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 All Worth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

Scott: Welcome to All Worth'S "Money Matters." I'm Scott HansOn.

Pat: I'm Pat McClain.

Scott: Thanks for joining us today. Both myself and my co-host, we are financial advisors, Certified Financial Planner, charter financial consultant. Spend our weekdays helping people like yourself. And come here on the broadcast on the weekends to be your financial advisors on the air.

Pat: That's our attempt to help people.

Scott: Yes.

Pat: After many, many years, seen lots and lots of different things. I was talking to a person the other day, where was I? They asked, they said, "So what makes your portfolios go wrong?" You know, we manage quite a bit of money.

Scott: What makes our portfolios go wrong?

Pat: Yeah. Like, when you build a portfolio, what do you worry about? They asked the question, like, "What do you worry about that... When you build a portfolio, well, what will go wrong?" And I said, "Well, our portfolios are broadly diversified, so they're not concentrated in any one thing." I said, "What makes our investment portfolios go wrong? Are clients reactions to those portfolios."

Scott: The behavioral finance side of it.

Pat: The behavioral finance side of it. Which is... And the follow up question was, "Well, what does that mean?" I said, "Well, look, there's a risk premium that goes in to equity or stock investing. And in fact, there's a risk premium that goes into real estate investing."

Scott: It just means you achieve a higher return. That's your compensation for stomaching the ups and downs.

Pat: It's the extra amount of money you're going to get versus a fixed income, known duration, U.S. government bond. That's what you get the extra money for living with the volatility, the ups and downs. So every investment is based on timelines, if you've been a listener to this show at all.

Scott: Or a student of finance at all.

Pat: At all. Yes, you know that. But I said this. So the two things that go wrong is that clients actually, we talk about it, but then when it happens, they react differently than they thought they would have. And then I said the second thing that makes a portfolio go wrong is this fear of missing out, which is, there's a bright shiny object somewhere else.

Scott: Which is, again, behavioral finance.

Pat: Which is, again, behavioral finance, right? Which is, look, there's a bright shiny object over there. Why don't we own that?

Scott: Well, and it's typically our co-worker bragging about how much money they made, our neighbor. We hear on CNBC, the latest thing, of course, is Nvidia, AI.

Pat: Yeah, Bitcoin.

Scott: By the way, if you own an S&P 500, you own Nvidia, your largest holding right now in that fund.

Pat: Quite a bit of it. Quite a bit.

Scott: If you have not owned it up until this point, now is probably not the time to be buying. It was the largest company in the world. I don't know if it still is as of this date of this airing of this.

Pat: Day by day, it moves. It moves.

Scott: Pretty phenomenal.

Pat: Anyway, I don't know why I brought that up. When I was driving into the show today, I was thinking about the comment that they asked about our portfolios, and they said, "Well, what about other people's portfolios?" I said, "Well, it depends on how they're constructed." You can build a portfolio that is heavily overweighted in a particular sector, which is okay, as long as you know the cost of overweighting that in a particular sector.

Scott: And the impact it may have on your life.

Pat: That's right.

Scott: It's not just the cost, the impact it may have on your life.

Pat: Yes, that's the cost.

Scott: I'll never forget, Pat, years ago, and I'm sure...I know I've told the story before, but had a client that had a house in Northern California, his primary residence, and then had a house up in Washington, somewhere near the... I think on the coast somewhere in the state of Washington. And he had a fishing boat there. And he loved to fish. And so he spent, actually, I think, seven months a year or so up at that Washington house.

Pat: Fishing.

Scott: Assume, fishing, yeah. And he called me one day, he said... This is like at the top of the dot-com bubble, right? And he wanted to move half his portfolio into the cubes, which was the NASDAQ Index.

Pat: The QQQ.

Scott: Correct. Right at the peak, half his portfolio. Because he did his research. And it was the whole fear of missing out. Like, NASDAQ was up 85% in 1999.

Pat: And he wanted some of that.

Scott: He had some, but he just...

Pat: He wanted more of it.

Scott: Yeah, right. He probably didn't understand that he had quite a bit of it anyway.

Scott: Intellectually, he did, but the emotions kind of take over. So he calls me and says he wants to do this. And I say, "Bill," I said, "Here's the deal. We can certainly accommodate your trade and do that for you. And if you're right, this thing pays off, maybe you can trade your fishing boat in for a larger fishing boat." I had no idea what his boat was like. I don't know if he had a $20,000 boat, or a $200,000 boat, or who knows. I had no idea. I said, "If you're wrong on this, the fishing boat's gone, and probably the house as well."

Pat: In Washington.

Scott: In Washington.

Pat: Your happy place. Where you vacation.

Scott: Yeah. So he decided against making the trade. And the reason I'm bringing that because it's the cost... Like, what is the cost to your personal life?

Pat: What was the downside? He was only thinking about the upside. Like, oh, this is gonna hit. I'm gonna get something much better. Yes.

Scott: I'll have more money in my account. Yeah. I think that's why it's so important for people to really understand what's in their portfolio, how it's constructed.

Pat: Oh, especially this AI stuff. It is hyped.

Scott: And right, it's been a relatively easy time to be an investor the last year.

Pat: Oh, there's no question.

Scott: The markets go up, up, up. And a couple down days, up, up, up, up, up, up, down day, up, up, up, up, up. I mean, it's been [crosstalk 00:06:28].

Pat: And a big divergence between the NASDAQ and the Dow. The S&P actually stays somewhere in the middle.

Scott: The Dow doesn't even seem like a very good barometer anymore.

Pat: No, no. The S&P stays somewhere in the middle between the two of them. Anyway.

Scott: Yeah, it has been, but it's been... Essentially, I was talking to this guy. His specialty is communicating financial concepts. That's really his... So I was talking to him about...we were talking about the anxiety people have when they have a portfolio that's going down, and the temptation to sell out and wait until things calm down, whatever that means. And he says, "I don't know which anxiety would be worse, though. That anxiety when you see your portfolio going down, or the anxiety of you getting out, and the fear of missing the recovery, which has always occurred." And I thought he's got a good point, because if you get out...

Pat: Well, that's the same anxiety that actually causes people to actually take their portfolio and push it into the QQQs during the middle of the dot-com, right? Even though they've got some of it, they need more of it. Interesting. Behavioral finance. Just remember, you're the one. If you're...

Scott: Being a successful investor is not easy,

Pat: That's right. It is hard.

Scott: You've got to be very patient, disciplined, very disciplined.

Pat: Yes. You have to have an investment thesis that drives your decision making. If you don't start with an investment thesis that drives your decision making... [Crosstalk 00:08:07]. Yes. If you don't know what you want the money to do, the money will do nothing.

Scott: And by the way, the articles that are popping up every day on your social media or wherever you're reading your news, or the TV, those articles are not... Do not build an investment thesis based upon the latest article, because it's always on the latest thing.

Pat: And actually, it's self-feeding because they watch what you're reading, depending upon what... Mostly in the socials, they'll watch what you're reading and then feed you more of it in order to keep you engaged. Which, by the way, off story before we get to these calls. My grand nieces, two of them, and my grand nephew, came over yesterday for a swim at my house. We are out here in California. It's about 100 degrees. They don't have a pool. They came over yesterday evening for a swim. Which, by the way, was a great time. So my niece's children. So that would be a grand niece and grand nephew. So, I had the music playing for them, and the girls, five and seven, love Taylor Swift. So I opened my Spotify app, and I'm playing some Taylor Swift. And halfway doing their visit, I thought, "Oh, my gosh, I am really doing some damage to myself. Next time I am riding my bicycle." Spotify, because I use this DJ app on the Spotify...

Scott: It serves up what you listen to.

Pat: It serves up what you listen to. And so now, they're gonna be serving me up...

Scott: I actually don't like the Spotify [crosstalk 00:09:45] stuff, because they play the same songs from the same artists. And I'm like, I was just in a mood to listen to particular artist. I don't want to listen to them again.

Pat: That was my point. They're gonna think that I love Taylor Swift.

Scott: They will, yeah, yeah.

Pat: It's a terrible life.

Scott: I have two teenage girls.

Pat: But it's AI, it's AI. That's how it works. They're gonna give you more of what they think you like.

Scott: Well, if AI was truly smart enough, it would know that you had your grand nieces over, and would only serve it up when the grand nieces were out swimming.

Pat: But back to the social media, and if you're reading articles on social media, they're gonna feed you more. Just be careful.

Scott: I deleted my Twitter account, and then I was bored out somewhere, waiting for a plane or something, and reinstalled it, which is a mistake, because I don't know if you scroll through it, but it feeds exactly the stuff you're interested in.

Pat: I actually don't have... We have a subscription here through work, but I've never been on it. That's what I asked our marketing people. My kids actually told me I had a Twitter account. I didn't know, but through work or X. Let's go. Let's take some calls.

Scott: Yeah, so if you want to be part of our program, we always love taking calls. And our contact number to join us...

Pat: Give out your Twitter handle too.

Scott: No, I'm not giving up my Twitter because I don't tweet and I don't tend to like things. I just scroll.

Pat: It's the same news that they keep feeding up.

Scott: You are a scroll troll.

Pat: It's either Trump saying something stupid or Biden freezing. That seems like half of the stuff. Okay, so what is our number? Give our number out.

Scott: 833-99-WORTH, is our contact number. 833-99-WORTH. Or you can send us an email at questions@moneymatters.com. We are in California, talking with Susan. Susan, you're with All Worth's "Money Matters."

Susan: Hello.

Scott: Hi, Susan.

Susan: Hi, Scott and Pat. Thanks for taking my call. Love the program, whether it's podcasty or whatever. Okay, so I don't hear a lot of talk about this kind of stuff, because there's a lot about saving up for retirement, there's kind of. But I'm looking at seeing if I have any good ideas about tax efficiency now that we just recently completely retired, which I did as of January, and my husband did as of last September. And we had partially retired, but still had money coming in all the time. And then we augmented to part time, and now we're completely done. So now I think about this more.

Scott: And how old are you guys?

Susan: We're both 69. And I'm also factoring in, you know, this go, go, slow go, and no go aspect too, because this is the whole thing. Okay. So, we will... Do you want to me to give the details first?

Scott: Sure, please.

Susan: Okay. So we will have $110,000 annual income, of which $2600 is pensions and $6300 is Social Security. You lump us folks together. And then we have a little bit of stuff that comes in, and that's what makes it to 110. We are going down in tax bracket from where we were, which is nice. Currently, we're living just on stuff we had saved up and that kind of thing. So, this year, we're only going to be about 93,000, because I started taking my Social Security. I got my first check in April. Anyway, so that's where we're at with that.

Pat: How much money do you have in IRAs?

Susan: Well, all those kind of things, 403(b)s, all that junk, about 1.2.

Pat: And how about brokerage accounts?

Susan: Zero. I don't even have a brokerage account. That's part of this question.

Scott: All right. And then savings, cash in the bank.

Susan: Savings about 100. About half in cash and half in I bond, CDs, you know, savings accounts.

Pat: So the $110,000 in income is made up of Social Security and pension income. Is that correct? And you said a little bit of...

Susan: Yeah, and a little bit of...

Pat: A little bit of what?

Susan: We're in a real estate group that we've been in for a while. I don't know what it's called. Like, it's a private thing. Anyway, and we get about $300 bucks a month from them, on a quarterly basis.

Pat: Okay. And what's your question for us?

Scott: And your home is paid for, I'm assuming?

Susan: Yes, our home is paid for. We have no debt. So some of the ideas I was wondering about, because right now we're traveling and that's why we only have $100,000. Anyway, but we're having a good time. And so I was thinking that since RMDs are kind coming for my husband, his will start in '28 and mine will start in '29, that every year we should at least pull out enough from our 1.2 thing to come up to the end of the 12% tax bracket.

Scott: Yeah, you're right about there.

Susan: Okay, good. I am? Am I doing it wrong?

Scott: I mean, you gotta run the numbers, but you're around the bubble there. I think it's $90,000 of taxable income. So as married couple goes from 12 to 24%.

Pat: I think you're going in the right direction. When you said take the money out. I would convert it to a Roth IRA.

Scott: No, I would disagree with that.

Pat: Why? Would you spend it?

Scott: Yeah, I think you should spend it.

Pat: Ah, that's a good point.

Scott: I mean, you're talking about traveling. You're just retired, you're 69. I mean, what would not make sense is saying, oh, let's defer that trip till next year. Let's defer that trip to 2026. Let's defer that trip to 2027.

Pat: It won't be that much, 20 or 30.

Scott: Correct.

Pat: Yeah. Well, like, that's a lot of money. I don't wanna...

Scott: Let's say you started with a 3% withdrawal on this.

Pat: And started spending it. I'd be okay with that. We're getting to the same place, the Roth conversion...

Scott: I mean, if you were my older sister, that's exactly what I would tell you to do. Either that or you just let your retirement accounts continue to grow until then you have required minimum distributions.

Pat: But that's when you would do a Roth conversion.

Susan: Yeah. But that also means I'm not go going. I might be into slow going by then. [Crosstalk 00:16:41]. That's only four years away.

Pat: That's Scott's point exactly, which is, start the distribution and spend it.

Scott: Look, even if you said we want to do extra travel in the next 24 months, or whatever the time frame is, and we want to spend a little more than we typically would, I have no problem with that either. I mean, you save these dollars for this stage of your life. The reality is, yeah, we're here. You're 69. I mean, odds are at least one of you is going to be alive into the 90s, if not both. Statistically, at least one of you will be alive in the 90s. So we need to make sure we have income for that. But you've got Social Security and pension, and you've got quite a bit saved relative to the amount of income you already have coming in.

Pat: And by the way, it's the pension income that makes you comfortable saying, spend this.

Susan: Sure, because it's like that net whatever present value that I learned from you guys too. But can I ask you my quick four things, so that... Because what my plan was, was to not go into the 22% tax bracket very much, because I don't like to do that. I'd rather do other things like...

Scott: Well, you're going to be in a 20... In a couple years now, you'll be forced to be in that bracket, and then the rates are gonna...

Susan: Exactly. That's why I thought it's good now to take some out, because at least it'll be a little less. Yeah, no, I know. Because, yeah, we're going to be way over by the time we get there.

Pat: That's right. So it wouldn't be the biggest driver. It's good if you could stay out of it. But if you said, hey, I want to go to the Amazon, but I'm not going to do it because it drives me into a 22% bracket, I'd say that's a mistake.

Susan: Okay. But can I ask you these three things, you can go [crosstalk 00:18:18]. Okay, so I have a question about tax loss harvesting. I'm guessing there needs to be more churn, because your cost basis is what determines whether you have a tax loss to harvest. Correct?

Pat: All your money's in the qualified plan. There's no such thing as tax loss harvesting.

Scott: Unless you have a mutual fund or stock that you're holding outside of your retirement accounts.

Pat: Outside of it. If it's inside the retirement plan, you can't do any tax loss harvesting.

Susan: Oh, that's beautiful. Okay. So it'll only count once we start taking the money out and putting it in the brokerage account, that it'll start?

Pat: Thank you.

Scott: Yeah, one of the downsides of retirement accounts is everything is taxed as ordinary income. So if you bought Nvidia stock and Apple stock 20 years ago in your IRA, and you made a killing on those two stocks, rather than having a capital gains tax when you sold them, or even a step up basis if you held it to death, it's all going to be taxed as ordinary income, either while you're living or at your death.

Susan: Beautiful. Okay. So then once I put them in the brokerage account, then if I have a loss, then I can do that. Okay, that's one. Second thing is gifting to children, when you do that out of a retirement account, that's still taxed as ordinary income, correct?

Scott: Yeah, unfortunately, you... Again, if you owned a stock and you said, I want to give $10,000 or whatever amount of stock to your child, you can gift that stock. There's not any tax consequences for the gift if it's under the limits. And then your cost basis would just carry forward to theirs. With a retirement account, unfortunately, you say, I want to give my kids 10 grand. When you pull the 10 grand out, that $10,000 is going to flow through on to your income tax return, it has to be included on your tax return, and then you give the proceeds to your children. So it's not necessarily ideal.

Susan: Thanks. Next one is qualified charitable distribution accounts. If we were going to go above too much into the 22, could I use that much and put it in and start a qualified charitable distribution account? Or is that, again, pulling it out of retirement, paying money on it, then doing a qualified charitable distribution?

Pat: So that only takes place once you qualify for your RMDs, required minimum distribution. So you can't do it now.

Scott: I think you could do it at seven and a half still.

Pat: Oh, that's right, that's right. Thank you. But they still can't do it now, and it goes directly to the charity. It can't go to a charitable trust, then you distribute.

Scott: Yeah, it can't go to a donor advised fund. It has to go directly to the charity.

Pat: It has to go directly to the charity. Are you giving money to charities now?

Susan: Yes.

Pat: Okay. Well, then it would be...

Scott: At seven and a half, it would make sense for you to have, like, let's say you give money to church or March of Dimes, whatever it is. Like, if you just did that once a year and had the money come directly from your IRA, it would be more beneficial to you.

Susan: A good idea. Okay. Finally, as we move along, and you know, hopefully, we're just going to keep sailing through and I'll die when we're taking a nap when we're 95, but that might not happen.

Scott: Yeah, that's exactly what's going to happen, Susan. You and your husband, when you're 95, are going to go take a nap. You're going to finish watching reruns of...

Susan: And the grandkids are gonna come up and say, "Grandma, grandma." That's what's going to happen. Anyway. But my last one is, is there any reason we should do a QLAC, qualified longevity annuity contract as we move along? Is that something you do within your IRA and your stuff like that?

Pat: You're talking about longevity insurance. I wouldn't, because of the size of your pension and your Social Security.

Susan: Okay, that sounds beautiful.

Scott: Yeah. And insurance, there is always a cost to insurance. So as long as we can project... As long as we don't spend down that IRA, and have that IRA continue to grow. So if you take, say, a 3% distribution off it, and you're same relatively balanced portfolio, you should have growth above that. I mean, historically, stocks have done about seven percentage points above that of the rate of inflation. So if, let's say, you're 50-50 portfolio, maybe some real estate or whatever, if you can plan on say earning three to four percentage points above that of the rate of inflation, that means you can pull out three to four percentage points every year, and...

Pat: Still keep up with inflation. And then some. [Crosstalk 00:22:46].

Scott: On an annual basis, your account is gonna float all over, but over a long period of time.

Susan: And I can start right now this year, but once we get to RMDs, we'll be getting so much money, then I shouldn't take it 3% anymore, right?

Pat: But you just talked about the qualified charitable distribution is too, so you don't have any choice. You have to take it out.

Scott: It's gonna be about 3.5% [crosstalk 00:23:07].

Pat: Yeah, yeah. So you don't take what we're telling you now and the required random distribution. We're just saying you can start taking money out.

Susan: For right now? Yeah, 3%.

Pat: So appreciate the call. Congrats on the full time retirement.

Susan: Thank you so much. I appreciate you a lot.

Scott: All right, thanks. I wish you well. It's interesting, Pat, this week, I was in a meeting in Kansas City, and I hadn't been to Kansas City in a long time. It's actually pretty big city. It was bigger than I was expecting. A little over 2 million people in the metro area. I don't know why I brought that up.

Pat: Well, thank you for the little geography. Did you have barbecue? Did you have burnt ends?

Scott: I actually had... The night I got there, I was by myself, and I took an Uber to a steak house and had a Kansas City strip. I had to have a steak while I was in Kansas City, a Kansas City strip. And then I didn't have barbecue until I was at the airport, my flight was delayed three hours, and so I went to the barbecue place in the airport.

Pat: And you're vegan, but since you were in Kansas City...

Scott: Three hour delay. Anyway, I'm on the airplane, and then someone walks by with a basket, the flight attend with a basket of little snacks. I said, "Do you have anything healthy?" The guy pulls out these gummies. Oh, these are vegan. These are healthy. It's all sugar.

Pat: That's it.

Scott: And I thought to myself, wow.

Pat: Wow. This is where we draw the line now, gelatin and sugar, healthy.

Scott: That's what I though. And there were pistachios.

Pat: Oh. Well, that was healthy.

Scott: Anyway, what was I gonna state about my...

Pat: You went to Kansas City.

Scott: And one of the gentlemen in the meeting, also named Scott, he says...he liked to listen to the podcast. And he says, "What I noticed," He says, "You have a lot of people call with pensions." And I said, "Well, California, a lot of government employees, and we have really nice pension plans for our..." And so we had some discussion about that. And apparently, in Kansas, you work for the state of Kansas, you're not going to have the same kind of pension as if you work for the State of California.

Pat: Oh, that's in many states.

Scott: I don't think the state of Kansas has the same kind of deficit issue that California does. All right, let's continue on with calls. We're in New York, talking to Isaac. Isaac, you're with All Worth's "Money matters."

Isaac: Morning, gentlemen. First time, long time. I wanted to thank you guys for everything you do for us to tune in.

Pat: Thank you.

Isaac: And I've got a two part question today. I'm curious if I should consider selling 8K in individual stocks to put in a high yield savings account as an emergency fund. And if so, which stocks should I be selling? I've got stocks with profits and stocks with losses that I can harvest. And I'm not sure kind of how to balance those ideas.

Pat: How old are you?

Isaac: I'm 39 years old.

Pat: And tell us about the rest of the assets. Do you have money in a 401(k)?

Scott: Are you married? Do you have kids?

Isaac: Yeah. So I'm a single renter in New York. I make about 95K before taxes. I've got just shy of 100K in a 401(k). And then the stocks, the retail investing, is about 15K. That's where the stocks are. I've got about 6K in checking and savings. So that would include kind of like my baby emergency fund. But I want to kick it up.

Scott: Yeah. Because if you find yourself you need some cash, you don't want to have to be forced to sell your stocks. You might need cash the same time the stocks are down. That's what you're thinking?

Isaac: Well, that is also a five day kind of turnaround to get the money out of the investment account. And so if I need the money, you know, in an emergency, five days might not cut it.

Pat: I don't know if that would be the driver so much.

Scott: And how's your 401(k) allocated? Is it all 401(k) through your employer, or is it in an IRA?

Isaac: It is all through my employer? Yeah.

Pat: Is it all stock?

Isaac: Target date funds.

Pat: How did you get these individual stocks?

Isaac: So during lockdown, when my expenses were zero, I just had a ton of savings, and I downloaded RobinHood.

Pat: And you said you had $8,000 in stock. Is that correct?

Scott: No, 15,000 stocks, but he'd like to sell about $8,000 worth to increase your...

Isaac: Right. And alternatively, I can just cash flow, kind of build up the emergency fund over the next six months, and leave the stocks where they are.

Scott: I mean, through your employer, do you have any decent disability insurance? If something happened and you couldn't work for a while?

Isaac: Yeah. I feel like Aflac came in, did a presentation once.

Pat: Yeah, that's supplemental. You'd be paying for that.

Scott: But it's usually not that much through your employer. I pay for some supplemental, which is ineligible.

Pat: I don't see any issue with selling that stock. [Crosstalk 00:28:21]. I don't know if I would go either direction on this. If you could save it over the next six months, then...

Scott: I'd rather you see you save it.

Isaac: I think that's where I'm leaning as well.

Scott: I mean, assuming they're the decent stocks, and you're diversified enough, I mean, that 15,000 should be worth 30,000 in the next 8 to 10 years, and then 60,000 in another 8 to 10 years after that.

Pat: And then how much eight to 10 years after that, Scott?

Scott: A hundred and twenty thousand another 8 to 10 years.

Pat: Yeah, I would save it.

Isaac:
Excellent. And then in terms of, like, harvesting losses and profits, even if I don't go that route today, like, how does that work?

Scott: Yeah. There's no such thing as a free lunch, right? So, the concept of tax loss harvesting is when you look at your portfolio, typically near the end of the year, or actually throughout the year and during volatile times.

Pat: We use an algorithm on our portfolios that actually does it on a week...

Scott: Technology monitors it.

Pat: Yeah, on a weekly basis.

Scott: And so the concept behind this is, let's say you bought a stock for 50 bucks and it falls down to 35. You can sell that and you can lock in that loss. However, you don't want to do that unless you subsequently repurchase something somewhat similar. And there's what are called wash sale rules that state, I don't know if it's 30 or 31 days, 31 days, that if you sell a stock and repurchase that same stock or something... I don't know if it's substantially similar. I forget the... I don't have the exact terminology in front of me, but quite similar. They're going to treat it as the transaction never occurred, so you don't get the loss. So the danger of doing tax loss harvesting is you might sell a stock, maybe Nvidia was down, you owned it 15 years ago, and it was down. And so you sold Nvidia, and you thought, oh, I'm going to buy something similar. And you bought some company that doesn't exist anymore because it wasn't successful. You know, then you miss out.

Pat: But you can repurchase that stock back 31 days later and recognize the loss. So the idea behind that is that you actually manage... So then what you might want to do is you say, oh, I become overweighted in another stock. You sell that stock, recognize the gain, then you have the loss offset that gain in order to keep the portfolios. And sometimes in a really bad year, you will actually harvest losses and bank them. And bank them, which means that they roll forward, and you use those... So I can tell you, I just had a client that they had some money at another advisory firm, and years ago, we harvested losses in their portfolio. And we use them to offset gains in portfolios this year. They had then another firm, they never addressed any of the tax issues...

Scott: Why did the client have any money in another firm where they weren't being even managed properly?

Pat: Well, they moved it over to us after they recognized the difference. But so what happens is, sometimes advisors don't want to actually recognize losses in the portfolio, because it points out to the client that you lost money.

Scott: Yeah, but if you own a broad [crosstalk 00:31:57], you're going to have losses.

Pat: You're gonna have losses. If you own a diversified portfolio, there will always be losses in the portfolio.

Scott: Yeah, short term losses.

Pat: Yes, always, always, if you own a broad... Anyway, so that's the answer to your question. Thank you, Isaac.

Isaac: Awesome. Thank you so much.

Scott: All right. You know, since you're on the same topic, with technology, the advent of direct indexing... If you're someone who just came into a large chunk of cash, because it's little challenging if you've already have a portfolio for years, because you got tax considerations already built in. But let's say you just got a windfall of some [crosstalk 00:32:33]. You inherited some cash.

Pat: You got a big bonus from Tesla because of your being the CEO.

Scott: That whole thing. Whatever you think about... Anyway, [inaudible 00:32:49].

Pat: It's a different subject altogether.

Scott: But what a direct indexing does is, and you could do a direct indexing with a variety of different indexes. But rather than buying, say, an ETF or a mutual fund that has that index, it goes out and buys a basket of securities. So, let's say you want to just mimic the S&P 500, it might purchase a couple 100 different securities that's going to get you 98% or maybe even higher confidence, that you're going to mimic the overall index. And because if you look at the performance of stocks on an annual basis, you might look at the S&P 500 and say, oh, it was up 10% last year. Well, yeah, it was up 10%. Some stocks were up 200%, some were down 70%, right? They're all over the board of individual stocks. And so what direct indexing does is, you can design it to be either very aggressive on tax loss harvesting or less aggressive on tax loss harvesting. And so what it does is, as these individual stock goes down, it will liquidate that stock and repurchase it with something somewhat similar to keep you fully invested, and then you have these lost carry forwards.

Pat: Or or you offset gains. Which is, you get all the benefits of the broad diversification, the S&P 500, and you've upped the game a little bit because of the tax efficiency. And I was explaining this to another advisor who works at a small firm that doesn't have these sort of tools. This stuff, you would have never used it 10 years ago.

Scott: Because of the transaction costs.

Pat: Because of the transaction costs or what they call friction trading, right? [Crosstalk 00:34:36].

Scott: Although there's zero commission, there's still friction in it, but it's so small now.

Pat: Yes, it's really, really small, but there is a little bit friction, but it's hidden, so it's not as painful.

Scott: And I tell you, it's really powerful, direct indexing, for people who want to give some dollars to charity, because then you can cherry pick the ones with the highest return, transfer those over to a charity. You get the tax deduction on the fair market value, and you avoid that capital gain.

Pat: But remember, this direct indexing works really good for fresh money.

Scott: Fresh cash, outside of a retirement account.

Pat: Yes. Outside of retirement accounts. And the other is that the algorithms that have come in place...

Scott: And there's a cost too. So there's a cost for the direct indexing.

Pat: It's more expensive than...

Scott: Much more expensive than an ETF.

Pat: ...than an ETF, by three or four times.

Scott: More, yeah, yeah.

Pat: Which still when it's relative to the value that it actually brings to the portfolio, it's not much. It's more expensive, but not relative to the value it's worth.

Scott: And on that point, Pat, there's also, let's forget about direct indexing, there's technology out now that you can wrap on an existing portfolio for four or five basis points.

Pat: Five tenths of 1%.

Scott: Very small. And it goes and continues, monitors the portfolio and looks for opportunities to do tax loss harvesting. And it's really helpful if you've got a position, you're overweighted in one particular stock, and you'd like to figure out how to sell that, you can structure using technology. Saying, I want to try to liquidate. I want to reduce my exposure to Apple, or reduce my exposure to Microsoft, or whatever it might be. And I'm going to do it to give me up to $8,000 of capital gain per year. No more than 8,000.

Pat: So you set a tax budget.

Scott: Set a budget. And it'll then sell off that stocks at optimal times. But it also looks for opportunities for tax loss harvesting to maximize the amount it can diversify away.

Pat: And again, this stuff is... Look, Scott, you and I have been doing this for what, 30 some odd years. The idea that you could actually have technology do this, use technology, and the fact that the friction and the trading is so low, almost zero, versus how we used to do tax loss harvesting five years ago, right? You'd pull up the portfolio on a regular basis, you'd look at each one of them. Like, how do we do this? Then you do the calculation, you run the numbers, right? And then you'd be done. And then at the end of the year, you'd like, okay, one more time.

Scott: I mean, it used to be advisors... Financial Advisor work a lot in November, in the first half of December, looking for these tax loss harvesting opportunities.

Pat: Yeah. And setting a tax budget, the idea that you could set a tax budget... So talking to an advisor this last weekend from another firm, I was talking about this stuff, and I asked him, "Are you using..." He goes, "No, we don't do that." I'm like, "Why?" He said, "We're too small." And I thought, you know, there's a lot of benefit of getting to scale. A lot of benefit to getting to scale.

Scott: Well, you would think even a tiny... [Crosstalk 00:37:58].

Pat: Has the same tools, they're just not using them. They're overwhelmed.

Scott: They're hard to bolt together.

Pat: Correct. Because they have to come into your systems. They're overwhelmed with many other things.

Scott: There's too many technology options for most small, independent people that figure out how to put all these together and then worry about protecting your clients assets with... I mean, frankly, that's why there's consolidation in our industry. And you see companies, smaller companies, merging them with larger ones.

Pat: As we did, as other companies have merged into us. We were the platform.

Scott: Yes. Because it gives us more greater opportunity for... I mean, you think about the technology we have available for all of our advisors today that they wouldn't have those... Most of them didn't have [crosstalk 00:38:44].

Pat: And we wouldn't have it without them joining us either.

Scott: That's exactly right. No, there's no question about it. So let's continue on with calls here. We're talking with Kathy [SP]. Kathy, you're with All Worth's "Money Matters."

Kathy: Hi, there. How re you?

Scott: Hi, Kathy. We're fantastic.

Kathy: Good. I have kind of a quick question. I have a 457. And really the question is, is there any kind of formula that will help me decide when and how much I can start withdrawing from that account?

Scott: Well, one, when you need it. I mean, it's typically...it's based upon what else you've got going on with your finances. So for example, there are, sometimes we have people that are retired, we say, don't take any money from this account for the next three to four years. There's others who say, I don't even need the income. We're like, yeah, I know you don't need the income, but we're gonna have you take it, or we're gonna have you do a Roth conversion. So tell us a little about your situation. Are you retired?

Kathy: Yeah, so both my husband and I have pensions and our Social Security. And that's about 84,000 for the year. We have no mortgage, no car payment, all that stuff, which is great.

Scott: And how old are you?

Kathy: Sixty five.

Scott: And how much do you have, the two of you have in your retirement accounts, 457s, 401(k)s, IRAs, that sort of thing?

Kathy: So I'm the only one who has the 457. And I have about 50,000. And then we have a time account, CD, that has about 51,000 in there. And then we have a platinum savings that has about 110,000 in there. And we don't need the money.

pat: Don't touch it.

Scott: I wouldn't touch it.

Pat: Don't touch it.

Scott: Until you're 73, you'll have to take a required minimum distributions, about 4% roughly.

Kathy: Yeah, I think for me, it's 72 now.

Scott: Okay, 72. Yeah, the ages have changed.

Kathy: Yeah, yeah, yeah.

Scott: But it's about 4%. I wouldn't touch it until then.

Pat: I wouldn't do a thing until then.

Kathy: Okay. So basically, don't do a thing until I have to.

Pat: Yep. And even then... And how's it invested?

Kathy: You know, I was looking at my my sheet here. It's a target date, you know, fund.

Scott: If you were my sister, I'd say, get it out of the target date, put it in stocks, and don't touch this thing. This is money for way down the road.

pat: I'd buy the total market.

Scott: And think about this, like, this is money for 20 years from now. Something that comes up.

Kathy: Yeah. So do you recommend that I go ahead and put that into stocks.

Pat: The total market.

Scott: Total market index. Yeah, that's...

Pat: Total market. Fifty eight grand, total market, boom, done. And then about two thirds of the time, you're going to be delighted with it, and a third of the time, you're going to think that Scott Hanson and Pat McClain are morons. But we don't care what you think in the meantime. It's when you take the distribution out of the account that matters.

Kathy: Exactly. And I've already seen, you know, it's fluctuated, you know, like, I've lost a lot of money, and I hold on, it's like, whatever. Because, you know, I've been to your seminars, and I listen to you guys all the time. It's like, just let it ride.

Pat: That's right. That's right, yeah. And the total market, you'll be fine over time.

Scott: Yeah. Glad you called, Kathy. Appreciate it.

Kathy: Thanks so much.

Scott: Thank you. All right. Well, I think that's about all the time we're gonna have for our program today and halfway through the year, which is...

Pat: We're doing pretty good so far.

Scott: This year?

Pat: It's all right.

Scott: Oh, from an investor standpoint, it's been fantastic.

Pat: I was thinking about myself personally.

Scott: Yeah. Actually, nothing too tragic has gone in my life. It's been great having you with us. It's been Scott Hanson and Pat McClain of All Worth's "Money Matters." If you enjoyed this podcast, share it with a friend, or give us a review. See you next week.

Man: This program has been brought to you by All Worth 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.