to diversify your risk away from one company to where now you have more of just an overall stock market risk as opposed to risk dedicated to one individual security. So your situation, how much of the portfolio, what's the size of the portfolio and how much is in any one individual stock, and is it inside an IRA or outside an IRA, and what are the capital gains implications in actually selling that particular holding?

Debra: Yes, I've looked at those things.

Pat: Do you have one stock that creates a substantial portion of your portfolio?

Debra: About 9% including both my non-IRAs and my IRAs together.

Scott: Was it a company you used to work for?

Debra: Nope. And it's a company that I have the holdings, as I said, in both my Roth and my non-Roth IRAs. And it has...fortunately, I invested more in the Roth IRA, so it's really in a good position for me to continue holding that. And the other one, if I sell it, of course I have to deal with the capital gains.

Pat: I mean, even if you wanted to pair your exposure down, you would do it inside your Roth and not the others so you could avoid the tax.

Debra: Right.

Pat: From your portfolio, what percentage are you taking out each year for living expenses?

Debra: Basically nilch.

Pat: Okay. Then you're fine.

Scott: Yeah.

Pat: You got a pension, I mean...

Scott: Wouldn't bother me at all. And you said that if that whole holding went away, 10% of your portfolio is wiped out tomorrow just because that company turned into Enron, would it devastate your financial situation?

Debra: No, it'd make me sad and make me feel stupid...

Pat: No.

Debra: ...but no.

Pat: No? I wouldn't worry about it. Obviously there's enough there you could live without it. That's...

Debra: That's right.

Pat: That's what we're going to. Now whether it's the right financial thing to do or not, that's a completely different question.

Scott: What do you mean by that?

Pat: Well, no, because you wanna do it, but I don't think it's wise to hold 10% in a particular company stock, one company's stock. I wouldn't do it.

Debra: And it wasn't by design, it was because of the growth of the stock.

Pat: Which would cause me even...How long have you owned the stock?

Debra: Seven years.

Pat: What stock is it?

Debra: Nvidia.

Scott: It seems to me that that company's priced for...

Pat: Wow. And by the way...

Scott: It's all priced in. Anything that you know about, everyone else knows about.

Debra: Right.

Pat: I'd trim at least 25% of the portfolio.

Debra: Of that 10%?

Scott: Yeah.

Pat: Yeah. I have been in these situations with clients. I cannot tell you how many times...I can't even...Lucent Technologies, [crosstalk 00:40:30.707]...

Scott: It doesn't matter. They're all hot stocks.

Pat: ...all theses hot stocks that have gone up by 500%, 600% and I say, "You know what, we'll sell half of it," and then we're right.

Debra: And that's what I've historically done [crosstalk 00:40:48].

Pat: Have you trimmed this portfolio, this Nvidia at all out of the portfolio?

Debra: No, I have not trimmed Nvidia. No.

Pat: All right. You know what to do.

Scott: Yeah.

Debra: Yeah, thank you, guys.

Scott: All right, Debra.

Debra: Have a great day.

Scott: Yeah, appreciate it.

Pat: And we're now talking with Al in California. Al, you're with Allworth's "Money Matters."

Al: Hi, how are you?

Pat: We're great. How you doing?

Al: Just fine. I'm a retiree and I have a two-part question. First part is I have a CalPERS pension and I'm concerned about given the state's finances, the budget deficit and instability, geopolitical instability, you know, potential China invasion of Taiwan and escalation of Ukraine War, how that might affect the state in the long-term economics of the state. And wanna know just how the current distributions of pensions are sensitive to the state's financial picture, the governments.

Scott: How underfunded is PERS right now? Do you recall, Pat?

Pat: It is underfunded.

Scott: I don't know where it's sitting right now.

Pat: Yeah, that isn't so much the question, it's if it was, would they affect the ongoing pension distributions to...How old are you?

Al: Sixty-seven.

Pat: Sixty-seven?

All: Mm-hmm.

Scott: I mean, first of all, if I were in your situation, I wouldn't spend any time worrying about it.

Pat: I would agree with that.

Scott: One, you have no control over it. It's not like you can take your pension and go somewhere else with it.

Pat: And two...

Scott: You can't say, "Please gimme the cash that you've set aside for me and I'm gonna go move it to somewhere else."

Pat: And when you should start worrying about it, there'll be an indicator and that indicator will be that they will go to existing employees and say, "Oh, by the way, you know, you used to be able to retire at 55 and get a pension. You can't retire until you're 60 and get a pension. It used to be 1.5 times your years of service. Now it's 1.3." So there are so many...

Scott: Plus...

Pat: ...steps that will go through...

Scott: ...the increased employer contributions.

Pat: Yes, employer contribution.

Scott: Employee, I'm sorry. Employee contribution.

Pat: So before they touch the beneficiaries that are receiving checks right now, they will go through a series of steps. You asked my opinion. They will go through a series of steps to actually try to lower the ongoing pension liability by changing the payouts to those people not yet receiving the benefits. Now, we've already started seeing this happen in some districts around the State of California. And for the rest of the listeners around the U.S., we're more familiar with CalPERS because...

Scott: [crosstalk 00:43:43]

Pat: ...we're located here and we're in the state capital where it's being managed. They've already started with some districts, fire districts, water districts that have changed the benefits to the new employees versus ones that had started four or five years ago. You should worry, not that you could do much about it, when they actually go back and start changing benefits to people that those have been promised. Now, technically in the State of California...

Scott: You can't.

Pat: ...you can't. But that was a law that was put into place. It doesn't mean it can't be changed. Okay. That was the first part of your question. What was the second part?

Scott: But when I think about probabilities though...

Pat: Very low.

Scott: So low.

Al: Okay.

Scott: I mean...

Al: [inaudible 00:44:31]

Scott: ...I wouldn't lose sleep. Like, there's a lot of political uncertainty right now. There's often been times of a lot of political...I mean, we've got a couple wars going. This isn't the first time. I mean, if you think about other periods of times, it's much worse...

Pat: Oh, yes.

Scott: ...than what we're facing right now. So I wouldn't...And maybe China invades Taiwan, I hope not, maybe so. But I don't think the world's gonna come to an end if that happens either.

Pat: Might for Taiwanese, but not for the rest of us. Second question.

Al: Okay. Well, assuming or let's say that Republicans take over entire federal government, executive, legislative, and they already have the courts, what kind of changes can we expect in Social Security?

Pat: None of that would bother me as much as what your income is. So if there's going to be a change in Social Security benefits, our opinion, and I speak for Scott here as well, that it will affect those of either high net worth or high income.

Scott: We have no idea what's gonna happen.

Pat: But that...

Scott: But we all know that the trust fund is gonna run out in around 2034.

Pat: Regardless of whether the Democrats, Republicans...

Scott: Ten years from now.

Pat: ...Libertarians, parties to be named at a future date are in charge.

Scott: Currently, there's a statutory across the board cut of about 24%, somewhere in there.

Pat: It won't happen because you can't take away 24% of a 78-year-old widow who's making $1000 a month in Social Security and send $4,000 a month to a 65-year-old multimillionaire. Just it would never fly. What is your overall income and what is your net worth?

Al: Income's about $140,000, $150,000.

Pat: And what's your net worth?

Al: And net worth of real estate and everything about $2 million.

Pat: All right. But you're taking Social Security now?

Al: Right.

Scott: All right. You might be affected not in the near term...

Pat: It's 10 years out.

Scott: But not for a long time, if at all.

Pat: And we've heard so a democratic senator from Oregon had proposed taxing on...reducing benefits for those making over $100,000. Then you go to the other side, Chris Christie had also had said those making over $100,000 should have reduction of benefits.

Scott: So it's not a Democrat/Republican issue. I think when we get close to that cliff...

Pat: Then it will be...

Scott: ...neither party's gonna wanna see a 78-year-old widow on the television talking about how she can barely survive any longer.

Pat: But they may say, "Look, Al's making $140 grand a year, he is got 2 million bucks, Al could take a little bit of a haircut. And quite frankly, Al, you can. You don't want to. I can, but...

Al: But it all depends...

Pat: ...I don't want to.

Al: Well, I wouldn't die if I get cut off at the...

Pat: No, but you won't have anything to do with it and that time probably will come but it won't come until the final moment, until...

Scott: Or even couple months after the final moment, the wait. So appreciate the call.

Pat: Yeah, I wish you well.

Al: [inaudible 00:47:42]

Scott: Well, it's been fun being here in the studio with you, Pat, as always. Hope our listeners have enjoyed it.

Pat: Yes, and nice catching up with you again, Scott, as we talked about our personal lives.

Scott: Anyway. This has been Scott Hansen and Pat McClain of Allworth's "Money Matters."

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