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March 4, 2023 - Money Matters Podcast

When so much stock is too much stock, the danger of chasing dividends, and when to start withdrawing from a retirement account.

Your company offered you how much stock? On this week’s Money Matters, Scott and Pat explain why that could be risky business for some. Then an Oregon man asks whether he should start withdrawing money from his thrift savings plan. A caller from Illinois wants to retire alongside his wife but wants to run the numbers by Scott and Pat. Finally, a retiree from New York asks whether he needs to take Social Security right now in case the program’s trust fund runs out of money.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's CEOs 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 "All Worth's Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

Scott: Welcome to "All Worth's Money Matters." Scott Hanson.

Pat: And Pat McClain.

Scott: Thanks for being part of our program. This is a show where we come to you each week and talk about financial matters, help you make wise choices with your finances. Both myself and my co-host here, we're both financial advisors. And I'm glad you are taking some time to be part of the program. And if you'd like to join us, have a question for us, or want to be part of the program, we'd love to answer your question, you can call us at 833-99-WORTH, or send us a question at And if you get what I'm talking about, if you look at your phone where the podcast is, there will be more information, whatever, there will be a place where you can click questions.

Pat: There's a little person or something there, a little indicator that you just...

Scott: I think it's a hyperlink where it says Questions at, but I don't know what it is.

Pat: It's not a...

Scott: Actually, I don't know. I'm assuming it's there.

Pat: I have seen them on other podcasts. I don't listen to my own podcast.

Scott: No, neither do I.

Pat: Too busy staring at myself in the mirror.

Scott: And of course you do that because you're such a handsome guy. You listen to your own podcast while you're staring at yourself in the mirror. Anyway, before we take some calls, I thought...there's a pretty interesting article I saw, maybe it was a week or two ago. Amazon. So, Amazon has been growing leaps and bounds for 25 years, right?

Pat: Yes, in fact...

Scott: And they continue to reinvent themselves in the different areas.

Pat: Someone was telling me that they got hit by a bus, and I said, "That is so antiquated. You are more likely to get hit by an Amazon van than any other vehicle."

Scott: I would probably say that's [inaudible 00:02:12] there's way more Amazon vans than buses, first of all.

Pat: Yes, yes. And they're actually in your driveway, in your...

Scott: And they sometimes seem a little distracted if they're coming down the street.

Pat: Yes. Seem to be kind of a hurry.

Scott: A little bit of a hurry. How they can deliver something in two hours from the time that I ordered is... Anyway, that's not the point of our comments here. Amazon stock is down quite a bit, like half from where it was. So, it's taken a big tumble. And the challenge that their company is experiencing now is...I don't think it's actually down half. It's down more than 35% than the last year, okay? But for many people, their stock made up sometimes half of their compensation for most employees, anywhere from 15% to 50% of their compensation was in stock awards. And this reminded me, we broadcast out of Folsom, California [inaudible 00:03:16] outside of Sacramento. Folsom, there's a big Intel campus. I don't know how many thousands of employees out there.

Pat: Thousands.

Scott: But I don't think as many as it used to be.

Pat: There used to be a lot more.

Scott: But Intel's not the same company today as it once was. But back in the go-go days, we had a lot of clients who worked there, we had friends who worked there, and they talked about a total compensation package, which was a combination of your salary, your benefits, and the stock grants that you would. Get back then it was stock options. Today, it's mostly restricted stock units, same sort of concept. And so, that works fine when stock prices are going up. Matter of fact, employees like it. But Intel then went through a period where the stock declined, and then zigzagged for year after year.

Pat: Yeah, it'd hit a high back in 2000.

Scott: Yes. And so, they they struggled with maintaining the same employees. A lot of the excitement left. And I think it hurt the company's performance long term, too. When people aren't quite so excited about working there, they say, "Hey, I need more cash compensation. The stock's not doing anything." Well, it'll be interesting to see what happens with Amazon now, because with the stock price being down, people are starting to complain, "Well, wait a minute. My pay is not as high as it once was." And some people don't ever sell the stock, but a lot of people sell it as soon as they can, and it supplements their lifestyle.

Pat: Yes. Because it's part of their compensation.

Scott: It's part of their compensation, as they've been told. So, I don't know. I think it'll be...

Pat: It'll be interesting to watch.

Scott: And speaking of Intel.

Pat: Oh, yes. They cut their dividend recently.

Scott: By two thirds, which is more than a little bit. We've talked about this before. Look, if you go out there and say, "Oh, I only want blue chip companies, but I want those that pay the highest dividends. I'm going to be retiring and I'm building a dividend portfolio." Oftentimes the companies with the highest dividends are the ones in the most trouble.

Pat: And why is that, Scott?

Scott: Well, because dividend is a percentage of your share price. So, let's say a company's trading at $100 a share, and their dividend is $1. That's a 1% dividend. Doesn't sound very attractive if you're looking to building a dividend portfolio. But let's assume that company is struggling and the stock tumbles from $100 to $20. The company is still paying the dollar dividend. They're even more worried about it now because they're afraid that if they reduce it, share price will fall even further. So, now that dividend yield went from 1% to 5%. And if you're thinking, "Hm, I like the sounds of a 5% dividend. Sounds better than 1% dividend." Well, there's no guarantee the dividend is going to continue.

Pat: When you're looking at a company stock or even value versus growth, which value stocks have a tendency to be the dividend side of it, and growth have a tendency not to, the reality is you have to look at the underlying company, not the dividend. Because if the company...and I've seen many circumstances where the earnings of the companies were actually less than the dividends they were sending out, essentially the company was using their balance sheet to borrow money in order to pay a dividend, in order to keep that stock price high. It's unusual, but it does happen. So, this blind chasing the dividend is kind of crazy. It's a little nuts. And so, they cut their dividend by 66%. Now, let's talk a little bit about Intel.

Scott: It was over 5.5%. And so, it sounded attractive.

Pat: Yep. And now it's down to...

Scott: It was 5.6%. But because the stock price fell, that's why it got to 5.6%. And then they cut the dividend, now it's 1.9%, 2%.

Pat: Yes. So, Intel stock, high of $67 a share back in January of 2000. High. The highest it was was 23 years ago. March of 2020, the stock was trading at $55, and today it's at $25.

Scott: It was 67 bucks in January of 2000. Three years ago, $67. Today, it's $25.

Pat: Twenty-three years ago it was $67. January of 2000, it was at $67. March of 2020, it was at $55.

Scott: Oh, my.

Pat: This was the go-go stock.

Scott: It was not paying 5.6% dividend over those years.

Pat: No, no, no. It just...

Scott: So, this Intel was the hot company for a period of time.

Pat: Yeah. In the late '90s. Late '90s.

Scott: '80s and '90s.

Pat: So, watch what's chasing dividends.

Scott: Yeah. And look, if you own whatever the hot company is today, no company stay on top forever.

Pat: None.

Scott: Maybe if you're young and you can afford to withstand some losses, you still have time to make it up, that's maybe one thing. But if you are close to retirement, at retirement, and you are overweighted in any one particular company, you need to make sure that your lifestyle is not going to be impacted if that thing takes a major hit. And if it will, then you need to really ask yourself, why in the world are you overweighted in this particular company?

Pat: What affinity do you have to that particular company? The stock doesn't know you own it.

Scott: We have many stories of people that were overweighted in one particular... Even, look, back to Enron, people talked about their 401(k)s were wiped out. Your 401(k) was only wiped out if you're in Enron stock. If you were in the S&P 500, it wasn't wiped out.

Pat: I have no sympathy for those people.

Scott: None? You have a little sympathy for them. What do you mean you have no sympathy? You have some sympathy.

Pat: I'm trying to think whether I have sympathy for them.

Scott: If someone's on their deathbed of lung cancer and they've smoked all life, do you still have some sympathy for them?

Pat: I do. And I did.

Scott: Okay, well, there we go. So, you have sympathy for these people, too. We all make poor choices in life.

Pat: Okay. All right.

Scott: It's just in different areas. Right?

Pat: Right.

Scott: We don't want people to make poor choices in the financial area.

Pat: Thank you, Scott, for bringing me back to reality.

Scott: All right. Let's hit some calls here. Let's go to Oregon. We're talking with Jimmy. Jimmy, you're with "All Worth's Money Matters."

Jimmy: Hi, guys.

Scott: Hi, Jimmy.

Jimmy: So, okay, I got a question here, for crying out loud. It probably follows right up with what you were saying about making good choices. I'd like to know when I can start withdrawing from my TSP and the 401 account that I have. To be clear, I've worked for the federal government for about 38, 39 years. I had a mid-level more or less. So, that's pretty much my retirement savings. I have retired, I'm 66 years old, I retired in 2020. And I pretty much worked all my life, for crying out loud. And I have what I think is a pretty good number.

Pat: What's the account balance?

Scott: Okay, yeah. I could give you all my numbers. I have $445,000.

Pat: Okay, and that's in the Thrift Savings Plan. So, for the rest of the listeners, that's the equivalent of a 401(k) or a TSA if you're a teacher, of 403(b), or 457, but it's for federal government employees. So, it's called a Thrift Savings Plan. So, you have $445,000 in TSP.

Jimmy: Yeah, just about $450,000. That's correct.

Pat: Okay, and what else do you have?

Jimmy: I got $20,000 in cash, and I guess that's all I have.

Pat: All right.

Scott: Well, you've got a pension.

Jimmy: I have a pension, you bet. I'm sorry. I'm waiting for you guys to ask the questions. I don't want to be a jerk here.

Pat: So, you're asking when you can start taking out. Do you need income?

Jimmy: That's the big thing. I'm doing okay with my pension and my Social Security.

Scott: How much on an annual basis does that raise?

Jimmy: You bet. So, I'm making about $44,000 between my pension and Social Security.

Pat: You're married?

Jimmy: No, sir.

Pat: And is your you own your home?

Jimmy: I own my home. I have a balance on it at 3% of $155,000.

Scott: Do you have children?

Jimmy: No, sir.

Pat: What's the value of the home?

Jimmy: $530,000.

Scott: Do you have any intention of moving in the next 10 years or anything?

Jimmy: No, sir.

Pat: So, on the Thrift Savings Plan, take income if you want. I mean, if you want to start taking... I probably wouldn't go...

Scott: I would recommend taking income.

Pat: Yeah. What's the point?

Jimmy: Okay, fellas. So...

Scott: I mean, no one's dependent upon you, right?

Jimmy: No.

Scott: You're not married. You've got no heirs to worry about leaving anything to. Obviously, we need to make sure that your money... Go ahead.

Jimmy: I have a life insurance I would leave to my nephews and stuff. And I want to leave a little bit there and there.

Scott: You will leave some. No one''re not going to run all your money. And you want to make sure that you've got enough money for your old age, and should, some point in time, you need some care and those sort of things.

Pat: Tell me about the life insurance. Is that employer-sponsored life insurance, or are you paying for that out of pocket?

Jimmy: That's employee sponsored.

Pat: Okay, so you're not paying for it.

Scott: And does your pension have cost of living adjustments?

Jimmy: Yes, sir.

Scott: I believe so. Yes. Because it's an older one. So, that's going to continue to keep pace with inflation.

Pat: Yeah. Go ahead.

Scott: If you're my brother, I would say take 5% out of that.

Pat: I wouldn't go that high.

Scott: I would.

Pat: Tell me why.

Scott: His pension is going to continue to grow with inflation, as will Social Security. He's got quite a bit of equity in this house. Even if we find ourselves 15 years down the road, 20 years down the road, and his IRA has not...or his TSP has not'll still continue to grow, but not grown enough to make up for the inflation difference. There's all that equity in his house.

Pat: And he'll be 81 years of age.

Scott: That's correct.

Pat: In which case most people... We had a call last week with the people are 79, he said, "They don't spend much money anymore."

Scott: That's right. That's right. We were trying to give him more money, he didn't want any more money.

Pat: So, yeah. Okay, I was going to say 3%. Scott says 5% distribution. So, 5% distribution would be $22,500 a year, 3% distribution would be $13,500. Sure.

Jimmy: Yeah, 14 at 4% is 18 grand. Will that jack me up with taxes.

Scott: No.

Pat: No, you'll be fine.

Scott: No, because $44,000, so you'd be at $62,000 a year, gross income. You've got a standard deduction of roughly $14,000. So, now we're looking at really $48,000 of taxable income. And for a single individual, you're barely in the 22% tax bracket. Up to roughly $45,000, you're still in the 12% tax bracket so.

Jimmy: All right.

Pat: Yeah. So, would you spend the money?

Jimmy: What I would do is I would just have...I'd most likely expand a little bit more on my life, maybe some trips or so.

Pat: There we go. Let's go.

Scott: Yeah, I think you should.

Pat: Let's go. Have fun.

Jimmy: I'm healthy. I'm fit as a fiddle. Thank God. So, yeah, I'm able to do that kind of stuff.

Pat: You know why you save the money, right?

Jimmy: Yes.

Pat: To spend it.

Scott: For the future.

Pat: The future is here.

Jimmy: I appreciate that. The story is deep, and I didn't have anything to begin with. So, I'm very serious about that. So, I didn't have anything to begin with. I was never left anything. I've been a scrapper all my life.

Pat: That's right.

Jimmy: Now I have something, and I don't want to have to go back to a ways...I'm just nervous, you know?

Pat: No, I understand. But look, this will over the next 15 years, if you take a 5% distribution, we would expect the account balance to be...assuming that it is allocated correctly, which should be at least 60% equities. You'll have a higher account balance 15 years from now than you do today. Right? And you'll be 81 in which case you're like, "I don't want to go anywhere." Or maybe you will, maybe you'll be one of the rare 80 year olds. I had a client of mine that quit skiing when he was 84, snow skiing when he was 84. He just said it was too hard on his knees. I'm like, "Holy smokes, I'm 60. What's going to happen to me?"

Scott: Because your knees already hurt skiing, right?

Pat: I know. Yeah, go ahead, do it. Do it. And you'll get nervous. And the reason you'll get nervous is because that's why you have it. You show me someone that doesn't care about money, I'll show you someone that doesn't have any. So, your reaction to this is absolutely normal.

Scott: And set up an automatic withdrawal.

Pat: On a monthly basis that goes to your...and withhold 15% in taxes on it.

Scott: Yeah, to be safe. And a few percent for the Oregon tax.

Pat: Yes.

Jimmy: I'm doing now with the...I'm writing it down, so that's fine. I heard what you said about the allocation. I got super nervous here lately or a couple of years ago, but I feel I did the right thing. And I have most of my money in cash right now, 20% in stocks, and the 20% that's in stocks is in the S&P and the international.

Pat: It needs to be at least 50-50.

Jimmy: 50-50. Okay

Pat: 50-50. And look, you dodged a bullet that was reaction...

Scott: The challenge is...well, part of it, when you're working, you're like, "Oh, well, this is for my future and all that." And then when you're retired, two things. One is now the future is now, right? So, you've arrived at the future. But secondly, you have all this time to sit and think about it and fret about it, look it online, "And what happened today? And what my account balance is right now? And oh my gosh, I lost $18,000 just yesterday. Holy smokes. What's this? If it does this every day, I'm going to be broke in 28 days," right? I mean, your mind can do all kinds of crazy things, and you know it's irrational because you know markets go through cycles, and they always come back higher. Intellectually we know that.

Pat: Well, every portfolio...

Scott: Psychologically is what...that's what gets.

Pat: Every portfolio has three components, the investment, the tax component, and the investor component. And the two we can manage for very well are the tax component and the investment component. What's very difficult to do is to manage for the investor. And you've got two things that feed into it, right? You've got an intellectual and you've got an emotional component. And most people have a tendency at points in time to let one or the other steer.

Jimmy: So, the follow up on that... I appreciate that immensely. I understand that from some of the reading I've done about the markets, obviously, coming back very well. I think it happened here in 2008, like super crazy afterwards, right?

Pat: Yes.

Jimmy: I don't have all that time left anymore.

Pat: I know, but you have...but that's the thinking... You've got... If you're fit as a fiddle, right? You've got 20 years according to life expectancy tables.

Jimmy: Yeah.

Pat: Right? So, you have plenty of time. Go ahead, spend it. Spend it and put the portfolio 50-50.

Scott: Jimmy, when I started in the industry in July...I don't remember times I've said this before, but when I started...and I remind myself when I get nervous, I'm a human too. When I started in the business in July of 1990, the Dow Jones Industrial Average was roughly 2600. Today it's 33,000 or somewhere in that range.

Jimmy: Yeah, yep.

Scott: Through all the bad, the dot-com blow blowup, the financial crisis, the worst crisis since the Depression.

Pat: Republican presidents.

Scott: Democratic presidents.

Pat: Republican Congress.

Scott: Yeah, right. All those things. Oh, my gosh, look what happened on election night. I better get out.

Pat: Anyway, we appreciate the call. Enjoy.

Scott: Yeah, appreciate the call, Jimmy. All right. Let's continue on calls here. We're in California talking with Tim. Tim, you're with "All Worth's Money Matters."

Tim: Good day, gentlemen. Thank you for everything you do. Such good information.

Scott: Thank you, sir.

Pat: Thank you.

Tim: Yeah. Just really appreciate all the stuff you put out there. I had talked...spoke with you in the past. And we were talking about some aspects of my portfolio. And you educated me that I needed to have an umbrella policy on my home, which I have since done. And my question to you is, should I have some kind of similar umbrella policy attached to my vehicles?

Pat: It is.

Scott: Yeah. An umbrella policy will cover any gaps that you might have in your coverage. And typically, before you get underwritten for an umbrella policy, you have to have certain limits on your auto coverage.

Pat: So, was the same...

Scott: $250,000 or whatever the limits are.

Pat: Is the same insurance company on your umbrella is on your automobile?

Tim: Okay. So, they did ask me that information, but my home insurance is under a different company than my auto insurance. But they did...when I did the umbrella policy under my home insurance, they did ask me the information that pertain to my auto policy.

Pat: That's right.

Scott: Yes, you probably had to attest to that. And if you end up having auto insurance that has a lesser liability limit, and you're in an accident and exceed that, the umbrella policy probably will exclude...

Pat: That gap.

Scott: Yep.

Pat: That gap.

Tim: That gap. Got it, got it.

Pat: That's right.

Scott: And the reason the umbrella policies are so inexpensive relative to this coverage... I don't remember how much we told you. Did we tell you to get 2 million or a million, or?

Tim: A million.

Scott: Okay. And the reason... What was it a year, $400, $500?

Pat: Less.

Tim: In fact, I think it's even a little less than that. Yeah. I think it's right around $300.

Scott: Okay. And the reason behind that is that chances of a claim hitting them they think are practically zero.

Pat: Just like a 30-year-old healthy person buying life insurance, term life insurance.

Scott: It's practically zero. But only if you keep those limits high on your auto because they don't want to bring it back to the lowest limit.

Tim: Got it right.

Scott: So, you're fine. You're fine.

Tim: Perfect. Perfect. Yeah. I was just a little concerned about that. And I know that they had asked that information, but I wasn't putting two and two together that that actually did then covered for that whole...anything that could happen in the auto as well. I was just thinking about my home.

Scott: Perfect.

Tim: Fantastic. Thank you.

Scott: Appreciate the call. Thanks for being a listener.

Pat: Yeah. And for those families that don't have an umbrella liability, especially if you have young children, young children, or teenage children, or people on your auto policy that are driving, you want, depending upon your net worth, commence amount of...

Scott: Yeah, it's kind of a rule of thumb is you want an equal to the amount of what your net worth is. Up to a point, anyway.

Pat: Up to a point. Up to a point. And the reason behind that is if you're in an accident above, or you're children, or God forbid, any people that are driving your automobile, above your limits, the first thing that an attorney will do is do an asset search on you.

Scott: See if you have anything.

Pat: See if you have anything.

Scott: If you're broke, they're like, "Sorry, you don't have a case here because you can't get blood out of a turnip." But if they do an asset search and think, "Oh, look at this, guy's got all these assets here, he's got this house, got a rental house."

Pat: "And wow, good job."

Scott: "We're going after him."

Pat: Yes. Or her.

Scott: Or her, or them.

Pat: Them.

Scott: They.

Pat: They.

Scott: Go after they. Okay. We're not... We're stopping right there at that one. We're... Pat's laughing. We're out of time. It is a crazy world sometimes.

Pat: Scott.

Scott: Huh?

Pat: This is the first half of the show.

Scott: Okay.

Pat: Did you have so much fun?

Scott: We're taking a quick break. When we come back, we'll take some more calls. 833-99-WORTH.

Pat: Are you tired of this already?

Scott: No. I was confused. 833-99-WORTH. I'm looking at a clock. I thought it was... Anyway, we'll be back in just a couple moments. This is "All Worth's Money Matters."

Announcer: Can't get enough of "Allworth's Money Matters?" Visit to listen to the "Money Matters" podcast.

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

Pat: Pat McClain. Thanks for sticking with us.

Scott: Yeah. And you were laughing at me that I thought the show was over.

Pat: Even though Scott Hanson wants to leave. You were just confused.

Scott: I get confused sometimes.

Pat: You get to the moment.

Scott: And I looked at the clock. We do have a clock...I mean, we...although we have more podcast listeners today than we have terrestrial radio, we still do broadcasts on a couple of stations. And we're grateful for the listeners that join us there. Anyway, to join our program, we'd love to take your call, have you as a guest, our contact numbers 833-99-WORTH. Call and we'll schedule a time to have you on. If you're listening via podcast and you think, "How do you call the show?" You just call and we schedule a time that we are in the studio and take your call. You can also, if it's more convenient for you, just send us an email at, and we'll get some time set up.

Pat: And it's easy.

Scott: We're in Illinois talking with Mike. Mike here with "All Worth's Money Matters."

Mike: Hi, Scott and Pat. Thanks for taking my call. We really enjoy...we started listening to your podcast a while back, and really enjoy listening to you guys.

Scott: Thank you.

Pat: Appreciate it.

Mike: So, my question is this. I'm 55, my wife's 57. She stopped working about a year and a half ago, and I was laid off about six or eight months after that. I had gone and run my own calculations, and done all the...I think we're okay. I guess the question I want to ask is, do we need to go back to work? It's probably a question you get all the time from everybody.

Scott: And I'm sorry you're laid off, too. It's never easy in life to get laid off, but it's sometimes even more challenging when you've got retirement a few years in focus. And it is forces you earlier than you had planned.

Pat: Before we answer the question and dig into that, do you want to go back to work?

Mike: So, I'm not opposed to going back to work, but I like to have that freedom of not going back if I don't have to. And/or find a job that's something that really interests me, then I can do that. But if I don't have to, that's an option I'd like as well.

Scott: And what were you were earning on an annual basis, gross salary, total compensation before you were laid off?

Mike: About $200,000.

Pat: And what was your wife earning before she quit?

Mike: About the same.

Pat: So, $400,000. Okay?

Mike: Yeah.

Pat: All righty. So, the numbers. Your home?

Mike: We own the home. No debts. It's about $600,000.

Pat: Okay.

Scott: 401(k)s, IRAs?

Mike: We have a 401(k)s between the two of us, about $4.5 million. We have a Roth of $30,000. And then some savings in a brokerage account and checking account about $220,000.

Pat: Any investment properties?

Mike: No.

Pat: What are you living on now?

Scott: Is there a pension or anything?

Mike: So, we've been... No. I mean, we had more in the savings and we've been using that.

Pat: And how much are you using?

Mike: So, was keeping track actually last year, and our monthly expenses are around $11,500, $12,000 a month. And that's where we've been... So, we've been using...we have enough cash to pay for that.

Pat: Got it. So, you said $12,000, so $150,000 a year. So, the gross number pre-tax would be about $200,000 and $4.5 million. Would be what, 3.5% distribution.

Scott: That's 4.4% distribution.

Pat: Are you planning on staying in the home the rest of your life?

Mike: Right now, we're planning on staying. If anything, maybe downsize. I don't see us going anything...we're not looking to go up in anything.

Scott: And then Social Security's going to kick in in handful of years.

Pat: How old was your wife when she quit working?

Mike: 56.

Pat: Okay. And how much money is in her 401(k)?

Mike: $204,000, I believe.

Pat: Okay. And how old were you when you quit working?

Mike: So, I was just just under 55. So, you're asking because of the 401(k)s?

Scott: Yeah.

Pat: Correct. So, yeah, so you understand the role. If you're 55 or older in the year in which you separate from service, there's no IRS penalty or state penalty on distributions from 401(k)s.

Mike: Yeah.

Pat: Okay.

Scott: And I wouldn't want to go through 2023 only living off your savings without taking any distributions from your 401(k), either just an outright distribution or a Roth conversion, just because otherwise you're going to have zero in taxable income. So, then you'd be losing out on an opportunity to have some income that's not taxed, some that's taxed at 10%, some that's taxed at 12%, some at real low rates.

Pat: So, you would get to the point that you could probably take most of the $200,000 off of the 401(k)s. I don't know, Scott, how much I would be comfortable digging into that $220,000 in savings.

Scott: Well, you don't need that much in savings.

Pat: There's a number there between...

Scott: But I would probably convert some to a Roth rather than just spend it and draw down the savings.

Pat: And draw down the savings?

Scott: Yeah, at least to some level.

Pat: As long as that money's in the 401(k) and not in an IRA, it's completely liquid for the both of you.

Scott: That's right.

Pat: And so, the answer to your question is, can you retire? As long as you're over time, how is your 401(k)s allocated?

Scott: I mean, it's at about a 4% distribution.

Pat: You're fine.

Scott: And you're not on Social Security yet. You will be on Social Security.

Pat: You're fine.

Scott: I think you're fine.

Pat: You're fine.

Scott: The only thing that could derail it is you and making some bad calls when it comes to your investment, and trying to do some poor timing choices.

Pat: So, how is your 401(k)s, how are they allocated?

Mike: So, they're currently about 65-35, 65 stocks, 35 [inaudible 00:32:59]

Pat: And have you been consistent in that allocation over the years?

Mike: More consistent in the last couple of years than in the beginning. We were higher. We were probably 80-20, 70-30.

Scott: Beautiful. All the right answers. All the right answers.

Pat: Then I think you're fine.

Scott: You're absolutely fine.

Pat: And if you want to go work at the nursery, or whatever, hardware store, whatever you want to do, I think that's fine.

Scott: Yeah, you're absolutely fine. Just this year, starting tomorrow, you want to start taking money out of those 401(k)s to live on.

Pat: Or Roth conversion.

Scott: Run the numbers, figure out what amount that is, convert some to a Roth, and live off your savings. Or the combination. You're looking at me like I'm crazy.

Pat: Yeah, well...

Mike: So, are we looking at up to $90,000? I think, isn't that for joint...

Scott: Yeah, joint, but before it goes from 12%...and I'm not sure how the Illinois tax works. It's about $90,000, but you also have a standard deduction of roughly $28,000.

Pat: Yes. So, you could go to $120,000 roughly. And so, you want to do that. And by the way, so some of the 401(k)s allow you to set up monthly distributions, some of them will only let you take one distribution a year, some two distributions a year. You might want to just chunk it out, put it in a high yield money market account, and live off that.

Scott: Or... Yes. And maybe set it up so it's just a monthly...well, you know what your expenses are.

Pat: Yeah, but, Scott, I don't much...I would...what savings number would you be comfortable? You say draw that down. If he starts doing lots of money conversions to Roth, he's pushing himself into a higher tax bracket, and he may not need to.

Scott: No, I'm not saying. I'm saying keep the tax...the gross tax the same.

Pat: Okay.

Scott: But instead of spending those dollars, it'd be like taking...if he could take $100,000 from his savings and put it in a Roth IRA...

Pat: You'd do that.

Scott: I would do that. You would do that too.

Pat: I would do that.

Scott: Yes, you would. I know you would.

Mike: By putting into a Roth IRA, is there restrictions or anything on that? Because wasn't there something where you can't touch for five years or any of that, or is that not [crosstalk 00:35:14]?

Scott: Yes.

Pat: Yes. Yes, correct. But that doesn't apply to people that have $4.5 million. Well, if that's the rule, does apply.

Scott: You're not going to spend those dollars.

Pat: You're not going to spend it.

Scott: The Roth...

Pat: Those are long, long, long time away. But you should start that distribution today. Start the distribution today. And quite frankly, based on where the Social Security trust fund is today...

Scott: I would take at 62.

Pat: I would take it at 62, both of you.

Mike: Okay, because the calculator says it's about $230,000 each.

Scott: Yeah. So, actually, I wrote a...

Pat: Let's talk about this.

Scott: I wrote a letter to the editor at "The Wall Street Journal," which did not get published, unfortunately. And because there was an opinion piece on...maybe it wasn't an opinion piece, maybe it was just...on Social Security and why people should delay their benefits, which I think for the majority of Americans, yes, delay the benefits till age 70 because you need haven't saved enough, you need the income. But for those that have saved really well, you, the article said, "Oh, the high-income people, they can benefit even more from it." And it never took into consideration that there's a chance that benefits will be reduced for high-income retirees.

Pat: Which it will.

Scott: Well, it might.

Pat: Well, come on. Really, Scot?

Scott: Well, I'm just saying, if you're going to run a calculation, the calculation is you've got to use some assumption of that future payment. If it's a calculation based upon what's the net present value of a bond issued by Apple Corporation, you still think, "There's some possibility that 28 years from now they're not going to be able to..." whatever, there's a mathematical calculation that goes into that. The same sort of thing needs to happen when it comes to...

Pat: So, the calculator just used raw numbers, Mike. It didn't say, "Oh, the Social Security trust fund is going bankrupt..."

Scott: 2032, 2033, 2031.

Pat: "And by the way, we're going to have to do a 30% cut across the board." So...

Scott: Take the 22%.

Pat: So, that the 83-year-old widow that's living on $900 a month income goes down to $600. It didn't say that. Because we know that they're not going to cut the $900 month pension to the 83-year-old widow. But what we do think is, at least what I believe, Mike's pretty well off. Look at him. He's got all these assets, he's living as a fat cat in his $600,000 house.

Scott: Got millions of dollars in his retirement.

Pat: Millions in the bank.

Scott: It's about time he pays his fair share.

Pat: It's you fair share. So, that's why you take it at 62.

Scott: How dare someone with millions of dollars demand maximum Social Security benefit?

Pat: So, Mike, the idea behind it is if you believe that you will be impacted by a change in how Social Security distributions are calculated, either based on net worth or income...

Scott: We might be wrong.

Pat: Scott. We may be wrong. He's 55. Let's say he lives to be...

Scott: My rule of thumb...our rule of thumb, if you need Social Security for your lifestyle in retirement, you defer as long as possible. However, conversely, if you've done a great job saving, you're quite well off, and you're not going to be required to live don't need Social Security for your standard of living, which you don't based upon our calculation, then take it as soon as you can. It's assuming you're fully retired at 62. If not, then...

Mike: I have one other quick question.

Pat: Sure.

Scott: Yeah.

Mike: We have a few things coming up, like some home maintenance things, windows and stuff like that. And we may need a new car, things like that. Can I take that out of the...should I take it out of the cash, or stuff I'm taking...pulling out of the 401(k)? Or should I not even do that and defer that?

Pat: No, I would take it out of the cash.

Scott: Got to take it out of cash.

Pat: Right? Which is...

Scott: But we need to calculate your expenses, what it's really costing us, not just on a month-to-month basis, but we need to take into account, "We need to get a new roof every 25 years. We need to get a new car." All those sort of things.

Pat: But even, Scott, but even at 5%, right? We're going to run to the Social Security gap, even if he was taking 6% there.

Scott: Social Security is going to provide quite a bit. Even at 62. That's your income level.

Pat: Yes. Your income level. So, you would use that. So, start that distribution from your 401(k)s right away. That should...monthly. And any excess repairs around the house, cars, you take it out of savings. And then let's start... How long have you been without work?

Mike: About eight months.

Pat: And how's it going emotionally?

Mike: That's a good question. It's going okay. We're still maybe just finishing kind of the vacation phase of it, if you will. We get up when we want, do what we want at the time. But we're starting to look into what do we want to do, what should we be doing? We've got friends that 60, 62, 65 have retired, and then they end up with medical issues that they didn't [crosstalk 00:40:41]

Scott: Yeah. It's always that balance, isn't it?

Mike: And so, that's kind of what's weighing on us as well. I've had a chance to help take care of my father, who has some medical issues, which was really great. But the two of us, we're trying to figure it out.

Pat: Yeah. And so, start that income. If a job pops up that you want, that you want, that fits into your schedule. And I have a belief that actually people don't really want to retire as much as they want control over their schedules. That's my belief. Most people... And I do have a question for you. Your wife's was a planned retirement. The mere fact that you were let go, did you ruin your wife's retirement by being at home with her all that time?

Scott: She's been dreaming.

Mike: No, no, no.

Pat: No?

Mike: No, it's worked out well. It's worked out well so far.

Scott: Financially you're fine.

Mike: Good.

Scott: You are more than fine.

Mike: That's great to hear. Because my wife, she's been a little nervous, especially when we see all red on the markets. [crosstalk 00:41:48]

Scott: Yeah, tell her not to look at it.

Pat: Yeah. Yeah, but she didn't get nervous when you saw all the big black, though. And that's just the cost of the big black is the red now.

Scott: This is how the markets go. It's what they do.

Pat: And the only way you're going get to black...

Scott: You have some nasty winter storms in Illinois, but that's just what happens.

Pat: Yeah. And then...

Scott: And then you have about two weeks of the nice weather in the spring, and about two weeks of nice weather in the fall. Then the summer's hotter than Hades. Then you're good to go. Sir, I appreciate the call. Congrats on your great savings, by the way.

Pat: Yeah, appreciate the call.

Mike: Thanks guys. Appreciate it.

Scott: Pat, we were talking about Social Security. And I read an article just the other day about someone was...this was an opinion piece making an argument that they should lift the limits on how much tax one pays into Social Security.

Pat: I saw that.

Scott: Because it's roughly 150 grand, somewhere in there now.

Pat: Yeah, 160,000.

Scott: Raised it to 400,000 or so, or no limit whatsoever. All wages should be paying Social Security tax. The difference is there, there's a maximum benefit you get from Social Security. So, the way it is now, everyone who contributes, you get Social Security income in proportion to what you contribute. Actually, it's already skewed to lower income people. So, it's already skewed some to lower income people. But let's assume for a moment that someone's making $300,000 a year. Their Social Security tax would essentially double if they increased, but their benefit would not change one iota.

Pat: I understand. But you're pretending like it's a balance sheet item that the money is actually going into this fund...

Scott: It's Social Security trust fund.

Pat: Yes. You believe...

Scott: Al Gore's putting it in a lockbox.

Pat: Okay, but your thinking is, "Okay, it goes into this thing and then it comes back out to those people that actually..." That's no longer treated like that.

Scott: I understand.

Pat: It is a political football. It is a political...

Scott: I personally think it would be very damaging to...

Pat: To what?

Scott: Lift it. So, there's no cap any longer. Most high-income people are going to...they'll find tricks around that. I hate to say it.

Pat: Of course.

Scott: Yeah.

Pat: Most... Let's change that compensation. How they...

Scott: I guess they did...they changed Medicare on that, didn't they?

Pat: Yeah, they did. They moved it from a cap from 125 to unlimited on income. And then people said...

Scott: And then put the Obamacare tax in place too.

Pat: All right. Yeah.

Scott: All right, let's continue on with calls here. We're in New York talking with Harry. Harry, you're with "All Worth's Money Matters."

Harry: Hi, Scott and Pat.

Pat: Hi, Harry.

Harry: Thank you for hosting this very educational podcast and for taking my call.

Pat: Oh, our pleasure. What can we do to help?

Harry: I have a follow-on question about what you said about the timing for taking Social Security benefits in retirement in the previous call. So, I'm 63 years old and retired in 61. And most of my currently income right now is tax shelters offset by past real estate investments, real and paper losses such as depreciation. And therefore it does not contribute to my taxable income. Now this passive and tax sheltered income is more than sufficient to cover my living expenses. And this situation is likely to persist for another 5 to 10 years. And therefore I'm unlikely to need to rely on Social Security income any time soon. But my question to you is, in your opinion, if legislative changes do occur to Social Security in the future, will they affect somebody like me?

Pat: Okay, so this is a great question. This is an unbelievable question. By the way, this wasn't staged that we had these questions back to back. But I had mentioned earlier a wealth, right? To the last call...

Scott: Previous caller, essentially all his savings was in a tax deferred account.

Pat: Yes. And so, the question is...

Scott: So, his income is going to be all taxable.

Pat: Yes. What is your income?

Harry: The current income, if I just take the real estate income, it's about $8,000 a month. But I have some additional dividends and stuff which I don't take out as income.

Scott: On your tax return, what's the adjusted gross income amount or the taxable amount? If you can remember.

Harry: Oh, in round numbers, it's probably around 110K.

Pat: Okay, and what's your net worth minus any liabilities?

Harry: In round numbers, it's probably around $6 million.

Pat: And obviously, this income, you're using appreciation. It's going to come home to roost at some point in time, maybe.

Harry: Right.

Pat: Unless you hold some assets to death.

Harry: Right.

Pat: How much money do you have in IRAs?

Harry: In round numbers, it's probably around $2.2 million.

Scott: Oh, so quite a bit there.

Pat: Yeah. And are you married?

Harry: No. I have no kids.

Scott: So, let's assume that this...over the next 12 years, when your required minimum distributions kick in, your retirement accounts are going to double in value.

Pat: So, that would be a 6% annual growth. What did he say his IRA...

Scott: $2.2 million. So, $4.5 million when you're 7 and a half. And you're required minimum distributions at that point are roughly $150,000 a year, somewhere in there?

Harry: Well, I'm planning to convert all of it to Roth.

Scott: Are you doing so now?

Harry: I've already done some, and there's only a small amount left. Probably around maybe 700K.

Scott: So, most of that is in Roth IRA?

Pat: So, most of that income that you're showing up at taxable income is the conversion from IRA to Roth IRA?

Harry: No. I'm not taking any income right now from my IRA.

Pat: When you convert from an IRA to a Roth IRA, that's a taxable event.

Harry: Yeah, I paid the tax already.

Pat: Yeah. When did you convert? What years? Like last year, the year before, the year before that?

Harry: In the past three years or so.

Scott: But your taxable income is only $110,000?

Harry: Oh, no. I mean, when I do convert, it's much higher.

Pat: That was the question. Okay, all right.

Scott: We're just trying to get some...figure out your...

Pat: Yeah. Yeah. So, the question that you, I guess, asked is should you start Social Security now or what?

Scott: What do you think?

Harry: My guess is that they...if the government makes changes, they will probably take into account the fact that the depreciation is going to come to roost, and therefore some of the tax sheltered income will be protected. I mean, if you look at the situation, right, in another 10 years, if the depreciation comes home to roost, I may want to take...I may want to have a higher Social Security income than what I can get right now. Right? Do you understand?

Pat: Yeah.

Scott: I understand what you're saying.

Pat: I don't know if I agree.

Harry: Well, I'm going to need money...

Scott: So, you're making the best...

Harry: I'm going to need money to pay for the recapture.

Pat: Yeah, we understand that. But how that affects your Social Security is something completely different.

Scott: We have no... Look...

Harry: Yeah, I understand.

Scott: Right now, here's how it is set up right now. [inaudible 00:49:22] benefits are staying the same. If you're a higher income retiree receiving Social Security, 85% of those benefits are considered taxable. So, you have to return some of it back in the form of taxation. And the Social Security trust fund is going to go broke some time between 2031 and 2034. There's different estimates that come out.

Pat: If nothing is done.

Scott: And if nothing is done at that point, there's going to be across the board reduction. I think it's 22%, last I read. It's statutory. That's what we've got in store coming for us. So, it is our belief that Congress will make some changes, so that there's not an across the board 22% reduction. What changes they make we don't know. So, all we can do is speculate, surmise, guess. And part of our planning on the guesswork is, first of all, if you wait till 70, there's all those years you forego...foregone that income, number one. Number two, you also need to make it past a normal life expectancy for it to make sense for you to defer. But you throw in the fact that you have $6 million net worth today at 63. There's a good chance that in 10 years from now, your net worth is $8 million, $10 million. Odds are it's going to continue to go up.

Pat: And you're going to be able to control some of your income for only so long. So, I'd take it today.

Scott: I would. But if you would not...I mean, it's your call.

Pat: Yeah, I would take it today. Based upon all the known facts of what you shared with us, and what is happening with the trust fund, and the environment of taxation. Look, no one's going to have any sympathy for you, Harry. No one.

Scott: I will. I don't think... I mean, it's not going to be.

Pat: Well, he did save, worked hard, and paid more taxes because of it.

Scott: Yes, but I don't...I mean, I don't like the way the progressive tax structure is already.

Pat: Okay, but you're in a minority. Let's just going to go with that.

Scott: Correct.

Pat: You may not be in a minority with the people that listen to these calls.

Scott: No. Do you think Elizabeth Warren will feel sorry for him? A multimillionaire.

Pat: No. So, Harry, if I were you, I'd take it today.

Scott: Yeah. So, hey, that's...

Pat: Our opinion, but that's what he called for.

Scott: But it's our opinion. And we won't know until we see the future.

Pat: And if I were him, I'd take it right now. I'd be on their website this minute.

Scott: Most people should wait.

Pat: Most people.

Scott: Most people don't have $6 million saved for retirement. So, anyway, it's been great having you with us. Certainly appreciate you joining us for this week's program. And we've got some great tools and resources at our website, if you have been in a while, We'll see you next 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.