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March 30, 2024 - Money Matters Podcast

The balance between living for the present and saving for the future, the tax implications of retirement contributions, why home loans can make sense for good savers, and a talk about tithing.

On this week’s Money Matters, Scott and Pat explain the financial impact of embracing not just the journey, but the destination. A Virginia caller who is five years from retirement asks for help understanding how his contributions impact his taxes. A California man wants to know whether he should take out a loan so he can build a home. Finally, a Pennsylvania caller wonders whether she should tithe from her Social Security income.

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

Download and rate our podcast here.


Announcer: 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: Pat McClain, thanks for joining us.

Scott: Both myself and my co-host, we're both financial advisors, certified financial planner, charter financial consultant. We spend our weekdays, some of our weekdays helping clients like yourself and broadcast on the weekends being your financial advisor on the air.

Pat: Helping people with their financial questions so that they can live a, I don't know, less concerning or peaceful life when it comes to their money.

Scott: Actually, Pat, I was on, last few days, I was a guest on another person's podcast, which is kind of rare for me to do. But it was the Retirement Wisdom podcast, all on retirement stuff. Interesting about this, and the reason I'm bringing this up, the guy who hosts the podcast, it's been happening for a number of years now, he used to be a Merrill Lynch broker for a number of years and then kind of transitioned out as coaching and he has this kind of coaching to help people into retirement. And I share with them the four pillars that we have at Allworth, our art of retirement, which is essentially you need the four pillars, health and wellness, prosperity, people, purpose, those are the four that you need to have dialed in pretty well.

Pat: You need that not only in retirement, but hopefully most of the way through life.

Scott: Okay, well, my whole point on this, so as the conversation evolved, I'm 57 right now. I hope to keep doing some sort of work for the next 20 years, frankly, I don't personally ever want to retire. I've saved for retirement. So if there's some health issue that takes me out tomorrow, it's not a problem. But the conversation kind of changed to discussing more of like, how about life's about the journey today instead of counting down the years until you retire and then doing the things you love to do?

Pat: Yes.

Scott: How about figure out a way to navigate your life?

Pat: Yes. But it's really difficult.

Scott: If that topic's boring to you, it's probably boring to the listeners. I can look at your face.

Pat: It's not boring. It's just it's it... It is depending upon where you are in your professional career, right, it's difficult. If you're the same company or in the same industry for 20 years. But if you've just in your early 50s switched industries and went to a new company or a startup or whatever, I mean, there's so many outside forces.

Scott: You're probably going to have to work a little more.

Pat: Yeah, I mean, can you imagine at your age going to work for a startup today? Fifty-seven, you go to work for a startup?

Scott:: It would have to be like curing of all cancer or something with a high probability of success. I mean, I don't know what it would be to motivate.

Pat: So how was the podcast?

Scott: Well, I was the guest, so it was phenomenal.

Pat: Okay. Was it okay?

Scott: Sure.

Pat: Was this a paid position?

Scott: Ten bucks.

Pat:Who's the guy that does it?

Scott: Joe. I forget his last name. My bad. Yes, Joe. Joe Casey.

Pat: Joe Casey, the Retirement Wisdom podcast.

Scott: On retirement stuff. But it did get me thinking about a guy and, Pat, I know one of the things is financial advisor and this program is about financial matters, but it all ties together because I know we both have worked with people over the years that they hate their job. They don't have enough money saved for retirement. And it's either well, you suck it up and continue at the samejob for the next six years or you pivot and do something different and work for 10 years.

Pat: And here's the alternatives. I'm not telling you which one to go. Just telling you the economics behind the decision-making is.

Scott: Exactly right. And sometimes people are leaving a pension on the table. I got to tell you, there's fat 401(k) match.

Pat: But the pensions on the table are the hardest ones, because if you have a defined benefit pension plan, one guy came to me and he's like, "Look, I'm going to leave now." And I said, "You got four years and your pension looks like this." I said, "I'd absolutely stay. I mean, because if you look at the value of that defined benefit pension plan, once it becomes vested, you look at how much you're making on an annual basis, it is a huge amount."

Scott: Yeah, that and even if you're even if you're in...

Pat: A profession where you've got a high pay that you don't like...

Scott: Yeah, it's difficult. And so sometimes it makes sense to.

Pat: Yeah, but we're here for your questions, if you'd like to join the show, 833-99-WORTH. We're in Virginia with David.

David 1: Hello, Scott and Pat.

Scott: Hey, how you doing, David?

David 1: Doing great. It's great to be on the show. I'm a big fan and a longtime listener.

Pat: Well, thank you.

David 1: Been listening to you guys for about two weeks now.

Scott: Two weeks?

David 1: But a big fan.

Pat: Okay, well, good.

David 1: Really grateful to find you guys.

Pat: All right. What can we do for you?

David 1: Thank you so much. I was hoping to ask a question. My wife and I are five years from retirement. We have a defined pension plan with the state of Virginia. And we probably need to do some making up.

Scott: You both work for the state of Virginia?

David 1: We do.

Scott: And you'll both have pensions.

David 1: That's right.

Scott: What percentage of your pay will the pensions make up when you retire?

David 1: That's a good question. Together, the combined at today's rate about a little over 11,000 a month.

Pat: Okay.

David 1: We make right now 260 between the two of us. We both make right around 130. I'd have to do the math real quick.

Scott: That's fine. Now, so you're essentially making roughly twenty thousand dollars a month and your pension is going to be $11,000 a month.

David 1: Yeah, I think it's about 60%.

Pat: Twenty-one. Yeah. Okay, so what's your question for us?

David 1: Well, a little bit of background might help. I come from a family where educational or finance education wasn't a big part of our family. I was told two things in life. One, don't rent a house, buy a house. Thought that was good advice. I followed that. And the other one was never invest in the stock market.

Pat: Okay.

Scott: Really?

David 1: Yeah, it really was that. And so I kind of had to learn the ropes through through the finance world a bit. And it was a little bit bumpy. It's really hard to find a good financial advisor. Fell down a couple of traps. But now after working for a company for almost 30 years, we're getting close to retirement. And I'm trying to figure out, I've heard you guys as of recently, I've listened to, I don't know how many podcasts in the last two weeks, but I have completely enjoyed listening to a lot of the back ones. There is something called a back door Roth IRA. And I started to look up some of the guidelines for when you can get tax deductions for your Roth IRAs. And I'm not sure how it applies to me. I can tell you what we have.

Pat: That's perfect. That's what you obviously have listened to the show. You know, I got to I'll share this with you. It's kind of off topic. I had I had a meeting with clients earlier today. We're taping this on a weekday and I had clients earlier today. And he wanted to know if we prep the listeners for the calls, he said, because they they normally come prepared and oftentimes will answer questions before you ask them. So is that you prepping them? And I said, "No, no, that that's people that call the show that listen to the show, because we have a tendency to ask all the same questions time and time again. So answer whatever questions you think we're going to ask."

David 1: Okay, so I think you may ask what we currently have in our retirement plans.

Pat: Correct.

David 1: So I'll run you through the list. And my question for you is, do you want me to combine my wife or do you want us to do it separately?

Scott and Pat: Separate.

David 1: Okay, so I have in a Roth roughly 160,000. And I have in a 403(b), roughly 586,000. And then I have something called a 401(a). Quite frankly, I'm not certain I know what that tax code is, but I have 147.

Scott: How much?

David 1: One hundred forty-seven thousand. And then embarrassingly, not being the financially educated at home, I didn't know what an HSA was until this year. So we started contributing to that and I have about $5,200 in the HSA. And then 17,000 in a 457, which I also realize had come to find out that we have something called a 457 available to us in addition to our 403(b), which I didn't realize. And so we started contributing to that. So we'll be maxing out our 403(b)'s and our 457s and our HSA's from here on out for the next five years.

Pat: And what does your wife have in her name?

David 1: She has less. So she has 140, I'm sorry, 150,000 in Roth IRAs. Pretty close. A traditional for 99,000. Let's see her fourth...

Scott: A traditional what?

David 1: She has just a small traditional IRA.

Scott: How much is in that?

David 1: Nine thousand. And her 403(b) is, let's see, I got to add this up. It looks like 510,000. And she has a few thousand also in a 401(a), which is 3,700.

Pat: And that's typically money that your employer contributes on your behalf is what the 401(a) balances are. It's the other side of a 401(k). It's employer contributions.

David 1: Okay, great. And then an HSA of 6,000 and 26,000 in her 457.

Scott: And what is it you're trying to do? So right now you say you're going to maximize both the 401(k) and 457.

David 1: Yeah.

Scott: So how much on an annual basis are you putting into the combined accounts?

David 1: Well, we I put I've been putting in about 20 to 25,000 every year for a number of years in mine. She's been putting in less in hers. But we we actually have another income of about a 50 to a 100,000 a year on top of our our income at our jobs. So we have plenty of money to put away right now.

Pat: What's the source of that income?

David 1: Mineral interest royalties.

Pat: So it's not earned income. It's passive income.

David 1: It's passive income. Yeah.

Pat: Okay. And it's something you inherited.

David 1: Yeah, that's right.

Pat: Okay. How old are you?

David 1: I'm 58.

Pat: And your spouse?

David 1: Fifty-seven.

Pat: And by the way, you are an incredible saver. I don't care what advice you got growing up. I'm glad you didn't listen to the one not. You wouldn't have 160K in your Roth if you didn't invest in the stock market. That's just fact. Great savers, great savers.

David 1: Thank you. That makes me feel better because it's been a bit bumpy. I can tell you some stories.

Pat: Oh, no. Look, look, I don't care what the path looked like.

Scott: You know, I'm going to take a little issue with that, Pat. So what David's got going for him, his wife, they have a pension. But if you backed out the pension, if they had no pension and were making 260,000 a year and had this saved, you'd say, "What the heck's wrong with you? You have don't have nearly enough saved."

Pat: I stand corrected. I stand absolutely corrected.

Scott: You factored in what the shortfall is and looked at a savings compared to the shortfall. And you're like, "You are in great shape."

Pat: Correct. You're in great shape.

Scott: You picked the right career path and saved enough.

Pat: Your risk tolerance, my guess, is at least in life was relatively low. I assume the home is paid for?

David 1: We have two homes. We've already bought our retirement home and they're both paid for.

Pat: Okay. And what's your question for us? Roth IRA. Back to a Roth.

David 1: I actually should probably tell you I have about $100,000 in the bank and I have roughly $80,000 in a brokerage account in addition to that. But I'm trying to understand the tax implications that I've heard you discuss with other callers. And I just don't know if I understand how how our 403(b) tax implications and 457 tax implications work when we're contributing now at a maximum. Is that considered a back door Roth IRA kind of situation?

Pat: No.

Scott: Are you contributing on the before tax or an after tax traditional basis?

David 1: I'm contributing before tax.

Pat: Yeah. Why don't we describe what a back door Roth is? Oh, and by the way, this is on the chopping block right now.

Scott: Which back door Roth are you referring to, the back door 401(k) Roth or the back door Roth IRA?

Pat: The back door Roth IRA.

Scott: It's on the chopping block.

Pat: Yeah. Yeah.

Scott: Is it a IRS clarification or is that...

Pat: No, it looks like legislation trying to get rid of it.

Scott: All right. Well, it exists today. And I did it personally for 2023 and 2024.

Pat: I did it personally for 2023, 2024.

Scott: And what what this enables you to do is it doesn't matter how much money you've got going into a 401(k) or 403(b) or 457, as long as you have some sort of wage income, earned income at least equal to the amount that you're going to contribute to the IRA, traditional IRA, you can do this. And this this really impacts those that the income limits are such that they can no longer contribute to a Roth IRA. So you contribute to a traditional IRA.

Pat: Non-deductible.

Scott: Correct. Non-deductible, traditional IRA. And then you immediately convert that to...

Pat: A Roth IRA the very next day. The very next day.

David 1: Okay. Are we referring to what I was advised by my bank to buy in addition to not even considering what my company allows me to do, but outside of that to buy my own? I think it's the caps right around 7,500.

Pat: That's right. Correct.

David 1: Okay. Because I was buying those every year for a while. And that's how I got up to 160 in the Roth. Okay. I was buying when I made a lot less money.

Scott: Got it. Got it. But you can't now because once your income exceeds 240,000, you can no longer...

Pat: As a couple. Yes. So you were putting it directly into a Roth IRA. This you have to you have to stop at a traditional IRA first and then convert to a Roth IRA.

David 1: I understand.

Scott: So what happens when you convert, you don't just look at that one IRA that you're converting. You have to look at all of your IRAs. Now, you don't own any other IRAs.

Pat: So you're fine.

Scott: You contribute 7,500 bucks for 2023 and 8,000 for 2024, the maximum limits and then you immediately convert those, it's not going to trigger any sort of taxable event, mainly because you were not able to take a deduction. Because your income is too high for a deduction to be in the non-deductible IRA.

Pat: But your wife, who has this $9,000 in an IRA, when you convert it from a traditional IRA to a Roth IRA, it goes in on a pro rata basis, which means not all of it's going to convert. So my recommendation...

Scott: It'll all convert, but you only get a tax break on... Forty percent of it's going to come down as taxable income to you.

Pat: So but my my recommendation since you have five years is to go ahead and just convert your wife's traditional IRA, this $9,000 into a Roth IRA. Just do that tomorrow. You're going to pay taxes on that. Right? So that's 9 grand that's going to show up as taxable income. And then every year after that, you're just going to do a non-deductible IRA.

Scott: Including right now.

Pat: Correct.

Scott: Before April 15th, you could do 2023 and 2024.

Pat: All in the same year. And then then I would wait and I'd do it again in '26. I do '25 and '26 just so that you don't have to go through the paperwork twice. Now, some people will say, "Well, you're putting money in at the end of the year and you're losing a year's worth of earnings." And I'm like, "Yeah, good for me. I don't I don't like paperwork. I don't want to be distracted. I want to do this transaction as few times as possible." So convert the 9,000 from a regular IRA to a Roth IRA and then do two back door Roths for you and your wife. Use the money that you've got in the bank to do that. And you want to do for '23 and '24.

Scott: And then I'd try to maximize your contributions to the 403(b)s and 457s.

Pat: Why, Scott?

David 1: Yeah, that's what we were planning on doing. We don't have any other expenses without any house.

Scott: Just because their income is going to drop quite a bit once they retire.

Pat: I don't think so.

Scott: Well, then convert on a Roth basis. I mean, contribute on a Roth basis.

Pat: But we're going to go out and grow this. They've got five years to retire. Right? So you got five years of growth on this. I mean, you'd have to do the numbers. It looks to me that they're pretty dang comfortable. I don't know if I would push into both the 403(b) and the 457 is my point, to the maximum.

Scott: My guess is your income much higher today than it used to be a couple of years ago?

David 1: Yes, it is, it's much higher. We both after the pandemic, we both kind of got promoted.

Pat: Okay, all right. Okay, I'd make the argument that maybe you actually use both of them as well. You're used to living on a much lower income than you're making today, correct?

David 1: That's right.

Pat: You haven't had a life.

David 1: We're comfortable where we're at.

Pat: And you haven't had lifestyle creep. You didn't go out and buy a $7,000 barbecue.

David 1: No, I didn't. I didn't do that.

Scott: Do they sell $7,000 barbeques?

Pat: Yeah, but you did buy a $300 smoker, the Smokey Joe down at the Costco.

David 1: Well, I couldn't get myself to buy a seven thousand...

Scott: I'm still thinking about that seven thousand.

Pat: Oh, it happens.

David 1: But for most of our life, we bought cars under a $1,000 and just drove them until they died and then bought another one for $1,000. And then recently, now that we have more money and we need a little bit more dependence on our cars, we went and just bought two cars with cash.

Pat: All right. Yeah, yeah. I would do what Scott says.

Scott: I'd run the numbers just because you might be able to have... Well, you know, money is a funny thing, right? So my guess is when you were young, just like most couples, there wasn't that much coming in. You really had to scrimp and save and and cut corners where you could. And it was not easy to save. But you're at a time now, my guess is if you continue to if you maxed out both the 403(b) and the 457s...

Pat: You're going to have too much money.

Scott: Yeah. You're you're going to end up down the road, you're going to have way more money than your lifestyle requires. And so then it just creates another issue.

Pat: Yeah. And my guess is it's maximize the 403(b) and probably 50% in the 457. You can still use them both, but you don't have to max them both.

David 1: Okay.

Scott: And I would do that. And you're good. You're good.

Pat: But you are a good saver. I mean, you're not the greatest saver ever but you're good savers.

Scott: Well, considering the income just lent to the level, that's right. That makes a big difference.

Pat: Yeah. Great job. You're in phenomenal shape for retirement. Share that podcast with your friends. We're trying to have our marketing people tell us when we get a certain...

Scott: Once we get 100 listeners.

Pat: No, they say like 100,000 or something, we hit the tipping point and then everything goes viral or something and I get to go on Oprah. Is she still around? Does she still have a show?

Scott: I don't know. Not on television. Is Oprah still on television? Do you know, David?

David 1: I shouldn't say this in public, I've never watched Oprah.

Scott: I don't think she's on the air. I think she has her own channel, her own universe now.

Pat: I don't know. Anyway, share, share, share that podcast, if you will, and give us a rating. And we'd appreciate it.

Scott: Yeah. And that's a I think I've watched Oprah before.

Pat: I have watched Oprah. You get a car, you get a car. You get a car.

Scott: I missed that one.

Pat: Everyone gets a car.

Scott: My mother-in-law was a huge Oprah fan.

Pat: Was she?

Scott: Oh, yeah. Oh, yeah. So that's probably where I've seen it when I was at her house. Oprah special.

Pat: Well, she, Oprah, I mean, Dr. Phil came from Oprah. Who's the other crazy doctor that ran for office?

Scott: Oh, yeah. What happened to him?

Pat: Dr. Oz?

Scott: Oz. Yeah, yeah, yeah. Dr. Oz. Is he crazy? I don't know if he's crazy or not.

Pat: Rick Edelman used to be on Oprah all the time. Financial services guy in our industry. Friend of mine. Anyway, I'm dropping names now.

Scott: You are dropping a personal friend of mine. When Dr. Phil and I were having coffee last week... Let's continue on with calls here. Let's talk with David in California. David, you're with Allworth's Money Matters.

David 2: Gentlemen, happy New Year.

Pat: Thank you, sir.

Scott: Thank you.

David 2: Although I don't know if there's a rule on that.

Scott: I don't know.

David 2: Like what part of the year you stop that, but it seems early enough.

Pat: All right. Well, we appreciate the sentiment. How can we help?

David 2: So I've been listening to you gentlemen for years. And back in the early 2000s, you gave me some rock-solid advice about purchasing CalPERS service credit for myself.

Pat: Wow. You have been listening for a while.

David 2: Yeah, it's been a bit. And then same for my wife, CalSTRS. So we did it. We took your advice. And at the time, it seemed like a lot of money, but it was, I think, one of the best financial decisions we've made so far.

Pat: It was easy.

David 2: Yeah. So here I am 20 years, 20-plus years later. I don't know how that happened, but that's kind of a philosophical discussion for later.

Scott: David, how old are you?

David 2: Let's see, 52 and a half.

Scott: I'm 57. I went to a concert a year ago in Los Angeles to see Joe Jackson. He was popular. He came out in the '70s and '80s. And I think I walk in, I'm like, who are all these old people? I realized that was me.

Pat: He was the one that's saying, "I'm the man."

Scott: Yeah, exactly.

Pat; You're going to hear me on the radio.

Scott: Yeah, yeah, yeah. Exactly.

Pat: That's the only reason I actually got in, I wanted a talk show, is because Joe Jackson inspired me.

David 2: That's great. Yeah. I know that feeling. I look in the mirror, I'm like, who's that guy? Anyhow, yeah. I tend to digress a lot, which is probably why I enjoy listening to you guys.

Pat: Squirrel.

David 2: We'll see if we ever get on track. So you want me to start with some key facts?

Scott: Sure, fire away. What's going on?

David 2: Okay. So I've been married for close to 30 years. Wife and I have two adult financially independent kids, so they're off our dime. Don't have to worry about our parents, they're financially independent. So my wife is about three years older than I am. She'll be retiring and collecting her CalSTRS pension this summer. So June of this year, which is kind of nice from the standpoint of on the mortality tables, I think, we're lined up because she's three years older than I am. I think it puts us right at the same spot, right?

Scott: That would be ideal, right?

Pat: Yes. You get a two for one deal on a casket.

Scott: Share in a hospital bed as you both die. Exactly. That's what you're planning. That's great.

David 2: We sort of didn't plan it that way, but it worked out. For what it's worth, she doesn't plan to work anymore after that if she starts collecting her pension. I'm in CalPERS and I plan to work at least another three years. I mean, I might even just keep going after that. Don't know yet. But regardless, when we both are collecting our pensions, we'll be basically taking in more money than we need. It's kind of a high class problem that all my friends in private industry, I don't blame them, they've got pension envy. So I get it.

Pat; That's right.

David 2: Yeah. So I've got that kind of nice problem. So here's what we're looking at now. We've got a fair amount in my 401(k), 457, and her 457 and 403(b). And then our Roth IRAs, if you add all that up, it's close to two.

Pat: Okay.

Scott: And how much of that is Roth?

David 2: Just about 200. So about 100 for her and 100 for me.

Scott: Ten percent.

David 2: Yeah. And I've got it all, everything is in the total stock market index fund except for, and I know I shouldn't do this, I got it, but it's kind of fun for me. In my Roth IRA, about 100, I just mess around buying individual stocks.

Scott: Okay. That's fine.

David 2: So I just allow myself that.

Pat: Yeah, 5% of the portfolio.

David 2: Yeah. And you know what's interesting about that? I've been doing that for the last several years. I'm just about neck and neck with my wife who has the total stock market.

Pat: There you go.

David 2: She's beating me by a little bit.

Scott: There you go. One would expect her to beat you by a little bit.

David 2: Right. I know. And that's completely rational. So here's what I did, in 2020, we bought a lot and paid cash for it up in the Sierra Nevada mountains here, east of Sacramento. And our plan has been to basically build a house. So this will be a vacation home/retirement home potentially in California.

Pat: Okay.

David 2: We're likely staying in California.

Scott: Whereabouts is it?

David 2: Up in the Tahoe area. Yeah. Outside of that TRPA, so I don't have to worry about quality issues with building there. I thought I was going to be able to save enough. And then also based on a loan I took out of my house a couple of years ago, our house was paid off, but I couldn't help myself because interest rates were so low that I took out a loan. And so with that loan, about 600, and then the cash I've saved, I've got about $1.1. But I think I'm going to be about 200,000 to maybe 300,000 short. So my thought was I would pull out money from her 457 and or 403(b) when she retires this summer as we start building, just to have that cash.

Scott: The challenge is, I mean, conceptually, like, yeah, but the problem is that the taxation on those dollars, because you pull out 300 grand, it's like you earned another 300. It's added on to the rest of your income and it pushes you into higher tax rates.

Pat: And so how much will her pension be?

David 2: She'll be at about 80.

Pat: And what's her income now?

David 2: A little over 100. But the other thing is we live on far less than we make because we max out her 457, her 403(b).

Scott: So you've managed to save a few hundred grand. You're making the payments on your $600,000 mortgage that you pulled out in order to build this.

Pat: And so the interest rate on this mortgage is 3%.

David 2: It's like 2.8.

Scott: Is the plan when you retire, are you going to move up there full-time or are you going to do a back and forth, or you don't know?

David 2: Probably do a back and forth, but realistically, we don't know. So as I'm processing this through, I'm thinking I hear about Roth IRA conversions all the time. And I know this isn't the same. I'm not suggesting it is. However, in my kind of pretzel logic, I'm like, well, if I take the money out now, because I'm going to get hit, I think I'm going to get a much higher income tax bracket when I retire.

Scott: Yeah, well, the $2 million, you're eventually going to have to start taking distributions at it.

Pat: But he's only 52 years of age.

Scott: I understand. She's 55 and we'll have separated. I know, like, if you can spread that withdrawal out over a few years, three, four, five years, then it makes some sense. So I mean, what you might want to consider is getting a loan for that amount.

Pat: So I have a different thought, Scott. So you'd need 200,000, correct?

Scott: Two to three, which might be four.

David 2: Maybe three.

Pat: Okay, but you haven't started construction yet, correct?

David 2: Correct.

Pat: Have you started drawing yet?

David 2: No.

Pat: Have you even started the planning? Have you got an architect?

David 2: Yes, that's all done. We're probably either going to start building this summer or the following summer.

Pat: So I would actually consider a loan on her 403(b) and 401(k), which I don't think I've ever said that on this show. Never said that.

Scott: But once you separate service, not 403(b)s don't need to be repaid, 401(k) does.

Pat: That's right.

Scott: But a 403(b), you can have a retirement.

Pat: Yes.

Scott: There's 50,000 is the limit.

Pat: Fifty thousand is the limit. But my thinking is you might be borrowing... You're worried about this problem too soon.

David 2: Okay.

Scott: I would agree. You got a few buckets to choose from.

Pat: You could easily take a loan on your on the property up there once, you know, you could build the thing and probably actually get it permitted and spend the last $200,000 on it. Right? I mean, we're talking about plus you've got more room in...what's the value of your home that you took the $600,000 loan on?

David 2: Probably about nine.

Pat: Okay, so you got a little bit of room there. So you might use a combination of things.

Scott: A hundred grand, a home equity.

Pat: You might use a little bit of Roth, a little home equity, a little bit of borrow from the 401(k) and 403(b)?

Scott: And a little bit of withdrawal from the 401(k).

Pat: That's right. Yeah. Yeah.

Scott: You can swing it. No question.

Pat: Yeah, there's no... Yeah, you're fine. You're worried about something. It's too premature.

Scott: He's doing some planning.

Pat; Of course he is. I mean, that's why he's done so really well.

Scott: Yeah, I think our point is if you needed the money now, we'd give you some. But you've got several options. We'll see where things stand.

Pat: Call back in two years.

David 2: Okay. My thought was if I pull some of it out now and keep it below, a certain marginal tax rate and spread out, I like kind of like one of you suggested over a period of three years.

Pat: I wouldn't do that.

David 2: Okay.

Pat: And the reason is, I think your income will go down once you retire a little bit.

Scott: Not much.

Pat: A little bit. A little bit. So it won't make a bit of difference whether we do it now or then. But you can use a loan on the home.

Scott: He doesn't want the two million to grow to five to six million and then require minimum distributions either.

David 2: Because I think when I step off of here, I'm going to keep working when I'm done with the PERS deal.

Pat: Well, then you're going to have even more income to pay down the loan. Right?

Scott: And there is no tax considerations. It'd be one thing. But there's major tax considerations.

Pat: Yeah. If you step out of PERS and you go get a job that pays the same amount that you were making for the state of California, we've compounded the problem. That's why I wouldn't worry about it.

David 2: Okay.

Pat: And are you an engineer by chance or planner or something like that?

David 2: No, no, I hate to admit I'm a lawyer.

Pat: You are. Yeah, I would. Listen, I bike ride with a lawyer from the state of California. I really enjoy him.

Scott: It's like when somebody I never wanted to say I never want to tell people what I do either. I don't. "What do you do?" "I think do I have to answer the question?". I'm a financial advisor. They think, oh, no, he's going to try to sell me life insurance.

Pat: I just tell everyone I'm a first responder. I respond to financial problems.

Scott: Or as a wealth manager. Like that sounds too like hoity-toity.

Pat: I'm only joking when I call myself a first responder. I've never said that. But anyway, we appreciate even though you are an attorney, we appreciate your service to the state of California.

David 2: Likewise, gentlemen, thank you.

Pat: He was pretty funny.

Scott: I know. Let's head now to Michigan. We're talking with Robert. Robert, you're with Allworth's Money Matters.

Robert: Hi there. Thanks for taking the call.

Scott: Yeah.

Robert: So I'm not sure how to frame my question. I would describe it as sort of a macro question about the values of the stock market. So I guess I started paying attention to stuff in the 1990s and, well, lots happened since then. But if you look at the P/E ratios for the market over the past 100-plus years, throughout the 1900s, like the P/E ratio for the S&P 500...

Scott: Sixteen, 17.

Robert: Right. I mean, when it would get up into the 20s, people would say, you know, it's getting kind of high. And that would often be the beginning of a peak, of getting close to a peak. And then starting in the '90s and the dot com era, it sort of has...

Scott: Some companies had no E so they went price to sales and stuff like that.

Robert: Yeah. So but the S&P 500 P/E ratios have changed. Whereas now a number that when you see it going down toward the 20s or certainly upper teens, we seem to see it getting near the bottom of the market. And that's about where it goes back up. So I guess I can't quite wrap my head around that.

Scott: In the '70s, it was what, seven or eight, the P/E ratio got really low.

Robert: Right, throughout the whole 1900s, a P to E ratio of the 20s was considered very high.

Scott: But that's been the norm the last 30 years, 20.

Robert: Yeah, exactly.

Scott: So it got as high as like almost 30 in 2000.

Pat: Yeah, right before the blow up. What's your question?

Robert: Yeah. So well, my question is, you know, just looking at that, it sort of seems like what I would call long-term irrational exuberance. Like we're all sort of now very comfortable with high P/Es. And are we unwise?

Scott: Well, then let's... Okay, with that, let's assume that...

Pat: Can we step back for a second? Can you describe to the rest of the listeners what we're talking about, Scott, on the price to earnings ratio?

Scott: How much earnings a company has relative to its price. And the higher the price to earnings, the more an investor is willing to pay for each dollar of earnings.

Pat: So if a company is priced at $20 a share and it earns a dollar per share, it has a price to earnings ratio of 20. So the ratio is 20 to 1. If the same company keeps the same earnings of a dollar, but the stock price goes to $30 a share, it is now 30 to 1. And it's implied that there's more risk the higher the price to earnings ratio is.

Scott: But what's interesting, when we as financial guys, good financial guys talk about how hard it is to predict where the markets are going to go in any particular short period of time, particularly because, one, we don't know where the economy is going to be in earnings, but we don't know what investor sentiment is going to be. And that's one of the big wild cards, right? So like when you retire, are price to earnings ratios going to be 22? Are they going to be 16? Are they going to be 12? Are they going to be 30? We don't know. But even let's assume that we have a regression to the mean and that it's been an anomaly the last 25, 30 years where the price to earnings ratios have been, and it's going to revert back to where it's been historically 16 or whatever. If you run the numbers, you would still be better off with equities over a long period of time.

Robert: So it doesn't trouble you, basically? End of the story.

Pat: No. And one of the things is investor sentiment.

Scott: Have no control over it.

Pat: But investor sentiment moves around based upon what are the alternatives? The stock market isn't the only place to invest money, right?

Robert: Right.

Scott: Yeah, well, we saw what happened in 22 when the feds jacked up rates so many times, right? And then we've seen what's happened with the market when the feds said, I don't think...I think we're done. I mean, if you go back to the '70s, that's when they kept going higher and higher. Short-term rates were almost 20%.

Pat: So the alternative...

Scott: That's right. Why should I own stocks when I can get 20% in the money market?

Pat: Right? Which, by the way, made it harder for companies to earn money because the cost of borrowing, which they use, companies use money to borrow...

Scott: And raising capital.

Pat: Was much more difficult. So your question is, are we troubled by the price to earnings ratio?

Robert: Yes.

Pat: I'm no more troubled by the price to earnings ratio than I am weather. It is what it is.

Scott: Yeah. That's...yeah.

Robert: Well, the weather doesn't affect your finances, or at least not much.

Pat: I understand, but I'm not in the market...I'm not going to predict the weather next year, nor am I going to predict the market next year. Or even six months from now.

Robert: Even if it reverts back to where it used to be, where it rarely gets above 20, you would still say the numbers are in the favor of equities.

Pat: For a long-term investor.

Scott: Yeah, for a long-term...not someone who needs money in a couple years.

Robert: No. Okay. Well, that's my...because, you know, looking at the charts, it just looks like, wow, we're just living in a strange era. What if we go back to the norm? It seems like, you know, the value of things could take a cut by 50%.

Scott: Oh, yeah. Or it could happen over a long period of time, and you still end up with outsized returns, even if price to earnings ratios went to 12.

Pat: Well, but let's throw out the top 20% highs and lows and tell us where we're at.

Robert: In terms of P/E's?

Scott: Yes. I mean, there's actually lots of reasons why the P/E ratios are higher and why they may...I mean, one is just the democratization of investing.

Pat: There's no question.

Scott: I mean, how many people owned stocks 50, 75 years ago? Not very many, right? I mean, in other words, we have no problems with this. I wish I could predict where they're going to be. I have no idea. But, yeah. And I'm with you, like...but that's one of the great variables that we have when we invest in equities, or really, for that matter, lots of other investments. We don't know what investors are willing to pay for those in the future. Whether we buy a house, it doesn't matter. Real estate?

Pat: Or we don't know what people are willing to pay in the future.

Scott: We have to make some assumptions.

Pat: What we do know is that this market is pretty liquid, which actually causes it to react much faster than illiquid markets, because the price, it's easy to buy and sell. It is not so easy to buy commercial real estate. No one really knows, you read all these articles about commercial real estate, and I think no one really knows. No, you can't even speculate to guess, other than those that are fully leased. And even those that are fully leased, you don't even know because you don't know what the competitive pressures are on the other side. And so you're like, it is what it is. But if I never bought a building, I'd own it for three years. I'd own it for 10 years, or 15 years, or 20 years. And you should think the same thing about your equities in your portfolio.

Robert: All right. Well, I appreciate taking the call.

Scott: Yeah. Thanks for calling, Lawrence. I appreciate it. It was actually a good question. I'm trying to think last time we had that question.

Pat: Years.

Scott: Might have been years since we've had that question.

Pat: Yeah, I was trying to think.

Scott: It's not really esoteric. It's just a little more in the weeds than a lot of people get.

Pat: Yeah. Did we get that question a lot prior to the dot com? Do you remember?

Scott: Well, I do remember a time when we're thinking, it's getting crazy at these valuations. It's getting crazy. And like, make sure you're diversified here.

Pat: When they went into bankruptcy and the number one thing was out of the bankruptcy, they sold for the most amount of money was that puppet dog, the sock dog.

Scott: What happened to the puppet?

Pat: I don't know where that puppet dog is today. It's on tour with...

Scott: Pet rock. We're in Pennsylvania talking with Shirley. Shirley, you're with Allworth's Money Matters.

Shirley: Yes, hi.

Scott: Hi.

Pat: How can we help, Shirley?

Shirley: Well, I just had a question. I am getting my Social Security now and we've always tithed on our gross. And I was just wondering how to handle my Social Security income. Do I tithe on that since I tithed on the gross or I just wanted somebody's suggestion with that.

Scott: So as part of your religious practice over your life, you've taken a tithe, I'm assuming 10%?

Shirley: Yes.

Scott: Okay. And 10% has gone to the church. Whether that income, I mean, isn't it the first fruit of the crop? So it would seem to me, regardless of where the income, income is income.

Shirley: Okay, okay. I just know that it was taken out from my, from my gross.

Pat: Oh, you never paid taxes on it.

Shirley: No, but I paid tithe on it because it was my gross.

Pat: All right. Oh, because it was on your growth.

Shirley: Yes, yes.

Scott: So as an example, if your income was $100,000 and you paid 76, or actually on the Social Security, $6,200 of Social Security, you still had the $100,000 gross. And when you say gross, you'd look at your paycheck and say, what was the gross amount?

Pat: And you tithed on that?

Shirley: Right.

Pat: And let me ask you a question then. Did you tithe? Did you put money into a 401(k) or 403(b) or 457 while you were employed?

Shirley: Yeah.

Pat: And you didn't tithe on that?

Scott: That reduces the gross.

Pat: Unless it was a Roth IRA.

Shirley: Well, we would have put that, that was, that also was after, I mean, whatever my paycheck was in gross, I gave 10%. So even what I put into 401(k) or, I mean, what I put into IRAs, that was after tithe also.

Pat: Well, then the question should be, do I tithe on my Social Security benefit and on any distributions from my IRAs or 401(k)s?

Shirley: Well, when we would take this distribution, I would think I would tithe because that hadn't been... Yeah. I mean, I tithed on that too. I tithe on all my stuff.

Scott: That's right. So you're asking a bit of a theological question to some financial guys. Well, I mean, I have, I actually know the scriptures on this stuff pretty well, but there's not, it's not that clear cut on even what a tithe is, number one. Number two, if we're still in the era of tithe, is tithe actually what a requirement is or is it just a start? Because gifts and offerings sometimes would go above that amount.

Shirley: Right. And we do that too. But our 10% goes to our church and then we give way above that to other things too. But yeah, my question was just with my Social Security. Yeah, I just wanted somebody's opinion on that.

Scott: My wife and I have been at the same church 31 years, 32 years, and I've never been one to say that my tithe has to go to my local church and couldn't go to other areas. Yeah, well it doesn't matter where it went to.

Pat: Well then you're doing it.

Scott: So then you're doing it. Then you're doing it if you're given above that anyway.

Pat: You're doing it.

Shirley: Right. Yeah, I know. But I was, yeah. The question is...

Scott: So it sounds to me like when you do your taxes, you're giving away more than 10% a year. Is that right?

Shirley: Yeah, correct. Yeah.

Scott:: So then to Pat's point, you're already tithing Social Security if that's the case. Or how about you just tithe the taxable amount?

Shirley: What do you mean the net?

Scott: Not all Social Security is taxable. Some of it comes back tax-free.

Shirley: Yeah, yeah, that's fine.

Pat: What do you think you should do?

Scott:: Yeah, that's really good. It's a heart issue. All of this is a heart issue anyway, right?

Shirley: Yeah, correct, correct. I just thought, you know, I would just love to hear, you know, somebody's professional opinion. You know, I've looked on the Internet and, you know, yes, it is a heart issue and it's between us and God.

Scott: Yes. So I think it's really I think the right answer is what you and your husband feel comfortable with because you obviously are very generous. You are giving beyond that anyway. And whether you say I'm going to take it each month, I get my check or it's going to come out of other gifts that you do throughout the year.

Pat: Shirley, are you are you worried about running out of money in your lifetime?

Shirley: No.

Pat: You've got more than enough?

Shirley: I don't know what life's going to look like. So I don't know what more than enough is, you know, because who knows what life's going to look like.

Pat: And who have you named as beneficiaries in some of your IRAs?

Shirley: Well, we have children.

Scott: Yeah, but it sounds like you're given it anyway.

Shirley: I know. But yeah, we definitely are giving above. That's right.

Pat: Okay.

Scott: Maybe you look at the Social Security as the funds that come in that the tithe from there can go for the above and beyond things so that other nonprofits and charities you like to support ministries you support.

Shirley: Yeah. Yeah.

Pat: Are you using are you using your IRAs? How old are you?

Shirley: I'm 68.

Scott: Okay. I mean, like my wife and we when we were first married, we said we're going to we're going to be tithers. We're going to add. But I'm not I'm just not that legalistic on like this check comes

Pat: Yeah.

Shirley: Yeah. I mean, everybody has to do what they want to do.

Pat: It's an interesting call.

Scott: Yeah, it is. It's an interesting call. Yeah, I appreciate it. I appreciate it.

Pat: We could be here for hours.

Scott: You can line up with lots of different people and get lots of different perspectives on it.

Pat: I could give you six opinions right now and they're all mine.

Scott: I think you can get people who have in-depth spiritual discussion and have lots of different answers on things as well.

Pat: It's weird.

Scott: Yeah. So I appreciate the call. Yeah, that's all. That's all opinions. We don't have any. That's it. That's all you got from us. Yeah, we appreciate the call though very much. Hey, we have a couple minutes left here before we're going to sign off. And I was at a conference a week and a half ago, Barron's. Barron's the magazine, they put on these conferences periodically.

Pat: And for the listeners out here, I hate conferences. Pat McClain hates conferences. I consider it businessman's jail. I absolutely detest them.

Scott: I've been to a number of conferences with Pat over the years. He's never stays through that the whole conference. He just disappears halfway through.

Pat: I go through him with the best of intentions. So thank you for representing Allworth at the industry conferences.

Scott: But my what my what my takeaway on this. So we've been an independent firm since 1993 registered. We launched as a registered investment advisor. And back in the day, we were like mocked from the big Wall Street firms, little independent advisors. And today there are a number of firms like Allworth and what I mean by like Allworth, national firms, hundreds of advisors in all independent with a fiduciary mindset, mindset, registered investment advisory firms that don't manufacture product, don't have an inventory of things to sell like the Wall Street.

Pat: But solid infrastructure, technology, finance, like Wall Street.

Scott: And frankly, superior service to what the I mean, most of the firms like ours, employees, CPAs do provide tax advice.

Pat: Estate planning, other services.

Scott: And it's just I was just at the conference just looking around. And some of these people I've known for a long time that also had small firms back in the day that are now national firms. And it just got me thinking about how much the industry has changed. And really, if you're going to work with a financial advisor, how important it is to work with somebody who is independent.

Pat: And a fiduciary.

Scott: And a fiduciary. Fiduciary is a legal obligation, a legal obligation to put your interest above their own.

Pat: And I'll throw in one last caveat. Financial planning based.

Scott: True. Otherwise, they could just be asset managers. So, hey, it's been great having everyone with us. We certainly appreciate our handful of listeners. We'll see. We'll see in another week.

Announcer 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.