Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investment, 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: Yeah, glad you're with us as we talk about the world of finance. We're both practicing advisors, and we meet with people.

Pat: Similar to you.

Scott: And we've been doing this show for almost 30 years, helping people with their...

Pat: Long time. All right. So, Scott, there's a couple of things I want to talk about in the world of finance, which is the S&P 500 exits the longest bear market since 1948.

Scott: I saw the headline. I'm like, the longest bear market.

Pat: In terms of length of time, I guess, and there were no bells or announcements when it exited. There were lots when it entered. And then the other thing I want to talk about which I found fascinating, which are these zombie mortgages.

Scott: I read that article as well.

Pat: Zombie mortgages. I found that absolutely... I think I keep up on this stuff, but when I read this article...well, let's talk about it now.

Scott: Yeah.

Pat: Okay.

Scott: S&P, the bear market's boring. This is pretty interesting.

Pat: This is really interesting.

Scott: If the markets go through ups and downs...

Pat: It's gonna happen.

Scott: Yeah.

Pat: And remember, why...let's finish up on the S&P 500. It goes up and down, up and down. It enters the bear market. If you ask...

Scott: Whatever bear market is.

Pat: Yeah, down 20%.

Scott: It's a made-up term. Yeah, we make it up. It means nothing.

Pat: And so it's up 20% from its bottom. But who would...in the midst of all the turmoil that's going on in the political environment, the economic environment, the bear market comes to an end. Blah blah blah. All right, now...

Scott: And this means nothing either. If you look at the S&P 500 after exiting a bear market, which we just did 1 week or 2 ago, on average, the 1-year return is 9.3%. It's the average. The median is 13.1%, and it's positive 61% of the time. Well, guess how often the market's positive. Sixty-one percent of the time. And what's the long-term average? Ten percent. Like, there we go.

Pat: So thank you.

Scott: So nothing.

Pat: Thank you. So these...

Scott: And by the way, anytime you think you found something with some correlation, it's gone.

Pat: These are zombie mortgages. Zombie mortgages are...this goes back years and years during the great financial crisis when many homes went into foreclosure or loans were reworked.

Scott: Yeah. So think back...this is really interesting, right? If you think back to the early 2000s, mid-2000s, before the financial crisis, that's where a lot of these came from, right? And people were buying homes. If you remember back, fog a mirror. You don't even need to fog a mirror if you can just sign a document.

Pat: Yeah, they call them liar loans or no documentation loans.

Scott: And oftentimes, people would use the first and the second to get the loan to get the house.

Pat: And they call them piggybacks.

Scott: Or you saw people who's...they put nothing down on a house, the house went up in value. A year and a half later, they took a big line of credit on it so they can buy a boat and kinda, like, escalated, whatever.

Pat: Right?

Scott: That's the kind of thing that was happening before the financial crisis. The financial crisis hit, and many people reworked their mortgages.

Pat: Existing mortgage.

Scott: And thought that the second mortgage just went away because they no longer made payments on it.

Pat: So let's say a house was...let's say someone paid $300,000. Let's say they paid $400,000 for a house, and they financed...let's assume they financed 100% of it back in the day, right? So a $400,000 loan. And then let's assume, a year later, they took out a $100,000 home equity loan...

Scott: Because it went up in value.

Pat: ...because the house is worth $600,000. That's exactly the stuff that went on, right? Then the market tanked, home values fell to 350, and the homeowner is like, "Wait a minute, the house is worth less than the mortgage balance." They go into the loan company, said, "You need to rework this loan, otherwise, we're going to walk away."

Scott: And that was the first loan.

Pat: Correct. So they'd work with the bank. The bank said, "Okay, we're gonna lower your principal amount. And here's the new payment." Because the bank didn't want to have the house go into foreclosure. But the second...the line of credit of the second mortgage, they're second in line. So there was no equity left. They're like, "What do we do?" They did nothing.

Scott: They did nothing.

Pat: Including communicating that we still have a lien on your house.

Scott: Yes. Like, this debt still exists.

Pat: That lien, it was never removed from title. That lien still remained.

Scott: And in fact, not only did that lien remain...

Pat: They just gave up trying to get payments from people.

Scott: The interest rate kept accruing on that loan, 10 years? Twelve years? What did that mortgage company do with that loan? What did the financiers do with that loan? Oftentimes, they sold them for six cents on the dollar, seven cents on the dollar, eight cents on the dollar to other finance companies. And why would this company buy a $100,000 mortgage, second mortgage, on a house that had no equity and pays $6,000 for it or $7,000?

Pat: Well, they know that there's gonna be maybe 1 out of 10 they're gonna be able to collect on.

Scott: And at some point in time, those people are gonna stay in that home.

Pat: And the home is gonna increase in value, and there might be equity again.

Scott: And there might be equity again.

Pat: And that's where we are today.

Scott: And so people are now getting contacted by a lending institution that they borrowed money from for the second loan, second mortgage, third mortgage line of credit that's 15 years old. And they're being told, "Hey, you know that 100 grand you borrowed? You owe to us now. And it's not 100 grand. It's $240,000. Oh, and by the way, we're going to foreclose on your house. You know why? Because you've paid down that first mortgage."

Pat: And now there's equity.

Scott: And now there's equity.

Pat: So you either pay us or...

Scott: ...or you work out a payment plan or we're gonna take this house. And some of these people, it's mandatory.

Pat: Oh, yeah. I mean, I wouldn't wanna be in...personally, I wouldn't wanna be in that business. It sounds nasty.

Scott: Yes. I understand why it exists. But part of the problem for some of these people, Pat, is that loans, oftentimes, are resold in the secondary market to a servicing company. So you might have gotten a loan from one of the big quickener, whatever, and it could have been sold, particularly back in the day, sold to a servicing company. Well, some of these people, it was the same servicing company that did the first and the second. And so when they went through the process, dealing with ABC Financial and having ABC Financial rework their loan, they assume that included both the first and the second. And then because of the second, they even quit mailing to them.

Pat: They just said, "What's the point?"

Scott: But that lien never left, and that debt...that signature that somebody put when they took the money, that was then recorded on the property. That never went away.

Pat: It's a lien on the property. So you might have borrowed money from Washington Mutual, thinking, "Washington Mutual..."

Scott: They went bankrupt.

Pat: They sold to Bank of America. "Oh, by the way, they worked my loan out." They may have worked one of your loans out, but it'll be interesting to watch. Watch what will happen.

Scott: And if you're listening, you think, "I wonder if that impacts me or one of my family members."

Pat: You can go and look it up.

Scott: Just do a search on your...see what liens are on your property.

Pat: That's right.

Scott: That's public record.

Pat: Yes, you can look it up. You can look it up. I found it just absolutely, like, fascinating. I thought to myself, "This is amazing. These guys are that patient," the investors that bought these loans.

Scott: Well, no one's gonna just throw them away.

Pat: Well, that's a good point.

Scott: Right?

Pat: No one just said, "Shred them."

Scott: I mean, think about if you're the mortgager, because, obviously, we're all thinking right now from the homeowner.

Pat: That's right.

Scott: Because it sounds disastrous and predatory to use them. But you think about it from the finance company.

Pat: They lent the money.

Scott: They put out this money, and they had to take a loss, Pat, from 100,000, now they're thinking like, "We're probably not gonna get anything out of it." But why would they just walk away completely? They're gonna market to markets, and they're gonna say, "I'm gonna a financial loss internally."

Pat: But we can get something out of this.

Scott: And if there's someone out there that's going to say, "I'll give you a penny," it's more than nothing.

Pat: It's more than they have now.

Scott: So you're gonna sell it, and then that person, the company who bought it, like...

Pat: Well, my point is the company that bought it, they're very, very patient investors.

Scott: And I remember when I was in college, I had a friend of mine, his family owned a collection company, and it was medical debts. And he worked at that part-time.

Pat: That's got to be hard.

Scott: I remember at the time thinking, "That's not the business I'd want to be in." And his job was to call people, "Yeah, I know. We went through..." all that stuff, right? Like, that just...

Pat: Yeah.

Scott: So do a search if you think that could be you, because that's not... And my guess is it'll work its way through. But it's a base in how real estate prices, home prices, for the most part around the country, have held up.

Pat: It is. We talked about it on the show a few weeks ago. It's perplexing.

Scott: I mean, there's a handful of markets we're seeing some declines, primarily the liberal areas of coasts, mostly, the big cities and stuff, not the Beltway, or I mean...

Pat: The Sun Belt.

Scott: The Sun Belt. Yeah. Anyway, nobody can predict...

Pat: You can't predict.

Scott: ...any markets over a short period of time. All right, we're gonna take some calls. If you wanna join us. And by the way, we love taking calls, because I just find people interesting. One of the reasons I got in this business, you get to combine finance, which I always enjoyed, along with people, which I find people fascinating and their situations interesting. And if you've got something you're trying to deal with, maybe someone's recommending something to you, and you're wondering if it's the right thing, maybe something you've been pondering, maybe you're stuck, whatever, we'd love to take your call. You could either send us an email with that question, and we'll schedule time, at questions@moneymatters.com. Again, questions@moneymatters.com. Or you can call this number, 833-99-WORTH, and it gets you set up that way as well. Let's start off here in Arizona, talking to James. James, you're with Allworth's "Money Matters."

James: Hi. So I guess my question would be, seeing on the news what's going on with the banks these days, I was wondering, if you had, let's say, over $250,000 in one bank, should I be moving some of that money around? Because the way I understand it is you're only insured up to $250,000 in each bank.

Pat: Kind of.

Scott: Sort of.

Pat: Kind of.

Scott: So it's per beneficiary of the account.

Pat: So it's the owners of the account times the number of beneficiaries, not to exceed four beneficiaries. So what that means is if you are a single person, let's say, and you have a trust and the bank CD.

Scott: Let's assume there's no trust. Most people don't have a trust. And people with money who need trust don't...a lot of people don't have them.

Pat: Okay. So then it's 250. But if there's a joint owner on the account, then it's 500.

Scott: And then, if you have a trust, and let's say this is just a traditional family, husband and wife and two kids.

Pat: Then it's a million.

Scott: And it's a million.

Pat: Yeah. It's two owners times the number of beneficiaries times 250,000. So now, in saying that, are you married?

James: I'm not.

Pat: Okay. And how much do you have in any one institution?

James: So I have a small business. I have, basically, a business checking, business savings, personal checking, personal savings. I have an IRA and a stock portfolio. All of that, in total, last time I checked, was about 442,000.

Pat: Okay. So the IRA, is it through the same banking institution?

James: Yes, sir.

Pat: Okay. So that doesn't have...is it in bank CDs or is it invested more in equities, stocks, bonds, mutual funds, something like that?

James: So the IRA, I'm not too sure about. I have been looking at my IRA, and I always thought that, like, people wanting any IRA, it was going to sort of grow a little bit. You get something on your money back. It seems like my IRA just sort of has the money that I put in it. I believe it's a traditional IRA.

Pat: So an IRA is a title. It's a part of the tax code.

Scott: Like an umbrella.

Pat: Like an umbrella. The investment that you put inside that is completely up to you, within some boundaries. My guess is that you have it in a bank IRA and a regular savings account. It's the wrong place for it, by the way, 100%. How old are you?

James: So I'm 49 right now.

Pat: Yeah, 100% the wrong place for you. Absolutely the wrong place.

James: Okay.

Scott: Because you're just gonna get interest. It's not getting real...

Pat: Yeah. So you need...if you're not comfortable actually doing it yourself, then you need to hire someone. I wouldn't hire the financial advisor that sat in the bank branch but to go...

James: Okay, that's what I have right now.

Pat: Oh, I'm sorry.

James: And that's one of the reasons why I called you, because I was gonna call him and ask him some things. But my concern was that he's with the bank itself.

Pat: That's right. Yeah, he's gonna sell you...he or she is probably gonna sell you an annuity for that IRA, if they haven't already.

James: So, what would you suggest? I've been putting the max in every year because it helps with my taxes.

Pat: Yeah, yeah. And you need money for retirement.

James: Right.

Pat: You're probably not...even if you like to run your business forever, there might come a day when you can no longer.

Scott: And you said you're 49.

James: Yes, sir.

Scott: Yeah. I would go all equities. I'd buy the total market at a minimum. How much money is in the IRA?

James: I think it's 38,000-ish right now. I pretty much just started it a few years ago.

Pat: Okay.

James: So I've been putting the max in.

Pat: How many employees do you have?

James: Actually, it's just me.

Pat: Okay. All right. Well, there's lots of things you can do. If you need to save more money, you can set up what's called a simple 401(k), a self-employed 401(k).

Scott: There's another name for it.

Pat: Yeah. We're both blanking out on the name. But you can set up...

Scott: Individual 401(k), solo K.

Pat: Solo K, that's right. So you could set up a solo K, which allows higher limits, and then you could possibly make contributions to a Roth IRA or a nondeductible IRA and then convert it to a Roth. And a financial advisor will walk you through that. It's not going to be the bank broker. Most bank brokers just sell product.

James: Okay.

Pat: In terms of that money there, that would be under a different account or ownership for the FDIC. So let's just talk about the money you have in the bank. You can go... Is it a small regional bank?

James: No, it's a fairly large bank, well-known bank, yeah.

Pat: Okay, like JP Morgan or Bank of America or something along those lines or Wells Fargo.

James: Something along those lines, yes.

Pat: Okay. I wouldn't worry too much if I was a little bit over the limit there.

James: Okay.

Pat: But do you borrow money at all from the bank?

James: No, sir.

Pat: Okay. There are banks that'll use...what do they call that program? They get reciprocal insurance on it. And we had someone on the show a couple of weeks...

Scott: A couple of weeks ago. Kristen [inaudible 00:16:57].

Pat: A couple of months, I think. They call it [inaudible 00:17:01].

James: I was gonna say, basically, you're saying, so with the money I have in there, I shouldn't stress out about going out and buying.

Pat: How much over the 250 limit are you?

James: Like I said, it's in total about 442,000 altogether.

Pat: All right. I don't know why you actually...

Scott: Do you keep any more than 250?

Pat: I do not. That's what I was just saying.

Scott: We're above the limit.

Pat: I was saying. But we do as a firm...

Scott: Because it's impossible not to, and you have working capital, payroll, or whatever.

Pat: That's right. We do as a firm, but we use a bank that actually segregates it into different banks. So we put it in our bank, and they actually invest it in other bank, in another bank, and it's this reciprocity which moves the FDIC insurance way up, which most regional banks do. And had Silicon Valley Bank set up their depositors that way, they'd still be in business.

Scott: That's right, they would still be in business.

James: So real question, I have about, in my stock portfolio, I've put about 150,000 in there. I was gonna put some more in this year, but because of what's going on with the economy and everything, you know, I pretty much lost all the money that I made over the last...

Pat: You made it when?

James: Well, without getting into politics, when Trump was president, I made quite a bit of money, and then as soon as Biden took over, I've lost pretty much everything I made. Some of the principal went down, and then it came back. I understand it's going to do that. But would you suggest me putting more in?

Pat: Now, James, here's what you need. You need a financial advisor, because you've got your world upside down. That money that's invested in the market should be in the 401(k).

Scott: Or IRA.

Pat: Or IRA. And the money that should be out of the market, if that's the appropriate thing, is the money that you're using in your brokerage account. And you're not using all the tax benefit that is provided to you as a self-employed individual that you could. You'll, quite frankly, need some professional guidance. And it's not gonna take place from the bank. It's not going to take place from the bank.

James: Okay.

Pat: Because you can contribute to your retirement more than what you're just putting in the IRA. And, like, the best times to be buying financial assets are when it's really murky out, when it looks scary, when things aren't doing well, when there's concerns, because prices are depressed at that time. Those are the best times to be buying, not selling.

Scott: But over the long period of time...so, James, I'm 56. I started in this industry July of 1990. Okay. So 33 years I've been in this industry. When I started...and the reason I'm telling you this is because, why I'm such a big fan of long-term investing, the S&P...I mean, I'm sorry, the Dow Jones Industrial Average when I started was roughly 2,600. Today, it's roughly, what, 33,000, give or take, somewhere, depending on the day. So it's more than 10x, 15x over that last 30-some years. That's with all kinds of ups and downs. The dot-com thing, 9/11, financial crisis, you name it.

Pat: But, Scott.

Scott: Quantitative easing, inflation, all that stuff.

Pat: Agree on that. Your allocations, where you have them sitting in your portfolios is completely backward. You need a professional sit down to say, "Okay, what are we trying to achieve? Where is your money now?" By the way, you recognize the benefit of an IRA, but you could put a lot more money into a solo K than you can in IRA.

Scott: But you might want to some years and maybe not other years. You can have that flexibility.

Pat: And how is that money being invested in your brokerage account? Is it tax efficient or not tax efficient, or is that the right thing for you? And by the way, the way you've just described this $440,000, if you have some money in your brokerage account, that is not the same as having money in the bank. It's not an FDIC-insured product. If you have the money in an IRA, that is a different account ownership than you as an individual for FDIC insurance. So my guess is...I'm having a hard time trying to figure out where all these allocations are, is that you're not over the limit because you don't have any one individual account over $250,000.

James: Okay. So it's per account. So, are we saying...?

Scott: No, it's not per account per bank.

Pat: It's the title, but...

Scott: Because IRA is a different title.

Pat: The IRA is a different title. And so...

Scott: I don't know if that's right or not, the IRA.

Pat: I'm gonna check.

Scott: I've never advised a client to have an IRA.

Pat: Well, that's a good point. Well, that's my point anyway.

Scott: It's savings anyway.

Pat: Your asset allocation location is...it's crazy. Just go and hire a professional advisor, pay them by the hour or pay them as a percentage of the portfolio, but hire someone to actually fix the main thing, which is, "What should I buy, when, and why, and where?" Right? And you want a fee-based advisor, not a commission-based advisor. You go to a bank, and that person is sitting over in the corner. Lovely as they may be, 85+% of the time, they're commission-based.

James: That's the way I understand it. He told me he doesn't make money unless I make money.

Pat: All right. Maybe he's fee-based.

Scott: No, that's not true.

Pat: But that's not...

Scott: That's not true.

Pat: Well, that's not true.

James: Really?

Scott: No, I mean...

Pat: Not an advisor that... Even the hedge funds make money when they lose their client's money. There's no one out there that only makes money when a client makes money.

Scott: Yeah. Well, they make more money when the client makes more money.

Pat: That's right. They make more money.

Scott: Their interest might be aligned.

Pat: Like, us, as a firm, we make more money when our clients make more money. And when our clients make less money or lose money, we make less money or don't get paid as much.

Scott: But I remember having a conversation years ago with a client. They said, "Why don't you just charge me? I don't mind paying you when we make money. But those years that I don't make money, how about you don't charge me?" And I said, "Well, if the markets go down roughly one out of three years, how in the world can I have a company that operates when I've got payroll and whatnot?" I mean, that's not a realistic...

Pat: Anyway, you know what...

Scott: That's why there's no advisor that works that way.

Pat: You know what to do. James, appreciate the call.

Scott: Yeah, glad you called. Pat, this whole FDIC thing makes no sense to me. If you think back to the financial crisis, it was just too big to fail, right? And the idea was we don't want banks, we don't want any bank to be so large they're too big to fail. We're better off having a variety of different institutions across the country so that if one goes out, it's not going to tank the economy. And instead, where we are today, too big not to fail means you are so large you are pretty much guaranteed government backstop.

Pat: We will not fail. We will not allow you to fail. And so what we saw with Silicon Valley Bank is, because the regulations had changed in terms of their deposits and how they're regulated, they fell below this threshold. But they were still way too big. How is the number 16th largest bank in the U.S. not considered large? Which was what Silicon Valley was, right? Top 20. And so, after that, what we're seeing is that there is a flight away from small regional banks to big, big banks.

Scott: Yeah.

Pat: The JP Morgans, the Wells Fargos, the Banks of America. This is not good for local economies. This is terrible. You don't know your banker. You don't know your lender. Business is done between people. You might think it. And the closer you are to...

Scott: The representative of the big banks would argue that they have relationships. They have local people.

Pat: They certainly do. I mean, look at all the people that went in and scooped up all the bankers out of Silicon Valley when they blew up.

Scott: That's right.

Pat: Right? But taking the money out of the local economy and putting it in a large national bank is not the same.

Scott: I do think having a differentiation between individual private money and corporate money, particularly payroll, companies need to use a financial intermediary to deal with payroll. So, I mean, think about a large company when you've got hundreds of millions of dollars in payroll a week. So, like, how do you have FDIC limit? What happens if your bank freezes the day right in the middle of transfer? Those things need to get worked out.

Pat: We don't have any answers here.

Scott: Nobody quite does. But, anyway. We're taking a quick break. We'll continue back with calls. This is Allworth's "Money Matters."

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

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

Pat: And Pat McClain.

Scott: Let's continue with calls. We're talking with Jay in California. Jay, you're with Allworth's "Money Matters."

Jay: Hi there.

Pat: Hey, Jay.

Jay: So I retired a few months ago at 60 and had been talking to different advisors and planners. And I've got a couple of things I'm trying to sort out. And one of them is recommendations for, you know, the registered index-linked annuities to help reduce risk on my portfolio. And then the other question I have is just, what's a reasonable fraction of sort of assets to allocate towards long-term care? Those are the two things I'm currently working on.

Scott: Okay. So you're age 60. You just retired. Where's your income coming from right now?

Jay: So my wife is five years younger. She's working still till 60. I have a pension, and then I'm also doing a bit of a draw on a near-term cash bucket just to kinda keep income what it was prior to retirement.

Scott: And your pension, what percentage of your income is your pension replacing? Pre-retirement income, ballpark.

Jay: Our total, probably, well, it was about...it is, say, 40% of our total income.

Scott: So how much is your monthly pension right now?

Jay: Monthly pension is about 8,300.

Scott: And how much were you earning at your job?

Jay: Probably 20k a month.

Scott: And are you eligible for Social Security?

Jay: Yes.

Scott: Your home paid for?

Jay: We still have a mortgage at 3% or so.

Scott: Okay. And how much money do you have in investable assets, in IRAs, 401(k)s, that sort of thing?

Jay: It's about 1.45 million.

Scott: Why do you want an indexed annuity?

Jay: Well, I've had it proposed by a couple of different places. And it was recommended as, you know, securing more income and reducing risk, you know, like a sequence-of-return kind of risk. I think we have...

Scott: These two people you talk to, were they certified financial planners? Were they securities licensed? Do they manage money for fee?

Jay: Yeah. So one was from sort of a money management firm, and I'm pretty sure he was a CFP. And then I know the other person is a CFP but works at an insurance company.

Scott: Okay. So what I'm trying to determine is, are you worried about the volatility, or are they making you worried about the volatility in the marketplace? Because you acquired this $1.45 million over many, many years, and my assumption is that you were invested in equities or stocks at some point in time. Is that a fair statement?

Jay: Yeah, pretty much up until after I retired, actually, because it did go down a big chunk, you know, on the years or whatever it was ago. And so that kind of was a kind of wake up to maybe put more of it in a safer place, but it was pretty much all equities all of them is working.

Scott: And how was it allocated today, the $1.45 million? How much is allocated toward stocks, and how much is allocated toward bonds?

Jay: There's about 300k in a near-term money market bucket that I'm drawing in right now for the near term, over the next five years.

Scott: Okay.

Jay: And then the rest is, like, it's probably 60-40, 70-30 managed chunk, 1.1 million.

Scott: I like it.

Pat: I do, too.

Scott: I like it. I like it. So let's explain how indexed annuities work.

Pat: I'm not a big fan of indexed annuities.

Scott: Let's explain how they work. So when you buy an indexed annuity...there are just different types of annuities. There's lots of different types of annuities. They're not necessarily good or bad. It depends on how they're used. I've often said, "The world would have been better if they were never created because they are so often missold." And there's so many garbage annuity products out there. But with an equity-indexed annuity, when you buy that annuity, you give up control of your capital. So let's say you put $100,000 and you give that $100,000 to the insurance company. The insurance company...it's now part of the insurance company's assets. It becomes a liability to them, right? But it's on their books. They, in turn, go out and invest it. They put the majority of it in really safe type investments. Then they take some very small portion of it and buy options on, typically, the S&P 500. Sometimes it's a different index.

Pat: Yeah. But sometimes they create their own indexes.

Scott: Yeah. And then, as far as the return from the investment when you buy this annuity, it's almost impossible for the average person to understand exactly where the returns are coming from. Every contract is a little different. Insurance can be different. But, essentially, they say, "Look, we're going to guarantee your principal. We're gonna guarantee you some sort of return. But you're gonna need to guarantee to us that you're locking up your money for 7 years, 10 years, 12 years, 15 years, 19 years." And then you'll have your principal guaranteed maybe some small interest, and then your returns are going to be linked to the returns of this other index.

Pat: Which, by the way, oftentimes, ignores dividends.

Scott: And typically has caps on the upsides.

Pat: So you only participate in 60% or 70%.

Scott: And caps on the percentage in any one particular 12-month period. There's all kinds of strange caps, because, for the insurance company, like, the majority of it is sitting out there in conservative investments. They just take a very small portion to buy options. There's no way they're gonna be able to get the same kind of return they'd have on the market because they got all these other costs.

Pat: So what you're doing is you're buying insurance for the downside, and that insurance comes at a cost. And the question I always ask is, why? Why? What's the point of buying the insurance if, in fact, I believe that any downturn in the market will be temporary? And if it is, in fact, temporary, why do I need to insure against loss for a short period of time? Especially if my timeframe is 20 years, 30 years, 35 years, between you and your wife, you're 60, she's 55, right? That puts her at 90.

Scott: There are some, and the industry's changed. One of the other reasons I don't like equity-indexed annuities is the commissions that get paid to the salesperson. So the salesperson's commissions are 4%, 5%, 8%, 10%, 12% commissions paid to an advisor or an insurance salesperson at the time of the time of the transaction. Massive commissions. So suddenly, this person who sold you the product, they got paid a bunch of money upfront. As life continues on, your complexity and your financial life continues. They've already been compensated. So they're not going to be financially motivated to come along your side and help you with other problems. But, Pat, now, there are some companies out there that have insurance products that just go on a typical investment account. They don't... With ETFs, you don't have to lock your money up and then sort of [inaudible 00:34:25].

Pat: And then you just put the insurance on it. There's a cost.

Scott: Yeah. And it gets repriced every year. So we've told you how we feel about...and by the way, we've seen the aftermath. I remember the retired doctor coming into our office with $1.8 million worth of indexed annuities sold to him all by the same advisor wanting to know how to exit them. He couldn't exit them without a considerable amount of pain. How much money are you taking in monthly distribution? So you said you have five years of cash set aside, which is 300,000, which I'm not super good at math, but it tells me you're taking about $5,000 a month in income out of this.

Jay: Yes, out of the near-term cash bucket.

Scott: Got it. Have you run some projections over the next 5, 10, 15, 20, 25, 30 years of retirement?

Jay: Yeah. I tried several of the software, and I like doing that to see just how, at least projection-wise, some of these different options, you know, increase your, you know, projected chance of success or money at the end, even though realizing it's just kind of a long-term guess. But, yeah, this is a lot.

Scott: So, by the way, so you're taking over a little bit over 4% distribution, absolutely fine. My guess is when Social Security kicks in, you can lower that so that your income will stay relatively stable throughout that. So then you're going to move it back to about a 3% distribution once Social Security kicks in. Your allocation of 60-40, 70-30, I cannot see in my lifetime why an annuity would help you. Now, let's talk...

Pat: And you want other ways to go about it besides equity-indexed annuity.

Scott: Yeah. But then you talked about long-term care, did you not?

Pat: Oh, yeah.

Jay: Yeah. Yeah, I've been trying to, you know, I know I feel a little bit of time pressure-wise, just age-wise.

Pat: Yeah, you never know what comes tomorrow, right?

Jay: Yeah.

Pat: Once you need it, you can't buy it. Kind of like your house is on fire, you're not gonna get fire insurance.

Jay: Like, so I've been trying to think of it as, okay, I've got this much assets. How much of it should I allocate to this? And you know, I'm kind of leaning towards, you know, maybe a 10% to 15% max just looking at the quotes, because I've talked to a bunch of long-term or several long-term care people.

Scott: So, what have you seen? Like, what is the most appealing long-term care policy that you've seen?

Jay: I mean, I like the cash indemnity one because it gives you this sense that you can kinda use it for whatever you need it for. But I think the best buy for the money are sort of the traditional insurances, like when America has, like, you know, couple second-to-die death benefit, and the cost is, you know, maybe 100. And they can split it up either, you know, a chunk upfront and then so much for 10, 20 years, or whatever. So I've been leaning toward some small chunk upfront.

Scott: And how long is the payout? Those are the cash balance ones, right?

Jay: Yeah. So it kind of ranges. We looked at sort of maybe four or five years. And the one I mentioned, a couple of them has unlimited options once you sort of used up the death benefit for not a whole lot more.

Scott: I mean, so if you and your wife had, let's just call it, a normal end-of-life care experience, which is kind of what we're talking about here, you have plenty of assets and income to cover those things. Your pension is $8,300 a month. Plus you're gonna have Social Security. So you're gonna have plenty of household income to cover kind of a normal couple of year need of long-term care. Where it could be really problematic is if, suddenly, something happens to one of you. It's a 15-year Alzheimer thing, right? And so the shorter term you can self-insure for. It's the longer term that can be problematic. So if I were in your situation, looking at it, my whole focus would be on the risk that would really hit you hard. It's like an automobile. It's not the fender benders that are big deal, right? Like, no one likes that, but you can pay. It's if you have to do some massive liability that you have the insurance for. And I think of it kind of the same way here.

Pat: So, do you have money outside the IRA that you would fund that with?

Jay: Not really.

Pat: So you'd set it up on monthly payment.

Jay: Yeah, I think monthly or maybe a 10 or 20-year payment.

Scott: Okay. All right.

Jay: Kind of leaning toward a limited timeframe.

Scott: I like where you're going with this. I like...yep, yep, yep.

Jay: Okay.

Scott: And, look, you can't do everything. So don't insure the downside in the market. Just live with it. But insure the long-term care.

Jay: Okay.

Scott: Just because...look, these indexed annuities, just because you can't see the fee doesn't mean it doesn't exist.

Jay: Okay.

Scott: That is, people tell me, "Well, they don't cost anything." I'm like, "Yeah." You know how benevolent insurance companies are. We all know that.

Jay: I mean, are you guys more fans of, like, a time bucket approach for covering the downside periods?

Scott: No, to me, we look at it as income needs. So it's time horizon and risk tolerances.

Pat: And income needs. So you get to the same place by rebalancing the portfolio on a monthly, quarterly, weekly basis once you set your allocation. The reason people use the buckets of money or the time bucket thing is it's psychological. It doesn't do anything to help the portfolio. In fact, if you had this $300,000 sitting in cash, I would ask you, "What kind of cash is that in?" Right?

Jay: Yeah. Right now, it's in the money market.

Scott: Well, it's just a terrible place for it to be. You're giving up yield, and for no reason, because you said it's five years. And so, if I kept my portfolio consistent at a 70-30 and I knew that we had something short-term in the portfolio which is yielding higher than cash, you're going to be well served. In fact, it would be less expensive for you to hire an advisor to do that than the yield you're giving it up. Like, keeping it just in a cash account, which is probably paying 3/10 of 1% or 30 basis points or 0.5%. So that bucket of money is psychological, 70-30 gets you the same. You go to the... Are you retired from the federal government of the state of California?

Jay: Not the federal government.

Scott: Okay. So if we look at that pension that was sending you that money every month, they don't have a bucket of money set up that says, you know, "We've got five years of Jay's income in here." What they're doing is they're rebalancing the portfolio on an ongoing basis and then deciding what to sell every time they send you a check. That's how it works. So sometimes you're selling equities, and sometimes you're selling bonds, but you're trying to actually keep that portfolio to 70-30 or around there. Does that make sense?

Jay: Yes.

Scott: So, anyway, I think you're on the right track. Stay away from anyone that's trying to sell you an indexed annuity.

Jay: Okay.

Scott: All righty.

Jay: Very good. Thanks for the help.

Scott: All right. Appreciate the call.

Pat: Yeah. Thanks for calling. Anyways, this is really kind. There are people that could really benefit from having a relationship with an advisor that is a competent advisor they can trust. It'd be well money spent.

Scott: I agree.

Pat: And it's...

Scott: I just can't...in my whole life, I can't understand why anyone would think that that was a good alternative for Jay. I just can't. I just don't know why.

Pat: Yes, you do.

Scott: Well, not for Jay. I didn't say that was a good alternative for Jay. It was a good alternative for the person selling the product, but it wasn't a good alternative for Jay.

Pat: I don't like any sort of financial product where an advisor gets paid a big upfront commission and very little or nothing, typically, and ongoing. What kind of relationship is that? Would you want a relationship? This isn't...

Scott: With your contractor, someone building your home like that, would you pay them up front, right? Here you go. Here's the money. Hope it all works out well. Gee, what do you think is gonna happen down the road? You think, when the... Those contractors usually have a few different things going on at once, right?

Pat: Yes.

Scott: That's kind of, "We'll be back on Thursday." "What do you mean Thursday? I thought..." "Well, I've got this other product." So, where do you think your house would fall in line?

Pat: If you love to check all upfront.

Scott: The same thing with an equity-indexed annuity.

Pat: Actually, this is a tip for...the contractors hate this, but when I'm doing any major contracting, I put a date on it. And then we agree on one price if they go over that date and another price if they finish by that date. And the reason behind that is if you finish by a particular date, you're going to make more money.

Scott: Let me ask you a question.

Pat: What's that?

Scott: Of the contractors that had worked on your house over the years, how many have been repeat?

Pat: Most of them are repeat.

Scott: Oh, good.

Pat: Most of them are repeat. Most of them. In fact, I talked to one yesterday. Most of them are repeat.

Scott: You talked to one yesterday. You're always doing something in your house.

Pat: I did talk to one yesterday.

Scott: Pat's house is much smaller than what it would have been because they painted it so many times.

Pat: I was talking to the painting contractor yesterday. My house has shrunk. The interior, my house has shrunk.

Scott: Pat's house is like...it looks like, what do you call those, model home. Like, it doesn't even look like anyone lives there.

Pat: We're very clean.

Scott: Usually, you have a husband and wife, usually one is neat freak, the other one's not. They kinda balance each other. You guys are both, like, neat freaks now.

Pat: We're very organized.

Scott: Very organized.

Pat: Notice I didn't hear the neat freak. Very organized.

Scott: We're very organized.

Pat: We're clean and organized.

Scott: We're clean and organized. My mind is cluttered enough with stuff. Like, I need to be clean and organized.

Pat: The early years of my marriage, we argued quite a bit because I'm a bit of a neat freak. Clean and organized. My wife is much more relational, let's just say. And I've had to get to the point where you give up. Well, there are certain rooms that I'm just, "Oh." Like, when my kids...

Scott: You're not a hoarder, so it's not like there's piles of magazines in the corner or anything. But it's just...

Pat: Yeah, the kid just came back from college to stay for a couple of weeks, and just I've got to shut his door.

Scott: You just shut the door.

Pat: Yeah, just shut the door.

Scott: I don't go upstairs. The kids' rooms. I can't go upstairs. I just don't like it. It's not how I like to live.

Pat: It's almost like he doesn't exist. I live in a one-story house. Oh, upstairs? No idea what's upstairs.

Scott: I do every once in a while. They don't want me upstairs. Teenagers. "Oh, gee, dad's coming to my room."

Pat: I was gonna have the stairs removed.

Scott: All right, let's continue with the calls here. We're talking with Chuck in California. Chuck, you're with Allworth's "Money Matters."

Chuck: Hi, guys.

Scott: Hi, Chuck.

Chuck: Hi. So my question is about planning for Medicare costs, specifically any surcharges. So I just turned 60 a few months ago, and I'm planning to do Roth conversions as my income is expected to vary over the next few years.

Scott: Okay. Let's back up. What problem are we trying to solve?

Chuck: I'm planning for Medicare costs.

Scott: On which costs? Are we looking at a supplemental Medicare plan you're gonna buy when you're 65, or are you thinking about the Medicare premium that goes up as your income goes up in retirement?

Chuck: Yes, the last part there.

Scott: Okay.

Pat: Okay, okay.

Chuck: The Medicare surcharge.

Scott: Because you can be paying anywhere from...and I'm just explaining this out for...it's a broad list. You can be paying anywhere from 125 bucks a month roughly to 500 bucks a month roughly, depending on your income. So the higher the income, the higher your Medicare.

Pat: Which then leads to your question about Roth conversion. So fire away.

Chuck: Exactly. Because I've got some control of my AGI over the next few years as I approach that age. So I want to manage my Roth conversions with an eye on the medical surcharge that'll be coming up.

Scott: Okay.

Chuck: So I'm gonna turn 65 in September of 2027, and so I wanna try and figure out what tax years are correlated to Medicare cost. So, is it the 2025 tax year that impacts my cost the first few months that I go on Medicare, being September to December of 2027? And then in January 2028, is it gonna look at the next tax year, 2026?

Scott: Wow. You know, actually, it's the 12 months prior.

Pat: Yes. But there can be an adjustment based on your year. It's an estimate.

Scott: It's an estimate, and then there's a true-up.

Pat: And then there's a true-up. I don't remember what year it is.

Chuck: Okay.

Scott: So it's a true-up.

Chuck: But it's based on the account. It's a rolling period, right? So it's a rolling lookback period is what I'm trying to...

Scott: Yeah. So here's our experience. Those in retirement or retirement age, because sometimes people are still working, but those that are stuck paying this higher Medicare premium are typically such that there's not...we might be able to do a little bit of planning around the edges, but we're pretty much just stuck with it because we've got high income. It's the people that have a one-off year, there's a large capital gain, or that sort of thing. So tell us about your situation a little more.

Chuck: Well, because my income is low right now, I'm doing Roth conversions.

Scott: Okay.

Chuck: So it was driving up my...well, I have control over what my AGI is.

Scott: That's correct.

Chuck: So I'm gonna back off my AGI.

Scott: How much are you converting to Roths?

Chuck: Anywhere from 100 to 150 per year. It kind of depends on which taxes I want to pay.

Scott: Right. So, what tax bracket are you limiting yourself to?

Chuck: I'm trying to stay in the 22% to 24% federal tax bracket right now.

Scott: Got it. Got it. And are you...?

Pat: And you're a resident of California.

Chuck: Yes.

Pat: So you're 9%.

Scott: And you expect that you're going to stay in California forever.

Chuck: Probably, yes.

Scott: Okay. And how much money do you have in IRAs and qualified plans?

Chuck: I don't know, 1.5 million, 2 million.

Scott: Married?

Chuck: Yes.

Scott: Children?

Chuck: Yes, without children.

Scott: Got it. I like where you're going, kind of, but there's so many moving factors. And let's just assume that they're not gonna make changes to the Medicare premiums five years out.

Pat: Yes. And let's say, you know...

Scott: I like the concept of if you're in a lower tax bracket, taxes all considered, and that's Medicare tax is one tax.

Pat: That's right. So when you do these conversions and you get to Medicare, what will your income be that you're following, assuming no Roth conversions?

Chuck: It'll probably be pretty low. So, you know, it's just gonna be...

Scott: What's low?

Chuck: Investment income. So I'm probably gonna be under whatever is under the 22% bracket.

Scott: So that's where...

Pat: That's a 12% bracket. Now we're talking about a 10% differential.

Scott: Which is why you...so this is...

Pat: And we're talking about a few thousand dollars a year of Medicare taxes, and you're looking at paying more than 10% more in taxes.

Scott: Yes. So that's where you've got...I think you might actually be one of the few people that are actually considering doing too much of a Roth conversion.

Chuck: Oh, okay.

Scott: Right? So think about it this way. Because you're focused on this Medicare, and what I'm gonna ask you to do is focus on the world.

Pat: Yeah.

Scott: And I would step back and do an analysis of what my income coming from my IRS are in the year once I start Medicare, my Social Security, and then money coming out of the Roth. My guess is that you're doing way too much in Roth conversions between now and age 65, with the eye on that Medicare tax. And I think it...

Pat: And there's lots of moving parts, lots of other taxes.

Scott: Yeah.

Pat: Unfortunately, that's all the time we have in the program. As always, super fun being with everybody. So glad you took your time to join us.

Scott: If you like this program, do us a favor. Wherever you get your podcasts, go and give us a little review. State what you like or don't like about the program, give us whatever stars you feel are appropriate, and forward it on to a friend that you think would benefit as well. We'll see you next week. This has been Scott Hanson and Pat McClain with 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.