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

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

Pat: And Pat McClain. Glad you are with us. Today, we're talking about financial matters, as typical. We'll try to stay within the financial realm and not get too far.

Scott: Political?

Pat: It's a bizarre time right now. When you look at some of these... And we're not gonna get down that path, but some of these big companies and sports teams in these cultural issues and their customer base are revolting and you're seeing...

Scott: On both sides.

Pat: Yeah, it's... I guess it's, you wonder why companies step in the middle of these issues.

Scott: I don't know. Do they feel like they're being forced? I don't know. I mean, it would be... If you're sitting around a boardroom, you've got your leadership team there, and you're trying to make decisions that are beneficiaries, the beneficiaries of the stockholders...

Pat: Well, that is your first... It should be your first priority.

Scott: Yeah. Well, in college, they used to tell us it was stakeholders.

Pat: Well, they still have this... Now, it's a big stakeholder thing and capital is bad and all those other things.

Scott: Yeah. Yeah. It's stakeholders.

Pat: I'm assuming if you're listening to this podcast, you're not falling to the camp that capitalism's bad, we need to destroy it and rebuild it with something fresh. That's just at least 98% of the listeners, I would assume.

Scott: We're gonna go with that assumption.

Pat: And if the 2% that are offended, so be it.

Scott: Yes, yeah.

Pat: But you're sitting around a boardroom and you're trying to decide, okay, what's best for shareholder value? And there's two things that you think about, right? You think about short-term shareholder value, and then you think about long-term shareholder value. And it is always, always a difficult decision because what might be good for your stock price today to cause an immediate bump, may not be good for your stock price over time. Which is why pharmaceutical companies spend so much money on... Well, most pharmaceuticals, on research and development, software companies on research and development, because they know over time, it's good for 'em.

But if you wanted an immediate bump in your stock price, you might be doing other things such as, let's pull back on research and development so we can adjust our EBITDA so it looks really, really good for this quarter and we'll worry about tomorrow, tomorrow, right? And I wonder, is that what's happening in boardrooms that they have to...

Scott: Some of these social issues that they're happen in the middle of?

Pat: Yes. Or does it just start happening at some corner of a company and no one really pays attention until it's already out there. And some of these political issues are so hot no one wants to even speak upon... Speak to them. I think that's kind of what it is. I don't think it's senior lead... I don't think it's anyone in a boardroom saying, "Hey, let's take a stance on abortion. Let's take a stance on transgender. Let's take a stance on," whatever issues are of the day, right? Because it's no win. I mean, because Target serves what I would imagine, the ultra-right-winger, and the ultra-left-winger, and everywhere in between. I would assume.

Scott: Yes.

Pat: I remember being at a conference a couple years ago with the CEO of Charles Schwab, and they asked about some sort of, I don't even remember what it was. It was some sort of issue. And he says, "Our stance is we don't comment on anything that's not related to investments and financial planning."

Scott: That's actually probably a pretty good place to land.

Pat: Right? Because these companies...

Scott: They get involved in a cultural war.

Pat: And they shift. I mean, think of... If you just look over the last 20 years, think of this cultural world. Just, it's a new thing. Right? Something different. I mean, couple years ago when the riots, and the whole BLM thing was massive. You don't hear much about that. The MeToo movement. You don't hear much about that. Well, it's where we are. Well, I for one, as an investment advisor, would certainly like to see companies stay clear of these cultural issues because I don't see how it's beneficial to the company, nor do I see it's gonna make any difference in the cultural issues, either, frankly. Is it the corporate America's job to deal with these issues, or do they respond to the marketplace?

Scott: I don't know.

Pat: Well, I think they should respond to the marketplace.

Scott: You would hope so.

Pat: If I was building a widget, I would want whatever widget's gonna sell the most and make me the most amount of money if I was a widget salesman, widget producer, as in any company. Yeah.

Scott: But every widget manufacturing company, their number one goal is do no harm. That's probably not true.

Pat: I was gonna say, reminds me of the Saturday Night Live bag of glass, the toys, Dan Aykroyd played the toy salesman, G. I. Joe with a switch blade. You don't remember that?

Scott: No.

Pat: Bag of glass was with a Christmas night. I don't know why I thought about that.

Scott: We should get to the calls.

Pat: Anyway, yeah. Hey, we'd love to take some calls. If you wanna join us, our contact is 833-99-WORTH. It's 833-99-WORTH. We're in California talking with Raj. Raj, you're with Allworth's "Money Matters."

Raj: Oh, hi. Thanks for taking my call. I just had a quick question. I'm almost 67 and getting close to retiring in next year or so. And with all these uncertainties, and impending recession, and all kind of mixed advice you see in the media, I just want... Curious, what is the best thing to do for someone like me where we have remained invested for most parts, but then given the ongoing market fluctuations, is this the best time to kind of cash out or put it in safe investment vehicles, or what is the best way of someone at my stage?

Scott: So, Raj, that's a great question. You've been planning for this event your entire life. Here, it's upon you and...

Pat: You're like uncertainty. There's always uncertainty though.

Scott: And if this recession doesn't happen this year, there will be another one fairly shortly.

Pat: How is your portfolio constructed today? Like stocks to bonds, just so we can get an understanding of risk?

Raj: Well, I would say it's about 50/50 mix. But as I said, if there is a long recession or something and just about the time and getting ready to call it quits in terms of working career, then I think when you start taking distributions, I'm just wondering what is the best mix for... Given the current situation right now.

Pat: What's the account values of all of them?

Raj: Probably close to 5 million.

Pat: And how much distribution do you plan on taking when you retire?

Raj: Well, there's a mandatory, some of it is retirement about I've got about close to 2 million in retirement accounts. And that, you have to take out 4%, right?

Pat: Yeah. But not until you're 75, so...

Raj: 70, 71. Yeah.

Pat: Well, they've moved it.

Scott: It's moved up. Yeah.

Pat: Yeah. So, depending upon it...

Scott: That'd be three or four [inaudible 00:08:14].

Pat: ...it bridges up over time. So, how much do you think, like if you retire tomorrow, let's forget about the required minimum distributions. How much income do you think you'll take, $200,000 a year, $100,000?

Raj: Yeah, somewhere in that range, or maybe a little less. But it'll probably go up with time.

Scott: And do you have any muni bonds in the... Sounds like you got about 3 million outside of retirement accounts. I'm assuming a lot of your fixed income is there and tax-free bonds?

Raj: Yeah. I think some of it is in the... I don't know how they're constructed. This is a somewhat managed portfolio. So, I don't know...

Scott: I mean, do you have a financial advisor you work with?

Raj: Yeah. I work with Fidelity Wealth Management people, and they kind of oversee things, but I know the overall...

Scott: They're not, like, it's not like a fiduciary advisory relationship. Yeah. They're independent...

Pat: And they mostly just construct portfolios and don't get into financial planning if you're using someone at...

Scott: And I think they emphatically state they don't provide tax advice.

Pat: So, I think you're okay. I wouldn't change a thing other than I would look to see if we could make the money outside of the IRAs really, really tax efficient. Super tax efficient.

Scott: Because your biggest... The biggest area for you to add value over the next decade is in your tax planning.

Pat: That's right. So, in fact, if we...

Scott: And once you retire, your income's gonna look much different. Are you married?

Raj: Yeah. Yeah.

Pat: Okay. So, if I were to like build your portfolio from ground zero, I would have a tendency to put more money in the bonds inside of the IRAs, and more tax efficient things like the total market, or the S&P 500, or tax-efficient mutual funds in the brokerage account. And that has to do with what is called a step up in basis at the first day.

Scott: And probably spend maybe even a little, in your situation, everyone's situation's unique.

Pat: That's right.

Scott: And oftentimes, someone at retirement, the majority of their assets are in retirement accounts. For you, it's only 40%. So, it might actually be that we would draw heavier from that and allow the other assets to grow in a tax efficient fashion.

Pat: That's right. You would probably start your distributions almost immediately from the IRA when you retire. And just...

Scott: But it might also depend on what the beneficiaries look like because you might choose to keep more in the IRA.

Pat: Yeah. Especially if your kids...

Scott: And have more munis [crosstalk 00:10:46].

Pat: ...are in a lower tax bracket. So, there's lots of things that you should do from just...

Scott: A planning standpoint.

Pat: ...managing the portfolio tax efficiently in a planning standpoint. But the 50/50 allocation, I wouldn't touch it at all. Actually, I was listening to a podcast this last week and the guy that actually drew the correlation between negative with yield curves, right?

Scott: Inverted yield curve.

Pat: An inverted yield curve, was actually the one that actually created this model that says, well, this is a predictive of a recession. So, I was listening to him on a podcast this week and he said, "But it may not be this time."

Scott: He's the guy who created it.

Pat: And he...

Raj: They always say that.

Scott: If so, I think something like 95% of economists are predicting a recession latter part of this year currently. So, the market's already priced...

Pat: It's probably priced.

Scott: ...a light recession in.

Pat: Yeah. It's probably priced...

Scott: And historically, well, I mean, there's lots of recessions. You're 67, let's assume you live to 90, there'll be several more recessions, and a handful of bear markets.

Pat: And this portfolio has served you well by having an allocation like this over time.

Raj: Well, it's been very slow growth, unlike what many people do, probably better than me. But it's been very conservative for most parts. And it's been very conservative funds, mutual funds and so forth.

Pat: That's okay. That is all right. If you were a pension fund, if you were a pension fund and you looked at their allocations, they typically have 60% to 70% in stock or stock-like holdings, and the rest is in fixed income.

Scott: That's right.

Pat: So, you're not far off the mark. And remember, you're not managing it just into the first day of retirement, you're managing... Actually, you're managing this money for not only you, but your heirs, your beneficiaries. Because you're not gonna spend all this money in your lifetime.

Raj: Hopefully not.

Pat: You didn't get $5 million by blowing cash.

Scott: That's correct.

Raj: No. No, no, no. I'm a saver, but [inaudible 00:13:01].

Scott: That's why you have the 5 million bucks.

Raj: So, avoiding risk is, again, risk management is, I think, crucial [crosstalk 00:13:08].

Scott: Yeah. But I think it's also important, Raj, let's don't forget about the biggest risk for retirees is inflation.

Raj: [Crosstalk 00:13:16] run out of money.

Pat: Well, it's inflation. It's spending power.

Scott: Spending power.

Raj: Exactly. Yes.

Pat: And that's why the equities actually play a very, very important role in your portfolio, the stock side of the portfolio. If you didn't...

Scott: You can't have raising prices without companies raising prices.

Pat: That's right. Which then feeds on itself. But if you were my older brother, I would say, "Look, the portfolio's, okay. You really need to dig into what is the objective of the portfolio?" Assume you're going to leave money to your heirs. What money should you leave them? Should you leave them the money in the IRA or in the brokerage account? And it depends on what you're...

Scott: If we're gonna pull 150, 200 grand a year, let's assume, where are we gonna pull that from?

Pat: A combination of both or what percentage? And the tax planning is critical for you.

Scott: And it might even be some Roth conversions for the first few years.

Pat: How much money are you making now at your employment?

Raj: Probably little under half million.

Pat: Okay. And I assume you have no debt?

Raj: No, no, I never have any debt.

Pat: I knew that. Yeah. Yeah. Don't change the construction of the portfolio in terms of the stock-to-bond weighting, but most certainly, dig in on the tax aspects of it. And remember, you don't know what you don't know. And the people at Fidelity, they may not have ever even mentioned tax. And that is really what the elf is.

Raj: Well, they do some tax harvesting within the managed part of the portfolio, but...

Scott: That's a start.

Raj: ...I dunno, it has not shown a growth. They just say that it saves me tax money every year.

Pat: That's a start. That's a start for tax planning. So, all right. Appreciate the call.

Raj: Great.

Pat: Yeah. And by the way, you should think about Social Security. I'd probably take it the day I retired just because of your net worth.

Raj: Actually, I turned it on because that'll benefit between me and my wife. I think our breakeven point would be somewhere in mid to late-80s. So, my advisor said, "You should turn it on. So, I turned it on."

Pat: Well, I would've done it for another reason, which is I would be afraid of a change in legislation for rich people. And that the...

Scott: Well, there's... Yeah. It's already set in law that there's gonna be a reduction as soon as the trust fund goes negative, which is gonna be in either '23 or '24.

Pat: '33 or '34.

Scott: I'm sorry, '33 or '34. So, a decade from now.

Raj: Scott, you scared me for a minute.

Pat: No. No, no. But it could happen.

Scott: It'll be there before you know it.

Pat: It could happen. All right, I appreciate the call.

Raj: Sure. Thank you so much.

Scott: Thanks. Let's head now to Hawaii and talk with Marie. Marie, you're with Allworth's "Money Matters."

Marie: Hi there, good morning.

Scott: Hi.

Marie: My name's Marie.

Scott: Hi Marie.

Marie: Hi, I'm 57 years old and thanks for taking my call.

Pat: Aloha.

Marie: Aloha. Yes.

Scott: 'Aloha.'

Pat: Or is it Mahalo? I don't know. Which one is the...

Marie: Both.

Pat: Okay, okay.

Marie: Yeah. They're both good. They're both good.

Pat: Okay. So, you're 57.

Marie: Yes. I got laid off last year from my company and instead of looking for another work, I decided maybe I can take a break, retire early. I have some savings and kind of wanna focus on my health for now before even thinking about maybe going back to work later. And then I just wanted to see if this early retirement myth is actually...actually works. So, I did move here last year, and the lifestyle here is a lot simpler to... A lot of things are free, fresh air is free, the beach is free. So, I'm not really spending a whole lot of money. So, a lot of my...

Scott: You know what's really... I'm gonna stop you just really. That's really interesting because just about every article you would read would talk about how expensive it would be to retire in Hawaii, but they're written by journalists, most of these financial articles written by journalists, by journalists that just look at how much a housing's gonna cost, and energy's gonna cost, and food's gonna cost. But then you talk to Marie who's actually there and she's like, "Most of the stuff I love to do is free."

Pat: I had a client that retired to Hawaii. She was just...

Scott: She's not spending 300 bucks a ticket to go to the Met.

Pat: Yep. She did it 15 years ago, same thing, got an early retirement offer, said, "Hey, can I afford to move to Hawaii and live like this?" And I said, "Yeah, if you can make $1,000 a month." And she works part-time in hospitality and she absolutely loves it. Just loves it. Couldn't be happier. So, you wanted kind of us to do a check on your financial situation? Is that what...?

Marie: A little bit, but I think one of my main reasons because most of my living expenses comes from interest and dividends. And so, a lot of my money is invested, about 70% in stocks and 30% in bonds right now. I had a kind of generic question. So, it seems like whenever I watch the stock market this year, it's kind of starting to creep up a little bit the past few weeks and... But people still talk about recession all the time. So, for somebody like me who's kind of dependent on my portfolio, what should I do? Do I go defensive and put some cash aside, or is this whole recession talk another one of those things that people are propagating fear, or kind of just wanted to see your point of view.

Pat: How long has your portfolio been 70/30? How many years?

Marie: It's kind of been that way. Actually, it was a little bit more leaning towards stocks, and then when I retired last year, I started putting more on not bonds, but like treasuries.

Scott: What percentage of your portfolio are you withdrawing on an annual basis? Do you know?

Marie: Just relying on interest and dividends right now because I'm not really spending a whole lot of money.

Pat: And how much is that?

Marie: Maybe a year, about $40,000 a year.

Pat: And how much money... So, give us the breakdown of the total dollar amount of the whole portfolio.

Marie: About 800,000.

Pat: 800,000, and you're taking interest and dividends of $40,000 a year?

Marie: Yes.

Pat: And how much money do you have in IRAs?

Marie: IRAs is, since I can't touch it yet, right? I have about 750k.

Pat: Well, actually, and you've got no income coming in other than the dividend...

Marie: Yeah, for now, because I'm [crosstalk 00:19:58].

Scott: So, you have what? Lemme just get it, you've got 1.5 million in savings and you're living off $40,000 a year, is that correct?

Marie: Mm-hmm. Yes.

Scott: All right. Then your allocation is completely fine, regardless of what is gonna happen in the next 12, 24, 36 months.

Pat: We shouldn't worry about the 12, 24, to 36 months.

Scott: Because you are living off withdrawing such a small percentage of your net worth that you've got the luxury of being able to have the time to let the markets go through the cycles that they're gonna go through.

Pat: But now, there is a planning opportunity.

Scott: And let me...back on the markets. So, because of your question, like the majority of economists are now expecting a recession. So, the market...like, investors know this information or, at least, what people believe, and its currently priced in. So, theoretically anyway, market prices are gonna fluctuate based upon new information that think that something that we haven't thought about, something's changed that's not in our model today that we haven't, weren't able to predict today. Theoretically, that's what's gonna drive tomorrow's stock price.

Pat: So, your allocation is fine I think. And the money is in an IRA, not in your 401(k), correct?

Marie: Oh, sorry. The retirement money is in 401(k).

Pat: Okay. This is brilliant. This is beautiful. I was hoping you were gonna say that. And you quit when you were 56 years of age.

Marie: Yes.

Pat: Okay. This is a great planning opportunity. You need to start taking income from that 401(k).

Marie: But isn't the minimum age is 59 and a half?

Pat: Only on an IRA.

Scott: Well, it's there, but there's exceptions. One exception is if you are 55 or older and terminate service from your employer.

Pat: You can get at the money without penalty. You pay taxes on it. So, the mere fact that you are at such a low tax bracket is why we wanna start taking money out of that 401(k) today. Now, had you put it in an IRA, we would've used what's called a 72(t) distribution, but you don't have to worry about that. So, for the rest of the listeners, a 72(t) is...

Scott: Or just a Roth conversion.

Pat: Or a Roth conversion. But why would you do a Roth conversion if she never wants to go back to work, Scott?

Scott: Well, good point.

Pat: Right? I'd start taking distribution...

Scott: From a financial standpoint, this is awesome.

Pat: This is great. You're fine.

Marie: Really?

Pat: Yeah.

Scott: My guess is you've been a great saver. My guess is you never had a super high income, you've been a great saver your entire life. Is that right?

Marie: I had a super high income, and I was a great saver.

Scott: Okay, both.

Pat: Okay. So, here's why you wanna start taking some money out of that, the 401(k). So, forget all the rules about 59 and a half, right? You wanna start taking a monthly distribution if the 401(k) allows it. It may only allow an annual distribution, in which case you wanna take it annually, and then start spending it on a monthly basis. I think I'd probably... I'd have to do some planning around it. But I would probably start taking...I don't know.

Scott: Yeah. Because there's room in the low tax bracket and you've got some capital gains that are at nothing...

Pat: On your brokerage.

Scott: The tax planning is the bigger issue in my mind.

Pat: Yeah. I would probably look at... I'd have to do some analysis on it, but I'm guessing you could probably take almost $20,000 a year out of the 401... Now, I said guessing...

Scott: Or maybe more.

Pat: ...but I'd run it through a...

Marie: Yeah, I don't need anymore.

Pat: I'd run it through a model. I'd do some tax planning around it. So...

Scott: And the idea behind this is, it's basically tax arbitrage. When we're in a low or 0% bracket, like we wanna maximize that as much as we can rather than deferring, and suddenly we'll find ourselves in a 12% or 22% or worse down the road. All right?

Marie: Yes.

Scott: Does that make sense, Marie?

Pat: And you may...

Marie: Yeah, I understand.

Pat: You may need a financial advisor to actually walk you through this and actually determine the amount. And you should be rebalancing your portfolio and doing some tax loss harvesting on that brokerage account right now.

Scott: Yeah, for sure.

Marie: Sure. Yes, I do. I do that. Yeah. Well, I did it too much last December, so... But at the same time, I was thinking about Roth conversion, but then, they have that five-year minimum rule that you can't touch it, right? So...

Scott: Yeah. But if you did it, you're probably not gonna touch it until you're 90.

Pat: Yeah. So, I could make an argument for a Roth conversion, but if the plan is really never to go back to work, I...

Scott: I would still make the argument for Roth conversion.

Pat: You would? How much?

Scott: Well, instead of withdraw, I would do a Roth conversion.

Pat: Why wouldn't you do a little bit of both?

Scott: Because she's got plenty of money after tax. It's like, if she can just suddenly have the ability to take 20 grand from her brokerage accountant and throw it into a Roth, wouldn't she do that?

Marie: Boy, yeah. I guess, I can do both.

Scott: Yeah, you could do both. I mean, do a financial plan and you can see what the difference is down the road.

Pat: I could make an argument on both sides of this. But a Roth conversion, most...

Scott: It's because you just like to argue.

Pat: All right. Well, that's true.

Marie: He just likes to analyze and discuss.

Scott: No. I could tell the look in his eyes, he's thinking, "You're probably right, Scott, but I'm gonna come up with some argument to say why you're not 100% right."

Pat: Okay. What we do know is that you need to start draining that either in Roth or income...

Scott: From a tax planning standpoint.

Pat: And it might be worth your time to actually pay someone to help you do it. So, but congrats on the retirement. Good for you.

Marie: Thank you. Yeah. Thank you.

Scott: Yeah. Good for you.

Marie: Well, it's always good to have some time to focus on the health, right?

Scott: And to figure out how to live on $40,000 a year in Hawaii is quite impressive as well, I must say.

Pat: Yes. So, well, I appreciate the call. We're taking a quick break. We'll be right back with Allworth.

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

Pat: Welcome back to Allworth's "Money Matters." Now, before we go back to calls, interest rates are up dramatically on cash, right? Short-term. How quickly it moved is actually mind boggling. But that's exactly what the fed's point was, right? To slow inflation. We're gonna make it more difficult in the capital markets to use leverage to slow growth. Yeah. And so, we've got a time right now with interest rates. Short-Term interest rates are high, long-term interest rates are low. But for the long-term investor, either one can be a bit of a trap. So, right now, a three-year... I'm sorry, a three-month government treasure bill is yielding roughly 5.25. Six months is almost 5.5%, 5.4%. Okay? Two-year, right? So, invest your money for 6 months, 5.4%, 2-year, 4.5%, 5-year, 3.8%, 10-year, 3.7%. That is what's called a negative yield curve.

Scott: Yes. So, yes, interest rates are high on the short end, low on the long end.

Pat: And historically, it has been the other way around that the longer you lend money for, the higher the interest...

Scott: Doesn't that make sense?

Pat: ...that you're gonna receive, yes.

Scott: I'm gonna lock my money up. The longer you lock your money up... One would think a rational investor would say, "The longer I'm gonna lock my money up, the more interest I'm gonna demand, more return I'm gonna demand for that investment." Here's the danger with high interest rates for longer-term investors. It is tempting to look at this as a great alternative for what would otherwise be good long-term investments, equities, stocks.

Pat: And there was an article in "The Wall Street Journal" a week ago on... It comes out on Saturdays, I think, Jason Zweig, which I normally really enjoy his coms, I always read his coms.

Scott: As do I.

Pat: He usually drops, I think, Friday nights sometime, or something like that because it's usually when I read it, late Friday afternoon. And this was published in "The Wall Street Journal" a week ago. This particular one, funny because I almost wrote to him. And I can't expect every time someone writes that I fully agree with their opinion, right? But the perspective was that, hey, cash is a great alternative right now. And he said at roughly trading at just over 5%, it's trading at 19 times earnings. So, it takes you 19 years for an investment to get your cash back in interest. He said that and he compared it to the stock market, which is also trading at roughly 19.

Scott: They're not the same. Absolutely.

Pat: Right. So, think about this, if you put $1 million into a treasury bill that's yielding just over 5%, first year, you're gonna get 50 some odd thousands, next year, 50 some odd thousand, no inflation by the way. Ten years, 50 some odd thousand, 15 years...19 years, 50 some odd thousand. And by that point, you've got your $1 million back in interest. Okay? So, the argument of this article was that's trading at 19 times its forward cash flow. And the argument was that the stock market is trading at roughly 19 times. And the difference is earnings. And the difference is corporate earnings go up over time.

Scott: Your interest, [crosstalk 00:29:54] difference.

Pat: Yes. Well, to compare the two, I thought, was preposterous. So, his point is, this is a decent alternative to equity investing. Let's say you take the same $1 million and buy the broad basket of S&P 500. It's yielding what, roughly 2% today? Let's call it 2%.

Scott: Yeah. A little bit over.

Pat: So, it's not yielding... So, a million-dollar investment will get you $20,000 a year in interest. Now, over the next 20 years...

Scott: But companies don't pay out, most companies don't pay out everything they make.

Pat: No. I was talking about dividend. Dividend [crosstalk 00:30:32] is roughly... Correct. Correct. They're earning in about 5%, just over 5%.

Scott: They're reinvesting back in the business.

Pat: On average, right? That's the 19 times. So, they're earning about the same as in interest. But over time...

Scott: You would expect...

Pat: Assuming our world hasn't changed in such a manner that no longer do we have growth, no longer do we have innovation, no longer do we have increased productivity anytime in the next 19 years.

Scott: Correct.

Pat: And it might occur in year 3, 7, 12, who knows? So, if you're a 19-year investor, you're gonna keep your money in cash? That would be foolish. I don't think that article is particularly arguing that, but it made such a strong case for cash, I was a little perplexed. Cash has a place...

Scott: No question.

Pat: ...in a portfolio.

Scott: No question.

Pat: And it's a better alternative today than it was a year or two ago. For sure.

Scott: That's right.

Pat: There's no question about it.

Scott: That's right. That's right.

Pat: And if you've got money sitting in a savings account earning 5% and you've got a mortgage at 3%, what's the point of paying it off right now? Yeah. And if interest rates decline in three years...now interest rates are back to 2.5%, then it's a different, you gotta look at it in the...

Scott: But we don't know what interest rates will be in two years or three years, nobody does.

Pat: Nobody has a clue. Nobody does. The Federal Reserve doesn't. The Fed, they're like, we have no idea we're gonna look at this quarter by quarter, actually, week by week to see...

Scott: So, they've cranked up rates, cranked up rates, cranked up rates. Now, it looks like they're taking a little bit of breather, like what is this really gonna mean for the economy?

Pat: But even then, they're not sure. They're looking at data that comes in every day. What are participation rate? What kinda leverage is in the marketplace? If we slowed growth too much, are we gonna create unemployment above and beyond what would be considered reasonable in order to stop inflation? They're just, they're tightening up. That's why they call it tightening. So, we're gonna take leverage out of the marketplace. How do you take leverage out of the marketplace? You make leverage more expensive. We've seen it in home prices. We're seeing it actually in...

Scott: The home market is a bizarre market right now.

Pat: It is crazy. My son just made an offer on a house in Denver at $10,000 over asking.

Scott: What was the house selling for?

Pat: 550.

Scott: Is he near the downtown area?

Pat: Closer. Yes.

Scott: What does a 550 buy in Denver in 2023?

Pat: Well, didn't buy it. It went for 580.

Scott: How many offers on it?

Pat: Well, two. He has the one that he knew of was one other one. It went for 580, 1,700 square feet. Two bedroom, two bath, 55-year old home that had been recently re-plumbed and re-electric, needed new roof.

Scott: But it's still being outbid.

Pat: Oh, absolutely being outbid. Being outbid.

Scott: It's really bizarre. And this is a prime example to say how... To just remind yourself how difficult it is to try to time the market. Because if you would've said, "Hey, interest rates on a 30-year mortgage are gonna go from 2.75% to 6.5% and you modeled this after home prices have increased anywhere from 30% to 200% dependent on the market."

Pat: If you modeled that, you would say that there's going to be a steep decline.

Scott: Of course, you would. Right? Think how much more monthly payment is for the same mortgage? But what I think what's interesting now, Pat, is there are a lot of people that have homes that don't wanna sell. Like, I would normally move up. I would normally consider a transfer to another city, but I've got a mortgage at...I've got a $700,000 mortgage at 2.75%. And the new market, even if I can buy a house for slightly less, that $500,000 mortgage at 6 or 6.5 Is gonna be much more than I've been paying, which slows the mobility.

Pat: Which is why inventory is so low in most parts of the country.

Scott: That's right.

Pat: Or what you're seeing is people that have the means to actually do it will then start converting those homes into rental properties and then re-leverage on the backside for new property if they have the means to do so. Just to not get rid of that low interest rate.

Scott: Yeah, I would think that's correct. Yeah.

Pat: Yeah. Or convert it to an Airbnb.

Scott: But who knows where interest rates are gonna be another two years from now.

Pat: Anyone's guess.

Scott: They could be low again.

Pat: Probably not below 3%, I don't think.

Scott: I don't know if that's really been healthy for... I think that the loose monetary policy is coming back too. And we talked about it a couple years ago.

Pat: Yeah. And so, like cash, there's clearly a place for cash in a portfolio, and it's much more attractive today. But for any investment that you've got five-plus years on, it's probably not gonna make... Probably not the best place for you to stick it. I mean, we're talking about housing, and if your plan is you're saving for a vacation... Let's say a second home that you wanna buy in four years, cash is the perfect place for it. Because you know exactly what you're gonna have when you need the money.

Scott: But probably not 10 years, or 12 years, or 20 years.

Pat: No. And cash is the ideal place for shorter term. That's the correct place. You don't want to try to invest in the latest AI company or SPAC, or you try...SPAC's not popular anymore. AI is what's the latest company that's gone through the roof or whatever? And I'm thinking, oh boy, investors getting used it. But look, by the time it's the front page of "The Wall Street Journal" and it's the top story on CNBC...

Scott: It might be too late.

Pat: ...it might be too late, I'm just guessing.

Scott: Could be a little late.

Pat: The cat's out of the bag at that point. The price has probably already been bid up. Any excess returns probably been squeezed out.

Scott: And then what you're seeing is a lot of lesser also ran companies actually enter into the capital markets in order to extract value.

Pat: Well, I tell you, in California, we've clearly seen that in the marijuana business. I don't use marijuana personally, I think I did in college, but it's been a long time but it was one of those things that you saw so many people enter the market. I've got a close friend that went into the growing business. Actually, I know a couple people that went into the growing business, and they were mitten money for a little while. Prices have collapsed. Anyway, we should probably take some calls here. We're gonna listen to some calls. We are in California talking with Richard. Richard, you're with Allworth's "Money Matters."

Richard: Hi, it's great to be with you guys.

Scott: Thank you.

Pat: Thank you. What can we do to help?

Richard: Yeah. I'm looking at a proposed settlement associated with my CalPERS long-term care. So, it's proposed settlement's gonna be considered by the class action settlement considered by the courts, they haven't authorized it yet in July. So, I've been sent two options in front of me, one, take a lump sum payment, this is for both my wife and I have long-term care, lump sum payment between us. It's 50,000. It's approximately 25,000.

Pat: And that's a refund of premium?

Richard: Yes. Yeah. Eighty percent of the premium since we began the program back when we were 36, that's what it represents. Take a lump sum payment and discontinue participation in the CalPERS long-term care. Or, option two, continue long-term care with CalPERS and get $1,000 each, and there would be no rate increase for us through November of 2024.

Scott: 2024?

Pat: Oh. And what happens in December of 2024?

Richard: Well, my expectation is more increases, but there's no certainty on what those would be.

Pat: Well, then you could pretty much count on an...

Scott: Uncertainty, yeah.

Richard: That's precisely, precisely what I'm [crosstalk 00:38:59].

Scott: How old are you?

Richard: I'll be 64.

Pat: And let's decide whether you need long-term care insurance or not. Let's start there.

Richard: Yeah. Well, when I signed up after going through situations with both my wife's parents and my parents, I got concerned and thought, well maybe this is something we need to do. And back then, it was cheap.

Pat: Yeah. It was really, really, really inexpensive. In fact, it was so inexpensive, it wasn't sustainable.

Scott: They couldn't... That's right.

Richard: Exactly.

Pat: So, what is your monthly pension that you receive?

Richard: Monthly pension is 17,000.

Pat: Okay. And does your spouse receive a monthly pension?

Richard: She does not.

Pat: And how much money do you have in IRA's, brokerage account, savings, all that sort of stuff?

Richard: 401, 457, a million. Outside of just in equity kind of investments, it's about 400,000, and then savings about 350, and the home's paid off.

Pat: So, we're at 1.75 million at $17,000 a month in income.

Scott: Would you be able to medically qualify for a new long-term care policy today?

Richard: I think I can, I'm not sure about my wife.

Scott: Because that's the question, right? So, if you can go out and medically qualify for a new one, what I would probably recommend is if you wanted to continue with long-term care insurance is buy a life insurance policy, a single-pay life insurance policy that has a rider for it. Is gonna end up being less expensive for you over the next 20 years.

Pat: And the reason that is, is essentially, you give them a lump sum and they say, "Okay..."

Scott: And most long-term cares are not that long.

Pat: Right. They're how long you stay in a facility. You give them a lump sum and let's say you give them 200,000 and they say, "Okay. We will promise you $8,000 a month in benefit." That 200,000 will quit earning interest, it just stays there. If you go in a long-term care facility, you have to blow through that 200,000 before the risk actually hits the insurer. So, consider it a high deductible.

Scott: But then if it's a 5 or 10-year stay, you've got insurance there.

Pat: And if you never use it, then that $200,000 goes to your heirs at your death. That's how these long-term care policies...

Scott: So, it might be that something like that would make sense for you, but for your wife, you might wanna keep her on the plan.

Pat: That's right.

Scott: Because if she can't medically qualify today, she's probably best... Well, if she can't medically qualify, then the question is do you want insurance or not? And you only have one option.

Pat: Well, here's the... But expect this to happen though. When that happens, you're gonna say it, you're going to...

Scott: Adverse selection.

Pat: You're gonna create an adverse selection pool in the insurance contracts...

Scott: The only people are gonna be stuck...kept with it are the ones that couldn't get anywhere else.

Pat: And the premiums will skyrocket because of the adverse selection in that pool.

Richard: Sounds like though, what I should do, because this got two months right now before the court, I think they take this thing up in July, I can actually start contacting a company just from an eligibility standpoint...

Pat: That's right.

Scott: A hundred percent.

Pat: That's right. And go into underwriting for the both of you and determine whether you can get any new policy. And then when that happens, I gotta tell you, I would have a tendency if you didn't qualify, I might take that risk in-house for your wife, which means I don't know if I would actually...

Scott: Well, you'd might continue the premiums until, at least, next November.

Pat: But she's given up the $25,000 because, right. See if it was option one or option two.

Scott: This is one you have to make a decision by...?

Richard: The court takes it up in, I think, first week or [crosstalk 00:43:16].

Scott: Actually, in the next couple weeks, I would talk to a long-term care specialist and apply for a couple policies and see what happens.

Pat: Yep, yep. And for both you and your wife. But my guess is that this...

Scott: And if she can qualify, you're probably better off moving to a different policy at this point.

Pat: No question. There is...

Scott: And it might not be that bad in another year or two, but if we go another decade out, 20 years out...

Pat: For the premiums, because what happens is this adverse selection means all the people that couldn't qualify outside like you, you qualified outside, you leave all the bad risk behind. Right? All the risk. And it's called adverse selection...

Richard: It's a really good point. There's just gonna be a concentration.

Scott: That's exactly right.

Pat: That's right.

Scott: And the way these policies, the way they have the premium, they can raise the premium based upon their claims.

Pat: By the claims in that particular risk pool, which is all those people that were employees of the state of California that couldn't get insurance elsewhere. And you would expect those premiums to just go out of sight because the insurance companies aren't going to lose money on this.

Scott: They don't lose money.

Richard: I get it. No, that makes a lot of sense.

Pat: Right? And so, then you might just decide rather than I'll take my 25,000... And by the way, you've got $17,000 a month in pension, and then you probably have Social Security on top of it?

Richard: I will. I'm working again, so I'll put that off. But yeah.

Pat: Okay. Okay. I'd take that risk.

Scott: I mean, if it was only one of you, if you were single, I'd say, what in the world you paying for long-term care insurance? You got plenty of money coming in on a monthly basis to pay for whatever you need. The reality is you got plenty of money coming in on a monthly basis to pay for what both of you need. But what makes you feel [inaudible 00:45:05].

Pat: Yeah. So, I would see if I qualified. If I didn't qualify, I'd actually take the 50 grand and walk. And I'd take that, your wife's, and I'd... Bear the risk yourself, you self-insure on that one.

Richard: That's really helpful.

Scott: All right, Richard.

Richard: Appreciate the counsel, and good to talk with you guys and really enjoy listening to the...

Scott: All right, thanks.

Pat: Well, thanks. Will you do us a favor? Can you go on...

Scott: Give us a review.

Pat: A review please.

Richard: Of course.

Pat: Our marketing people say if we get enough positive reviews, we will hit a tipping point at some point in time and then...

Scott: Whatever that means.

Pat: I don't know what...

Scott: I don't know what impact that's gonna have on anyone's life, but...

Richard: Well, count one more.

Pat: All right. Appreciate it.

Scott: It's interesting, it's like this long-term care call, I actually found out that it was... I thought it was quite an interesting call, and I think probably educational for a lot of people. Just the whole adverse selection pool because it happens in life insurance as well.

Pat: That's right. That is that...

Scott: Not like a whole life because that stuff determined ahead of time. But these universal lifes...

Pat: Yeah. The selection pool, that's why they have the emancipator 1, 2, 3, 5, 7, 15, 21...

Scott: Insurance companies, they all these different names for things.

Pat: Yeah. Well, when we were at Lincoln National Life Insurance, it was the emancipator.

Scott: Yeah. It was a long time ago. You learn a lot starting there.

Pat: You do.

Scott: And I'm just...nothing disparaging about the insurance company.

Pat: Oh, no. No, no. And we're in California with Sammy. Sammy, you're with Allworth's "Money Matters."

Sammy: Yes. Good afternoon gentlemen.

Scott: Hi Sammy. How can we be of service?

Sammy: Well, I have a question about IRAs. I'm 79 years old, I'm retired. I've got a state of California savings or PERS retirement. And I have quite a bit in IRAs that I accumulated over the years working for the state, both in 401(k)s, 457s and also some traditional IRAs outside of that state system. And I'm just wondering if it's time for me, at this point, to consider converting those to Roths.

Pat: How much money do you have in those?

Sammy: Grand total in there is 419k.

Pat: Okay. And are you married?

Sammy: Yes.

Pat: And what is your family income?

Sammy: The two of us together probably 175, I'd say.

Pat: And you have children?

Sammy: Adult children on their own.

Pat: And should you and your wife both pass on, will these dollars go to your kids?

Sammy: Yes, they are... Right now, it's set up in one-third beneficiaries for wife and two kids.

Pat: Okay. And so, let's talk about your kids because the reason we want...

Scott: And so, let me just get clarity on this though. Currently, it's structured so if you got hit by an Amazon van today and passed away, a third goes to your wife, and the other two-thirds go to your adult children. Is that correct?

Sammy: That's correct.

Pat: Huh. That's interesting.

Scott: And what is the tax situation like for your children? Is their income above 175 grand?

Sammy: No.

Pat: What is their income?

Sammy: They're probably in the neighborhood of anywhere from 85 to 100.

Pat: Okay. And they have children?

Sammy: One of them does, one of them does not. So, one of 'em has two children.

Pat: Okay. So, it's curious that you have money going to your children and...

Scott: Are they both in California?

Sammy: No, they're both out of state.

Pat: What states?

Sammy: Utah and Illinois.

Pat: Okay. See, and the reason we're asking this question is you asked us... With asking us should I put money in a Roth...

Scott: Should I convert to Roth.

Pat: ...was should I voluntarily pay the tax on this now or not? And the only reason you would is if there's a high probability of you being in a lower tax bracket in the future. And we don't believe that's going to happen. But the beneficiaries are in a lower tax bracket than you. So, if you were to pass away and they inherited the Roth, let's say it happened tomorrow, you converted everything to tomorrow, tomorrow into a Roth, and then the very next day you pass away. And you pay taxes on that, you would be paying taxes at a higher rate than they would when they took the distributions from the IRA.

Sammy: Gotcha. Yeah.

Scott: Unless they cashed it in all at once. But then, it would still be a wash.

Pat: Yes. Correct. So, the answer is no. You shouldn't be converting money from the IRAs to Roth IRAs.

Sammy: That makes sense because they'll have 10 years too.

Scott: That's right. That's right.

Pat: That's right. You got it. But my question more than that is, if you were to pass away tomorrow, the way you described it is if you'd passed away tomorrow, your IRA, one-third of the $419,000 would actually go to your wife, one-third would go to each one of your children. Is that correct?

Sammy: Yep. That's the way it's set up.

Pat: And would your wife's income drop because of your pension or any other income? Most certainly it would because of Social Security at your death.

Sammy: No. She's got her own trust. We each have our own separate trust. We married late in life...

Pat: Okay. All right.

Scott: Got it. Enough.

Pat: There we go. Thank you. You answered all the questions right there, because it's highly unusual. And you have your own trust? Perfect.

Scott: It's not always that unusual on second marriages though, or later marriages.

Pat: That's right. That's right. But perfect. Nope. Nope. The answer to your question is yep, do not convert.

Scott: Yeah. Appreciate the call, Sammy. And I may...

Sammy: Was great. And the next question is...

Scott: Oh, fire away.

Sammy: ...do you know something about the Amazon truck that I don't know?

Scott: No.

Pat: No. It's just they seem to...

Scott: Pat's trying to change the story instead of... If you got hit by a bus tomorrow, Pat says you're much more likely to get hit by an Amazon truck van because they're everywhere.

Pat: They're everywhere. They're obsequious.

Sammy: I believe it.

Pat: I see one in front of my house at least twice a day. I think they're following me.

Scott: They might be in your house just dropping something off twice a day.

Pat: I know.

Sammy: That's likely. That's likely. Yeah.

Scott: All right. Appreciate the call.

Pat: Yeah. Thanks, Sammy.

Sammy: Thank you.

Scott: It's interesting, Pat, when money gets transferred by beneficiary designation, even if your will, or trust states something different. And sometimes, on second marriages it gets pretty complex because you've got an IRA, you're like, "Well, I wanna make sure my spouse... If I die, I want my spouse to be able to have income from this. But I don't wanna disinherit my kids. When my spouse eventually passes on, I wanna make sure my kids get what's coming to them." And it takes some tricky planning.

Pat: Yep. Much more difficult in a qualified plan than not.

Scott: Correct. It can be done, but you need to do some planning on that. Well, that is all the time we've got. It's been great being here with you. If you like what you listened to, please give us a review where you get your podcast. Enjoy your weekend.

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.