Managing Inheritances, RMD & Roth Conversion Strategies, and Small Financial Adjustments for Big Future Gains
On this week’s Money Matters, Scott and Pat provide valuable advice for those dealing with unexpected inheritances, including strategies for managing and investing these funds wisely while balancing personal enjoyment and future planning. They also delve into the complexities of Required Minimum Distributions (RMDs) and the importance of considering Roth conversions to optimize tax outcomes. Finally, they emphasize the importance of dynamic financial planning, using case studies to illustrate how even small adjustments can significantly impact one’s financial future.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
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." Scott Hanson.
Pat M.: Pat McClain. Thanks for joining us.
Scott: Yep. Glad to have you as we talk about financial topics. Got a good program as always.
Pat M.: Yeah, taking some calls. And some personal stuff. I got to share this with you. You might find this humorous, Mr. Hanson.
Scott: Is it financial related in the slightest?
Pat M.: No.
Scott: Okay, good. Even better.
Pat M.: Well, maybe a little bit. So I like doing stuff around the house. I enjoy it. Right?
Scott: How many years you've been in your house?
Pat M.: Twenty-nine.
Scott: Twenty-nine years. How many times you've had to paint it?
Pat M.: Oh, probably four or five times.
Scott: Pat jokes that his house is getting smaller on the inside and larger on the outside.
Pat M.: It's wood. It's wood. So what happens is it needs constant care. So I'm power washing the driveway and then the sidewalk.
Scott: Do you have a gas-powered power wash or electric one?
Pat M.: That's the problem. The gas one. So immediately, I apologize to the neighbors. Like, "Sorry about this."
Scott: Because it's so noisy.
Pat M.: It's so noisy. And I'm pretty fastidious about stuff. I've kind of got a little OCD maybe going on about how things have to be organized and just right. And it drives me crazy when the walkways got stains and stuff. So I do it and I'm almost done.
Scott: All right. I haven't been to your house in a while. But I remember when I go over, and like Cath would offer me a glass of water. And I learned just not to take one because once the glass is set on the counter, if you leave it there for like four minutes, either Pat or Cathy pick it up and put it in the dishwasher. So the counter is perfectly clean.
Pat M.: That is correct.
Scott: Your house looks like...you could list your house for sale right now. You can have an open house right now, and the house would be fine for it.
Pat M.: It would be at about 98%. Right. So I'm power washing. And the big power, it's so noisy, and I've got headphones on to block the noise. And it kind of rattles around. So I'm out in the backyard next to the pool, washing the pool deck, power washing with that scrub head. And all of a sudden, the thing goes dead. I think, "Oh, it's out of gas again." And I turn around, and that power washer is at the bottom of the pool.
Scott: Oh.
Pat M.: It's just rattled right into the pool. Just rattled right into the pool. Just...
Scott: Is it dead?
Pat M.: Oh, yeah, it's dead. Now, I could...like, if you take off the spark plug, then you crack it, get the water out, and do the whole thing. But I have a friend that's kind of a mini mechanic, so I'm like, "Do you want this?" He's like, "Absolutely." And then Jeff Bezos, who's saved my marriage more than once, had an electric power washer delivered to me the next day, which I'm quite happy with. Much quieter. Doesn't rattle. Hasn't he saved your marriage a couple of times?
Scott: I just can't believe how quickly the Amazon delivers stuff to my house.
Pat M.: It's amazing. It's amazing. It's absolutely... He has saved my marriage...
Scott: And for low-priced items, I don't go anywhere else. I just...
Pat M.: Yes, you don't even...
Scott: Sometimes on larger ones, I'm like...
Pat M.: I'll comparison shop.
Scott: Yeah. And I want to make sure that other businesses survive, not just Amazon...
Pat M.: That's right.
Scott: ...eats the world.
Pat M.: Right.
Scott: But it's interesting, Pat, on your home keeping track...from a financial standpoint, it's probably not the best use of your time.
Pat M.: Correct.
Scott: But you get in some emotional.
Pat M.: Yes. Yeah, I enjoy it. I enjoy it.
Scott: I hate it.
Pat M.: Well, then don't do it.
Scott: I was a tree trimmer for five years. Now I don't like working in the yard at all. At all. I don't like plucking roses. I don't like doing any of that.
Pat M.: But they... And the reason I...that had nothing to do with financial.
Scott: Yeah, what are we talking about?
Pat M.: I just thought I would...I thought you'd find it amusing that... I found it very, very amusing that it happened to me.
Scott: You did?
Pat M.: Oh, yes. I wasn't upset at all. I just looked at it and I thought...
Scott: So here's how...
Pat M.: ... "You're kind of a moron, McClain."
Scott: Here's how... And we will get to financial matters. Here's how horrible I am when it comes to home improvement stuff. When we were first married, 1992, we bought a...we borrowed a little bit of...I think a 10% down I borrowed from my parents that I paid back over the next couple of years. And we had a guestroom because it was just the two of us. There was a tub there with a shower curtain. And I said, "Wouldn't it be nice to get one of those shower doors?" So I go down to HomeBase, I think it was called at the time, and we bought the shower door for 180 bucks or whatever it was. And there was a sign they'll come and install it for you for another $79, or whatever it was 30 years ago.
Pat M.: You're like, "I don't need any part of that."
Scott: And I thought, "I can do this. I'm not an idiot." And so I realized I needed to have...the first thing you do is there's a track that sits on the tub, and you have to cut that track. So I had to buy a saw to do that. Then I bought...I had to buy a little file so that I can get the burrs off.
Pat M.: The burrs. Yeah.
Scott: Yeah. I took shop in high school, so I realized just measure twice, cut once. I measured like five times. I had the measurement down perfect. Wrote it down, went to the garage. I cut a perfectly nice cut. Used the file. No burrs.
Pat M.: Feeling good about yourself.
Scott: Oh, yeah. Pride comes before the fall. Went up, put it in the bathtub. It was exactly two inches short the length of the tape measure.
Pat M.: That's funny. Did you hire someone to come and put it in?
Scott: I actually know there's an 800 number you can call, because now I need a new track.
Pat M.: Yeah. And they sent you one?
Scott: Apparently this must happen more than once, because that's why there's that, "Before you do anything, call this 800 number." And they sent me a new track, and I actually did put it. And I said, "Never again."
Pat M.: And that was it. There we go. Anyway, thank you for listening to handyman tips from Scott and Pat.
Scott: Look, I get it when people enjoy doing it. I get no joy. I'd rather be out on my bike or hiking or something. But anyway. We're going to talk about some financial matters. Actually, before we get to the calls, tax time is around the corner.
Pat M.: Yes.
Scott: There's not much you can do to change what your tax liability is going to be for 2024. But there's a couple of things to keep in mind. One, if you have not yet found your taxes, you might just want to file an extension. Right? Because we've got essentially two weeks until our taxes are due. If you find an accountant, they're all busy, if you're in process, maybe they get it.
Pat M.: I wouldn't hire an account that would take me on as a client right now.
Scott: Well, hopefully you already have a relationship with one.
Pat M.: Okay. Yes.
Scott: And if not, you might be able to hire someone who can just do an extension. But instead of cramming to get it done...
Pat M.: Just file an extension. Just make an estimated tax payment.
Scott: And frankly, as your financial life becomes more complicated, there are times when it's virtually impossible because you might be waiting for K-1 from some partnership or whatnot. But the second thing is there's still an opportunity for IRA contributions. If you qualify for a Roth, you can set up a Roth, you can do a Roth for your children. I've got a 17 year old that has a job. She made some wages last year.
Pat M.: Earned income.
Scott: Yeah. So I'm doing a Roth contribution. I actually just did the paperwork a couple weeks ago, set up a Roth for her, making a contribution on her behalf into her Roth IRA. If you have grandkids, you can do the same thing. They have to have some wage income, some earned income. Babysitter stuff's not going to work because they need to...it has to be reported. Technically, they're supposed to report the babysitter wages, but I don't think anyone actually does.
Pat M.: Yes.
Scott: And I hope the IRS doesn't start harassing 14-year-old teenage girls.
Pat M.: Yes. And what else could you do?
Scott: You can do a backdoor Roth. If you don't have any other IRAs, you can essentially do a nondeductible IRA. And then the day afterwards, convert it to a Roth.
Pat M.: Yes. You can fund a SEP.
Scott: You can fund a SEP. You can file an extension and fund...if you own a business, file your SEP IRA as late as the time you actually file your tax return. You can push it out to October 15th. And same thing with a...if you've got a cash balance plan, or another type of pension plan that was established prior to December 31st of last year.
Pat M.: Had to be established.
Scott: Or a solo K.
Pat M.: Had to be established.
Scott: You can fund that up until the time you file your extension. So right there alone might be a reason for you to file your extension.
Pat M.: Solo K had to be established in 2024.
Scott: So you still have a few things.
Pat M.: Yeah. And remember, it's the best time to actually do tax planning is at the same time you're doing tax preparation, because you can ask to prepare, "What should I have done?"
Scott: Well, that's... Pat, so I tend to file...October 15th is the deadline. I'm usually filing October 10th. Okay?
Pat M.: Right there. Yes.
Scott: Somewhere right in there. It doesn't mean I ignore it. I mean, because to your point, the tax planning is an ongoing thing.
Pat M.: Tax planning is actually where the best decisions are made.
Scott: Throughout the year.
Pat M.: Throughout the year. But the easiest thing to do if you're doing your own taxes is ask yourself, "What did I miss out on I should have done?" When you're preparing your taxes. Or if you're using an accountant, or an enrolled agent is ask them, "What should I have done that I didn't do?" And then do it.
Scott: Yeah. And you're going to have a better time, better experience talking with your accountant not on April 13th.
Pat M.: Yes.
Scott: When they're all pulling their hair out trying to figure out how they're going to get all stuff done.
Pat M.: Oh, we watch these accounts in our office, because we have a tax preparation business. And they're just...
Scott: I was just walking into the hall, and there's one of our tax directors, another one of our accountants, and they're chatting. And I almost teased them like, "What are you guys doing talking? Get back to work." But I thought that they might not take it well. But I said, "How are you guys surviving?" And I said, "My guess is every tax season you question why you chose this career." She says, "That's exactly what happens every tax season." Kind of like as a financial advisor, every time there's a pullback in the markets, not a short-term one.
Pat M.: Yeah.
Scott: But look, these markets...a pullback can last much longer than days, weeks, months, years.
Pat M.: Years. The longer they go, the harder it is to stay invested.
Scott: As long as you've got...if your money that's in stocks is designed for five plus years, there's nothing for you to worry about.
Pat M.: Keep it there. So, yeah.
Scott: All right, let's take some calls. 833-99-WORTH is our number. If you want to be part of our program, have a question for us. Or you can send us an email at question@moneymatters.com. We're in Pennsylvania with Bobette. Hi, Bobette.
Bobette: Hi.
Scott: You're with Scott and Pat.
Bobette: Hi. Thank you for taking my call. How are you, gentlemen?
Scott: Good.
Pat M.: Good. What can we do to help or try to help?
Bobette: Okay. I loved your story. So that definitely helped. Laughter is good medicine always.
Scott: Okay. Thank you.
Pat M.: That's the kind of positive re-enforcement that keeps me coming back.
Bobette: Good. My husband is a retired home contractor, so I have many stories.
Pat M.: I imagine.
Scott: And I imagine your husband went into places like Pat McClain's house, and actually fixed properly the stuff that McClain had attempted to do.
Pat M.: That's probably true.
Bobette: Oh, yes, yes, yes. Several redos. Yes. But thank you for taking my call. I received an inheritance. And I don't know what to do with it. And I've never... This is new for me. This area, I don't know, investing. I'm disabled, so this is totally new. I was never taught investing, all that good stuff.
Scott: And you say disabled. Are you receiving Social Security disability?
Bobette: Yes, I am.
Pat M.: And how old are you?
Bobette: I'm 55.
Pat M.: And you said your husband is retired. Is he of similar age?
Bobette: Yeah. He's in a different profession now.
Pat M.: Oh, he is. Okay. And how much money did you inherit?
Bobette: $125,000.
Pat M.: Okay, so I'm going to start with this, and then we're going to answer your question.
Bobette: Okay.
Pat M.: If someone gives...
Scott: Hold on. Is this money from one of your parents or a distant family?
Bobette: Yeah, from my father.
Pat M.: Okay. When you inherit or are gifted money, it is considered separate property in a marriage.
Bobette: Okay.
Pat M.: So I'm just going to throw that out there. Which means that if you put it in your account with just your name on it. Right? And something happens to the marriage, then it's yours. The spouse has no claim on it. But if you took that $125,000 and paid down the home that you own together, you have co-mingled that, in most states, into community property. And then your husband now has claim to it in most circumstances. All you divorce attorneys out there, you'll notice that I'm speaking with as many disclaimers as I possibly can. Just be aware that it is now separate property. And when you go to invest the money, that kind of comes into play. So what does your overall financial situation look like? Is your home paid for? Do you have a lot of credit card debt? Do you have car debt? What's your financial situation?
Bobette: No. We're working up to being debt free. Home is totally paid off. I'm living in a home that my mother gifted to me. I took some of the money and cleared up my credit. So I've been doing everything to improve my financial situation.
Pat M.: Is your husband living in the home that you...
Bobette: Yes.
Pat M.: ...inherited from your mother as well?
Bobette: Yes.
Pat M.: And is the home just in your name?
Bobette: Yes.
Pat M.: Okay.
Scott: And what's the family income? And how old is your husband?
Bobette: Oh, he'll be 64 this year.
Pat M.: Okay. And what's the family income, including your Social Security benefit?
Bobette: Including? Hm? I'd have to ask him. I can't remember right now. I apologize. I should have had that.
Scott: And with your disability, I might get very personal here with you, but is this something you think you'll have a normal life expectancy, or shorten life expectancy?
Bobette: A shorten life expectancy. I have a sickle cell anemia. So the normal life expectancy for someone that has it, for males is about 40, 45, and women it's about 45, 50. So God has blessed me with extended years.
Pat M.: Wow.
Scott: Oh, wow.
Pat M.: And do you have children?
Bobette: Yes. We have one daughter.
Pat M.: Okay.
Bobette: Who's in law school.
Pat M.: Nice. Well, the first thing you need to do is get a will or a trust, depending upon the state in which you live. I mean, that's the first thing.
Scott: And is the daughter between you and your husband, it's first marriage?
Bobette: Yes.
Scott: Okay. That makes it clean and easy.
Pat M.: Yeah. So you want to do a will or a trust.
Scott: What do you want to see these... So when you inherit assets, it's always a little bit emotional because someone we loved is no longer there. And now we have...
Pat M.: That's the assumption.
Scott: Okay. What would you like these dollars to do for you? Forget about the investment. What would you like to see happen differently as a result of these assets?
Bobette: I would love to be able to be financially independent, be able to have the money working for me. That's what I would like to do. I'd love to open up a health spa. A health medical spa. So, like I said, I would love to have it working for me.
Pat M.: And do you have any money now invested or saved for retirement, you and your husband?
Bobette: Yeah. He has an IRA from his job.
Pat M.: 401(k)?
Bobette: Yes. I'm sorry. Yes.
Pat M.: Okay. And do you know the approximate balance of that?
Bobette: No, I don't.
Scott: And how much do you...so if you put these dollars to work for you somewhere, let's say, for example, you went out and put it in a CD, you might get 4%, maybe a little better than 4%. Let's just call it 4%. So that could provide about $5,000 a year in income. If you invested in something that maybe got a little bit higher, maybe you can get a little bit more than that. That's if you wanted to keep your principal intact, so your principle's there long term. How much were you expecting or hoping that these dollars could provide an additional income?
Bobette: Oh, that's a good question. It would be nice if I could...I guess ideal, if I could maybe live on $5,000 to $7,000 a month. I did buy 3 ounces...
Pat M.: A month or a year?
Bobette: A month. It would be nice. I did buy 3 ounces of gold with it. That's the only really investment that I've made.
Pat M.: Well, if you're taking $5,000 a month out of this, then your money is going to last you a little bit over two years.
Bobette: Right. That's why I haven't touched it at all, because I don't know what to do with it.
Pat M.: Okay.
Scott: Well, you're in an interesting situation because what you told us is that your normal life expectancy is 45 to 50, and you're 55.
Bobette: Right.
Scott: So you could be looking at this a couple different ways. You might be looking and say, "I'm on borrowed time. I don't know how many more years I have. I'm going to enjoy these dollars. These are the things that I value right now, and I'm going to use these dollars for these certain things." Which I completely understand. Why wouldn't someone want to do that? Or you might be saying, "I want these dollars to help with my daughter's law school," but imagine she'll be able to pay off whatever debts are when she finishes law school.
Bobette: Right.
Scott: So, I mean, how are you thinking about things?
Bobette: I think both. I want to enjoy it. And then I also want it to go for good. Because the first thing I did was when I got it...because it was totally unexpected. And then I took out instantly...I took out my [inaudible 00:19:35] offering with it, and just did a little stuff with it. But I didn't want to do anything major unless I...
Scott: Smart.
Bobette: ...totally understood what was going on. Right.
Scott: Yeah, smart. It's typically what we would recommend as well. Take your time.
Pat M.: How long ago did you inherit the money?
Bobette: I inherited it in September 2025.
Pat M.: '24.
Bobette: I'm sorry. Yes. '24. And it's been in my money market.
Pat M.: Well...
Scott: This is tricky. This is tricky.
Pat M.: Yeah. Because you have to have kind of a design for it. And so if you said to me, "Well, I just want this money to go to my daughter," then we would...
Scott: [crosstalk 00:20:21]
Pat M.: ...invest it quite aggressively. If you said, "Okay, I want income from this of, let's say, $500 a month." A month. Not...
Scott: Then we could structure something that'll probably last you to the rest of your life.
Pat M.: Yes.
Bobette: Okay.
Pat M.: Or you could say, "I want a combination of the two," which is, "I'm going to take 30 grand, and my husband and my daughter and myself are going to take the trip of a lifetime. We're going to go on a safari, or we're going to go to Italy, and we're going to do this."
Scott: Whatever it is, whatever you want to do.
Pat M.: Whatever floats your boat. Right? Or Disney World.
Scott: Whatever it is.
Pat M.: Which I can't imagine that being a trip of a lifetime. Disney World. But it might be.
Bobette: No Disney. I want to do all of the above. All of the above.
Pat M.: But then decide what is for... It's hard to answer a question about what to do with money if we don't know what the intent of the money is.
Scott: I'll tell you what though, if you were my sister, I don't know much about you, but just what you've told thus far, I would be like, "Why don't you enjoy these dollars?" I mean, it sounds to me like the chance of you being alive 20 years from now is pretty slim.
Bobette: Right.
Scott: Is that possible, though?
Bobette: Anything is possible with God. But yeah, I don't really see myself 20 years from now being here.
Pat M.: And maybe you just split the difference.
Scott: If you're my sister, I'd say, "Look, let's come up with some dollar amount. Whether it's $50,000, half the account, $40,000, whatever, that we're going to plan on spending the next few years. Those sort of things that we've wanted to do that we've never had the money." Maybe they're trips, maybe they're [crosstalk 00:22:09]
Pat M.: And then the other, you decide what you're going to do with the money. But we can't answer a question like, do I know...was it a good idea to buy the gold or not? I don't know. I mean, because without a direction...
Scott: I wouldn't recommend more than 5% of your portfolio...
Pat M.: In gold.
Scott: ...in gold.
Bobette: Right. I've been researching it, so that's why I only did the 3 ounces. Because I want to spread it out evenly. I don't want to have all my eggs in one basket.
Scott: That's right. That's right.
Bobette: And I do want to enjoy it. I do want both.
Pat M.: Okay. But every investment is based on a timeline and intent with those dollars. Right? And so if you said this...
Scott: Whether it's $125,000...
Pat M.: Or $10 million.
Scott: ...or $125 million.
Pat M.: It doesn't matter. Right? So if you said, "I want half of it to go to my daughter when I die," I would invest that in an equity portfolio.
Scott: That portion you would invest differently.
Pat M.: And then the other portion, if you were going to spend it or take income from it, I would invest that differently. Call us back when you answer those questions for yourself.
Bobette: Okay.
Pat M.: And I'll tell you exactly what I think you should do with the money. We will tell you exactly what we think you should do with the money. But in this...
Scott: But if you're my...again, if you're my sister, I would encourage take...figure out some dollar amount that it was going to give you enhancement. If you don't think it is, then don't.
Pat M.: Might not. She might feel guilty about spending that depending upon...
Scott: I know.
Pat M.: ...how the money was...
Scott: And that's why I brought up that it's hard when you inherit money.
Pat M.: Because you said this was unexpected, which I took to mean that you didn't know that your parents had money.
Bobette: Yes, pretty much. My father sold a farm. It was actually his second wife that just decided to give it to me. My father died 11 years ago. And so I thought I had gotten everything I would get from him. And here she was just calling me up one day, said, "Hey, I sold his farm, and this is yours."
Scott: Wow.
Pat M.: Wow.
Bobette: Yeah.
Scott: You don't hear those stories very often.
Pat M.: That's something.
Bobette: I know. I know. I know.
Scott: Wow. That is massive.
Pat M.: So call us back when you think about this, and think, "Okay, well..." If you didn't have sickle cell, and you didn't give us those life expectancy numbers, our direction would be a lot different than without that information.
Bobette: Okay.
Pat M.: I mean, it truly would be. And you might just decide, "Hey, I just want $500 a month and improve my day-to-day lifestyle."
Scott: She wanted $3,000 to $5,000.
Pat M.: Well, that can't happen.
Scott: You can do it for a short amount of time.
Pat M.: Yeah. $5,000 a month is...yeah, your money is going to be gone in less than two years, which might be the answer. Just know what the outcome is.
Scott: Figure that your portfolio...I wouldn't figure that...just think about it generating a maximum of 5% a year. I don't care if you invest it gold, in Nvidia. A well-balanced portfolio, your time horizon is not going to be terrible. I would just bank on 5%. So whatever dollar amount you have, say, "All right, if I earned 5%, what could this generate?" And then that gives you...then you could start thinking, "All right, how much of this do we want to spend today on whatever our wants or needs are, our desires are, and how much we want to have?"
Pat M.: "And how much to supplement our lifestyle today?"
Scott: Yeah.
Pat M.: So give us a call when you think through that.
Bobette: I will. Thank you so very much.
Pat M.: All right. Thank you.
Bobette: This has been very helpful.
Pat M.: Okay. Good.
Bobette: Thank you. God bless you both.
Scott: Yeah. God bless you, too. I appreciate that call. It's interesting, Pat. One of my first thoughts, someone with no investing experience is like...there are times when an immediate annuity is helpful to people. You give up control of your principal in exchange for a lifetime income, which works great if you're in phenomenal health particualry.
Pat M.: Yeah, but she could do an intermediate annuity period certain.
Scott: Yeah, but it doesn't do the same sort of thing.
Pat M.: It doesn't do the same thing.
Scott: Because one of the challenges when people inherit money that haven't had a lot of investing experience, it's hard.
Pat M.: It's really difficult.
Scott: Because they invest in something. The first time something goes down, they're like, "Oh, my gosh, I inherited these dollars. And what happened? This has fallen in value." It's really difficult. I mean, as an advisor of three decades, I know how hard...
Pat M.: When inherited money comes in...
Scott: Inherited money for somebody that has not had experience, because the best experience is your own experience, right? The best education. I think you become a better investor when you've had some losses over the years.
Pat M.: Oh, over time.
Scott: When you've made some mistakes.
Pat M.: Over time. Yes.
Scott: Yes. And so it's really difficult when...whether it's an inheritance, or it's some pension lump sum that and you've never really had any investing experience, and suddenly you've got a large sum of money that you have to be responsible for navigating. It's a big challenge.
Pat M.: Yeah. And as she said, anything's possible, right? I remember when I started in the business, I had a couple of clients that had AIDS, and they thought it was a death sentence.
Scott: That's right.
Pat M.: Right? And they were spending the money like it was a death sentence. And it didn't turn out to be, thankfully.
Scott: So I got a story. I had this client. He had been widowed unfortunately. His wife had a long battle with cancer. He was working. He calls me up one day and says, "Scott, I have terminal cancer." "Oh, God," thinking that's just horrific. He was probably, I don't know, mid-50s, late 50s. And so he came in and visit with me. We had a conversation and he says, "Yeah, my doctor told me to quit drinking." He says, "Forget it. I'm going out with a bang."
Pat M.: Let's go.
Scott: Whatever. I'm not here to judge you, your life, whatever.
Pat M.: Let's go.
Scott: Well, he blew through 90-some percent of his cash. Just...
Pat M.: All his money?
Scott: ...wasted it all. Yeah, just blew it.
Pat M.: All his liquid assets?
Scott: Correct. No, his retirement account. Just spent it all. He called me and said, he says, "I'm looking for an attorney." I said, "An attorney for what?" "Well, my doctor had the charts mixed. I'm not dying after all." I don't know what happened to this gentleman, because there was no money left for us to help him out with.
Pat M.: Wow.
Scott: Tragic.
Pat M.: Just a little bit funny?
Scott: Of course it is. That's why I'm telling the story.
Pat M.: Just a little bit. Come on.
Scott: It's a true story. He probably didn't find it so funny.
Pat M.: Oh, no. It's kind of sad. Really sad.
Scott: Kind of sad.
Pat M.: It would have been fun to hang out with him for the last...
Scott: Maybe. I don't know.
Pat M.: I don't know. If you're into that thing.
Scott: Yeah.
Pat M.: If you're into that thing.
Scott: Yeah. Anyway. All right, let's continue on with calls. By the way, if you get a terminal diagnosis, might want to get a second or third opinion before you start blowing through your savings.
Pat M.: Noted. Thank you.
Scott: Might want a second or third opinion regardless.
Pat M.: Noted.
Scott: All right. We're talking with Pat in California. Pat, you're with Allworth's "Money Matters."
Pat: I wanted to thank you guys. I actually called a couple of months ago, and you advised me to start interviewing financial advisors. And so I started that process. And of course, I'm learning more and more stuff like crazy. Unfortunately, it seems to be making it more complicated than I had...my more simple spreadsheets had predicted. So I came up with a couple of things that I thought I'd ask you about. And by the way, I'm talking to one of your guys next week. So we'll see how that goes. But again, thanks for that recommendation.
Pat M.: Well, thanks for putting us in the mix.
Pat: I've been with you guys for 30 plus years, probably. Or 30 years or so.
Scott: Oh, good. Well, maybe it will take another 30 years to really build that trust.
Pat M.: What's your question for us?
Pat: Yeah. So I turn 70 next month. I'll start Social Security. I've got about $3 million in IRA's pre-tax. My really post-tax...after-tax net worth is in a couple of houses, my house and a house I got some kids living in, and then I've got another house I'm buying to help another kid live in. They'll pay me some rent, have some retirement income from that. But then I'll inherit and all of that. I don't know if I talked to you about that last time. But...
Pat M.: Okay. And so I don't recall the phone call.
Pat: That's okay.
Pat M.: But I assume we told you to make sure that these homes were identified in the trust in order to make sure that they go to the right places.
Pat: Yes, yes. And we got a trust. And we got a will, and all of that's kind of laid out and everything. So one of the things I learned that I hadn't really thought about or planned about, I never really thought Roth IRAs were...really would apply to me because I kind of always felt that it's all about do you think that taxes are going to be more in the future or more now. And so if you think that taxes are going to be less in the future, well, then...or less now than it will be in the future, then do Roth conversions or Roth IRAs so that you pay less tax in the long run.
Pat M.: Well, that can be case. But really, what you're trying to do is you're looking...
Scott: At your tax rate.
Pat M.: At your tax rate.
Pat: Well, there you go.
Pat M.: Which is are you moving up...when you do the calculation, there's $3 million, right? You're going to have to start taking distributions in a few years. What's the value then? And then, "What's my required minimum distribution rate at that point in time? Right? And am I moving myself into a higher marginal tax rate than I am today?"
Pat: Exactly.
Pat M.: And what you're trying to do is take advantage of that gap. And by the way, because of how IRAs are inherited by your children at some point in time, they have to drain that money in 10 years.
Scott: Ten years. No more lifetime spread.
Pat M.: Which means it becomes even more importantly over the lifetime of the account.
Pat: Yeah. So what I learned about was this idea of I guess the guy that I talked to called it the tax...the RMD bomb. Basically, you hit a point where the RMD percentage, as it continues to go up, it gets to a point where you have to take a lot more out than than you need.
Pat M.: That's right.
Pat: And then you wind up paying a higher tax rate.
Pat M.: That's correct.
Pat: And so I could be in that situation where it jumps from 22% or 24% to 32%.
Pat M.: That's correct.
Pat: And so you suggest... And also, like you said, the other thing is that...if the amount that you're leaving is an inheritance, because they have to take it out over 10 years, that could be a bigger tax hit on your kids than maybe you otherwise thought it would be.
Scott: Yeah. There's been a couple of changes in the last even five years. So one, it used to be that the people who inherited the assets could stretch their withdrawals out over their lifetime. So you pass away, you leave a 60-year-old an IRA, they can spread it out over the next 25, 30 years. That's gone. Now it has to be distributed in 10 years. The second thing is, the required minimum distribution start date, it got pushed up to 70. It's moving up to 75. But there was no increase in life expectancy.
Pat M.: So the distribution as a percentage becomes higher when you first do it versus a 70 and a half.
Scott: That's right.
Pat M.: So what is your income today?
Pat: Yeah, my income today is around $260,000.
Pat M.: And one more thing on that because I...just to get some clarity on this. The formula that's used to determine your required minimum distribution is not a male life expectancy, it's not a unisex life expectancy. It's a life expectancy table between unisex your age and unisex someone 10 years younger. The uniform table for whatever reason, between the IRS and Congress, that's how this formula was derived. So when you start thinking about as you get older in life, your life expectancy becomes shorter, which is going to trigger higher required minimum distributions. But it's not really just your life expectancy. It's a joint life expectancy between you and a hypothetical person 10 years, your junior.
Pat: Yeah, so when I start the minimum required distributions, which is the year after I turn 73, so when I turn 74, it turns out that the number in the table is 25.6, and the percentage is 3.91. And that's fine. That's fairly close to what I think I'm going to need to draw it to a little less. But then it goes up until it becomes 9.26 at age 92. Now, I don't know if I'll make it to 92. But you've got to...when you plan, you've got to pick a time horizon, right?
Pat M.: Yeah. And you're married, correct?
Pat: Correct.
Scott: And you're in California?
Pat: Yes.
Scott: And are your kids in California?
Pat: Three out of four.
Scott: And are you going to stay in California?
Pat: Yes.
Pat M.: So you've got a lot of room for Roth conversions between now and then.
Pat: Yeah. So that's the thing. Like I said, the whole deal was I never thought about it before, but all of a sudden it becomes now a strategy for reducing how much I wind up with at the end in...
Pat M.: That's right.
Pat: ...in pre-tax money. And so now my question becomes, so if I start doing some Roth conversions to sort of manage that down, how do I think about that money? So when I'm thinking about withdrawing from my IRAs, I have to think about sort of two buckets, right? Some that's in...
Pat M.: Are we talking about after you've done the Roth conversions?
Pat: Well, I'm just talking about, as I have to start taking my RMDs, I don't want...right now while I'm still in the...have been in the contribution phase, because I have Air Force pension, I start Social Security next month, things like that. And I have a good income. I've been 100% pretty much maybe...let's call it 95% in the market in my IRAs. But now I'm looking at...I'm actually still working. I'm going to retire November 15th, 2027. So I've got just a little under three years left.
Scott: And how much is your income at your work? How much is...if $260,000 is your wage?
Pat: Yeah. I'm a sole proprietor. I have a consulting business with the State of California. So I'm actually going to half time. I've got two contracts right now. That's all the details basically. It's about $160,000. Let's put it about $160,000.
Pat M.: Do you have a pension plan with your work?
Pat: No. Well, I have a SEP IRA with my business, my consulting business. I have a pension, I'm a retired Air Force. And so I have...
Pat M.: Because you can funnel a boatload into a Roth just off that. You can do a solo K which is very minimal, or you can do a setup like a cash balance traditional pension plan for yourself, and funnel a couple hundred grand into a Roth.
Pat: Yeah, I have another little complexity with that where I'm...because I'm cutting down to half time, then I don't have the excess for these next three years that I have had. I've been contributing to max that I could have in SEP IRA.
Scott: And you don't have a lot of cash outside of retirement accounts?
Pat: I don't have a lot of cash outside. I just have enough for where...we have another little complexity where we're buying a house for one of our kids to rent. And so that kind of thing.
Pat M.: Pat, so your question for us is?
Pat: Well, it has to do with the Roth IRA. So I've been trying to plot out, so how does my investment strategy on my IRA change as I shift from contribution mode to withdrawal mode? But then I kind of thought, "Okay, I've got to have about a quarter of that in cash instead of being on the market so that I don't have to sell stuff." If this year turns out to be a down year...
Pat M.: I get it, I get it.
Pat: ...I don't want to sell stuff.
Scott: Yeah. But you can do like for like. So the cash goes in a Roth and you buy the same securities you just sold, and you haven't missed anything.
Pat M.: Yeah, but understand what you're saying is, "But when I go to take the RMDs, should I..." Because you have no money outside the IRAs...
Scott: Got to pay the taxes.
Pat M.: ...you've got to pay the taxes, so you would manage to that. Absolutely.
Pat: Absolutely.
Pat M.: So you would manage. So here's what would happen. If you sit down with an advisor and you go, "Okay, this RMD, well, this needs to be converted into a Roth between now and the thing that... Oh, and by the way, we're going to plan for that tax liability when you take the RMD, even if you're not going to spend it." So your RMD comes up and it's 4%. And let's say the account balance at that point in time is $4 million. That's 160 grand. And you live in the State of California, We figure out that you're in a about a 40% tax bracket. I would manage that portfolio 60% equities and 40% or 35% fixed income.
Pat: In the IRA?
Pat M.: In the IRA. And then when the required minimum distribution comes out, they send the money directly to the taxman. You don't ever touch it. And so you're using that bond portion. And then you're buying back similar or identical positions in the brokerage account on the other end.
Scott: Or it goes into a Roth.
Pat: Oh, I see what you're saying. Okay.
Scott: You can't...once you're on the RMDs, you can't move that to a Roth.
Pat M.: You can't move that. So I'm talking about when the RMDs happen.
Scott: It's only a couple years.
Pat: Right. I can take out a little bit more than the RMD. Whatever it is I'm going to put in the Roth, it's going to be more than the RMD plus the taxes.
Pat M.: Okay. Yeah. Well, that's what the adviser...to determine what that amount is. But your idea that, "I'm managing the money differently because of this tax liability," is spot on. It's 100% spot on, which is you don't want the volatility of an equity portfolio knowing that you've got a tax bill coming due in three years or four years. Right? And it sticks with this investment...
Scott: Although I could make the argument that...
Pat M.: Over time?
Scott: ...it would be a lower tax liability because it can be based upon the value of the account. Although the worst would be...
Pat M.: The market falls 40%.
Scott: ...after the 12/31, and your RMD is one number, and what your securities are...
Pat M.: You could cut the...you could split the difference...
Scott: Circle back up.
Pat M.: ...as long as you know what it is. Right? But it has everything to do with what the timeline in the investment is. And so even though you might not be spending the RMD, you want to account for the tax liability for the RMD.
Scott: But you might then spend the RMD, once he's not working.
Pat M.: But then that would drive the portfolio somewhere different as well.
Scott: My guess is you'll be spending some of these dollars from your retirement account once you quit having a wage.
Pat: Oh, absolutely. And that's the thing. I mean, I have friends who say...like State of California employees, "Well, my pension is going to be so much between that and Social Security. I don't even actually need any of my IRA money to live on." But I'll need to basically replace that 160K a year wage with my...minus the Social Security, with my IRA withdrawals until my RMD starts teeing my mean.
Pat M.: Okay. Well, then what happens is... I pretty much can tell you probably where you're going to end up. You're going to end up at a 70/30 or 60/40, somewhere in there, portfolio. And then you're going to start your RMDs on a monthly basis. And then every time that money comes out... And what happens is they use the...we use the rebalance of the portfolio to take into account that required minimum distribution on a monthly basis.
Pat: Okay. You do it monthly?
Pat M.: Oh, we do it monthly. We run the portfolios through screens on a weekly basis to make sure that we're tracking against our underlying index. But you're constantly making adjustments. So I think you're making a bigger deal out of this than it needs to be. What you should be concentrated right now is, "How much I should be doing in Roth conversions today?"
Scott: There you just need to run the numbers.
Pat: [crosstalk 00:43:15]. And I figure...and I'm not worried about you guys trying to figure that out on the phone. But the last question I had for you was, so because I'll be withdrawing from the IRA, I get that that has to be split, like you said, 70/30, 60/40, something like that, so that I don't wind up having to sell stuff to take withdrawals.
Pat M.: Thank you. Thank you. Thank you.
Pat: It's a wrong time. But the other question is now I'm putting my...I never really considered the Roth because I only have like a tiny bit in Roth, because way back when, somewhere along the line, I was able to put something in Roth. But now if I start contributing $20,000, $30,000, $40,000, $50,000 a year or something like that into a Roth, I'm kind of assuming that the Roth, I'm never going to spend it.
Pat M.: Thank you.
Pat: It's going to be inherited.
Pat M.: Thank you.
Pat: And so I can leave that basically 100% in the market because...
Pat M.: Thank you.
Scott: Exactly.
Pat: ...[crosstalk 00:44:07] 20 plus years. Am I right on that?
Pat M.: Thank you.
Scott: A hundred percent.
Pat M.: You are absolutely right.
Pat: [crosstalk 00:44:13] I'm listening. Okay. [crosstalk 00:44:16]
Pat M.: You're absolutely right.
Pat: I think I'm learning. Okay. That was a big question.
Pat M.: No. Because the timeline for that particular investment, and it would...you blend it. I mean, that's what the advisor does, right? So even though your IRA may be 70/30, your overall portfolio may be, depending upon how much ends up in the Roth, might be 85/15. Right?
Pat: Sure. I gotcha.
Pat M.: Right?
Pat: Yeah. Depending on how it goes over time.
Pat M.: Yeah. And a lot it just depends on how comfortable are you with volatility and the risk premium, and in terms of ups and downs. Which you sound like, yeah, you kind of got it together. And now what we're doing is we're cleaning...
Scott: Well, someone could have it together even if they don't want that much risk in their portfolio, Pat.
Pat M.: Okay. I guess that's my view of the world.
Scott: He got it together.
Pat M.: I'm just trying to make him feel good. No, you're a...
Pat: I feel great, thanks.
Pat M.: Pat, you're 100% spot on. You're 100% spot...
Pat: Well, that's good to know.
Pat M.: And the advisor's actually going...the advisor's going to build a model that actually shows you. And then they're going to update that model on a couple...two, three times year to make sure that you're on track. Right? In terms of the Roth contributions.
Scott: And one of the things that you need to take into consideration at least is the impact on your Medicare premiums. The IRMAA tax.
Pat: Yeah. Because I'm already at two X, and it's because I'm taking some money to buy this house, converting basically pre-tax to after-tax house.
Scott: Whoa. You're already taking money out now? So how much are you taking out?
Pat: Well, it's kind of a separate deal just specifically for this house purchase.
Scott: But it's not because it impacts what you may or may not be able to do for a Roth conversion.
Pat M.: Your advisor will actually walk you through that.
Scott: Because that flows through on your tax return.
Pat: Yeah. I'm going to be near the 24% mark. And so I'm not going to go over that. So it's kind of like, what do I need for the house? What's my income that year?
Pat M.: That's right.
Pat: And then what's the gap up to that 24%? Because the next thing jumps to 32%, which is crazy, right?
Pat M.: That's right.
Pat: So that will determine how much I can do for the Roth.
Pat M.: So what happens is you could actually do...I mean, the financial planning process is highly dynamic. I mean, it's highly dynamic where you'll sit in an office with an advisor, and they will have...
Scott: Or on Zoom.
Pat M.: Yeah, or Zoom. And he'll collect all this information from you. And these are your hopes and dreams. This is what you want to do. And then present it to you on a large screen that says, "Okay, well, what happens if we did this?" And it's dynamic, it's taking place while you're in the meeting, where you could create every...you could say, "Well, what happens if I want to spend another $30,000 a year on consumables or big vacations," or whatever. They would actually just run you through the case study. It's super dynamic. Right? Rather than us sitting here guessing you going in. And I'm hopeful that you met with other advisors. They went through a dynamic planning process with you as well.
Pat: Yeah, yeah.
Pat M.: Yeah. So yeah.
Pat: Well, one that I talked to, they kind of wanted...they gave me a basic idea, asked me a bunch of questions, and said they'd come up with a plan. But that plan, you kind of have to pay for upfront. But then if you go ahead and put your money with us in management, then we waive that fee. So it made sense to me. And the guy seemed like he was a pretty good guy. So can I ask you a question that would kind of be a pitch for your company a little bit?
Pat M.: Sure.
Pat: I mean, kind of like what I'm asking is, so one of the things, like a guy I met with a few weeks ago, he said, "So asset management is a big piece of any advisor's job, but we do all these other things well. So tax advice, and estate planning advice, and all these other things." So he kind of built a little bubble picture in a circle with all the different things. And are you guys primarily asset management, or are you primarily...do you have that sort of whole picture kind of thing?
Pat M.: I don't know how many accountants we have working at the firm. A number, probably in the dozens.
Scott: Yeah. And I appreciate the call, Pat. This is where the wealth management, financial planner, whatever you want to call it, this is where our industry's headed. Historically, and Pat, even when we started, we did some financial planning, but it was highly investment driven in the financial planning. As time has gone on, you're seeing consolidation in the independent wealth space. First of all, there are more accounts now with independent wealth advisors than there are at the big firms.
Pat M.: Like Merrill Lynch or Morgan Stanley. That sort of thing.
Scott: Yeah. Most of those state...they'll sate right on their website they don't provide tax advice. So they're a bit limited in what they can provide. But what's happened is there's been consolidation in this space primarily as a way to offer greater services to clients. So Allworth...and there's many of other companies like that today. Matter of fact, if you look at the top 20 largest IRAs in the country, of which we're one.
Pat M.: Which we're number 15, I think, or something like that.
Scott: Somewhere in there. I don't know the number.
Pat M.: I don't know if that...
Scott: I don't remember if it's Barron's, or one of those. Hopefully on our website it's somewhere to...we don't get in trouble from the [inaudible 00:49:54]. The large firms, almost all of them...
Pat M.: Offer.
Scott: ...tax preparation, tax planning, estate planning, sometimes estate preparation, insurance analysis, insurance planning, sometimes fulfillment on insurance.
Pat M.: 401(k) plans for small businesses. Right? And so we didn't offer all that...
Scott: Medicare planning.
Pat M.: Planning. We didn't offer that 10 years ago. But as we, like many of others of our competitors, have gotten larger, you can...I don't know how many advisors we have at the firm, 200 and something.
Scott: Like 100 and something.
Pat M.: I have no idea. There was a lot of people that conferenced a couple weeks ago. I knew that. But the idea is that you could actually offer these services in-house because you can spread those costs over a larger number of clients and the number of advisors. Where 10 years ago, if you came to a firm like ours, we would be working with a third party attorney. Sometimes we still do. We still do. I mean, we're appropriate. We'll work with your attorney and we'll work with your accountant.
Scott: That's right.
Pat M.: It's up to you. But if you want, then we will offer the services. And it's just the way the industry is going to go.
Scott: Yeah. And the consolidation, we've rolled in a number of firms. Same thing with all the large firms. There's this massive consolidation because the technology, all the tools that that can be provided for the end client today, the services are so much greater than they were even five... I mean, we've talked about, Pat, previously, direct indexing and how technology does tax loss harvesting, and technology has made things so much more efficient and effective. The reality is an advisor today can serve more clients, be much more effective. And that's just where the...one, it's what the clients demand and expect.
Pat M.: In the marketplace. It's what competition...
Scott: That's right. But anyway, this is all the time we have for this week's program. And as usual, it's been great having you. By the way, if you want to make sure you don't miss one of these shows on your Apple or Spotify, wherever you get your download, make sure you hit the Follow button. If you hit the Follow, you'll get delivered it automatically each week, and that's good. So this has been Scott Hanson, Pat McClain, Allworth's "Money Matters." We'll see you next week.
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.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat M.: Pat McClain. Thanks for joining us.
Scott: Yep. Glad to have you as we talk about financial topics. Got a good program as always.
Pat M.: Yeah, taking some calls. And some personal stuff. I got to share this with you. You might find this humorous, Mr. Hanson.
Scott: Is it financial related in the slightest?
Pat M.: No.
Scott: Okay, good. Even better.
Pat M.: Well, maybe a little bit. So I like doing stuff around the house. I enjoy it. Right?
Scott: How many years you've been in your house?
Pat M.: Twenty-nine.
Scott: Twenty-nine years. How many times you've had to paint it?
Pat M.: Oh, probably four or five times.
Scott: Pat jokes that his house is getting smaller on the inside and larger on the outside.
Pat M.: It's wood. It's wood. So what happens is it needs constant care. So I'm power washing the driveway and then the sidewalk.
Scott: Do you have a gas-powered power wash or electric one?
Pat M.: That's the problem. The gas one. So immediately, I apologize to the neighbors. Like, "Sorry about this."
Scott: Because it's so noisy.
Pat M.: It's so noisy. And I'm pretty fastidious about stuff. I've kind of got a little OCD maybe going on about how things have to be organized and just right. And it drives me crazy when the walkways got stains and stuff. So I do it and I'm almost done.
Scott: All right. I haven't been to your house in a while. But I remember when I go over, and like Cath would offer me a glass of water. And I learned just not to take one because once the glass is set on the counter, if you leave it there for like four minutes, either Pat or Cathy pick it up and put it in the dishwasher. So the counter is perfectly clean.
Pat M.: That is correct.
Scott: Your house looks like...you could list your house for sale right now. You can have an open house right now, and the house would be fine for it.
Pat M.: It would be at about 98%. Right. So I'm power washing. And the big power, it's so noisy, and I've got headphones on to block the noise. And it kind of rattles around. So I'm out in the backyard next to the pool, washing the pool deck, power washing with that scrub head. And all of a sudden, the thing goes dead. I think, "Oh, it's out of gas again." And I turn around, and that power washer is at the bottom of the pool.
Scott: Oh.
Pat M.: It's just rattled right into the pool. Just rattled right into the pool. Just...
Scott: Is it dead?
Pat M.: Oh, yeah, it's dead. Now, I could...like, if you take off the spark plug, then you crack it, get the water out, and do the whole thing. But I have a friend that's kind of a mini mechanic, so I'm like, "Do you want this?" He's like, "Absolutely." And then Jeff Bezos, who's saved my marriage more than once, had an electric power washer delivered to me the next day, which I'm quite happy with. Much quieter. Doesn't rattle. Hasn't he saved your marriage a couple of times?
Scott: I just can't believe how quickly the Amazon delivers stuff to my house.
Pat M.: It's amazing. It's amazing. It's absolutely... He has saved my marriage...
Scott: And for low-priced items, I don't go anywhere else. I just...
Pat M.: Yes, you don't even...
Scott: Sometimes on larger ones, I'm like...
Pat M.: I'll comparison shop.
Scott: Yeah. And I want to make sure that other businesses survive, not just Amazon...
Pat M.: That's right.
Scott: ...eats the world.
Pat M.: Right.
Scott: But it's interesting, Pat, on your home keeping track...from a financial standpoint, it's probably not the best use of your time.
Pat M.: Correct.
Scott: But you get in some emotional.
Pat M.: Yes. Yeah, I enjoy it. I enjoy it.
Scott: I hate it.
Pat M.: Well, then don't do it.
Scott: I was a tree trimmer for five years. Now I don't like working in the yard at all. At all. I don't like plucking roses. I don't like doing any of that.
Pat M.: But they... And the reason I...that had nothing to do with financial.
Scott: Yeah, what are we talking about?
Pat M.: I just thought I would...I thought you'd find it amusing that... I found it very, very amusing that it happened to me.
Scott: You did?
Pat M.: Oh, yes. I wasn't upset at all. I just looked at it and I thought...
Scott: So here's how...
Pat M.: ... "You're kind of a moron, McClain."
Scott: Here's how... And we will get to financial matters. Here's how horrible I am when it comes to home improvement stuff. When we were first married, 1992, we bought a...we borrowed a little bit of...I think a 10% down I borrowed from my parents that I paid back over the next couple of years. And we had a guestroom because it was just the two of us. There was a tub there with a shower curtain. And I said, "Wouldn't it be nice to get one of those shower doors?" So I go down to HomeBase, I think it was called at the time, and we bought the shower door for 180 bucks or whatever it was. And there was a sign they'll come and install it for you for another $79, or whatever it was 30 years ago.
Pat M.: You're like, "I don't need any part of that."
Scott: And I thought, "I can do this. I'm not an idiot." And so I realized I needed to have...the first thing you do is there's a track that sits on the tub, and you have to cut that track. So I had to buy a saw to do that. Then I bought...I had to buy a little file so that I can get the burrs off.
Pat M.: The burrs. Yeah.
Scott: Yeah. I took shop in high school, so I realized just measure twice, cut once. I measured like five times. I had the measurement down perfect. Wrote it down, went to the garage. I cut a perfectly nice cut. Used the file. No burrs.
Pat M.: Feeling good about yourself.
Scott: Oh, yeah. Pride comes before the fall. Went up, put it in the bathtub. It was exactly two inches short the length of the tape measure.
Pat M.: That's funny. Did you hire someone to come and put it in?
Scott: I actually know there's an 800 number you can call, because now I need a new track.
Pat M.: Yeah. And they sent you one?
Scott: Apparently this must happen more than once, because that's why there's that, "Before you do anything, call this 800 number." And they sent me a new track, and I actually did put it. And I said, "Never again."
Pat M.: And that was it. There we go. Anyway, thank you for listening to handyman tips from Scott and Pat.
Scott: Look, I get it when people enjoy doing it. I get no joy. I'd rather be out on my bike or hiking or something. But anyway. We're going to talk about some financial matters. Actually, before we get to the calls, tax time is around the corner.
Pat M.: Yes.
Scott: There's not much you can do to change what your tax liability is going to be for 2024. But there's a couple of things to keep in mind. One, if you have not yet found your taxes, you might just want to file an extension. Right? Because we've got essentially two weeks until our taxes are due. If you find an accountant, they're all busy, if you're in process, maybe they get it.
Pat M.: I wouldn't hire an account that would take me on as a client right now.
Scott: Well, hopefully you already have a relationship with one.
Pat M.: Okay. Yes.
Scott: And if not, you might be able to hire someone who can just do an extension. But instead of cramming to get it done...
Pat M.: Just file an extension. Just make an estimated tax payment.
Scott: And frankly, as your financial life becomes more complicated, there are times when it's virtually impossible because you might be waiting for K-1 from some partnership or whatnot. But the second thing is there's still an opportunity for IRA contributions. If you qualify for a Roth, you can set up a Roth, you can do a Roth for your children. I've got a 17 year old that has a job. She made some wages last year.
Pat M.: Earned income.
Scott: Yeah. So I'm doing a Roth contribution. I actually just did the paperwork a couple weeks ago, set up a Roth for her, making a contribution on her behalf into her Roth IRA. If you have grandkids, you can do the same thing. They have to have some wage income, some earned income. Babysitter stuff's not going to work because they need to...it has to be reported. Technically, they're supposed to report the babysitter wages, but I don't think anyone actually does.
Pat M.: Yes.
Scott: And I hope the IRS doesn't start harassing 14-year-old teenage girls.
Pat M.: Yes. And what else could you do?
Scott: You can do a backdoor Roth. If you don't have any other IRAs, you can essentially do a nondeductible IRA. And then the day afterwards, convert it to a Roth.
Pat M.: Yes. You can fund a SEP.
Scott: You can fund a SEP. You can file an extension and fund...if you own a business, file your SEP IRA as late as the time you actually file your tax return. You can push it out to October 15th. And same thing with a...if you've got a cash balance plan, or another type of pension plan that was established prior to December 31st of last year.
Pat M.: Had to be established.
Scott: Or a solo K.
Pat M.: Had to be established.
Scott: You can fund that up until the time you file your extension. So right there alone might be a reason for you to file your extension.
Pat M.: Solo K had to be established in 2024.
Scott: So you still have a few things.
Pat M.: Yeah. And remember, it's the best time to actually do tax planning is at the same time you're doing tax preparation, because you can ask to prepare, "What should I have done?"
Scott: Well, that's... Pat, so I tend to file...October 15th is the deadline. I'm usually filing October 10th. Okay?
Pat M.: Right there. Yes.
Scott: Somewhere right in there. It doesn't mean I ignore it. I mean, because to your point, the tax planning is an ongoing thing.
Pat M.: Tax planning is actually where the best decisions are made.
Scott: Throughout the year.
Pat M.: Throughout the year. But the easiest thing to do if you're doing your own taxes is ask yourself, "What did I miss out on I should have done?" When you're preparing your taxes. Or if you're using an accountant, or an enrolled agent is ask them, "What should I have done that I didn't do?" And then do it.
Scott: Yeah. And you're going to have a better time, better experience talking with your accountant not on April 13th.
Pat M.: Yes.
Scott: When they're all pulling their hair out trying to figure out how they're going to get all stuff done.
Pat M.: Oh, we watch these accounts in our office, because we have a tax preparation business. And they're just...
Scott: I was just walking into the hall, and there's one of our tax directors, another one of our accountants, and they're chatting. And I almost teased them like, "What are you guys doing talking? Get back to work." But I thought that they might not take it well. But I said, "How are you guys surviving?" And I said, "My guess is every tax season you question why you chose this career." She says, "That's exactly what happens every tax season." Kind of like as a financial advisor, every time there's a pullback in the markets, not a short-term one.
Pat M.: Yeah.
Scott: But look, these markets...a pullback can last much longer than days, weeks, months, years.
Pat M.: Years. The longer they go, the harder it is to stay invested.
Scott: As long as you've got...if your money that's in stocks is designed for five plus years, there's nothing for you to worry about.
Pat M.: Keep it there. So, yeah.
Scott: All right, let's take some calls. 833-99-WORTH is our number. If you want to be part of our program, have a question for us. Or you can send us an email at question@moneymatters.com. We're in Pennsylvania with Bobette. Hi, Bobette.
Bobette: Hi.
Scott: You're with Scott and Pat.
Bobette: Hi. Thank you for taking my call. How are you, gentlemen?
Scott: Good.
Pat M.: Good. What can we do to help or try to help?
Bobette: Okay. I loved your story. So that definitely helped. Laughter is good medicine always.
Scott: Okay. Thank you.
Pat M.: That's the kind of positive re-enforcement that keeps me coming back.
Bobette: Good. My husband is a retired home contractor, so I have many stories.
Pat M.: I imagine.
Scott: And I imagine your husband went into places like Pat McClain's house, and actually fixed properly the stuff that McClain had attempted to do.
Pat M.: That's probably true.
Bobette: Oh, yes, yes, yes. Several redos. Yes. But thank you for taking my call. I received an inheritance. And I don't know what to do with it. And I've never... This is new for me. This area, I don't know, investing. I'm disabled, so this is totally new. I was never taught investing, all that good stuff.
Scott: And you say disabled. Are you receiving Social Security disability?
Bobette: Yes, I am.
Pat M.: And how old are you?
Bobette: I'm 55.
Pat M.: And you said your husband is retired. Is he of similar age?
Bobette: Yeah. He's in a different profession now.
Pat M.: Oh, he is. Okay. And how much money did you inherit?
Bobette: $125,000.
Pat M.: Okay, so I'm going to start with this, and then we're going to answer your question.
Bobette: Okay.
Pat M.: If someone gives...
Scott: Hold on. Is this money from one of your parents or a distant family?
Bobette: Yeah, from my father.
Pat M.: Okay. When you inherit or are gifted money, it is considered separate property in a marriage.
Bobette: Okay.
Pat M.: So I'm just going to throw that out there. Which means that if you put it in your account with just your name on it. Right? And something happens to the marriage, then it's yours. The spouse has no claim on it. But if you took that $125,000 and paid down the home that you own together, you have co-mingled that, in most states, into community property. And then your husband now has claim to it in most circumstances. All you divorce attorneys out there, you'll notice that I'm speaking with as many disclaimers as I possibly can. Just be aware that it is now separate property. And when you go to invest the money, that kind of comes into play. So what does your overall financial situation look like? Is your home paid for? Do you have a lot of credit card debt? Do you have car debt? What's your financial situation?
Bobette: No. We're working up to being debt free. Home is totally paid off. I'm living in a home that my mother gifted to me. I took some of the money and cleared up my credit. So I've been doing everything to improve my financial situation.
Pat M.: Is your husband living in the home that you...
Bobette: Yes.
Pat M.: ...inherited from your mother as well?
Bobette: Yes.
Pat M.: And is the home just in your name?
Bobette: Yes.
Pat M.: Okay.
Scott: And what's the family income? And how old is your husband?
Bobette: Oh, he'll be 64 this year.
Pat M.: Okay. And what's the family income, including your Social Security benefit?
Bobette: Including? Hm? I'd have to ask him. I can't remember right now. I apologize. I should have had that.
Scott: And with your disability, I might get very personal here with you, but is this something you think you'll have a normal life expectancy, or shorten life expectancy?
Bobette: A shorten life expectancy. I have a sickle cell anemia. So the normal life expectancy for someone that has it, for males is about 40, 45, and women it's about 45, 50. So God has blessed me with extended years.
Pat M.: Wow.
Scott: Oh, wow.
Pat M.: And do you have children?
Bobette: Yes. We have one daughter.
Pat M.: Okay.
Bobette: Who's in law school.
Pat M.: Nice. Well, the first thing you need to do is get a will or a trust, depending upon the state in which you live. I mean, that's the first thing.
Scott: And is the daughter between you and your husband, it's first marriage?
Bobette: Yes.
Scott: Okay. That makes it clean and easy.
Pat M.: Yeah. So you want to do a will or a trust.
Scott: What do you want to see these... So when you inherit assets, it's always a little bit emotional because someone we loved is no longer there. And now we have...
Pat M.: That's the assumption.
Scott: Okay. What would you like these dollars to do for you? Forget about the investment. What would you like to see happen differently as a result of these assets?
Bobette: I would love to be able to be financially independent, be able to have the money working for me. That's what I would like to do. I'd love to open up a health spa. A health medical spa. So, like I said, I would love to have it working for me.
Pat M.: And do you have any money now invested or saved for retirement, you and your husband?
Bobette: Yeah. He has an IRA from his job.
Pat M.: 401(k)?
Bobette: Yes. I'm sorry. Yes.
Pat M.: Okay. And do you know the approximate balance of that?
Bobette: No, I don't.
Scott: And how much do you...so if you put these dollars to work for you somewhere, let's say, for example, you went out and put it in a CD, you might get 4%, maybe a little better than 4%. Let's just call it 4%. So that could provide about $5,000 a year in income. If you invested in something that maybe got a little bit higher, maybe you can get a little bit more than that. That's if you wanted to keep your principal intact, so your principle's there long term. How much were you expecting or hoping that these dollars could provide an additional income?
Bobette: Oh, that's a good question. It would be nice if I could...I guess ideal, if I could maybe live on $5,000 to $7,000 a month. I did buy 3 ounces...
Pat M.: A month or a year?
Bobette: A month. It would be nice. I did buy 3 ounces of gold with it. That's the only really investment that I've made.
Pat M.: Well, if you're taking $5,000 a month out of this, then your money is going to last you a little bit over two years.
Bobette: Right. That's why I haven't touched it at all, because I don't know what to do with it.
Pat M.: Okay.
Scott: Well, you're in an interesting situation because what you told us is that your normal life expectancy is 45 to 50, and you're 55.
Bobette: Right.
Scott: So you could be looking at this a couple different ways. You might be looking and say, "I'm on borrowed time. I don't know how many more years I have. I'm going to enjoy these dollars. These are the things that I value right now, and I'm going to use these dollars for these certain things." Which I completely understand. Why wouldn't someone want to do that? Or you might be saying, "I want these dollars to help with my daughter's law school," but imagine she'll be able to pay off whatever debts are when she finishes law school.
Bobette: Right.
Scott: So, I mean, how are you thinking about things?
Bobette: I think both. I want to enjoy it. And then I also want it to go for good. Because the first thing I did was when I got it...because it was totally unexpected. And then I took out instantly...I took out my [inaudible 00:19:35] offering with it, and just did a little stuff with it. But I didn't want to do anything major unless I...
Scott: Smart.
Bobette: ...totally understood what was going on. Right.
Scott: Yeah, smart. It's typically what we would recommend as well. Take your time.
Pat M.: How long ago did you inherit the money?
Bobette: I inherited it in September 2025.
Pat M.: '24.
Bobette: I'm sorry. Yes. '24. And it's been in my money market.
Pat M.: Well...
Scott: This is tricky. This is tricky.
Pat M.: Yeah. Because you have to have kind of a design for it. And so if you said to me, "Well, I just want this money to go to my daughter," then we would...
Scott: [crosstalk 00:20:21]
Pat M.: ...invest it quite aggressively. If you said, "Okay, I want income from this of, let's say, $500 a month." A month. Not...
Scott: Then we could structure something that'll probably last you to the rest of your life.
Pat M.: Yes.
Bobette: Okay.
Pat M.: Or you could say, "I want a combination of the two," which is, "I'm going to take 30 grand, and my husband and my daughter and myself are going to take the trip of a lifetime. We're going to go on a safari, or we're going to go to Italy, and we're going to do this."
Scott: Whatever it is, whatever you want to do.
Pat M.: Whatever floats your boat. Right? Or Disney World.
Scott: Whatever it is.
Pat M.: Which I can't imagine that being a trip of a lifetime. Disney World. But it might be.
Bobette: No Disney. I want to do all of the above. All of the above.
Pat M.: But then decide what is for... It's hard to answer a question about what to do with money if we don't know what the intent of the money is.
Scott: I'll tell you what though, if you were my sister, I don't know much about you, but just what you've told thus far, I would be like, "Why don't you enjoy these dollars?" I mean, it sounds to me like the chance of you being alive 20 years from now is pretty slim.
Bobette: Right.
Scott: Is that possible, though?
Bobette: Anything is possible with God. But yeah, I don't really see myself 20 years from now being here.
Pat M.: And maybe you just split the difference.
Scott: If you're my sister, I'd say, "Look, let's come up with some dollar amount. Whether it's $50,000, half the account, $40,000, whatever, that we're going to plan on spending the next few years. Those sort of things that we've wanted to do that we've never had the money." Maybe they're trips, maybe they're [crosstalk 00:22:09]
Pat M.: And then the other, you decide what you're going to do with the money. But we can't answer a question like, do I know...was it a good idea to buy the gold or not? I don't know. I mean, because without a direction...
Scott: I wouldn't recommend more than 5% of your portfolio...
Pat M.: In gold.
Scott: ...in gold.
Bobette: Right. I've been researching it, so that's why I only did the 3 ounces. Because I want to spread it out evenly. I don't want to have all my eggs in one basket.
Scott: That's right. That's right.
Bobette: And I do want to enjoy it. I do want both.
Pat M.: Okay. But every investment is based on a timeline and intent with those dollars. Right? And so if you said this...
Scott: Whether it's $125,000...
Pat M.: Or $10 million.
Scott: ...or $125 million.
Pat M.: It doesn't matter. Right? So if you said, "I want half of it to go to my daughter when I die," I would invest that in an equity portfolio.
Scott: That portion you would invest differently.
Pat M.: And then the other portion, if you were going to spend it or take income from it, I would invest that differently. Call us back when you answer those questions for yourself.
Bobette: Okay.
Pat M.: And I'll tell you exactly what I think you should do with the money. We will tell you exactly what we think you should do with the money. But in this...
Scott: But if you're my...again, if you're my sister, I would encourage take...figure out some dollar amount that it was going to give you enhancement. If you don't think it is, then don't.
Pat M.: Might not. She might feel guilty about spending that depending upon...
Scott: I know.
Pat M.: ...how the money was...
Scott: And that's why I brought up that it's hard when you inherit money.
Pat M.: Because you said this was unexpected, which I took to mean that you didn't know that your parents had money.
Bobette: Yes, pretty much. My father sold a farm. It was actually his second wife that just decided to give it to me. My father died 11 years ago. And so I thought I had gotten everything I would get from him. And here she was just calling me up one day, said, "Hey, I sold his farm, and this is yours."
Scott: Wow.
Pat M.: Wow.
Bobette: Yeah.
Scott: You don't hear those stories very often.
Pat M.: That's something.
Bobette: I know. I know. I know.
Scott: Wow. That is massive.
Pat M.: So call us back when you think about this, and think, "Okay, well..." If you didn't have sickle cell, and you didn't give us those life expectancy numbers, our direction would be a lot different than without that information.
Bobette: Okay.
Pat M.: I mean, it truly would be. And you might just decide, "Hey, I just want $500 a month and improve my day-to-day lifestyle."
Scott: She wanted $3,000 to $5,000.
Pat M.: Well, that can't happen.
Scott: You can do it for a short amount of time.
Pat M.: Yeah. $5,000 a month is...yeah, your money is going to be gone in less than two years, which might be the answer. Just know what the outcome is.
Scott: Figure that your portfolio...I wouldn't figure that...just think about it generating a maximum of 5% a year. I don't care if you invest it gold, in Nvidia. A well-balanced portfolio, your time horizon is not going to be terrible. I would just bank on 5%. So whatever dollar amount you have, say, "All right, if I earned 5%, what could this generate?" And then that gives you...then you could start thinking, "All right, how much of this do we want to spend today on whatever our wants or needs are, our desires are, and how much we want to have?"
Pat M.: "And how much to supplement our lifestyle today?"
Scott: Yeah.
Pat M.: So give us a call when you think through that.
Bobette: I will. Thank you so very much.
Pat M.: All right. Thank you.
Bobette: This has been very helpful.
Pat M.: Okay. Good.
Bobette: Thank you. God bless you both.
Scott: Yeah. God bless you, too. I appreciate that call. It's interesting, Pat. One of my first thoughts, someone with no investing experience is like...there are times when an immediate annuity is helpful to people. You give up control of your principal in exchange for a lifetime income, which works great if you're in phenomenal health particualry.
Pat M.: Yeah, but she could do an intermediate annuity period certain.
Scott: Yeah, but it doesn't do the same sort of thing.
Pat M.: It doesn't do the same thing.
Scott: Because one of the challenges when people inherit money that haven't had a lot of investing experience, it's hard.
Pat M.: It's really difficult.
Scott: Because they invest in something. The first time something goes down, they're like, "Oh, my gosh, I inherited these dollars. And what happened? This has fallen in value." It's really difficult. I mean, as an advisor of three decades, I know how hard...
Pat M.: When inherited money comes in...
Scott: Inherited money for somebody that has not had experience, because the best experience is your own experience, right? The best education. I think you become a better investor when you've had some losses over the years.
Pat M.: Oh, over time.
Scott: When you've made some mistakes.
Pat M.: Over time. Yes.
Scott: Yes. And so it's really difficult when...whether it's an inheritance, or it's some pension lump sum that and you've never really had any investing experience, and suddenly you've got a large sum of money that you have to be responsible for navigating. It's a big challenge.
Pat M.: Yeah. And as she said, anything's possible, right? I remember when I started in the business, I had a couple of clients that had AIDS, and they thought it was a death sentence.
Scott: That's right.
Pat M.: Right? And they were spending the money like it was a death sentence. And it didn't turn out to be, thankfully.
Scott: So I got a story. I had this client. He had been widowed unfortunately. His wife had a long battle with cancer. He was working. He calls me up one day and says, "Scott, I have terminal cancer." "Oh, God," thinking that's just horrific. He was probably, I don't know, mid-50s, late 50s. And so he came in and visit with me. We had a conversation and he says, "Yeah, my doctor told me to quit drinking." He says, "Forget it. I'm going out with a bang."
Pat M.: Let's go.
Scott: Whatever. I'm not here to judge you, your life, whatever.
Pat M.: Let's go.
Scott: Well, he blew through 90-some percent of his cash. Just...
Pat M.: All his money?
Scott: ...wasted it all. Yeah, just blew it.
Pat M.: All his liquid assets?
Scott: Correct. No, his retirement account. Just spent it all. He called me and said, he says, "I'm looking for an attorney." I said, "An attorney for what?" "Well, my doctor had the charts mixed. I'm not dying after all." I don't know what happened to this gentleman, because there was no money left for us to help him out with.
Pat M.: Wow.
Scott: Tragic.
Pat M.: Just a little bit funny?
Scott: Of course it is. That's why I'm telling the story.
Pat M.: Just a little bit. Come on.
Scott: It's a true story. He probably didn't find it so funny.
Pat M.: Oh, no. It's kind of sad. Really sad.
Scott: Kind of sad.
Pat M.: It would have been fun to hang out with him for the last...
Scott: Maybe. I don't know.
Pat M.: I don't know. If you're into that thing.
Scott: Yeah.
Pat M.: If you're into that thing.
Scott: Yeah. Anyway. All right, let's continue on with calls. By the way, if you get a terminal diagnosis, might want to get a second or third opinion before you start blowing through your savings.
Pat M.: Noted. Thank you.
Scott: Might want a second or third opinion regardless.
Pat M.: Noted.
Scott: All right. We're talking with Pat in California. Pat, you're with Allworth's "Money Matters."
Pat: I wanted to thank you guys. I actually called a couple of months ago, and you advised me to start interviewing financial advisors. And so I started that process. And of course, I'm learning more and more stuff like crazy. Unfortunately, it seems to be making it more complicated than I had...my more simple spreadsheets had predicted. So I came up with a couple of things that I thought I'd ask you about. And by the way, I'm talking to one of your guys next week. So we'll see how that goes. But again, thanks for that recommendation.
Pat M.: Well, thanks for putting us in the mix.
Pat: I've been with you guys for 30 plus years, probably. Or 30 years or so.
Scott: Oh, good. Well, maybe it will take another 30 years to really build that trust.
Pat M.: What's your question for us?
Pat: Yeah. So I turn 70 next month. I'll start Social Security. I've got about $3 million in IRA's pre-tax. My really post-tax...after-tax net worth is in a couple of houses, my house and a house I got some kids living in, and then I've got another house I'm buying to help another kid live in. They'll pay me some rent, have some retirement income from that. But then I'll inherit and all of that. I don't know if I talked to you about that last time. But...
Pat M.: Okay. And so I don't recall the phone call.
Pat: That's okay.
Pat M.: But I assume we told you to make sure that these homes were identified in the trust in order to make sure that they go to the right places.
Pat: Yes, yes. And we got a trust. And we got a will, and all of that's kind of laid out and everything. So one of the things I learned that I hadn't really thought about or planned about, I never really thought Roth IRAs were...really would apply to me because I kind of always felt that it's all about do you think that taxes are going to be more in the future or more now. And so if you think that taxes are going to be less in the future, well, then...or less now than it will be in the future, then do Roth conversions or Roth IRAs so that you pay less tax in the long run.
Pat M.: Well, that can be case. But really, what you're trying to do is you're looking...
Scott: At your tax rate.
Pat M.: At your tax rate.
Pat: Well, there you go.
Pat M.: Which is are you moving up...when you do the calculation, there's $3 million, right? You're going to have to start taking distributions in a few years. What's the value then? And then, "What's my required minimum distribution rate at that point in time? Right? And am I moving myself into a higher marginal tax rate than I am today?"
Pat: Exactly.
Pat M.: And what you're trying to do is take advantage of that gap. And by the way, because of how IRAs are inherited by your children at some point in time, they have to drain that money in 10 years.
Scott: Ten years. No more lifetime spread.
Pat M.: Which means it becomes even more importantly over the lifetime of the account.
Pat: Yeah. So what I learned about was this idea of I guess the guy that I talked to called it the tax...the RMD bomb. Basically, you hit a point where the RMD percentage, as it continues to go up, it gets to a point where you have to take a lot more out than than you need.
Pat M.: That's right.
Pat: And then you wind up paying a higher tax rate.
Pat M.: That's correct.
Pat: And so I could be in that situation where it jumps from 22% or 24% to 32%.
Pat M.: That's correct.
Pat: And so you suggest... And also, like you said, the other thing is that...if the amount that you're leaving is an inheritance, because they have to take it out over 10 years, that could be a bigger tax hit on your kids than maybe you otherwise thought it would be.
Scott: Yeah. There's been a couple of changes in the last even five years. So one, it used to be that the people who inherited the assets could stretch their withdrawals out over their lifetime. So you pass away, you leave a 60-year-old an IRA, they can spread it out over the next 25, 30 years. That's gone. Now it has to be distributed in 10 years. The second thing is, the required minimum distribution start date, it got pushed up to 70. It's moving up to 75. But there was no increase in life expectancy.
Pat M.: So the distribution as a percentage becomes higher when you first do it versus a 70 and a half.
Scott: That's right.
Pat M.: So what is your income today?
Pat: Yeah, my income today is around $260,000.
Pat M.: And one more thing on that because I...just to get some clarity on this. The formula that's used to determine your required minimum distribution is not a male life expectancy, it's not a unisex life expectancy. It's a life expectancy table between unisex your age and unisex someone 10 years younger. The uniform table for whatever reason, between the IRS and Congress, that's how this formula was derived. So when you start thinking about as you get older in life, your life expectancy becomes shorter, which is going to trigger higher required minimum distributions. But it's not really just your life expectancy. It's a joint life expectancy between you and a hypothetical person 10 years, your junior.
Pat: Yeah, so when I start the minimum required distributions, which is the year after I turn 73, so when I turn 74, it turns out that the number in the table is 25.6, and the percentage is 3.91. And that's fine. That's fairly close to what I think I'm going to need to draw it to a little less. But then it goes up until it becomes 9.26 at age 92. Now, I don't know if I'll make it to 92. But you've got to...when you plan, you've got to pick a time horizon, right?
Pat M.: Yeah. And you're married, correct?
Pat: Correct.
Scott: And you're in California?
Pat: Yes.
Scott: And are your kids in California?
Pat: Three out of four.
Scott: And are you going to stay in California?
Pat: Yes.
Pat M.: So you've got a lot of room for Roth conversions between now and then.
Pat: Yeah. So that's the thing. Like I said, the whole deal was I never thought about it before, but all of a sudden it becomes now a strategy for reducing how much I wind up with at the end in...
Pat M.: That's right.
Pat: ...in pre-tax money. And so now my question becomes, so if I start doing some Roth conversions to sort of manage that down, how do I think about that money? So when I'm thinking about withdrawing from my IRAs, I have to think about sort of two buckets, right? Some that's in...
Pat M.: Are we talking about after you've done the Roth conversions?
Pat: Well, I'm just talking about, as I have to start taking my RMDs, I don't want...right now while I'm still in the...have been in the contribution phase, because I have Air Force pension, I start Social Security next month, things like that. And I have a good income. I've been 100% pretty much maybe...let's call it 95% in the market in my IRAs. But now I'm looking at...I'm actually still working. I'm going to retire November 15th, 2027. So I've got just a little under three years left.
Scott: And how much is your income at your work? How much is...if $260,000 is your wage?
Pat: Yeah. I'm a sole proprietor. I have a consulting business with the State of California. So I'm actually going to half time. I've got two contracts right now. That's all the details basically. It's about $160,000. Let's put it about $160,000.
Pat M.: Do you have a pension plan with your work?
Pat: No. Well, I have a SEP IRA with my business, my consulting business. I have a pension, I'm a retired Air Force. And so I have...
Pat M.: Because you can funnel a boatload into a Roth just off that. You can do a solo K which is very minimal, or you can do a setup like a cash balance traditional pension plan for yourself, and funnel a couple hundred grand into a Roth.
Pat: Yeah, I have another little complexity with that where I'm...because I'm cutting down to half time, then I don't have the excess for these next three years that I have had. I've been contributing to max that I could have in SEP IRA.
Scott: And you don't have a lot of cash outside of retirement accounts?
Pat: I don't have a lot of cash outside. I just have enough for where...we have another little complexity where we're buying a house for one of our kids to rent. And so that kind of thing.
Pat M.: Pat, so your question for us is?
Pat: Well, it has to do with the Roth IRA. So I've been trying to plot out, so how does my investment strategy on my IRA change as I shift from contribution mode to withdrawal mode? But then I kind of thought, "Okay, I've got to have about a quarter of that in cash instead of being on the market so that I don't have to sell stuff." If this year turns out to be a down year...
Pat M.: I get it, I get it.
Pat: ...I don't want to sell stuff.
Scott: Yeah. But you can do like for like. So the cash goes in a Roth and you buy the same securities you just sold, and you haven't missed anything.
Pat M.: Yeah, but understand what you're saying is, "But when I go to take the RMDs, should I..." Because you have no money outside the IRAs...
Scott: Got to pay the taxes.
Pat M.: ...you've got to pay the taxes, so you would manage to that. Absolutely.
Pat: Absolutely.
Pat M.: So you would manage. So here's what would happen. If you sit down with an advisor and you go, "Okay, this RMD, well, this needs to be converted into a Roth between now and the thing that... Oh, and by the way, we're going to plan for that tax liability when you take the RMD, even if you're not going to spend it." So your RMD comes up and it's 4%. And let's say the account balance at that point in time is $4 million. That's 160 grand. And you live in the State of California, We figure out that you're in a about a 40% tax bracket. I would manage that portfolio 60% equities and 40% or 35% fixed income.
Pat: In the IRA?
Pat M.: In the IRA. And then when the required minimum distribution comes out, they send the money directly to the taxman. You don't ever touch it. And so you're using that bond portion. And then you're buying back similar or identical positions in the brokerage account on the other end.
Scott: Or it goes into a Roth.
Pat: Oh, I see what you're saying. Okay.
Scott: You can't...once you're on the RMDs, you can't move that to a Roth.
Pat M.: You can't move that. So I'm talking about when the RMDs happen.
Scott: It's only a couple years.
Pat: Right. I can take out a little bit more than the RMD. Whatever it is I'm going to put in the Roth, it's going to be more than the RMD plus the taxes.
Pat M.: Okay. Yeah. Well, that's what the adviser...to determine what that amount is. But your idea that, "I'm managing the money differently because of this tax liability," is spot on. It's 100% spot on, which is you don't want the volatility of an equity portfolio knowing that you've got a tax bill coming due in three years or four years. Right? And it sticks with this investment...
Scott: Although I could make the argument that...
Pat M.: Over time?
Scott: ...it would be a lower tax liability because it can be based upon the value of the account. Although the worst would be...
Pat M.: The market falls 40%.
Scott: ...after the 12/31, and your RMD is one number, and what your securities are...
Pat M.: You could cut the...you could split the difference...
Scott: Circle back up.
Pat M.: ...as long as you know what it is. Right? But it has everything to do with what the timeline in the investment is. And so even though you might not be spending the RMD, you want to account for the tax liability for the RMD.
Scott: But you might then spend the RMD, once he's not working.
Pat M.: But then that would drive the portfolio somewhere different as well.
Scott: My guess is you'll be spending some of these dollars from your retirement account once you quit having a wage.
Pat: Oh, absolutely. And that's the thing. I mean, I have friends who say...like State of California employees, "Well, my pension is going to be so much between that and Social Security. I don't even actually need any of my IRA money to live on." But I'll need to basically replace that 160K a year wage with my...minus the Social Security, with my IRA withdrawals until my RMD starts teeing my mean.
Pat M.: Okay. Well, then what happens is... I pretty much can tell you probably where you're going to end up. You're going to end up at a 70/30 or 60/40, somewhere in there, portfolio. And then you're going to start your RMDs on a monthly basis. And then every time that money comes out... And what happens is they use the...we use the rebalance of the portfolio to take into account that required minimum distribution on a monthly basis.
Pat: Okay. You do it monthly?
Pat M.: Oh, we do it monthly. We run the portfolios through screens on a weekly basis to make sure that we're tracking against our underlying index. But you're constantly making adjustments. So I think you're making a bigger deal out of this than it needs to be. What you should be concentrated right now is, "How much I should be doing in Roth conversions today?"
Scott: There you just need to run the numbers.
Pat: [crosstalk 00:43:15]. And I figure...and I'm not worried about you guys trying to figure that out on the phone. But the last question I had for you was, so because I'll be withdrawing from the IRA, I get that that has to be split, like you said, 70/30, 60/40, something like that, so that I don't wind up having to sell stuff to take withdrawals.
Pat M.: Thank you. Thank you. Thank you.
Pat: It's a wrong time. But the other question is now I'm putting my...I never really considered the Roth because I only have like a tiny bit in Roth, because way back when, somewhere along the line, I was able to put something in Roth. But now if I start contributing $20,000, $30,000, $40,000, $50,000 a year or something like that into a Roth, I'm kind of assuming that the Roth, I'm never going to spend it.
Pat M.: Thank you.
Pat: It's going to be inherited.
Pat M.: Thank you.
Pat: And so I can leave that basically 100% in the market because...
Pat M.: Thank you.
Scott: Exactly.
Pat: ...[crosstalk 00:44:07] 20 plus years. Am I right on that?
Pat M.: Thank you.
Scott: A hundred percent.
Pat M.: You are absolutely right.
Pat: [crosstalk 00:44:13] I'm listening. Okay. [crosstalk 00:44:16]
Pat M.: You're absolutely right.
Pat: I think I'm learning. Okay. That was a big question.
Pat M.: No. Because the timeline for that particular investment, and it would...you blend it. I mean, that's what the advisor does, right? So even though your IRA may be 70/30, your overall portfolio may be, depending upon how much ends up in the Roth, might be 85/15. Right?
Pat: Sure. I gotcha.
Pat M.: Right?
Pat: Yeah. Depending on how it goes over time.
Pat M.: Yeah. And a lot it just depends on how comfortable are you with volatility and the risk premium, and in terms of ups and downs. Which you sound like, yeah, you kind of got it together. And now what we're doing is we're cleaning...
Scott: Well, someone could have it together even if they don't want that much risk in their portfolio, Pat.
Pat M.: Okay. I guess that's my view of the world.
Scott: He got it together.
Pat M.: I'm just trying to make him feel good. No, you're a...
Pat: I feel great, thanks.
Pat M.: Pat, you're 100% spot on. You're 100% spot...
Pat: Well, that's good to know.
Pat M.: And the advisor's actually going...the advisor's going to build a model that actually shows you. And then they're going to update that model on a couple...two, three times year to make sure that you're on track. Right? In terms of the Roth contributions.
Scott: And one of the things that you need to take into consideration at least is the impact on your Medicare premiums. The IRMAA tax.
Pat: Yeah. Because I'm already at two X, and it's because I'm taking some money to buy this house, converting basically pre-tax to after-tax house.
Scott: Whoa. You're already taking money out now? So how much are you taking out?
Pat: Well, it's kind of a separate deal just specifically for this house purchase.
Scott: But it's not because it impacts what you may or may not be able to do for a Roth conversion.
Pat M.: Your advisor will actually walk you through that.
Scott: Because that flows through on your tax return.
Pat: Yeah. I'm going to be near the 24% mark. And so I'm not going to go over that. So it's kind of like, what do I need for the house? What's my income that year?
Pat M.: That's right.
Pat: And then what's the gap up to that 24%? Because the next thing jumps to 32%, which is crazy, right?
Pat M.: That's right.
Pat: So that will determine how much I can do for the Roth.
Pat M.: So what happens is you could actually do...I mean, the financial planning process is highly dynamic. I mean, it's highly dynamic where you'll sit in an office with an advisor, and they will have...
Scott: Or on Zoom.
Pat M.: Yeah, or Zoom. And he'll collect all this information from you. And these are your hopes and dreams. This is what you want to do. And then present it to you on a large screen that says, "Okay, well, what happens if we did this?" And it's dynamic, it's taking place while you're in the meeting, where you could create every...you could say, "Well, what happens if I want to spend another $30,000 a year on consumables or big vacations," or whatever. They would actually just run you through the case study. It's super dynamic. Right? Rather than us sitting here guessing you going in. And I'm hopeful that you met with other advisors. They went through a dynamic planning process with you as well.
Pat: Yeah, yeah.
Pat M.: Yeah. So yeah.
Pat: Well, one that I talked to, they kind of wanted...they gave me a basic idea, asked me a bunch of questions, and said they'd come up with a plan. But that plan, you kind of have to pay for upfront. But then if you go ahead and put your money with us in management, then we waive that fee. So it made sense to me. And the guy seemed like he was a pretty good guy. So can I ask you a question that would kind of be a pitch for your company a little bit?
Pat M.: Sure.
Pat: I mean, kind of like what I'm asking is, so one of the things, like a guy I met with a few weeks ago, he said, "So asset management is a big piece of any advisor's job, but we do all these other things well. So tax advice, and estate planning advice, and all these other things." So he kind of built a little bubble picture in a circle with all the different things. And are you guys primarily asset management, or are you primarily...do you have that sort of whole picture kind of thing?
Pat M.: I don't know how many accountants we have working at the firm. A number, probably in the dozens.
Scott: Yeah. And I appreciate the call, Pat. This is where the wealth management, financial planner, whatever you want to call it, this is where our industry's headed. Historically, and Pat, even when we started, we did some financial planning, but it was highly investment driven in the financial planning. As time has gone on, you're seeing consolidation in the independent wealth space. First of all, there are more accounts now with independent wealth advisors than there are at the big firms.
Pat M.: Like Merrill Lynch or Morgan Stanley. That sort of thing.
Scott: Yeah. Most of those state...they'll sate right on their website they don't provide tax advice. So they're a bit limited in what they can provide. But what's happened is there's been consolidation in this space primarily as a way to offer greater services to clients. So Allworth...and there's many of other companies like that today. Matter of fact, if you look at the top 20 largest IRAs in the country, of which we're one.
Pat M.: Which we're number 15, I think, or something like that.
Scott: Somewhere in there. I don't know the number.
Pat M.: I don't know if that...
Scott: I don't remember if it's Barron's, or one of those. Hopefully on our website it's somewhere to...we don't get in trouble from the [inaudible 00:49:54]. The large firms, almost all of them...
Pat M.: Offer.
Scott: ...tax preparation, tax planning, estate planning, sometimes estate preparation, insurance analysis, insurance planning, sometimes fulfillment on insurance.
Pat M.: 401(k) plans for small businesses. Right? And so we didn't offer all that...
Scott: Medicare planning.
Pat M.: Planning. We didn't offer that 10 years ago. But as we, like many of others of our competitors, have gotten larger, you can...I don't know how many advisors we have at the firm, 200 and something.
Scott: Like 100 and something.
Pat M.: I have no idea. There was a lot of people that conferenced a couple weeks ago. I knew that. But the idea is that you could actually offer these services in-house because you can spread those costs over a larger number of clients and the number of advisors. Where 10 years ago, if you came to a firm like ours, we would be working with a third party attorney. Sometimes we still do. We still do. I mean, we're appropriate. We'll work with your attorney and we'll work with your accountant.
Scott: That's right.
Pat M.: It's up to you. But if you want, then we will offer the services. And it's just the way the industry is going to go.
Scott: Yeah. And the consolidation, we've rolled in a number of firms. Same thing with all the large firms. There's this massive consolidation because the technology, all the tools that that can be provided for the end client today, the services are so much greater than they were even five... I mean, we've talked about, Pat, previously, direct indexing and how technology does tax loss harvesting, and technology has made things so much more efficient and effective. The reality is an advisor today can serve more clients, be much more effective. And that's just where the...one, it's what the clients demand and expect.
Pat M.: In the marketplace. It's what competition...
Scott: That's right. But anyway, this is all the time we have for this week's program. And as usual, it's been great having you. By the way, if you want to make sure you don't miss one of these shows on your Apple or Spotify, wherever you get your download, make sure you hit the Follow button. If you hit the Follow, you'll get delivered it automatically each week, and that's good. So this has been Scott Hanson, Pat McClain, Allworth's "Money Matters." We'll see you next week.
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.