SPEAKER_1: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401ks, Scott Hanson and Pat McLain 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: Pat McLean, thanks for joining us.

Scott: Yeah, glad you are part of our program today, both myself and my financial...my financial, my co-host, we're both financial advisors.

Pat: Well, we do act as financial advisors to each other.

Scott: We do. That is correct. Second set of eyes.

Pat: Second set of eyes. What do you think about this?

Scott: Yeah, but we certainly enjoy being your financial advisors on the podcast radio on the weekend. So we've got a good program lined up as usual, some good calls and talking about some things that are relevant in the marketplace. And it's this year just started has...the last five months or so. The tech stocks, the Magnificent 7, you know, every couple years they come up with some other new thing, but now it's the Magnificent 7. And it, I get this, part of it feels like 1999.

Pat: Little bit, especially with the AI, NVIDIA. Anything that actually has AI.

Scott: Nobody knows quite where it's going to go. We see that there's future there. We don't know who the winners are going to be.

Pat: Yep, but companies are actually reshaping their message to say AI.

Scott: Of course, everyone is. And I remember I read an article in the last couple weeks about these teenagers and their investment prowess. And I thought, this just reminds me so much of 1999, was anything that was internet-related shot up through the, you know, price to the moon.

Pat: Yeah, pets.com.

Scott: And we're seeing a bit of that now, not...and I just think people need to be a little bit careful. We don't know who the winners are going to be. There will be. You think, what happened to Netscape?

Pat: Yes.

Scott: Wasn't that the big browser, Netscape?

Pat: Yes.

Scott: How about Yahoo? Yahoo, whatever you wanna, however you wanna pronounce it.

Pat: Yes.

Scott: Bing. Some of these things never took off.

Pat: Yeah, and actually remember the back in the day when the content companies were now merging with internet companies.

Scott: You mean like Time Warner and AOL?

Pat: Yes, right? That was the big thing, right? Which is, oh, we've got an internet company and we've got a content company.

Scott: AOL is another company. They were like...they were the NVIDIA of its day.

Pat: Yes. And that was displaced by actually mom-and-pop content and young man content and people that would just post whatever they want.

Scott: I was just, I don't know, a week or so ago, I was reading about NVIDIA. They've been around for a long time, right? But amazingly, yeah, a long time. It's not really overnight. So to compare them to AOL is not fair because they had a very nice business before, but the stock's just gone through the roof the last couple of years. And I, because, and I'm no expert in this area. So if you're an expert in this area, forgive me. But, I mean, my understanding is the chips they make is, it's designed more for AI than some traditional type stuff. And I just glanced at Intel. So.

Pat: That's funny because I was thinking about Intel and NVIDIA yesterday. I'm thinking these guys, I mean, they were the market leaders for years and years and years, Intel.

Scott: That stock has gone nowhere in 20-some years. You've made maybe the dividend of 1% or something. Maybe it's two. I don't know what the dividend is. Nothing. For 20 years. That stock's done terrible last five years. And the reason I'm...

Pat: It was the darling in the '90s.

Scott: My wife. So my wife worked for Intel for five years before we had kids in 1991. And at that time, they were on fire. And when someone would show up in the parking lot with a new car, people would joke, "Oh, that $50,000 car actually cost you a million dollars because that's what your stock would have been worth had you not sold it to buy the car." That's how fast the stock was going up during that time.

Pat: It would go up forever.

Scott: Correct, and it was a pretty good sized company at that time.

Pat: Yes.

Scott: And of course, it didn't.

Pat: That's right. The car may have been the best investment.

Scott: Well, yeah. So right now, just be careful if you're suddenly overloading in some of these stocks because it's the hot thing. I was chatting with one of our advisors last week and he was telling me about one of his clients just loves Rivian. Is that the pickup truck?

Pat: Yes.

Scott: Rivian. They're good-looking pickups, I've seen them. I don't want one myself, but the stock's down, I don't know, 90-some-odd percent.

Pat: Yes.

Scott: And so he had this client, he said he really wanted to buy some of the stock and, whatever, let's make sure it's not gonna impact your lifestyle if it goes the other direction. So he made some investment in it and of course, it went up dramatically after that and the client was so happy. He's like, "Man, I've made more than what this new pickup's gonna cost me," because I guess he was on order for pickup. Well, the story's changed now, right? Now, he could have bought a couple of pickups for what he's lost in the stock.

Pat: It's the nature. It's the nature of the business. Some changes in the Dow Jones Industrial Average, which I always find curious. By the way, it is not an index, it's an average. So why we continue to watch the Dow Jones industrial average is kind of confusing to me. Why that is on every news report versus broader markets. Like, the S&P is always quoted.

Scott: Yeah, total market would probably be better.

Pat: The total market would probably be a better indicator of actually how economic activity in companies are.

Scott: On any particular day or week or month or whatever.

Pat: Yes. Yes.

Scott: Because Amazon's now part of the Dow. And I was actually kind of surprised that it hadn't been, I mean, I don't pay much attention to the Dow.

Pat: Yeah. And they dropped what? They dropped...

Scott: Walgreens.

Pat: Walgreens? I'm like, okay. No one was shocked by this.

Scott: I'm always confused between Walgreens, CVS, like I said, like, which one am I going into? They're all the same, they're kind of depressing. Aren't they?

Pat: Yeah, well, yes.

Scott: I don't know, the whole atmosphere in those things are weird. [inaudible 00:06:42]

Pat: I try not to go in very often.

Scott: Yeah, well, what do you know? So...

Pat: The Dow Jones...

Scott: And Uber.

Pat: Yeah, they were added.

Scott: Replaced JetBlue. That's in a transportation index. Like that didn't make any sense. Whatever. Yeah, they're averages.

Pat: Yeah. And remember when the Dow Jones started there were 11 stocks and nine of them were railroads. Nine railroads. How many railroads are in the Dow Jones now?

Scott: I have no idea. Is there still one in there?

Pat: I don't think there's any.

Scott: How long will Amazon be in the Dow? Probably not 100 years from now.

Pat: Yeah, I would imagine they won't be there 100 years...

Scott: My guess, AI is gonna do things that we have no idea at this point, no one can really fathom, right?

Pat: Yes.

Scott: And they'll have some really interesting applications.

Pat: It's scary.

Scott: Scary and exciting all at the same time.

Pat: Yeah, scary and exciting.

Scott: Yeah, but I mean maybe AI, maybe some company will use AI, just will know what I need before I even know I need it and I won't even have to bother clicking anywhere.

Pat: Yeah, it just sends you stuff.

Scott: Maybe. I had a light bulb that went out. There are all these new light bulbs now, they're hard to kind of figure out. And the writing's so small, I'm trying to read the stupid thing, and I've got old man eyes anyway, and I'm like, I can't read...

Pat: Take a picture of it.

Scott: Yeah. And figure out exactly what the manufacturer and everything.

Pat: Yeah.

Scott: That was news to me. Someone showed me that.

Pat: Someone introduced that to me like last year. It was just like, "Take a picture." Boom, there.

Scott: And here it is.

Pat: Yeah, comes to your house.

Scott: All right, there we go.

Pat: That's... You wanna take some calls?

Scott: I don't know, I'm kind of enjoying our conversation. But yes, let's start off here in California talking to Christine. Christine, you're with Allworth's Money Matters.

Christine: Hi, good morning.

Scott: Hi.

Christine: So here's the scoop. I'm 48. I have no retirement. I've been a stay at home mom for 20 some years. Divorcing. Husband has retirement. I've already made the deal, whether it's a good one or not. I'm keeping the house which is paid for. He's keeping his retirement. So what should I do? I have a little bit of money. Should I be buying an IRA? Am I too late to buy an IRA?

Pat: No, no, you're not too late. And who decided, let's, the question was IRA, but let's talk a little bit about the assets in the marriage. How did you guys determine who gets what and did you have an actuary work with you or a qualified advisor, an attorney that guided you through this?

Christine: No, the retirement is not huge. It's probably honestly a little less than what the house is worth and the house is owned free and clear.

Pat: Okay.

Scott: Oh, good for you then.

Christine: And the retirement will grow but at the moment...

Pat: Let me just share something for the rest of the listeners because this is a common mistake that is made in a divorce where people will look at two assets. Let's say your house was worth a half a million dollars and it's free and clear and the 401k or IRA is worth a half a million dollars And you're like, "Okay. You take the 401k or IRA and I'll take the house," and everyone's happy. No. It doesn't work that way.

Scott: Well, it can but it's not equitable or equal.

Pat: It's not equitable and the reason is and, by the way, if that were the case then you got the better end of the deal because you have to bring everything into an after-tax basis or after-transaction cost basis in order to compare them. So if you were sitting with me and you said, "Okay, this house is worth 500,000 and the IRA is worth 500,000, really the house is worth about 95% of the 500,000 because of transaction cost of liquidating that would be real estate fees.

Scott: There could be some capital gain in excess of the exemption, but maybe not.

Pat: Probably not, but you would look at that and then you take the 401k or IRA and you'd say, "Well, how much is this worth after tax?"

Scott: Ten percent, 75%, 70%, depending on someone's tax bracket.

Pat: Right. So, I know that's not why you called, but very rarely do we actually get phone calls about that. For the listeners, it's really, really, really important if you're going through a separation that you actually look at everything on an after-tax basis.

Scott: If you have a good financial advisor, they can run these numbers for you. I mean, I've done it a number of times over the years.

Pat: I've done it with clients where they asked me to split the assets for them because they both trusted their advisor and so anyway, back to the IRA.

Scott: So, you're 48, Christine. Are you back in the workplace?

Christine: So I'm not, and probably neither is actually going to file for divorce for several years until there's like, a necessity. So I imagine we'll just continue to file this married filing joint. So how does that also like, in that case, based on income and I am not really super familiar with IRAs, but it sounds like in that case, it might be more appropriate to invest in a traditional IRA right now and maybe later convert it like through the backdoor thing? I know very little.

Pat: Okay. And what's the reason you're putting off the formal...?

Scott: I understand for most people divorce is not, obviously, that's not what someone intended when they got married, right? And it's not the ideal but that just happens sometimes in people's lives and sometimes it's just way things go but it sounds like... Is this just a separation at this point that may...?

Christine: I mean, eventually somebody will file the paperwork, but like I don't have health insurance once the paperwork is filed, so no reason to rush.

Scott: Okay.

Christine: Obviously, it's for his benefit filing taxes to continue to claim me and for me not to go back to the workforce and want to claim the kids and things like that.

Pat: Okay. So you can make an IRA contribution...

Scott: ...without... You can do a spousal IRA.

Pat: That's right.

Scott: Unless his income is greater than 210 or something like that.

Christine: Okay, so no, so that was my question. No, we're below that.

Scott: Okay. Okay. I think it fades out at 190, somewhere in there.

Pat: Yeah, and then, yes, you can make a spousal contribution into an IRA. And you should.

Christine: Is that a traditional IRA or a Roth?

Pat: Well, it depends on what the overall income is.

Scott: Well, who's paying the taxes? I would do the Roth.

Pat: You would do the Roth.

Scott: Well, it sounds like you're going to continue being a stay home parent.

Christine: I hope, yes.

Scott: And he's going to continue to work.

Pat: And support the household.

Scott: And so he's the one paying the taxes. If you invest in a traditional IRA, there'll be a tax deduction today which he'll receive but you're gonna end up paying taxes on the withdrawals in the future. If you do a Roth, he's not gonna get the tax deduction so he'll end up writing a slightly larger check to the tax man.

Pat: And then when you take the money out, it comes out tax-free.

Scott: So I would do the Roth.

Pat: Do you have any other IRAs?

Christine: No.

Pat: Okay. Easy.

Scott: And is this, Christine, is the motivation behind this is just so that you have some assets given where you guys are and at some time you might find yourself by yourself and you want to make sure you have some retirement assets?

Christine: I mean, I just want to know that there's something there.

Scott: Yeah, I get it. Yep.

Christine: So for sure, it'll be, I mean, what if I don't have anything else besides this house when it's time to withdraw? Like, it's still going to be highly taxed or...

Pat: Well, Roth comes out tax-free. Yes, it could. Well, if you don't have anything...

Scott: Then you need to make sure you have something besides the house at retirement time, Christine.

Pat: But the answer to your question is if you made a traditional IRA...

Christine: [inaudible 00:14:53] social security, but I'll need a little something else, right.

Scott: That's correct.

Pat: Do you imagine you'll be living in the same house forever?

Christine: Oh, no, no, no, no, no. Like that's already happening soon. And so we've decided at this time, just based on what we're doing, the income will be like split as far as like the support for our household here with the kids.

Pat: Okay. Well, then, you do a Roth.

Scott: I would do the Roth for sure. You're my sister, I'm saying do the Roth.

Christine: Okay.

Pat: Yep. And you've got until April 15th to do it for 2023.

Christine: Right. Perfect, thank you.

Pat: All right.

Scott: All right.

Pat: Appreciate the call.

Scott: We wish you well, Christine. And I tell you, divorces are always challenging financially.

Pat: Yes.

Scott: And I mean, and often, I mean, I don't know how many times, I know you've seen it, we've both seen it. We've had clients that are retired or retirement age. And they go through, they come in and say, "Oh, guess what? We're getting divorced." Oh, you're like, "Well, you barely had enough money to begin with for your lifestyle. And now like, who's going to go back to work?" Oftentimes, that's often, because there's just not... now you've got to support two households instead of one household. From a financial standpoint, try to avoid it.

Pat: Oh, devastating financially.

Scott: Typically.

Pat: Can be.

Scott: Typically, not good.

Pat: All right, we're heading to New York talking to another Christine. Christine, you're with All Worth's Money Matters.

Christine: Hi.

Scott: Hi, Christine.

Christine: How are you?

Scott: We are actually, I'm doing great today. It was one of those good days for me. I don't know. I woke up in a good mood.

Christine: Yes. I have a question about when is it when is it better to rent than to own a home? And for retired people. My husband and I are both retired. I'm 68, he's 74. We own our home free and clear. Taxes are high, home repairs are high, are expensive. We have a cash income of just over $5,000 a month, and we do have $200,000 in mutual funds that I often use, pull out some money in order to pay for some repairs and things like that with the house. And I'm wondering if I'm just sort of... But I'm not making headway and if there's...if it makes more sense as we get older maybe to look at renting rather than owning.

Pat: What's the value of the home?

Christine: It's probably about 270.

Scott: And what do you... So, you're not obviously near Manhattan.

Christine: No, we're north. We're north of Syracuse.

Scott: Got it. And do you owe anything on it?

Christine: No.

Pat: And if you did sell the house and rent, what could you rent your house? How much would it cost you to rent a similar house?

Christine: It would be an apartment probably, and it would probably be about, I would say the top end would be 2000, probably between 1700 and 2000.

Pat: So here's the value of owning a home. It's your inflation hedge. But in the, you look at the numbers and the fact that you actually said taxes and home repairs, right? Often people actually leave the home repairs out of it.

Scott: And anyone who's owned a home for a long time knows that they're a real expense.

Pat: It's real. It's a real thing. Is money...

Christine: Last year it was over $15,000.

Pat: Is money tight?

Christine: Well, that's all we have for an income is $5,000 in cash a month.

Pat: And how often are you taking money out of the $200,000 in mutual funds?

Christine: You know, it's usually when, like we had a bad window issue and that was $8,000. And so, you know, I had to take it out of that. We are able to save money from the income, from our cash income. So, you know, I'm able to sort of build-up for taxes so I can pay the taxes out of what we're bringing in on a monthly basis cash-wise.

Pat: And so what does it cost you to maintain the household, just the repairs and taxes? Do you believe like on an annualized basis, $15,000, $20,000?

Christine: I'd be in the 8,000 to 10,000. We've had a couple of weird things happen in the last couple of years. But hopefully, we're not going to have those for a few more years now.

Pat: Do you like the home?

Christine: Oh, I love it. We love it. We love the area. Yeah.

Pat: So, if a comparable home would cost you $2,000 to rent today, what do you think it would have cost you to rent 15 years ago?

Christine: Probably $1,200.

Pat: Right.

Scott: So if you guys, if you were 88 and 94, it'd be pretty simple. The concern we would have is what inflation could do to the rent. Your home, and if we have high inflation, the value of your home presumably is going to go up in value over that time. Inflation is increasing prices, right? So maybe that over...

Pat: When we say high inflation, I mean it's higher than, when we say high inflation, there were periods of time where inflation was much higher than it...a lot higher than what we saw in the last 12, 24 months.

Scott: So you're looking and thinking, well, we sell this. I could avoid property taxes. I could avoid repairs, probably 1,000 bucks a month at a minimum of savings there. And you think, then I need to come up with only another extra thousand dollars. But the concern would be what happens if that $2,000 rent is $2,500 or $3,000 or $3,500 or $4,000? And considering that the $5,000 of monthly income, you're able to meet your income needs, your lifestyle needs, and the $200,000 that you have in these mutual funds is essentially only being used for these home repairs when necessary, I think you're in pretty good shape.

Pat: Yeah, and if need be, if things got really, really bad, you could do a reverse mortgage.

Scott: But that would be 10, 15 years out probably.

Pat: That would be a long ways away.

Christine: Okay.

Pat: And so I like the fact that you own the home. In fact, really like the fact that you own the home and it's free and clear and that the fact that you said you loved it.

Christine: Yeah, yeah, very much.

Pat: Yes. So very rarely does it make sense for people to rent for the long term. It makes lots of sense to rent for the short term.

Christine: Yeah. Yeah. Oh, I was hoping you'd say that, that it wouldn't really save us that much money.

Scott: It would be, I think it would be worse for you financially. It would enter a new risk into your financial situation...

Pat: ...that you do not have today. It doesn't exist for you, which is inflation.

Christine: Excellent.

Pat: Which is inflation. So, you know, if worse comes to worse, you could do a reverse mortgage, but that's years and years and years, if ever.

Christine: Got it. Got it. Okay.

Scott: All right, Christine.

Christine: Well, thank you so much.

Pat: And I assume you're both, well, obviously, your husband would be on social security. Are you taking social security now as well?

Christine: Yes, yes.

Scott: And I mean, it might actually make sense for you to say, let's look at our house and let's plan if we're here for the next 15 years, what repairs might we need in the next couple of years? Do we look at taking care of a bunch of things at once and taking 50,000 out of your savings or 75,000 out of it to get the house so you don't have many repairs?

Pat: And remember the difference between that is needs and wants.

Christine: Yeah, well I tried to do a lot of that stuff before I retired.

Scott: Perfect.

Christine: Yeah, like the roof and that sort of thing.

Pat: Perfect, perfect, perfect, perfect. You're in good shape, you're in good shape.

Scott: Yeah, don't move. You're better off to stay.

Christine: Thank you so much. I appreciate your time.

Scott: All right, Christine. Inflation, it's hit, it's different areas. Food costs are up dramatically. The percentage of income that the average American is spending on food has never been higher in 30 years for some families.

Pat: Yes, it's a percentage of income.

Scott: For some families, it is really challenging. It's very, very difficult. But even things such as auto insurance is up dramatically.

Pat: Homeowner's insurance.

Scott: And parts of it is, in large part it's just the repairs are so much more expensive. Both home, get contractors out is much more expensive than it used to be. Cars, getting your cars worked on.

Pat: Part of that is actually due to how cars are built today.

Scott: Correct. All the regulations, there's all the stuff that has to be in it.

Pat: Yes, yeah. The technology.

Scott: It's endless.

Pat: The technology that actually is associated with the cars.

Scott: The new cars now they have some warning to make sure that you didn't leave the baby in the backseat. I rented a car recently, a brand new car, something like a warning, "Make sure you didn't leave the baby in the back seat."

Pat: You have a baby?

Scott: No, I don't! [inaudible 00:24:35]

Pat: I don't know, I was thinking, when did you get a baby? And how does it know?

Scott: I don't want a baby.

Pat: How does it know? It just knows.

Scott: It's just one of those, it's just, it's...

Pat: They add up.

Scott: Yeah. So many things on the... And then its inflation's been...

Pat: The lower the income, the greater the effect of inflation, because your percentage of your income going towards basic needs is where we've actually seen a large increase in inflation.

Scott: Or dining out.

Pat: Yeah, that always...

Scott: What?

Pat: I just... That is a pure luxury.

Scott: Well, I mean, you take someone who's, let's say, on the lower income side of things, working a couple jobs trying to raise kids.

Pat: That's right.

Scott: There's no time for cooking. They're buying McDonald's, pizza, all the healthy foods.

Pat: Well, maybe it's not pure luxury.

Scott: I mean, I think there's maybe for the middle class, it's a luxury.

Pat: That, yes. I don't know, when I first started in business 33 years ago, I packed my lunch almost every day.

Scott: Oh yeah, I used to carry a lunch often.

Pat: Yes.

Scott: And if I went out, it was somewhere cheap.

Pat: Yes. Yeah, and normally with someone higher up in the organization hoping that they would buy.

Scott: Actually, I remember, man, my first year, I would go to Bobby McGee's at happy hour time and eat and buy a Diet Coke and eat, blow through the chicken wings, the veggies at least twice a week. That was my dinner.

Pat: At Bobby McGee's.

Scott: Was it Bobby McGee's. It was Bobby McGee's. That was the name of the restaurant. Yeah, happy hour. I'd get a Diet Coke and that would be my dinner. I'm sure no one's playing a violin for me. We've all, almost all of us, many of us have been there. All right, let's continue on with calls. By the way, if you want to be part of our program, we tend to schedule our calls in advance and you can join us by sending us an email at questions@moneymatters.com. Questions@moneymatters.com. We're talking with Jason. Jason, you're with Allworth's Money Matters.

Jason: Hello, Scott and Pat.

Pat: Hi, Jason.

Jason: This is Jason.

Scott: Hi, Jason.

Jason: Hi. Long time listener. I just have a question concerning Roth conversion. I'd like to run the scenario with you to see if it makes sense or whether I'm missing something.

Scott: Please, please.

Jason: Okay, both I and my wife are 59 year old, 58 year old. I'll be 59 pretty soon. We're both retired, married filing joint with one daughter, 19 year old in college. For the tax year 2024, I've estimated our AGI to be roughly 160K. That's pension plus taxable interest. And so we do qualify for the American Opportunity Tax Credit to $2,500. Most likely entirely. But I'm thinking of doing Roth conversion and foregoing the $2,500. And I just want to run through the scenario.

Pat: What is that tax credit?

Jason: It's the American Opportunity Tax Credit for expenses going to college.

Scott: Oh, yeah, okay. Thank you. College, yeah. It's funny, there are so many credits, and they all phase out. We have a software program that you can, we do what-if scenarios, and we can look at all these different phase-outs at different income levels. That's the kind of programs we use when we're doing analysis on Roth conversions.

Jason: Right. From my research, the phase-out begins at 160K and ends at 180K. So for the tax year, 2024, I think we're good. The AGI estimates to be 160K. But if I'm doing any Roth conversion, obviously, that's going to change. And I am thinking of doing Roth conversion, and we're looking at perhaps converting to 100K.

Scott: How much do you have in retirement accounts? Tax-deferred retirement accounts?

Jason: For the roll over IRAs, we have about 1.4 million. For 401k, around 600k. For Roth IRA is about 250k. And then also taxable brokerage account about $350K.

Pat: And what did you say was in the Roth? 250?

Jason: Roth, it's around 250k.

Pat: Okay.

Scott: And I assume you'll both qualify for Social Security when the time is...

Jason: Yes, when the time comes.

Pat: Yeah. And where's this 160? This 160 is just pension income and taxable income off of the brokerage account and any money you have in the bank, correct?

Jason: Yes, that's correct. Our annual pension roughly 135K and for 2024, I estimate about 25K for the taxable interest.

Scott: Okay. And you live in California?

Jason: Yes, northern California.

Scott: Are you gonna stay in California?

Jason: That's the thing, highly likely we're going to stay in California. I mean, I can't rule out the possibility, but most likely not moving away. So anyway, the reason I'm thinking of doing the conversion this year is because upcoming 2026, the tax bracket reverts back to I think around 2017. And when I look at it, all the tax brackets around my income range probably go up 2 to 3%.

Scott: Yeah.

Jason: And also some of those brackets actually shifted lower so that you hit the 33% or 32% or 33% earlier. So based on my calculation, if I do the conversion of, let's say, 200K this year, my additional tax bill will be around 66K, state plus fed. But if I wait till 2026, it's going to be about 77K, $11,000 more. So by doing the conversion now, I actually save some tax. Of course, that's, you know, in the future, who knows what's going to happen. But then I would forego the $2500.

Scott: Is your hundred...where's the $160,000. How much of that is pension?

Pat: One hundred thirty-five.

Jason: Hundred and thirty-five K, 135k pension and then 25k projected interest, taxable interest.

Pat: Why is it... On that brokerage account, are you managing that tax efficiently?

Scott: Doesn't sound like it.

Jason: No, actually not at this point. We're mostly in short-term treasury at this point across all accounts. So no, I'm not managing [inaudible crosstalk 00:31:38]. But I am investing in treasuries, which is state tax-free. So at least it's that so, but not centrally.

Scott: Is your 401k and your IRA also in treasuries?

Jason: Mostly, yeah, mostly. Short-term treasury. I do have some small amount of, short-term treasury, some in one-year and two-year duration, and then very small amount in TIPS, and then on the side I also have some I bonds. [inaudible crosstalk 00:32:10]

Scott: So most of your portfolio is in fixed income then is what I just heard.

Jason: Yes. Yes, it is.

Scott: So if I took a look at this $2.45 million across the board, 90% plus in treasuries.

Jason: Yes, I would say.

Scott: What was your, how was your portfolio the last few years? Have you always been in short-term treasuries?

Jason: They were not, but I was really never fully invested in equity. I would say at most 40% equity, 60% fixed income [inaudible crosstalk 00:32:45].

Scott: So why don't you have 40% equity today?

Jason: I'm sorry, what's the question again?

Scott: Why don't you have any equities today?

Jason: Oh, just risk tolerance and never really found a good entry point or reentry point, so to speak.

Scott: Okay.

Jason: Yeah.

Pat: So first of all, I question the assumption that you're going to generate $25,000 a year in taxable income off of $200,000 brokerage account.

Scott: Three-fifty brokerage.

Pat: Oh, $350 brokerage. All right.

Jason: So it's just for this year because we did liquidate some I bonds. So I've already done the calculation. It would be roughly 25K. And that's also from Treasury last year that got cashed out earlier this year, I bond and so forth.

Pat: Okay. Okay. Okay, so yes, you should do a Roth conversion. Yes. Whether it's 200,000 or not, I'd actually have to do the calculation myself.

Scott: I wouldn't do it. It sounds high. I'm 57. If I had your financial situation, I would not convert $200,000.

Pat: No, but that's what I said. It may make sense to convert some.

Jason: Right. The reason I'm doing that is looking at around converting 200,000 is going to push me all the way near the top of the 24% bracket. And I want to take advantage of that. So, and then obviously with any conversion to Roth, I'm essentially contributing more into the Roth [inaudible crosstalk 00:34:18] in this scenario, because I'm paying the tax from outside brokerage. Personal brokerage.

Scott: Yeah. No, we understand.

Pat: But the way I view it, that delta between, even let's assume that none of these tax reductions remain intact, which we don't know. We'll, actually, frankly, should know more come November after the election to see who controls the House and the administration and all that, right? Then I think we'll have a little more clarity on what may or may not happen.

Jason: That's correct. So if I am doing any Roth conversion at all, I definitely would want to push it all the way up to the top of the 24% bracket just so that, because even if I do a little small amount, I'm going to lose out on the $2,500 American Opportunity Tax Credit. So I don't want to just do a little.

Pat: Yeah, I'm just saying I wouldn't...if I were in your situation I would not because it's...I gotta be real transparent with you. You are focusing on one little tiny thing in your portfolio.

Jason: Yes, I am.

Pat: And you are missing what I consider you're...the greatest wealth opportunity in the way your investments are structured. You're both 59 years old. You probably have 30 years plus ahead of you. If you called and said your portfolio was 40% equities today, I'd say, "Okay, great."

Scott: Still a little concerned.

Pat: But when you've got, that's your biggest thing. And you're focused on trying to save 2% or 3% of marginal tax bracket, which we don't even know what's gonna happen. And there's no guarantee that the Roth, this is under the assumption that our tax law, the structure of our taxes are gonna be the same 10, 20 years from now.

Jason: That's correct.

Pat: That's a big bet too. But Scott, I wouldn't be surprised if we saw lower income taxes with a value added tax at some point. Or a wealth tax.

Scott: Or a wealth tax.

Pat: But I think that there's room for...

Scott: Or an excise tax on large retirement withdrawals.

Pat: Which has happened.

Scott: Or at death.

Pat: So I'm not saying the 200,000 is what bothers me. I think there's room for some Roth conversion there.

Jason: But if I do a small amount of conversion...

Scott: You'll lose the 2500 bucks.

Jason: ...and I'm not getting, yeah, I'm not getting the bang for the buck by giving up the $2500, I don't want to do that. I mean, I may start doing it three years later after I no longer, the AOTC doesn't apply to me anymore then, yeah, then definitely that will be a no-brainer at that time. I would convert up to whatever the, you know, 22% [inaudible 00:36:52] but for now, the [inaudible crosstalk 00:36:54] because I have the $2500 AOTC. Go ahead.

Pat: Jason, here's how I view this. If I were a medical doctor and you came into my office and were 450 pounds with diabetes and had serious health issues, I would say, "Look, Jason, we need to figure out a change in your lifestyle, a change in your mindset to have you lose weight otherwise you're a dead man." Right? I look at your financial situation, you're all in treasuries. Crazy by the way, particularly because you have a pension which is the equivalent of having treasuries. If I did a net present value of that 135,000 based on two 59-year-olds, we're looking at 3 million plus there.

Scott: In fixed income already.

Pat: In fixed income. And in addition to that, you've got another 2.65 or 2.6 in treasuries as well. I agree with Scott 100%.

Pat: I would find, I would like, what do I need to do behaviorally to get comfortable by having some equities in my portfolio that are going to protect me in the event of a hyperinflation period? Because that's the biggest risk you've got. I'm sure your pension doesn't have a cost of living adjustment.

Jason: They do.

Scott: Then are you a retiree from the government?

Jason: My wife is from the state of California. I'm from the federal, but my adjustment doesn't occur until I'm age 62.

Scott: That's right.

Jason: Her adjustment will start this coming year.

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

Jason: So we do have some form of adjustment there but, go ahead.

Pat: So, I agree with Scott. If you want to do the Roth conversion, do the Roth conversion. Whether it makes any difference in the long, I don't know. I really don't know.

Scott: It's kind of like the example of the 450 year old man with heavy diabetes that is thinking about...

Pat: Four hundred fifty pounds.

Scott: Four hundred fifty pounds, what did I say?

Pat: Old.

Scott: Okay, 450 pounds. "I'm thinking about getting a facelift. What do you think, Doc? Should I get my facelift to jowls, what do you?" The issue is something completely different.

Jason: Right. So with my portfolio, I hear you. Basically, it is my asset allocation, which I do totally agree. It's just that I haven't found a good entry point, so to speak. I know I can always graduate [inaudible crosstalk 00:39:20] but it's just I don't feel comfortable. Go ahead.

Pat: That's the whole point.

Scott: It's a behavioral thing here, but it's not... You don't feel comfortable. If I... You can do whatever you want. It's your life, your money, obviously. But when you call a couple financial advisors that have been doing this for three plus decades, figure out a way to get comfortable, whatever that is. Support group, investing club, I don't know. Finding someone you really trust. That's going to have the much...that's going... The impact on your finances, your family wealth and income. The impact there is 20x of what this Roth conversion is.

Pat: Yeah, you're talking about timing of taxes for a couple percentage points. You know, like great. Great.

Scott: It's easier to calculate though.

Pat: Oh yeah, it doesn't require actually any emotional energy.

Scott: No. It's like, you know, Jason, that's the...

Jason: That's exactly right. It's more analytical. It's just numbers on paper.

Pat: And you're not alone. Look, this is behavioral finance. It has much a greater impact on someone's overall financial plans than the asset allocation and everything. What did you do for a living?

Scott: Engineer.

Jason: Engineer.

Pat: There, we knew. We knew that. We knew that because it's easy to draw lines.

Scott: Well, you have... Yeah.

Pat: You're very nature leads itself to this sort of a... Right? This sort of...

Scott: What did you engineer, by the way?

Jason: I'm an electronic engineer.

Pat: Okay. There we go. There we go. That is, and you're not alone.

Scott: No.

Pat: You're not alone. I could have told you, you were an engineer without even asking the question.

Scott: I answered that before he did, so I guessed it.

Pat: And so that's the work that needs to be done. Your portfolio, at a minimum, should be 40% equities. At a minimum. But the Roth conversion, do the Roth conversion. And it might be, look, there's some ways to structure. You might say, "I'm going to take these dollars are for when we're in our 70s," and peel off 40% and say, "I'm not worried about the value this year. I'm going to worry about when I'm 70." And I, I tell you, I have done it for clients that were very similar to you, which is, look, we're going to construct a portfolio that allows you to sleep at night because of your view of the world. We're going to take some money and we're going to put it in a IRA self-directed and I'm going to go a hundred percent equities. And then I'm going to take the other half and I'm going to put it in treasuries. And once you believe that there's enough in those treasuries that's going to last you until your dying day and then some, you won't worry as much about the equity position.

Jason: So, so if I am going to gradually move into equity, which part of money should I start with? Roll over IRA, 401k, Roth? Or it really doesn't matter? Or across the board? Percentage-wise or what would you recommend?

Pat: I'd do the Roth.

Scott: Roth, because you're never going to spend those dollars.

Pat: You're never going to spend those dollars.

Scott: Well, you might at some point.

Pat: I doubt it. Your home's paid for, I assume.

Jason: Home's paid for, yes.

Pat: Yes, and you're probably not spending the $165,000 you're making now.

Jason: We're not, we still have leftover, yes.

Pat: Yeah, it's kind of like we've seen this movie before. Right? We're practicing advisors. We work with people like you all the time. Right? And that's not either a good thing or a bad thing, it's just a thing. Right? It's not good or bad. We have no, you know, look, it's you have to fight your own tendencies and urges to be a good investor.

Jason: Yeah, I agree. It's more mindset. It's just that, you know, I keep waiting and waiting for a good entry point but it [inaudible crosstalk 00:43:25].

Scott: That's why today.

Pat: But if you were an electrical engineer, we wouldn't wait for for something. We'd actually put together a plan and execute on that plan, would we not?

Jason: Yes.

Pat: Regardless of market conditions. Because you've missed some entry points.

Jason: Yes, I did. I definitely did.

Scott: I started in this industry, I've said this a number of times in this program, I started this industry July of 1990. The Dow Jones Industrial Average was roughly 2600. We've had 30 years of good entry points, 33 years of good entry points because the Dow's approaching 40.

Pat: So, Jason, you know what you need to do, so I appreciate the call.

Scott: Well, that is all the time we've had. It's been great being with you. Certainly appreciate our listeners and if you like this, give us a good review and we'll see you next week. This has been Scott Hanson, Pat McClain, Allworth's Money Matters.

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.