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

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

Pat: I'm Pat McClain. Thanks for joining us.

Scott: That's right. There's really nothing going on in the financial world, so we think we'll skip the show today.

Pat: Oh, my. Oh, my. My, oh my. But it seems too, Scott, it does seem that, you know, with the banking...

Scott: Who knows.

Pat: ...turmoil.

Scott: Who knows where we are.

Pat: Well, the government is pushing in hard to try to stabilize. I think so. You don't think so?

Scott: Well, for sure. I mean, Yellen pretty much said, "We're gonna do what we need to do."

Pat: Yeah, which again, I feel bad for the small regional banks though.

Scott: Well, I think that's the story that not being told much and in a moment, we'll have a guest on who's the president of a community bank.

Pat: And the importance of the small regional banks, the play in local economies with small and medium-sized businesses.

Scott: You look at business loans, Pat, of under a million bucks, let's say, the vast majority of those are done through the community banks.

Pat: That's right.

Scott: The local bank.

Pat: That's right.

Scott: The bank of whatever, right? The local bank that you...not the national banks, the local bank. The national bank's not...they're not gonna lend $300,000 to someone starting a new business.

Pat: I don't even know these people. And the regional bank's like, "Well, that's Jimmy. Jimmy's dad..."

Scott: Right? Our kids played lacrosse together, right? All that stuff.

Pat: That matters. Businesses are made up of people and small bankers like to know the people they're lending the money to. The big banks, you're a spreadsheet in most cases, unless you're really, really super rich.

Scott: The Feds, of course, they didn't raise rates quite what people were expecting a couple weeks ago, anyway. So raise them a quarter of a percentage point. This week, market sold off a bit, then rallied back up. It's probably going to be...

Pat: It's hard to stay invested. It is hard.

Scott: It's really hard. It's so tempting.

Pat: It is.

Scott: It was tempting to put your money in the bank. Now you're thinking, "I better spread it out over banks."

Pat: Oh, like treasuries. Anyway, we're gonna talk about that and we have Krista Snelling joining us.

Scott: And we'll take some calls as well.

Pat: Yes. Absolutely.

Scott: Yeah. If you want to join us, 833-99-WORTH is our number. And we'll take your call. And so, we're gonna talk...we thought it'd be kinda interesting to have a guest on. So Krista Snelling, we've known Krista for almost 20 years. Pat and I started a reverse mortgage company in 2004 and she was our CFO, and then Jen with Financial bought the company in 2007. And then, Krista went on, she was the CEO...sorry, CFO of Five Star Bank. Today, she's president and chief executive officer of Santa Cruz County Bank.

Pat: Which is a regional bank on the coast of California.

Scott: Yeah. So Krista, welcome to the show.

Krista: Hi. Good morning.

Scott: So the last few weeks for you have been kind of boring, like, going in late, heading home early type days?

Krista: Lots of golf.

Pat: You don't even golf. Do you golf, Krista?

Krista: No, I don't. I don't. Yeah, it's been busy. It's been busy. I have had a lot of client interaction, but I enjoy that. But it's been stressful.

Pat: So let's kinda talk about, you know, the most surprising thing...

Scott: Just for a little background. What's the size...so you were the CFO at Five Star Bank. Then you moved over to, you're the chief executive officer and president and member of the board for Santa Cruz County Bank. How large are those banks, just to give us some ballpark and [inaudible 00:04:19.071] deposits or whatever?

Krista: Yeah. So Five Star Bank has just over $3 billion in assets at the last reporting period. And we here at Santa Cruz County Bank have $1.7 billion...

Pat: And $1.7 billion. Will you explain to the listeners, when a bank says it's their asset, what exactly does that mean?

Krista: It means that the banks, typically bank assets are cash, a securities portfolio and a loan portfolio...

Scott: And the loan...

Krista: ...and the loans typically being the biggest one.

Pat: And the loans would be to local businesses or individuals. Is that correct?

Krista: Yes.

Pat: So if we went and tore apart a $2 billion book, a bank says that they...and you don't have to speak to Santa Cruz County or Five Star, but if a bank said, "We have $2 billion in assets," would $1.6 billion of it be in outstanding loans and the other 4..."

Scott: Yeah, what's a typical mix?

Pat: Yeah.

Krista: Yeah, that sounds about right. So typically, if you look at, you know, assets, liability and equity, right, as the three main things on a bank's balance sheet, typically equity is 10% of assets and then the liabilities make up the difference, right. So if it's $2 billion, you'd have $200,000 million in equity, $1.8 billion in loans and then you'd...I'm sorry, in deposits, and then you'd typically have a 90% loan to deposit ratio. So you would take that 1.8 times 90%, that would be your loan portfolio, and then the delta would be cash and securities.

Pat: Got it. Got it. Got it. Got it.

Scott: So a typical community bank would have roughly 90% in loans to their customers.

Pat: Not quite that high, but correct, Krista?

Krista: Yeah. I mean, I would say, you know, between 70 and 90, somewhere in there.

Scott: Okay. And Silicon Valley Bank, from what I've been reading, seems like it was a minority. Was that correct?

Krista: Oh, very much so. Yes, very much so. I mean, Silicon Valley Bank was a minority for a couple different reasons, very much an outlier. They had a highly concentrated deposit portfolio, right, with all the VCs and, you know, that kind of stuff, highly volatile. And they also had a securities portfolio that was very long-dated. And so, when rates went up, they had a lot of unrealized losses. And then, as their deposits started running out, they had a liquidity crunch, had to sell their securities portfolio at a giant loss, and then that's what triggered the whole thing. So, you know, community banks generally, right, I think I can say this, but I don't know of one that has the kind of concentration in their deposit base like Silicon Valley Bank had. It was a real outlier in that way.

Scott: Not only the deposit base, but also the people who took the loans, right? It's pretty much in all startups.

Pat: And Krista, you talked about unrealized. So essentially, for the listeners, they're lending money, excuse me, they're actually taking and buying long bonds, which are 10-year treasuries, and they're getting the interest rates from that. And when the interest rates rose, all of a sudden, these bonds well in value and they're earning less money than they're actually paying out to depositors. Correct?

Krista: Yes.

Scott: That's not sustainable.

Pat: Do you have to recognize, if you don't sell the bond, do you carry it on your balance sheet at current market or at maturity?

Krista: Depends. There's two ways to do it. You can classify your securities as held to maturity or...this is where I'm ex-CFO, right? But you can classify 'em as held to maturity or available for sale. If they're held to maturity, they're on your books at cost. And if they have available for sale, they are at their market value. So most of their securities were in held to maturity.

Scott: So they didn't have to realize the decline in value.

Krista: Correct. Until they sold.

Pat: Until they sold, right? So if you looked at it from the outside, "You're like based on their accounting, everything looks fine." And then, someone said, "We need to sell this," and they're like, "Oh, based on our accounting, everything is terrible."

Krista: Right.

Scott: So Krista, tell us about what the next weeks and months...

Pat: Before we get there, Scott, can you give us a little history as to why Silicon Valley, the 16th largest bank in the U.S., wasn't regulated like a large bank? That was the most perplexing thing to me, which is how does the 16th largest bank in the U.S. go under and the regulators say, "Well, it wasn't a large bank."

Krista: That is a very good question. You know, and going back to the laws, you know, under Dodd-Frank, there were rules about regulating banks over $50 billion. And then, a few years ago, they upped that threshold from 50 to 250 billion.

Scott: Yeah, lobbied.

Krista: Yeah. And so, you know, Silicon Valley Bank was in that "sweet spot," finger quotes here, of right in between when those regs changed, they were under 50 billion, the rule changed to 250 and then they shot up...

Scott: They pushed for the rule to change.

Krista: Yes.

Scott: Yeah. They were involved in lobbying that.

Pat: And did they ever get over $50 billion in assets or have they always just stayed right underneath?

Krista: They were in the 40s from what I've read, you know, prior to that rule.

Scott: Prior to the rule. So they push for a change, so instead of...

Pat: But I don't know if I understand. Once that rule went into effect, were you grandfathered into that?

Scott: No, they pushed the limit so that there's heavy regulation on the large banks, $250...

Pat: Yeah, I get that.

Scott: ...and above 50. So then, they argued that it was too low of a number. Small banks like this don't pose any systemic risk to the industry, so why should we be regulated?

Pat: No, understood that but...

Scott: And their assets swelled after that.

Pat: So they were grandfathered?

Scott: No, there's going forward.

Krista: No.

Pat: Going forward. Got it. Got it. Got it. Got it. Got it. Got it. Got it. So they lobbied and changed the rules. So do you think that they're gonna change the rules back?

Krista: It appears to be that there's support for that, from what I'm reading. I don't know. It's all congressional action, but they're...

Scott: So you and your peers, other people in...what do you see the next weeks playing out for banks? Because here's what I kinda have a concern of. So let's say the medium-sized companies out there that have independent boards of directors and stuff, and they go to their CFOs of these companies and say, "Hey, wait a minute. Where are you guys keeping your cash reserves?" And they say, "Oh, I have it as a local, the community bank." Well, how much do you have in the account there? We have $5 million of cash reserves. Like, well, wait a minute. You can't keep $5 million in some little bank because what happens if they go under? Is that the kind of conversation that's happening right now?

Krista: Ten times a day. Yes. And what we are doing is we are working with a company called IntraFi, and most community banks are doing this as well, and mid-size banks too, where basically what IntraFi is, is it's a network of 3,000 banks across the country where we share deposits back and forth in order to, you know, get full insurance coverage. So like for me, right, if I have a client who wants to deposit a million dollars in my bank and wants to have full insurance coverage...

Pat: FDIC insurance, right? FDIC, just be clear.

Krista: FDIC, yes, full FDIC insurance, then what would happen is they would deposit a million dollars with me and I would put it into the network. And then, this network has, you know, legal agreements in place and that million dollars would be farmed out to four different banks in $250,000 increments. And then, it has a reciprocal piece, where I, in turn, would take four $250,000 deposits from other banks...

Scott: So essentially, the FDIC is insuring all depositors.

Pat: So why wouldn't you...right? So everyone's moving to this, correct?

Krista: Yes.

Pat: So what's the point? I mean, so I think I'm having a relationship with Santa Cruz, oh, I love that Krista Snelling, this is the greatest bank in the world. And I've got $10 million there and it's all FDIC-insured. And Krista's like, "Yes, it is." But behind the scenes, I'm trading this $250,000 deposit with Bill Smith's bank and he's sending me the 250...

Scott: Isn't the idea behind having limits on the insured amount so that there's at least some sort of due diligence that goes into it before you make a large deposit, an institution, to make sure the institution's viably sound?

Krista: Yes.

Scott: I mean, you might as well go for it. Invest in riskiest...that's how it's structured today.

Pat: But Krista, so essentially what's gonna end up is that all deposits are gonna be FDIC-insured.

Krista: Yeah. I mean, and IntraFi is, you know...I've been telling people, this is a genius idea and this service has been around for a long time. But, you know, there's a fee that banks pay for this, right? So IntraFi was in the right place at the right time. And there's other networks that do it as well. IntraFi is the one that we use.

Scott: So this is gonna put a hit on earnings for most community banks, just the fact that they're gonna have to suddenly pay a fee to up their insurance amounts.

Krista: Yes.

Scott: This is effectively what's going on.

Krista: But, you know, I mean, for us and everyone else, it's better than, you know, having the deposits walk out the door and people take 'em to too-big-to-fail banks as an alternative.

Scott: Well, that would be crushing on the local economies.

Pat: So what will it do to the local lending? Like, will small community banks, small regional banks, tighten up their lending to small businesses?

Krista: I mean, probably, is the answer, You know, depending on what their liquidity position is, right? Because at some point, it's just math, right, that you have to have deposits in order to fund loans, right?

Scott: Let me write that down.

Krista: This is just math, right? I've said this sentence a whole bunch of times in the past couple of weeks. But, you know, keeping your deposits locally...I like your guys' lead-in when you were talking about, you know, the impact of community banking business, things that I've read floating around in our ethosphere recently is that 40% of loans made to small and medium-sized businesses in this country come from community banks. So, you know, if you were a person trying to decide, you know, where to bank, and then you have the alternative to go to a too-big-to-fail bank, or you can take it into a fully insured deposit service with a community bank, you know, you're really doing a service to your area and your community.

Pat: Krista, when you were the CFO at Five Star Bank, which is a local Sacramento bank, which is where we are based, I would send business to you left and right. And people that would start businesses or had a large, you know, with a major bank, I said to them, "There's going to be a time in your career when you are running your company that you want to be able to call the people that are running the bank and work with them in a situation and you don't even know what it is. But you're gonna call Wells Fargo or Bank of America," which is fine, I said, "That banker there isn't going to know you or be able to actually adjust their processes because you're asking for it."

Krista: Yes. No, that's completely true. And that is one thing, going back really quickly to the IntraFi thing. You know, even though I hear that it's insured and all of that, but the relationship that you have, even the legally those deposits in that network are not on my books, you still deal with me, right, and people with my bank. So it feels like I'm your bank even though legally it's not.

Pat: But aren't they kind of on yours because...

Scott: Because there's a reciprocal agreement.

Pat: ...there's a reciprocal agreement.

Krista: Yes.

Scott: You send $50 million across the network and $50 million flows back to you, right?

Krista: Right. Exactly. Yeah. So when you need something, you call me, right?

Scott: You gotta love government regulation things, right? The government does all this stuff and people find workarounds, so that's how...

Krista: It's very clever, what these folks have done. But your point though about, you know, at community banks and more regional sized type banks is having access to decision-makers is a big deal. And you know where this really came into play, exactly what you were saying, Pat, is in PPP. You know, you could get people on the phone at Santa Cruz County Bank and at Five Star Bank during PPP and, you know, I don't know that you could.

Pat: Krista...

Scott: I remember talking to you personally at that time.

Pat: ...I don't know how many times I called you through in the PPP with friends of mine that...and I told them, "She'll get it done for you, but when it's all over you move 100% of your banking relationships over to..." Right?

Krista: Yes.

Pat: And you did.

Krista: Yes. Yes. And we did.

Pat: And they were happy. I mean, they were happy. So Krista, we miss working with you. That was many, many years ago. And I have sat with Krista on a couple non-profit boards. She is a dynamo. In fact, you were, like, voted Silicon Valley up and coming...what were you? Power 100's business leaders.

Krista: I was in the Power 100.

Pat: Wow, Krista. And to think I knew you when.

Krista: Yes, that's right. That's right. Well, it's good to talk to you guys.

Scott: Thank you, Krista.

Pat: Thank you. Best to you. Appreciate you.

Krista: Okay. Thank you.

Scott: Appreciate you taking some time today.

Pat: She's sharp.

Scott: This whole IntraFi thing is so interesting, right? Because had Silicon Valley Bank participated in this, there wouldn't have been an issue.

Pat: That's right. But why would they? Because IntraFi costs between 12.5 and 15 basis points. So a basis points is 1/100th of a...

Scott: Well, it does today.

Pat: It does today. That's right.

Scott: I'm not an expert in that particular field, but there's probably some competition, which will drive the price down to where it's gonna be.

Pat: That's kinda how capitalism works, right? But that is a drag on, but you're right. If the IntraFi system, at that point in time, if everyone's doing it, what's the point of the...why not just FDIC...

Scott: Well, of course. Because look, you're a president of a community bank. Someone says, "I have $10 million I need to deposit. I'm concerned about FDIC insurance." Like, no problem. We're gonna use the system. And then essentially, you send the money out to all these other banks scattered across the country. You could care less about their financial stability...

Pat: That's right.

Scott: ...because it's the FDIC and the government's gonna come and back them up.

Pat: That's right.

Scott: So what's the point of having any limits when effectively, there's a system in place where you can have every dollar FDIC-insured, whether you have $250,000 or $250 million.

Pat: And Scott, what we saw at Silicon and Signature Bank was a direct result of the changes that were put in after the last banking crisis. And then, they set these limits at 50 million, and then they moved them to 250 million, and quite frankly, it was called the Dodd-Frank Bill. Who was on the board of Signature Bank after he left...

Scott: Barney Frank of Dodd-Frank.

Pat: Of Dodd-Frank. Of Dodd-Frank, was on the board of Signature Bank that just failed.

Scott: And by the way, Signature Bank would have been the story had Silicon Valley Bank not failed first. Just like no one remembers Allen Stanford who was like a Bernie Madoff, but he was found out about three weeks later. And it was five billion loss or whatever it was. It was massive.

Pat: It was big.

Scott: It was very big. But wasn't as big as Bernie...just in the aftermath. Same thing with Signature Bank, which would be a huge story had Silicon Valley Bank not failed first. And I think just by the nature of the kind of clientele at Silicon Valley Bank, I'm sure there's plenty of people in the country, like, "We're bailing out these guys? Venture capitalists? The billionaires?"

Pat: The guys who get the carried interest to recognize as capital gains rather than ordinary income?

Scott: Those guys? The startups? The billionaire guys, the 28-year-old billionaires that work in their pajamas? Those guys?

Pat: [inaudible 00:22:06.758] driving my truck?

Scott: You wonder how that's gonna play out in the next election.

Pat: Oh, my. Oh, my.

Scott: But here we go. And we will take calls here in a moment. But Silicon Valley Bank was being monitored by the Federal Reserve. So the supervisors at the Federal Reserve Bank of San Francisco, they're the ones who oversaw Silicon Valley Bank in 2021, two years ago, they issued them six citations. The bank did not fix the vulnerabilities, and so by July of 2022, Silicon Valley Bank was in a full supervised review and was ultimately rated deficient for government end controls, placed under a set of restrictions that prevented it from growing through acquisition. So the Fed said, "You can't buy anymore little small banks." Yet they were still just kind of let to continue to run the bank.

Pat: Scott, that doesn't remain quiet for long that this has happened to you, even if the regulators said, "Don't tell anyone." And Silicon Valley Bank management said, "Look, this is really bad for Silicon Valley Bank. Everyone quiet." That doesn't stay quiet. So you wonder, like, so Peter Thiel was the one that actually tweeted and started this run on the bank, $42 billion in a single day. Do you wonder how long people in Silicon Valley knew that the money, uninsured deposits were at risk? Or did it break that day and someone said...one of the regulators quit working for the regulator or someone left the bank and said to their friend, "By the way, that place over there, it's burning down but you can't see any smoke yet."

Scott: According to this article, the leaders were assuming that higher interest rates would be helpful for the bank.

Pat: How is that?

Scott: Because if you can earn more than you're paying in, you know, as interest rates rise, most of us have accounts still at banks, checking accounts, they're still paying very little because the banks are very slow in raising that interest rate. So they have an opportunity to earn a higher rate but they're very slow on rates and...

Pat: But your long bonds lose value.

Scott: I guess they're not thinking about that because it didn't matter, because you could just classify them as held to maturity so you haven't lost a dime. Apparently, that's what they were thinking. And when you have all the depositors in the same industry...

Pat: You've got great regs.

Scott: ...and suddenly have a recession in that industry, which is we're in a tech recession, right, it's really fascinating because no more IPOs. We're getting all that fresh cash. The venture capital stuff had kinda dried up, so they're not getting that fresh cash. So suddenly, the deposits aren't coming in...

Pat: Because people are actually taking money out...

Scott: To run their business.

Pat: ...in order to keep their businesses alive and there's not a lot of new money coming in. And this is what's called the burn rate for small startups. It's like, how much cash do we have left before we blow up?

Scott: What a joke. The whole thing's...well, it's so frustrating.

Pat: The government has failed us.

Scott: Yet again.

Pat: Well, I'm not gonna go that far.

Scott: Well, come on.

Pat: Most certainly, changing the regulations from $50 million to $250 million is just...

Scott: Billion.

Pat: I'm sorry, billion.

Scott: All right. We're gonna take a quick break. When we come back, we'll start taking some calls. If you would like to be a guest on our program and have a question for us, we'd love to hear from you. Our contact number's 833-99-WORTH. You can also send us an email at questions@moneymatters.com and we'll be right back. This is Allworth's "Money Matters."

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

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

Pat: Pat McClain.

Scott: Let's head to calls here. We're in California. We're talking with Joe. Joe, you're with Allworth's "Money Matters."

Joe: Good morning. Have a question for you. Back in 2021, my parents passed away within two or three weeks. But having said that, sold the home and after everything, made about $775,000 profit. Immediately and put it with my 401(k), a small 401(k) that I had and that was in January of '22. So having said all of that, we've lost $75,000 out of that.

Pat: Joe? You put it with the same...so you weren't able to take that $775,000 and put it in your 401(k). I assume you put it in a brokerage account...

Scott: With the same company.

Pat: ...with the same company.

Joe: Right. Right. That's what I did. Yes.

Scott: Joe, here's what's hard for your situation. It's always hard. It's funny because I talk about this with our team. Like, it's really hard when someone inherits money or suddenly has a windfall from somewhere, because particularly if they haven't had all these experiences living through market cycles, you get this cash, you do what you think's a prudent investment, right, that's gonna do well for you over the long term, and then the soon as you invest, January of '22, the top of the market, things start falling from there. Now you've got over a year of experience now of nothing but pain and misery with your portfolio.

Joe: That's correct.

Scott: That sounds familiar.

Joe: Well, let me just say this. Both my wife and myself, we have some very good 401(k)s from our jobs, so we never really paid attention to the rise and fall. We were working, so we never really paid...we should have maybe, but we never paid enough attention to the rise and fall.

Scott: Are you retired now?

Joe: Yes, we retired last year.

Scott: Okay. Well one, you've got a lot of time now that you didn't have before to sit and monitor things, right?

Joe: Right.

Scott: You're not contributing like you were when you were working. And frankly, it's the worst financial downturn we've had in 15 years.

Pat: So your question is should you worry or not worry or what?

Joe: Well, let me just say this. It was money that I never thought about having, so I mean, with or without the money, we are gonna be fine. But still losing $75,000 and maybe still losing...what is the reason [inaudible 00:29:06.055] said was that, you know, bonds usually don't take a hit and they took a big hit last year.

Scott: Is this portfolio mostly in bonds?

Joe: Yeah, mostly in bonds, yeah.

Scott: I mean, last year was literally the worst year in recorded history for bonds. It was a nasty year for bonds. Now the bonds that are in your portfolio today are earning a much higher interest rate than they were a year ago. So there's some solace there, I suppose. Is your mortgage paid off?

Joe: No, probably have about six years left.

Scott: How much do you owe on your house?

Joe: Probably around about $170,000, give or take.

Scott: And what's the interest rate on your home?

Joe: Interest rate is probably around, I think it's around 4.5%, 4%, 4%.

Scott: Four percent. Have you thought about just paying off your mortgage? You're retired now.

Joe: You know what? We thought about that and I know this is something we needed...should have asked him the other day, we were speaking with our CPA. And that probably is the question we should have asked and we didn't. You know how when...I mean, you guys are your probably, but when you get a certain age, you want to keep all the money. But neither one of us has anybody to leave the money to.

Scott: Oh, you have no children?

Joe: No children.

Scott: And how old are you, Joe?

Joe: Sixty-seven.

Pat: Well, I'm 60, Joe, but thanks for calling me young. Around noon, I start feeling young. When I get up first thing in the morning, I don't feel young.

Joe: I hear you.

Pat: Tell us about the rest of the financial situation...

Scott: Your 401(k)s, ballpark...

Pat: ...pension, Social Security, that sort of thing.

Joe: Well, everything is good. I mean, we are making more money retired than we did when we were working because, you know, Social Security plus we both have some pretty great pensions. So technically, and we have good medical plans. So, you know, we're doing okay. I mean, $700,000, I mean, if we didn't have it, we still would be okay.

Scott: Okay. But we want to make sure we preserve it and grow it.

Pat: And how much money did you have in your...I assume that you retired either from a large company, state or municipality or the federal government.

Joe: Yes.

Pat: How much money is in your 401(k) plans?

Joe: Both of us together have about, I would say, probably about a million and a half, a little less than a million and a half.

Pat: Oh, my gosh. You guys are great savers. You are great savers. So here is, and you are right, about, you know, your portfolio and you being fine, if your income's higher now than it was while you were working. There's two things I would tell you. One is spend more money. Actively try to spend more money.

Scott: Because you're probably not touching your 401(k), right?

Joe: No.

Scott: You're gonna be forced to take withdrawals in about five years.

Pat: And so, spend more money.

Scott: I'd pay off your mortgage.

Pat: And I would pay off the mortgage too. And you could make an argument that you're better off in bonds than you are in this, but it's kind of a wash.

Scott: And did your advisor do some financial planning to say, "All right. You inherited these dollars because your folks passed away. Here's some different scenarios. Here's what your life's gonna look like in 5 years, 10 years, 15 years, 20 years."

Joe: No.

Scott: Okay. So I think a process like that would be helpful because investments are really based upon time horizons. Two things really. One is time horizons. That's when you're gonna need the money. And second is how much ups and downs you can withstand.

Pat: Or risk.

Scott: And typically, the better you can comprehend your portfolio and understand what's going on, oftentimes the more you're comfortable with some ups and downs. So for example, if you own the 500 largest companies, which over the last roughly 200 years, have done about 6.5% higher than the rate of inflation, around about 10% a year, if you realize that but one out of every three years goes down in value and you have a down year, it's like, "All right, that's how this thing works and I don't need the money for 10 years, so I don't really care what it's worth today." But without that kind of planning, everything you look at, it's like, the value today is highly important to you.

Pat: So back to your question. If you were in my office today, the little I know about this conversation, I would recognize all the losses from the portfolio. I'd go to the advisor and say, "Let's recognize these losses."

Scott: You'd probably say find a new advisor because they don't do the planning.

Pat: He's in my office, assuming he was in my office, which would be the assumption that he was unhappy with the existing...and obviously he is because he called us and not the advisor.

Scott: That's right.

Pat: Or at least a second opinion. I would recognize all the losses in the bonds. I would pay off the mortgage. I would actually probably start a distributions from your IRAs.

Scott: Yeah, you have no one to leave them to either. If you had five kids, would say do some Roth conversions, but I wouldn't even bother with that.

Pat: Yeah. And so, I would probably start distributions from the IRAs. And quite frankly, the only reason I would do that is so that you and your spouse would spend the money. And let me tell you why you have...

Scott: Or without any children, you might say there might be some charity or non-profit, church or something that's close to your heart. That kind of planning would come into play as well because you can take distributions from your IRAs, required member distributions, have them sent there directly without having to record them on your taxes.

Joe: Can I ask you just one quick question because, you know what? You're right. We've thought of everything. We give a lot to charity. We support two charities and...anyway, to make a long story short, I'm the one, I'm nervous because, you know, I'm worried about 10, 15 years from now, if I have to...and granted, we both have long-term care as well. But I'm just worried about will we have enough money...

Pat: That's what a financial plan does.

Scott: And it'll give you the confidence level, like, a meteor can fall from the sky and hit your house today, right? I suppose that's a possibility.

Pat: Actually, so we've done studies on retirees. What makes for happiness in retirees. What are the four indicators, right?

Scott: And a big one is confidence about their financial future.

Pat: It's not how much money you have. It's not actually how much money you have. It's the confidence that you have in your plan with the money you have, right? And then, the others are social, purpose and health. And so, if you look at the four components of happiness in retirement, right, it's purpose, people, confidence in your money...

Scott: And confidence in your health.

Pat: ...and confidence in your health. And so, you're missing...you've got plenty of money and intellectually you say, "I know I probably have plenty of money." But you lack the emotional confidence in your own, you know, view of your world. And what a financial plan does is...

Scott: You can lay out all the different scenarios...

Pat: ...they're real-time.

Scott: I gotta tell you this, Joe. Based upon your situation, if the whole financial system collapsed, you would be like the last one down.

Pat: I'm coming to your house.

Scott: Seriously. You've got pensions...

Pat: Social Security.

Scott: Are the pensions...you're in California. Are they state of California pensions?

Joe: Yes.

Pat: You've got cost of living adjustment.

Scott: Fifth largest economy in the globe, they have taxing authority. That's not going away. Their cost of living...

Pat: You have cost of living adjustments.

Scott: Social Security.

Pat: You've got long term care. You've got Social Security.

Scott: Bunch of money in the bank.

Pat: Yeah. You're fine. So back to your question. Recognize all the losses in the bonds, right? Just call 'em up. And all that does is I'm buying one bond and I'm selling one bond. I'm recognizing the losses on paper and I'm buying...

Scott: But this probably shouldn't all be in bonds.

Pat: It should not be in bonds.

Scott: And if you want...let's assume you did your portfolio and you wanted to save 50% in equities and 50% in fixed income, real estate and whatnot. You would probably diversify a little different within the 401(k)s and have some more tax efficient investments on that side. Are any of these in municipal bonds?

Joe: You know what? I'm ashamed to say I have no idea.

Scott: Hire an advisor so you don't have to worry about it.

Pat: That's why you hire an advisor. And you shouldn't be ashamed to say that, you know? I'm ashamed to say that I actually try to fix my own plumbing and oftentimes fail.

Joe: Been there, does that.

Pat: You're fine financially. You're fine financially. Recognize losses in that. Rebalance the portfolio. Pay the mortgage off. It's going to give you a degree...

Scott: Of confidence...

Pat: ...of confidence.

Scott: ...and comfort and safety and security. it's not all gonna go away because the reason you've got, you save so well is because you're always a little worried about the future.

Pat: You show me someone that doesn't worry about money and I'll show you someone that doesn't have any.

Joe: Imma have to use that one.

Pat: It's true.

Joe: I have to tell that one to my wife.

Pat: It's true. It's true. And quite frankly, you should have a conversation with your...if you had confidence in your financial situation, you'd have the ability to spend more and enjoy the fruits of your labor. This money you have is the way you stored your labor or your parents or whoever you inherited it from, right, this was bonus. And there's got to be a degree of guilt watching this thing fall by $75,000. You're like, you inherited from a parent or brother or sister?

Scott: His parents. Both parents passed away within weeks of each other.

Pat: Parents?

Joe: Parents.

Pat: So your mom and dad, they worked hard for this and you know how hard they worked. And there's a degree of, you know, stewardship that you have over these dollars. Right?

Joe: Yeah. Yeah.

Scott: Go talk to a good certified financial planner who's a fiduciary who can do a good planning with you and look at a variety of different scenarios and I think it'll put some comfort. And to Pat's point, I would also, I'd just pay the house off.

Pat: I would. But congratulations to you and your wife for just great savers, hard workers. You've done well.

Joe: Thank you very much and I appreciate your advice and we're gonna take it wholeheartedly.

Scott: Thank you, Joe.

Joe: Thank you, guys. Have a great day.

Pat: Thanks, Joe.

Scott: You know, it's interesting, Pat. We get pushback sometimes telling people to pay off their mortgage because we're just big fans. you hit retirement. If you got oodles of money, then it's not gonna make much difference whether you have a mortgage and have the dollars invested elsewhere. And if you don't have much money, it's probably better you don't have to worry about having a mortgage payment, right? So I'd look at this situation. He's in really good financial shape. One can run the numbers and say, "It would make sense, you can take the cash, invest it even in treasury bills, and get a higher rate than what you're paying on your mortgage today." But who knows what the market cycles are going to do and who knows how we're gonna react as investors. And some might say, "Oh, Scott and Pat, that was bad advice. This person had a 3.5% mortgage and you told them to pay it off and now they can get higher interest rates." Well, you see what happens to bond portfolios. We just saw what happened.

Pat: But Scott, the point being, paying off the mortgage, the outcome is certain. It is certain. There's no question about making that...certain or uncertain. Money not going out is exactly the same as money coming in. And so, he gives up a half or three-quarter of a percent in interest rates.

Scott: It's a rounding error.

Pat: Who cares?

Scott: Maybe.

Pat: Maybe. But let's say he gave up a percent and a half. He's got a mortgage at 4% and he could buy something that's yielding 5.5%.

Scott: Which would be taxable.

Pat: Which would be taxable. But who cares? The idea behind the money is the money serves you. You don't serve the money. And if it provides peace of mind, that has value.

Scott: Same reason you would have insurance. Oftentimes we buy insurance, not because we can't financially afford it, it provides a peace of mind.

Pat: Peace of mind. And he didn't need to buy a long-term care insurance, but he did.

Scott: Because it provided him peace of mind.

Pat: Peace of mind.

Scott: All right. Let's continue on, 833-99-WORTH. We're talking with Ken. Ken, you're with Allworth's "Money Matters."

Ken: Hi. Should I...Hi, Pat and Scott. I've been listening to you guys for a long time. This is my first time calling in.

Scott: Well, good. Thanks for calling.

Ken: Yeah. So my question is I know in the past, you have encouraged people to take Social Security as soon as possible if, you know, you have a certain net worth.

Scott: We've encouraged people to take Social Security early. We've encouraged people to take Social Security at normal time rates. We've encouraged people to take Social Security at age 70. It all depends on the situation.

Ken: So my question is should I wait to take Social Security to maximize my benefit to see as a kind of an insurance for long-term care? We have about six million in assets, four million in non-retirement and about two million in retirement. And our spending is about $125,000 a year.

Scott: And what's your income?

Ken: My income, I'm retired and my wife's gonna be retired. So my last year income was about $170,000 of that, about $80,000 was in dividends and distributions, about $90,000 was in actual wages.

Pat: And you said that was your last year. What were your retirement income between you and your wife look like? What I'm specifically asking for is do you have any pension income coming in?

Ken: I do not have a pension. Part of the non-retirement assets, 1.2 million, is in traditional IRA and my wife will have a small pension, about $25,000 a year. She worked part-time.

Scott: And of your $6 million in assets, is that including a primary residence?

Ken: That does not include my residence. The residence is paid off.

Scott: And how old are you?

Ken: Fifty-nine. And my wife is 57.

Pat: I don't think that...quite frankly, there's a good chance that this decision will be made for you, about whether you'll receive Social Security or not.

Scott: We've had this...so we don't spend too much time on this program again today.

Pat: But Scott, look at what's going on in France right now. Look at what is going on in France right now.

Scott: They're trying to raise the retirement age from 62 to 64.

Pat: They're trying to raise the retirement age by two years and there is mass protesting. Macron didn't think he was going to get the vote and he...I don't know what they call it over in France, but basically an edict. He just said, "This is the way it's gonna go." And then, he went to a no-confidence vote, which is essentially how the politicians could throw someone...

Scott: He's a prime minister, right? Is that right? Is he elected...doesn't matter.

Pat: No, he is elected.

Scott: Parliament doesn't elect him?

Pat: I don't recall that. I don't recall. But the point being is that they're running out of money and...

Scott: The populous is saying, "We're not gonna put up with you raising our retirement age." So you're 59. You're just gonna turn age 70 eleven years from now. That puts us in 2034. There are projections today with no changes that the Social Security trust fund's gonna be broke sometime between 2032 and 2034 and if there's no changes, there's an automatic reduction of 23%, 24%, depending on what numbers you're looking. More than 20% across the board reduction by the time you are age 70.

Pat: But it won't be across the board. They will look at income and say, "Anyone that has income over 100,000..." Chris Christie, eight years ago, was talking about this. A guy on the far right. So you want to take Social Security as fast as you can. Look, the long-term care, you're gonna be able to fund it one way or the other. If you're worried about it, if you are worried about long-term care, you can buy what's called an asset-based long-term care policy, which is a life insurance policy. Full disclosure, life insurance, not for everyone. But it has a component in there that actually where you give up the earnings in the life insurance policy to pay for a long-term care benefit. I don't think you need that.

Scott: They work quite well for those that want long-term care insurance for two reasons. One, interest inside life insurance policy's not currently taxed. So interest is not gonna accumulate in the policy because it's gonna essentially pay for the insurance. So you're able to pay for your insurance with pre-tax dollars. That's one reason they work. And secondly, you end up having a really long waiting period, kind of like a high deductible on a homeowner's policy, like high...because you spend your cash first. So you put $100 grand in, let's say, and you've got these long-term care benefits, you end up spending your own cash first before the insurance company starts throwing in their cash.

Pat: Which is a form of deductibility.

Scott: Yeah. So for someone like you, if this is something you're like, "I really want to predict it," I would look at that avenue first.

Pat: But I don't think you need that. But if you want the peace of mind, that's how I would do it. You and your wife should take Social Security the minute, and you can run spreadsheet after spreadsheet after spreadsheet, and you can tell me why it's better for you to wait 'til 70.

Scott: Well, that would ignore what's...

Pat: Legislative.

Scott: ...what we know that the Social Security trust fund will be...there will be less money coming in that's going out. And when that happens, by the way, the current law is there has to be an across the board reduction. So what we look at and say, first of all, will there really be an across the board deduction or will Congress step up and do something? And if they're gonna bail out, are they gonna bail out everybody or are they gonna bail out those that really need the money the most?

Pat: So I had this discussion with my wife of 37 years who I cannot believe is going to be eligible for Social Security a couple years. And I said, "We're gonna take your Social Security the minute you're eligible. We're not taking mine because I'm still working." And so, there would be no reason to.

Scott: Well, you couldn't get it. You sign up and it goes right back.

Pat: So you should take...you can make this argument about long-term care in your mind if you want, if you're not working, you and your spouse should take Social Security the minute you're eligible. And like I said, I don't think you need this asset-based long-term care, but if it makes you feel good, have at it. It's not gonna hurt you. It's not gonna help you. You've got plenty of assets. But you should...

Ken: It would made me, my wife, because her parents are in their late 90s and all her aunts and uncles are in their late 90s. So it's really her, she was talking to me about it and she's definitely gonna outlive me. So she's concerned that by herself.

Scott: Yeah, well, that's real, I mean, one, you've got the assets. I mean, there's other ways to get assurances and insurances in play. I mean, you can buy a longevity insurance, which essentially, it's a deferred annuity that doesn't kick in until you're age, say, 85 or 80.

Pat: But you don't need that. That would just be the assurance.

Scott: Back to the point of if we're gonna look at some things to provide peace of mind, there may be an economic cost for it, that's another...and it's not a bad thing for...there's nothing wrong with doing things to get peace of mind.

Pat: I assume you've spent some time on your estate plan.

Ken: Yes. Yes. Yeah, I have.

Pat: I would watch the unified credit closely...

Scott: How much you can pass away when you're...

Pat: ...and see what they do with it in the next few years, because you may be affected if there's major changes.

Scott: It's what, 11 million per person today, couple...somewhere in there.

Pat: A little bit. Yeah. So appreciate the call.

Ken: Thank you.

Scott: All right, Ken. It's funny. We get this question, sometimes it's like, "Are we gonna have this question again?" Because most people kinda know our opinion on it. But Social Security is a large income source, regardless of your situation.

Pat: Net present value of the stream of income's over joint life expectancy.

Scott: I saw some argument...I won't even go down that path. Anyway, we'll see what this next week's like and this will pass.

Pat: This too shall pass.

Scott: This will pass. So if you think back to the financial crisis, remember how dire things looked. The Dow fell to 6,000 some odd, right? I mean, it was a rough time. We went past that. That ended. The Dow hit over 30,000, still over 30,000 today. We're in a rough patch. This will end. If you're diversified, you've got the right kind of plan in place, you will weather this just fine. If you panic and sell out, you will regret it, as people in every other downturn, they come to regret it later on.

Pat: It's hard.

Scott: Anyway, it's good to having you guys. Hey, if you haven't taken a chance to give us a review, we'd love for you to do that. Just whatever you guys, if you get this from Spotify or from iTunes or wherever, iHeart, wherever you get it, please give us a little review on that. We would appreciate that. And again, if you would like to be a guest on our program, send us an email, questions at moneymatters.com, we'll set up a time to get you on and answer your question. So enjoy the rest of your week. This has been Allworth's "Money Matters."

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