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March 9, 2024 - Money Matters Podcast

Social Security and legislative risk, the importance of tax diversification, where to invest extra income, and a conflict of interest solved.

On this week’s Money Matters, Scott and Pat start the show by explaining how proper financial planning can overcome legislative risk to a portfolio. A Philadelphia man with a tax issue hears a solution he never thought of. Scott and Pat revisit a caller who needed to have a tough conversation with his father-in-law. Finally, advice for an Arizona man who wants to know whether he is on the right path to retirement.

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: Right, both myself and my co-host here are both financial advisors, certified financial planner, charter financial consultant. We help people like yourself on a daily basis and broadcast here on the weekends being your financial advisors on the air. Yes.

Pat: So this last weekend... I don't know how it came up, but my third child, my son, has a degree in economics, works as an analyst for a private equity firm, which by the way, what a grind. Holy smokes. Grind.

Scott: Yeah, there's certain areas of finance, it's like a rite of passage. It's kind of college hazing moves to the business world.

Pat: That's right.

Scott: Don't they just kind of try to abuse these young kids, it seems like. Investment banking, private equity.

Pat: But for whatever reason, Social Security, we started talking about taxation of Social Security.

Scott: With your son?

Pat: Yeah. How old is he, 24, 25? Which I thought was...I don't know how the subject came up. I don't remember it. But how, you know, the Social Security. And I said to him, "Well, first of all, I don't think you're going to get Social Security when you retire. So just consider it another tax you'll get no benefit from. And second of all, your thesis is mistaken." Because he said, "Well, yeah, I was talking to my friend's dad and he's thinking about taking Social Security." And he said, "I was reading an article about the analysis." And I said, "You have completely ignored legislative risk. You talked about taxation today, but ignored legislative risk." And if you're going to talk about social security...and if you've listened to this show at any length of time at all, you know we talk a lot about legislative risks with not just Social Security, but taxation, period. Right?

Scott: Well, you look at...our deficit spending is real now. I mean, it is dramatic.

Pat: And it's mind-boggling.

Scott: Correct. And in the past, our interest payments were so little, it was almost like it didn't matter. Now it matters tremendously. With higher interest rates on the debt, it's further deficit spending just to make those interest payments.

Pat: Not only on a federal level, but we're in the state of California.

Scott: Well, California's doing so well, though. We don't need to worry about any taxing...

Pat: But every time we talk about taxation, there is never a discussion involved around cutting expenses, very rarely about cutting expenses.

Scott: All the government agencies, they're all super efficient, though, Pat.

Pat: The point being though, the reason I brought this up is this big unknown. And I was thinking about a guy that called us, what, last week or the week before that had done this analysis about saving this $2,500 in a tax credit. And I thought to myself...

Scott: On a Roth conversion. Last week's call, yeah.

Pat: Yes. When I went away from that call, I was thinking to myself, tons of analyses were done about today with little thought about diversification...

Scott: Of tax planning.

Pat: ...of tax planning because much like the markets, you have no idea.

Scott: Here's the reality. The tax code is so complex that, yeah, Congress might focus on one area. Let's assume they increase tax brackets across the board. Okay? Just the tax number, 12 goes to 15 and 22 goes to 25 or 26. So they just bump them all up. There are other places to look into to say, is there another way we can defer? Are there some depreciation for depreciation? I mean, there's just... So you can't look at it in a vacuum and say, "Well, if this happens, this is going to be the impact here." And I think there's real risk in some sort of excise tax in the future.

Pat: On accumulated savings?

Scott: Yes, we call it a wealth tax.

Pat: But it could be an excise tax where they both look at the Roths and regular IRAs.

Scott: Who's to say Congress says that if you pull out more than 10,000 a year from a Roth, you're going to pay an excise tax, or 100,000, or whatever the number is. There's no...I mean, they can...

Pat: Well, they have.

Scott: In the past they have.

Pat: And who do you tax?

Scott: Those that have the money.

Pat: Why?

Scott: They've got the money.

Pat: They don't care how you got it by the way. There's no like, oh, hard savers, hard workers, none of that. I mean, look at what they did with student loans. Oh, we're just going to forgive them.

Scott: Well, didn't Biden just forgive a bunch of other ones?

Pat: Yes, but we're just going to forgive. We're not going to forgive the guy that came right out of college. A guy came and fixed my garage door a couple weeks ago.

Scott: I had a garage door fixed lately. I had a terrible experience. Tell me here about your experience.

Pat: This guy... Oh, great experience, little expensive, which is weird because it was called affordable.

Scott: That should have been your warning right there, discount garage doors.

Pat: But he started the company the day after he graduated from high school. He was 20 years old. He'd been doing it for two years, started his own company. The day he graduated, the day after he graduated from high school, very proud of him, bought the truck, saved up money, worked as a busboy.

Scott: And you felt great about having him do your garage door.

Pat: I really did.

Scott: Of course.

Pat: And I'm thinking, well, if he made that investment and decided not to go to college...

Scott: Well, there's no forgiveness of debt. We're transferring the debt from the student loan to the taxpayers of the United States.

Pat: That's correct. There's not forgiveness. It's a transfer.

Scott: So to your point, here's this guy, chose not to go to college, hustled, 20 years old, hustled to get his business going, worked his tail off, and his tax dollars are going to go to pay off those student loans.

Pat: So back to the Social Security. The thing that we preach about, diversification of a portfolio, you also really need to take that into account on diversification of taxation of a portfolio as well.

Scott: Yeah, and oftentimes, Pat, we'll see people come to retirement age and 80%, 90% of their retirement savings is in a traditional 401(k), IRA rollover, right?

Pat: There's not a lot of planning around that.

Scott: There's some, but it's...

Pat: It's minimal.

Scott: You need 50 grand for a new car and suddenly it's like, "Well, it's gonna cost me 70,000 because of the tax implications."

Pat: Yes. So keep that in mind when you're putting together your own financial picture. Diversification, diversification. diversification.

Scott: Yeah, it gets... Well, at some point in time, Pat, the government is going to have to reign in the deficit spending. Because the interest alone, if you keep run this out the next 20, 30 years, the interest expense alone will be much greater than any other expenditure.

Pat: But the idea at points in time has been that we could grow our way out of a deficit, but I think we're past that. We can have economic growth as a percentage of the deficit, as a percentage of the GDP, that you really could make the argument that we could possibly grow ourselves out of a deficit in terms of an increasing deficit. I don't think that's going to happen.

Scott: No, I don't think so either.

Pat: I don't think it's gonna happen. The bigger an economy gets, by the way, the harder it is to grow it.

Scott: So yeah, anyway. That's shared.

Pat: Good talk. Thanks for joining us

Scott: Well, to go into the future and not think about these things is imprudent and unwise.

Pat: Correct.

Scott: But let's take some calls. If you'd like to join us, our contact number is 833-99-Worth. You could also send us an email at We're starting off here in Philadelphia with Ed. Ed, you're with Allworth's "Money Matters."

Ed: Yes, thanks for letting me call in. I have a question.

Scott: Thank you.

Ed: I have a question for you guys. I am retired. I got, I believe, more money than I need for retirement. And most of my income from retirement is in dividends. I have an IRA, a traditional IRA that's worth over $500,000. I'm slowly trying to bring that down before the tax law changes at the beginning of 2026. My question for you two is I have a lot of money, I believe, a lot of money, sitting in my checking account at the end of the year. And for the last 30 years, I've been reinvesting most of that back into the dividend-paying stocks. And my tax bill is getting pretty big.

Pat: How old are you, Ed?

Ed: I'm 63.

Pat: Are you married?

Ed: Yeah.

Scott: And how much do you have in stock and what's your stock portfolio value that are paying these dividends?

Ed: Just under $9 million.

Pat: And you only have $500,000 in your IRA?

Ed: Yes.

Pat: And why dividend stocks? Just out of curiosity.

Ed: I've been factuated with dividends ever since I was like a teenager.

Scott: It's worked for him.

Ed: Oh, they have. They have.

Scott: It's worked for you. I've been like, oh they have, they have. Yeah, yeah. Not gonna try to get you changed on that one. It's clearly worked for you.

Pat: And what's the problem?

Ed: Yeah. My problem is that at the end of the year when I'm done paying all the bills and the taxes and everything I still have a lot of money, I believe too much money, sitting in my checking account. And for the last 40-some years, I've been taking a lot of what's left over at the end of the year and putting it back into the dividends that reinvest into the dividends, but my tax bill now is getting to be pretty big.

Pat: Well, if I gave you a solution, you're not going to like it. I'm going to tell you that you should quit buying dividend-paying stocks.

Ed: And do what? Just leave [crosstalk 00:12:14.261] ...

Scott: How about buy some stocks that don't pay dividends?

Pat: Buy some growth stocks.

Scott: My guess is that your portfolio is highly tilted towards value companies. You could just buy an index.

Pat: You're not managing this portfolio in a tax-efficient manner.

Scott: No, not at all.

Pat: There's been no attention paid to the tax efficiency of your portfolio. None. Because I would make the argument that you should have 50% of your portfolio in non-dividend-paying stocks. And the reason behind that is, obviously for current taxations, also because at death, appreciated assets under current law receive a full step-up in basis.

Scott: So you can avoid the tax.

Pat: Completely. So I appreciate the fact that you've got...this investment philosophy has worked for you. It would have worked for you if the portfolio had been growth stocks as well. In fact, it would have worked better.

Scott: How much do you have in cash?

Ed: Right now, excuse me, right now I got about $90,000.

Pat: Oh, well that's not bad.

Scott: No.

Pat: Have you started gifting? Do you have children?

Ed: Yes.

Pat: Have you started gifting to them?

Ed: Yes.

Pat: And the maximum stocks?

Ed: I give them money right out of my checking account.

Pat: Are they in a lower tax bracket than you?

Ed: Yes.

Pat: Why not give them stocks?

Scott: I'd give 'em stocks.

Ed: Never thought about that. Okay.

Pat: Well, you did call our show. Well, you did call a financial show to get an idea of something that you're not doing, right? So what happens, here's the reality. If you came into our office today, we would look at this portfolio and the first thing we'd do is we'd look at the allocation. My guess is, as Scott says, it's mostly...

Scott: Highly allocated towards value.

Pat: And large-cap value would be my guess, large-cap value. So we'd look at the portfolio, and the first thing we'd do is say, okay, where are the risk in the asset allocation itself? Well, you know, if I had a square with nine different squares inside of it, yours would be mostly concentrated in the top left hand. We'd say, let's try to actually mimic more of what the market is, which is growth, mid-cap, small-cap. Then after we said, okay, this is really how it should look. How can we build this so it's as tax-efficient as possible?

Scott: I'd use a direct index technology on this.

Pat: That's right.

Scott: You build a synthetic index and it's managed for tax, you do some tax loss harvesting.

Pat: That's right. And so what happens is that...and by the way, if some of these terms are new to the listeners or yourself, it's because they weren't around 10 years ago.

Scott: Three years ago.

Pat: And the reason they weren't around was the cost of friction, which is the cost of trading, was oftentimes more expensive.

Scott: Now it's nothing.

Pat: It costs nothing. So what we call friction is the cost of buying and selling. And the other thing is that we use technology today that didn't exist five years ago, certainly didn't exist 10 years ago. We use that to actually manage portfolios. So, you know, technology in the investment advisory world has changed. It's the democratization of investments by the use of technology. It brings private office-type services to the middle class or the high net worth, which you wouldn't be ultra-high net worth, but you'd be considered a high net worth client. So what you're doing, and you're probably doing all of this yourself, correct?

Ed: Correct.

Pat: And you probably don't want to turn this on to anyone else. My advice to you is you're missing out on technology.

Scott: Not only that, I mean, so we've mentioned one idea. You're gifting your children, that's an easy one. Just give stocks now, the appreciated ones. They're in a lower tax bracket. They could probably have...if they plan it right, they'll have no capital gains when they sell it. But you also might say, maybe we take some portion of this and use it to churn a remainder trust and get a nice big tax deduction from that today with a guaranteed income tomorrow and as we do that, the tax deduction, we can turn around and sell some of the existing stocks that we have now and encourage the capital gain...I mean, realize the capital gain, but have them wash out each other and then we can invest in something that's much more tax efficient. I mean, you've got a lot of options here in front of you, but it would mean moving a little bit away from having 100%...

Pat: Large cap value.

Scott: Yeah, large-cap value, which is what you're investing in.

Ed: And I do have a lot of growth stocks in the IRA.

Pat: Which by the way is exactly opposite. You've got it completely wrong. Like if I said, let's make this tax efficient, I'm like, "Let's call Ed," or, "Let's lose tax efficiency in this portfolio, let's call Ed." Because your growth stock should be in the IRA...

Scott: Your dividend should be in the IRA.

Pat: Excuse me, your dividend should be in the IRA and the growth stocks should be in the brokerage account.

Scott: Look, Ed, you've done a great job.

Pat: You're a great saver.

Scott: Good saver, this has worked for you, right? But it's at a point now, now you've created a new problem for yourself and it's the taxation of this, right? Because you've got probably got, depending on what kind of dividend stocks, you might have $400,000 coming in that you have to pay taxes on each year in dividends, right?

Ed: A little bit more. Yes, a little bit more than that. Yeah.

Pat: It tells us it's even worse than we suspected in terms of large-cap value.

Scott: Here's what I would do. You're my brother. I'd say, "Hey, Ed, go interview two qualified financial advisors, certified financial planners. Give them a minute." Go meet with two different ones and just hear what they have to say. Hear about their ideas. And if one resonates with you, just say, "Look, why don't you do a financial plan?" Pay for them to do a financial plan that they can come up with all these strategies to show you the impact it could have on you financially.

Pat: The money you would actually save in taxation would more than pay for the cost of professional asset management on this account. That's a promise.

Scott: Oh, yeah, for sure. I mean, you can manage this account for what, four-tenths, five-tenths of a percent, and cut your tax bill in half.

Pat: Yeah, yeah. Promise. Promise.

Ed: That's good. I'm glad I called.

Scott: Well, I'm glad you are too. And by the way, you've done well, so... Listen, if you did nothing, you're still going to be fine. You're still going to be fine. That's right.

Ed: I'm not worried about outliving my money. I'm worried about what you guys...what I called in about is my tax bill is getting huge.

Scott: Yeah, well, I get it.

Pat: And you have to take a different approach than the approach that you're taking today. And you, truly, you could get this tax bill...

Scott: And you might choose to take some portion, some of your stocks each year and put them in a donor-advised fund. And you can dole out to some charities in the future.

Pat: And you may actually choose to actually accelerate how you're actually giving this money to the children and use up part of your unified credit. Right? I mean, no one says that you can't go in and give the kids a million dollars today, because you can. It's just less money that you could pass on at your death. And by the way, we'll wait to see what happens in the next two years. We're going to see lots of people...

Scott: We'll know more come the elections.

Pat: Yeah, you know, we've talked about that a couple times in the last couple of weeks, Scott. This election...

Scott: Yeah, Ed, hey, appreciate the call.

Pat: Thanks. [inaudible 00:20:56.680]

Scott: We're on different topics, Ed.

Pat: This election's a big deal in terms of taxation.

Scott: Yeah, because it was six, seven years ago when Trump came in. He lowered taxes across the board. So we had a lower tax bracket and increased the amount that we can give to typically family, give to other individuals, either while we're living or upon our death. So it went from $5 million to...

Pat: At the time it was $11 million each. Now it's 13, 14, something like that.

Scott: But these tax breaks are set to expire the end of 2025. So January 1st of 2026, the way it's structured now legislatively, they'll revert back to what the tax law was before. So part of what Ed would do. So but if this happens, a lot of people are going to get hurt. The wealthy, yes, hurt more than others, but middle class are going to get hurt as well...

Pat: If it expires because it's going to revert back to...

Scott: So there's already talk in both parties of there's going to need to be some change because no one wants to be in Congress and have all your constituents angry with you because their Tax bill went up. So there's going to be some sort of change to this, whether they make some things permanent or it's another temporary thing. But nobody knows quite what's going to happen for the high-income people or the estate plan.

Pat: Scott, if Ed was sitting in our office, we would involve him in a sophisticated estate plan almost immediately, as well as the asset allocation and the tax ramifications. And the reason is, first of all, if you don't have an estate...if you've got an estate of any size at all and you don't have an estate planning attorney that you have a relationship with now, you're not going to find one in the year 2025 that's worth the time. I mean, I've talked to estate planners, that are like, "We're worried about the year..."

Scott: Well, yeah, there's a lot of people that are saying, "I'm going to wait to see what happens come November."

Pat: And if it goes against them, they believe that there's going to be change in the tax. You call your estate planning attorney, they're like, "Bill Smith. I've never worked with you, Bill Smith. Unfortunately, I have no room on my calendar for you, Bill Smith," or Ed.

Scott: I think there'll be some attorneys that'll figure out how to crank through this... Are you kidding me?

Pat: I would prefer to have a relationship...

Scott: They'll just increase their fees. "Okay. I'm pretty busy, but for X dollars, I'll squeeze you in."

Pat: It's almost like a supply and demand, like how market forces work.

Scott: I mean, who knows what's gonna happen in the future with some of these tax law changes? So I don't think we know. Well hey, right now it's time for... We do a segment periodically, Pat, what do we call this?

Pat: House call.

Scott: House call.

Pat: I don't know why we call it House Call.

Scott: What is the house call?

Pat: I don't know.

Scott: What do you mean you don't know?

Pat: I know what a house call is, but why do we call it House Call? This is the part of the show where we revisit a call from the past where someone called and asked us a question and we gave advice. And, for us, you know, we've been doing this for almost 30 years. I always wondered, I wonder if they took the advice or whatever happened.

Scott: That's what I'm talking about. Why don't we do this? Why don't we do this?

Pat: Why don't we do this? And so we went to the people that put our show together, Pietro and Jason, and said, can you follow up with some of these people and get them on the show again and find out if our advice was just complete garbage, whether they acted on it, or whether it was actually worth listening to? And then you guys can wager on whether...

Scott: And they call it House Calls.

Pat: And we call it House Calls. There we go.

Scott: And several weeks ago, we spoke to a California guy named Michael. He's a husband and a father. He listens to our show, but he's not one of our clients, but he found do I say...maybe an uncomfortable situation with the intersection between money and family getting mixed together. And I'm sure that just only pertains to his family because there's never any...

Pat: No conflict over money.

Scott: But, let's listen to a clip of that call.

Michael: One thing that has been recently proposed to me by my father-in-law. So he is an insurance agent who sells insurance.

Scott: Oh, no.

Michael: Oh, no.

Scott: No, I just... Your father-in-law wants to sell you something?

Michael: Oh, he already did. So he...

Pat: How much do you love your wife?

Scott: That's exactly right. This is getting really complicated. We haven't even gotten deep and it's already complicated.

Michael: Yeah, so he felt... Right now I'm putting money into an IUL and he's really, really aggressive about the [crosstalk 00:26:02.016].

Scott: IU...

Scott and Pat: Indexed universal life.

Pat: For the rest of the listeners, indexed universal life. So he's aggressive. How?

Michael: So I have other retirement plans. I do have a 457 with the state and I put money on the side and I also invest in like, you know, just CDs and money...some of my funds are in a money market. So he wants me to try to be as aggressive as I can with my IUL because he kind of thinks that, hey, 457s, 401(k)s and things like that, they're not as good. So I should kind of be throwing all of my money into the IUL.

Scott: Is he licensed in other areas of financial advice? Is he a certified financial planner?

Michael: I'm not too sure, but you know whenever I do bring anything else up like maybe just putting funds into a Roth IRA and just kind of managing it myself he says that it's not a good idea because, you know, how the IUL they have a floor.

Scott: That's right.

Michael: They have, you know...

Pat: one. Michael, Michael, Michael, let's just step back for a minute. Let's forget he's your father-in-law. Let me ask you a couple questions. Do you have any children?

Michael: I have one.

Pat: Okay. And how old is your child?

Michael: She's turning two this year.

Pat: And how much money do you have saved already in everything but the IUL?

Michael: Altogether I have about $100,000

Pat: Okay.

Michael: Somewhere around there, yeah.

Pat: Okay. So here's what happens is in these IULs. They're indexed universal life, and they have a floor, which is a return.

Scott: They're really complicated products.

Pat: And they have a cap as well, and they don't pay dividends on the underlying index as well. So let's just... And by the way, each one of the indexed universal life will actually have its own index that it's actually measured against. It doesn't have to be the S&P 500. Many of them actually have a combination of different indexes that they measure themselves against. What they're designed for is for those people that want to have some stock market exposure and want some downside protection. But the reality is the cost associated with that...

Scott: I think they're designed for those that don't want to take the time to go through the education process to really understand how financial markets work and, two, for whatever reason can't get to the point where they're comfortable seeing things fluctuate in value.

Pat: Thank you, Scott.

Scott: I don't view it like insurance, like homeowners insurance, like your house burns down.

Pat: I love insurance. I love certain types of insurance. I love umbrella insurance. I like auto insurance. I like homeowners insurance. I like disability insurance. I like life insurance. I don't like pet insurance. I've never insured anything, an appliance or a stereo or anything that Amazon offers me.

Scott: That's right.

Pat: Never. Never, right? I don't take insurance when I'm playing blackjack twenty-one. Don't like that type of insurance either.

Scott: How often do you play blackjack?

Pat: That's a joke. So, you don't need this.

Scott: You need life insurance.

Pat: You need a million dollars...

Scott: And this is his father-in-law.

Pat: That's right. But just say to your father-in-law... First of all, it's unfair for your father-in-law, quite frankly, to suggest this to you.

Scott: It's relevant. It is.

Pat: It's unfair.

Scott: I know, but it is.

Pat: Okay, well, look at-

Scott: We all have families.

Pat: But just look. I would just say if someone was trying to sell me something, I would just... If my brother sold aluminum siding, I would say, "I think that's awesome."

Scott: It's the year 2024. I don't know if people are still using aluminum siding.

Pat: What was that movie?

Scott: "Tin Men."

Pat: "Tin Men." If my brother was selling aluminum siding, I would say, "I'm glad you've found a career that you love. I don't want any. I don't need it. I don't think I need it. It just doesn't work for..."

Scott: It's his father-in-law.

Pat: I understand. You don't need to buy anymore and by the way...

Scott: You're much better off doing a Roth before you buy more of those.

Pat: That's right. So you need a million-dollar term life insurance policy. What do you make a year?

Michael: Close to $100,000.

Pat: You probably need $600,000, $700,000.

Scott: A million bucks. How much is this IUL for?

Michael: For $500,000.

Pat: And how much are you putting in it?

Michael: Right now I'm putting in monthly $750.

Scott: $750 bucks a month?

Michael: Yes, $750 a month. Yes.

Scott: Oh, my gosh.

Michael: And so he also added on there too for long-term care. So I did, you know, take a look at it because it is now at about a year and a half-ish. So I did kind of take a look at the statement to see what the breakdown and everything was. And yeah, after looking at it, it's kind of ridiculous, you know, how much I'm paying.

Pat: Yeah, because the long-term care only covers the premiums to keep the insurance in force if you become disabled.

Scott: Most people don't need life insurance their whole life. They need life insurance when they have people dependent upon them. Typically for the vast majority of Americans, it's when kids are at home or still in the middle of college.

Pat: Does your spouse work?

Micahel: Yes, she does.

Pat: And what does she make?

Michael: She's about the same thing as me.

Scott: Does she also have one of these IULs?

Michael: Yeah, so her dad's been doing it for a while. So she's been putting funds into it for a while.

Pat: You have 10% of your income going into an IUL. Do you realize that? 9%. You're putting $18,000 a year.

Scott: Your father-in-law is a he's a fringe advisor, right? So if you go out and looked at the universe of financial advisors in the United States, his recommendations, that was the very fringe ends.

Pat: So don't buy any more of this stuff. Scott, say it.

Scott: Well, look, I've got a father. Well, that's... If I were in your situation, I'd probably say, "Hey, Bill, at this stage in life, I think it would be cleaner and easier if I had a financial advisor outside of the family. It's just too uncomfortable for me and I hope you respect me as a man. I love your daughter. I'm going to do the best to take care of her the best I can. I just think it would be healthier for me if I had a financial advisor that was not family. In the same way, a surgeon would not want to operate on their child's son-in-law, I just would feel more comfortable having someone completely independent."

Pat: I gotta agree with you, Scott. You're not... And you wouldn't call our show if you thought this was the right thing, Michael.

Michael: Yeah. And so I mean the next step for me would be know, because there's a surrender value or surrender charge on it, so just pay that out and get out.

Scott: I would start with that conversation and see where that leads.

Pat: And look, you've got to... You said you worked for the state of California, correct?

Michael: Yes.

Pat: Does your spouse work at the state?

Michael: Yes, she does as well.

Pat: Okay, so you've got great pensions already. You have access to 401(k), 457, right, You can buy term life insurance through your employer, almost everything you need.

Scott: I would argue to have term of life insurance on the outside should they at some point in time separate service.

Pat: Almost everything you need.

Scott: A term life insurance is next to nothing.

Pat: And you can set up a 529 for the kid. You've got $18,000 a year going to this garbage. I agree with Scott. You need to have the conversation with your father.

Scott: And I would not talk about anything about insurance, that's all irrelevant. The product's irrelevant, it has nothing to do with the product, it's just, you would feel better having someone that's not family, and that way, when you're together, we don't have to have any financial discussions, we can just enjoy one another as family.

Pat: Right. You should know this. You should not own it. That's the way to start. And listen, you know, if he fights back, he's probably not going to disown you. I mean, you've got that grandchild.

Michael: Yeah. And it's his only grandchild, so...

Pat: Okay, there we go. There's leverage. That's all we needed.

Scott: That's a lot of leverage.

Pat: That's all we needed.

Scott: Okay, well we have Michael with us now. Michael, welcome back to Allworth's "Money Matters."

Michael: Hey, Scott and Pat, good to be back. How are you guys doing?

Scott: Good

Pat: Good, good. So, I don't remember... We did a lot of calls, but I distinctly remember this call because as we were answering, I thought, how uncomfortable is this for you?

Scott: Of course.

Pat: So, tell us, where did it go? Are you still married?

Michael: Still married. So the conversation with my father-in-law went as good as it possibly could. The outcome, probably not as good.

Pat: What do you mean?

Michael: A quick summary, you know, so I sat down with him, you know, took your guys' advice, told him, "Hey, you know, I feel more comfortable keeping finances separate from my insurance. And, you know, I kind of want to go into a direction of either handling the finances myself or working through someone else just so I don't go through family." You know, he spent about an hour just going over the things with me, trying to convince me that, hey, this is your best option, right? So then I kind of just listened through that. And then in the end, I'm like, okay, you know, but I still want to keep these things separate. So, you know, please, you know, just let me know what my options are. And then in the end, he kind of gave up, said, "All right, this is what you can do, right?" And this is where I mean, you know, the outcome, not really so good for me, just because with the IUL, the surrender charge was just way too much. So after taking a look at it, if I were to surrender it, it'd probably take about 90% of my cash value.

Scott: That's correct.

Michael: So just giving you like figures, I had about $13,000 or $14,000 in it. If I were to surrender it, they would only give me back about $1000. So I just decided to, hey, I'm just going to stop making payments on it. I'm not going to pay the premium or anything. No money's going to go into it anymore. And I'm just going to have them use my cash value to pay the premiums on my life insurance. Right.

Pat: That's right. So you're gonna draw down the cash value over time so you don't take it as a sudden hit to the surrender value.

Michael: So I basically have, you know, $500,000 of coverage over about five or six years. And after that, you know, I would look into term life insurance once all of that is all gone.

Scott: It doesn't sound like a bad outcome to me.

Michael: It's not too bad. The only thing is that, hey, you know, I'm paying about $150-ish for the, you know, monthly for the premium. Whereas, you know, if I were to go to term anywhere around 50 or 60, right? So it's not too bad, but it's, yeah.

Pat: You know, I would actually go out and buy the term policy today. I wouldn't wait the five years.

Michael: Oh, really? But wouldn't that just...I would have double coverage.

Pat: Yeah, you're going to have more coverage.

Scott: Or lower the face amount.

Pat: Or you could lower the face amount.

Michael: Well, I did ask him as well to lower the annual premium. I think they can only do that I think once a year and it doesn't take effect immediately. So even if I do do that, they only let you decrease it a certain percentage. I think it's about 25%. So it would lower my premium to let's say $120, but I'm [crosstalk 00:38:22.848].

Scott: I'm just kind of confused here.

Pat: So you're not paying anything else into the policy. You're just blowing through the cash value in order to make what they call pure insurance inside the contract. So if you have a $500,000 contract, life insurance contract, which is called the face value and you've got $15,000 in cash, you have pure insurance of $485,000 in the contract. So what you're doing is you're saying, okay, rather than take the hit, I'm going to try to make this a tolerable situation and just... But our point is if you lowered the face value...

Scott: Which is the death benefit.

Pat: For the death benefit, the face value to $400,000 or as low as they will allow you to, you're going to allow that policy to run longer.

Michael: Right. Right. Right. That makes sense. So, so ask them. And you can call the company directly. You don't have to go through the agent, by the way, you could call the company directly, which would be my recommendation. Because when we...

Scott: I would get make sure you're insurable and get term insurance.

Pat: That's why I said you should probably get the term insurance now is because we know that you're insurable now and for that little bit of money that that insurance would cost, quite frankly... And how many children?

Michael: I have one.

Pat: Okay. Plan on having more?

Michael: Yes, one more. Hopefully not twins or triplets.

Pat: Okay, well, I don't think... Well, anyway. So I would go out and buy another half million dollars of term Insurance, even while I was running through this, just because of the insurability issue. And it's not that expensive. And a million dollars of life insurance is not that much. And then call the company directly and say, when can I lower my face value or the insured amount, and how much? Do not talk to the agent...

Michael: Got it.

Pat: ...about that.

Michael: That's good advice.

Pat: The agent is your father-in-law.

Michael: Yeah.

Scott: But make sure you have term insurance first.

Pat: That's right.

Michael: Got it.

Pat: Make sure you have term insurance.

Scott: Because otherwise, if you can't get it, at some point, what would end up happening is you'd be back to paying the premiums on this thing to keep the insurance in force.

Pat: That's right. Okay?

Michael: Yeah. And you know, I had some other questions too that I kind of threw at you guys last time when you guys gave me some advice. So all of the money that I was putting into the IULs I'm basically going to be throwing it towards my 457 now. So I have two questions. Is it better for me to open up a Roth IRA right now and contribute to that instead of the 457, just so I have more options as to what I want to invest in? Or should I throw it all into the 457?

Scott: You have a brokerage... You're in the state of California, right?

Michael: Correct.

Scott: You have a brokerage window option.

Pat: Yes.

Scott: So you're not stuck with just the limited menu they give you. You work for a municipality?

Michael: The state of California.

Scott: Okay, so yeah, you've got's called a brokerage window. You can invest in anything you want.

Pat: That's right. And you can do it on a Roth basis.

Scott: Any publicly traded security.

Pat: Roth basis. So it's called an investment...or they go by self-directed brokerage accounts.

Scott: A brokerage link.

Pat: Or brokerage link or...I don't know.

Scott: PRCA.

Michael: Okay. Okay, I need to look a little bit more into that.

Pat: Yes, yes, yes. So, yeah, you've got tons of options. So you could do a Roth IRA, you're just making it more difficult for yourself.

Scott: I like the Roth 457.

Pat: The Roth 457 in a brokerage window. All righty?

Michael: Okay, got it. Thank you guys so much.

Pat: Appreciate it. Thanks.

Scott: And I'd love to see someone show me the difference of... Anyway, I'm not going to.

Pat: We made our point.

Scott: Boy. And it's you know, it...

Pat: It what?

Scott: Nothing.

Pat: Come on.

Scott: Look, there are places that I'm a big believer in life insurance. I'm a big believer in insurance. I have a lot of insurance. I don't love paying the premiums. But I have homeowners insurance, I have auto insurance, I have an umbrella policy, I like all those things. I have life insurance, disability insurance, dental insurance is not really insurance, it's just a mechanism to pay and get lower rates at the dentist, right? Health insurance feels that way, and you only have insurance if you really have something catastrophic. But I am a fan's just that there's oftentimes, some of these policies are mis-sold. Because if I'm an insurance agent and I'm looking at somebody sitting across the table that needs insurance, I could either sell them term insurance, and make a few hundred dollars in commission, or I could sell them a whole life policy or something equivalent to that, and make them pay...

Pat: Six, 7, 8, 10 times.

Scott: That's right, or more.

Pat: And Oftentimes it's used incorrectly in front of other investment vehicles that are actually better for the client. But don't get us wrong. There is a place in this world for annuities...

Scott: That's right. Whole life.

Pat: ...whole life, universal life.

Scott: And if we see the estate exemption drop down from where it is today, you're going to see a lot more ordinary... I mean, it seems like a lot of money, but it's...

Pat: Second-to-die policies.

Scott: You've got a home and some assets and suddenly the...

Pat: Or even asset-based life insurance policies with the Medicare, with long-term care writers on there. But the index universal life or the indexes, they scare me because you're supposed to hold this thing long enough that you're going to be able to go through the cycles.

Scott: That's right.

Pat: And what's the point of actually...

Scott: When you've got an 18-year surrender charge on a life insurance product.

Pat: Yeah, what's the point of actually putting downside protection in this thing and paying for it when you're going to live through the market cycle anyway? I mean, I have a variable universal life policy that I've owned for 30 years. I bought it when my children... I bought it before they were born and it's done great.

Scott: Well, it's because it's been in equities.

Pat: It's 100% equities.

Scott: Not an equity index.

Pat: 100% equities and it goes up and down in value and I quit putting premium payments into it, I don't know, five, six years ago and it's self-supporting, increasing face value. In fact, I looked at whether I should gift it out of my estate, but it's a collated terminal reserves.

Scott: Let's go to Arizona and talk with Richard. Richard, you're with Allworth's "Money Matters."

Richard: Thank you, guys, very much for taking my call. I'm excited to be talking to you.

Scott: Yeah, good. Thanks.

Richard: So my question is just kind of a general overall financial picture. I've been listening to you guys for the last couple of years and maybe a little bit prior to before that, just trying to get my ducks in a row here for, you know, set up for my kids and retirement and everything like that. So listening to your show, I think I know the deal here. I'll just go through and start getting you guys some figures if you're good with that.

Scott: Thank you.

Pat: Yep, thank you.

Richard: Okay, I'm 39 married. My wife currently stays home mostly, she works very part-time so her money isn't really factored into the overall equation. We have two kids, 8 years old, 10 years old. I work for municipal public safety out here in the Phoenix area. Salary it kind of varies just depending on overtime, but it's it can fluctuate somewhere right now around $140,000 to $150,000 a year. I am pension eligible as early as in six years. I don't plan to take a pension that early, but I guess the option will be available to me hopefully then. I have a 457 with my employer. I have currently about $390,000 there. I maxed that out, 100% in equities as I just...and especially, again, listening to you guys, I kind of view my pension as the bond portion of the portfolio. So I just have all that in equities.

Pat: Thank you.

Richard: We have a retirement health...excuse me, a reimbursement account through our employer as well.

Scott: HSA?

Richard: Not at HSA, we have that also. This is kind of a separate account. So it's called a retirement health savings, but I think they're classified as like health reimbursement accounts that can be used... I think it has a little bit more, like you can use them, say, towards premiums whereas your HSA I don't think you can. So I have about $25,000 in that. My HSA has about $56,000. I do have life insurance.

Pat: How's the HSA invested?

Richard: Again, I have that all in equities. So I have about 40%...

Scott: As do I. I'm older than you are, so I think it makes sense.

Richard: Okay, okay. I'm like, I hope that's okay. And I keep...I think our maximum out-of-pocket for my current healthcare provider is like $7,000. So I just keep that in reserve and then invest everything else.

Pat: Okay?

Richard: And life insurance through the employer for myself, I have $500,000. That's accidental death and dismemberment. $250,000 on my wife for the same thing. And then voluntary life, $390,000 on myself, $195,000 on my wife. And then through just on my own, I have a $750,000 term that expires...I got it a long time ago, it expires in 2032, so in about 8 years. So we own our own home. We owe about $116,000 on it. It's currently 15 year, 2.5%. Home value is roughly $550,000, $575,000 right now.

Pat: Okay?

Richard: I've got $75,000 in a high-yield savings. And then 529s for the kids. I kind of had some money earmarked for this for quite a while. I just sat on the sidelines and didn't do much with it. But I finally put some money into the 529s for them. So each one of them has right around $8,500 in a 529. IRAs, this is just old from previous employers rollover 401(k)s. In the traditional IRA I have $3,300 and then my wife, she was previously a teacher before we started having kids, so she has a 403(b). The money's still in there and that's around $5,800.

Scott: Are you calling for a job? I mean, I'm looking at this, we're both kind of, we're looking at each other kind of chuckling because...

Pat: You're textbook perfect. How much did you say you had in brokerage accounts?

Richard: I don't have anything in brokerage. I just have a 457.

Pat: Yeah, yeah put a little...

Scott: What do you have in the bank?

Richard: In the high-yield savings, we have about $75,000.

Scott: Yeah, perfect. Yeah. What is your question for us?

Richard: So, I'm looking for other opportunities and just, you is, I guess, like the life insurance thing. I don't know if I'm overinsured, underinsured.

Pat: You're not overinsured. You're not overinsured.

Richard: Okay.

Pat: You're probably underinsured a little bit, but not dramatic. You can put more money into the 529 plans, but you know that already.

Scott: And then insurance...I mean, I don't need to tell you this because you'll figure it out. Your insurance needs is probably, you know, the next 10 to 12 years to get your kids raised and then you're going to be pension-eligible should you die. I don't know what the survivor benefit is on someone in your...

Pat: And I assume you're in law enforcement?

Richard: Not law enforcement, I'm on the fire side.

Pat: Okay. So, yeah, if you increase that term insurance to $1.5 million, wouldn't hurt. And as you are well aware, maybe some more money in the 529, but you knew that, you didn't have to have me tell you that.

Scott: Are you contributing to Roths?

Richard: I am not. No, so that's another thing. I guess if I was going to look at anything outside, I guess, would that be a recommendation to look at? probably convert this traditional IRA to a Roth and, you know, not go into a brokerage?

Pat: Yeah, but, you know...

Scott: But you you can you can do a Roth just a regular...

Pat: 457

Scott: No, but in addition, right?

Richard: Yeah, and I did check with the employer that we have that option.

Scott: Right now you can do a Roth IRA, given your income level, you can do a Roth IRA for yourself, a Roth IRA for your spouse. You can do it for 2023 and 2024. So take some of the money that you've got in your high-yield savings and open up two Roth IRAs.

Richard: And then I can go back in 2023, you saying?

Scott: That's correct. Yeah, that's correct. You have until April 15th to do that.

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.