Male Speaker: 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: That's right. Looking forward to our program today. We've got some calls lined up and we've got some good topics as usual. Myself and my co-host, both financial advisors. Do we need to be saying every time the start of a show who we are and what we're about?

Pat: Well, for the radio.

Scott: Because it's all kind of old school. And radio, you ever listen to some radio shows, then listen to a podcast, and they have a break and it comes back immediately, but then they repeat the topic they're on because they're so used to what they've done in radio for years.

Pat: I haven't noticed that.

Scott: Anyway, I don't know why I'm bringing that up.

Pat: Okay. So financial guys. Last week we said that we were going to talk about the subject and we never got to it because we ran out of time and you're like, it's a podcast, how do you run out of time? We still format for radio.

Scott: And...yeah.

Pat: For the time being.

Scott: I don't know how people do three-hour podcasts, two-hour podcasts, personally. Anyway, we're not podcasters, we're financial guys.

Pat: Yeah, we're not. Listen, I'm not. I'm a blogger. And then I was going to become a vlogger and then an influencer, but I couldn't get anyone to listen to me. So I just do this podcast. So we talked about this new fiduciary rule on IRAs. So savers...and here's the kind of...let's go back there. So the industry is comprised of a traditional model advisor. They call themselves advisors now, but they are in a commission on transactions and on recommending products.

Scott: And oftentimes it's hard to see what that commission is. If you buy a bond through a commissioned broker, they make money on what they call the spread, the difference between what they sell it at and what they sell it to you at.

Pat: What they pay, yeah. No difference in the same way that Safeway makes their money at the supermarket.

Scott: And oftentimes you cannot tell how much they are making. You can ask them and they say, "Oh, on average, we make blah, blah, blah, blah." But you don't know on individual transactions what they're making.

Pat: And so that's kind of a traditional model. And from a legal standpoint...

Scott: Or people selling insurance products.

Pat: Correct. From a legal standpoint, they have an obligation to do what's suitable for you.

Scott: Is this suitable?

Pat: Suitable.

Scott: Whatever that means. Right?

Pat: Will this help them accomplish their objective, I guess?

Scott: And historically, the suitability would be a series of questions where you were trying to build a defense for your recommendation in case it comes back at you.

Pat: Incidentally, the mortgage industry, maybe it's changed since the financial crisis, but up until the financial crisis, there was no suitability requirement. That's why people sold all these crappy mortgages. It didn't matter if it was suitable for the people or not.

Scott: That's right.

Pat: Oh, you have no job and you want to...?

Scott: So the suitable versus best interest, right? Or what they call a fiduciary standard. So in your company 401(k), and you see this quite often, 401(k)s being sued because they weren't doing in their employees' best interest. They were using a fund that was more expensive.

Pat: Or their own stock.

Scott: Or their own stock. Or they were lowering the administration fees by using these more expensive funds so that the mutual fund company was helping to pay for the administration fees.

Pat: So 401(k)s are governed by ERISA law, Employee Retirement...

Scott: Income Security Act.

Pat: ERISA.

Scott: 1974, I think it was. Whatever it was.

Pat: But IRAs are not. IRAs are not. So once you leave that protection of the 401(k), 403(b), that environment, employer-sponsored plans, and move it into your own IRA...

Scott: Whether that's at Vanguard or State Street.

Pat: Or an indexed annuity.

Scott: Schwab.

Pat: Or an old-line, old-school, wirehouse broker. Or by, you know, gold, or real estate investment trust or, or, or.

Scott: This is where it could get interesting.

Pat: This is where it gets really...So the Department of Labor, for years, has been trying to actually get their hands on regulating the IRA. So once the money leaves the 401(k), it falls outside of this ERISA rules. A trillion dollars. A trillion dollars a year.

Scott: Gets transferred. People retire.

Pat: And move it into IRAs.

Scott: And move their money out of the 401(k) and move it into IRAs.

Pat: Into IRAs. Many times there's a reason for it. Oftentimes there's not.

Scott: And the Department of Labor has been wanting...well, a government regulatory body wants to do what? Continue to grow and regulate more. That's just the nature of things, right?

Pat: Yes. And so now...And this is supposed to take effect sometime in the next 6 to 12 months. That the same rules that apply on your 401(k) will apply on your IRA. Which means that they have to be held to a fiduciary standard. Which means the advisor, the person recommending this, be it a wire house, a brokerage firm, an insurance company, has to actually act as a fiduciary.

Scott: Meaning put your interest above their own.

Pat: Which will...

Scott: A legal obligation.

Pat: A legal obligation. Which would wipe out huge sections of the annuity sales, index annuity sales, annuity sales, gold sales inside IRAs, real estate investment trust. By the way, so I have a...Scott and I have a slanted view. We act as fiduciaries on the vast majority of the money that we manage. The money that we don't act as fiduciary are typically commissioned products that come to us after they've already been sold to someone. We didn't sell them.

Scott: The client comes here, they've got this annuity product someone sold them. Can you help us figure this out? Yes, we can.

Pat: And we will house them and typically not charge them on them. But technically, we live on both sides of the street, although about 99% of all the business we do is under the fiduciary model. So, the good thing about this is there will be less garbage for the consumer to consume from unscrupulous salespeople.

Scott: That's correct.

Pat: The bad thing about this...

Scott: I mean, maybe. I mean, people break the rules. People break the rules now and get away with it for years.

Pat: The reason I'm conflicted about this is it's more government regulation telling the consumer they're not smart enough to make decisions on their own.

Scott: There is already what's called FINRA, Financial Industry Regulatory Authority. There's the Securities and Exchange Commission. Every state has their own securities departments and insurance departments. They've been trying to push this through for years.

Pat: But are you conflicted on this? I think that overall, it is going to be better for consumers.

Scott: Well, I'm not a fan of another regulatory entity stepping into the fray. I just don't...

Pat: Fair enough.

Scott: It's going to add...it'll add cost to the...

Pat: To the final consumer.

Scott: Yeah, of course. Because it costs money to be in compliance [crosstalk 00:08:05].

Pat: And then how do you regulate it?

Scott: I mean, there's all the additional paperwork that is required. And we've been gearing up for this internally, so we have this additionally. But just when someone's taking money from a 401(k) and putting it in an IRA, there's lots of additional paperwork required.

Pat: And then you have to actually justify.

Scott: Before we invest it, just moving it out of the 401(k), we have to show why it's in the...

Pat: But this is the government saying, you're not smart enough to make your own decision.

Scott: And it's the Department of Labor saying money that you saved...you took some of your paychecks, set it aside while you're working. Now you're retired, you left the workplace.

Pat: And what's the difference between...are they going to regulate contributory IRAs too? And how can you tell the difference? That was the thing that I was...I didn't see it.

Scott: Because it gets blended all the time.

Pat: What's a contributory IRA? It's me putting money in my own IRA without an employer being involved in it, which I do every year. And then I convert it to a Roth IRA, which if you listen to this show any period of time, you'll understand why. So, overall, I don't know how I feel. The idea of the government just telling us...and this is new. This could be very well overreached from the Department of Labor.

Scott: Well, it might end up in the Supreme Court and get smacked down.

Pat: Oh, it's going to end up in court. Earlier versions were struck down in court or narrowed. So this has been going on for 10-plus years, this argument.

Scott: Oh, I remember it. It was supposed to be put into law years ago. It was under Obama, was pushing for it. And then Trump stopped it and then Biden pushed it again.

Pat: But the insurance companies are going to fight this tooth and nail because they sell a lot of indexed annuities into that. And quite frankly, that's the only reason I'm for this, is so that people don't get garbage.

Scott: Correct. Well, Pat, we had a call a couple weeks ago. A woman, she had inherited some money and she bought...actually, this wasn't inherited. She had taken...

Pat: Money out from a previous employer.

Scott: A 401(k). And at age 49, bought an equity index annuity. And I remember thinking at the time that that might have been suitable. Yes, can it help her get to her goals in retirement? But was it in her best interest? And I would be hard to argue...

Pat: If the salesperson, Scott...ask yourself honestly, if the salesperson would receive the same compensation between an index annuity and a fee-based asset management account, which direction would they go?

Scott: Well, they may not be licensed to sell.

Pat: Understand. But which direction would they go? Right. So some people want to get paid that all upfront because it's transactional. Give me that commission all upfront. Oh, and because of that, you've got a 10-year surrender charge. By the way, most people aren't...We changed the subject. Now we're talking about index annuity. By the way, most...

Scott: Well, these are the ones that are going to get...

Pat: That's what's going to get whacked.

Scott: Insurance products.

Pat: How does the insurance company pay for that commission?

Scott: It's manna from heaven, Pat.

Pat: Let's say the commission is 8%. Someone puts in $100,000, and on their very first statement, it shows $100,000 investment in this index.

Scott: Some guy met you at your house or met you at a Starbucks.

Pat: Or the bank.

Scott: Or the bank.

Pat: And they got a $6,000 to $8,000 commission. Where does that money come from? If you have $100,000 on your first account statement and that person gets $6,000 to $8,000 in commission, where did that $6,000 to $8,000 come from? They do the same thing with limited partners, real estate investment trust and LPs, limited partnerships in certain cases, non-traded REITs. Where does that money come from? Anyone? Right? Where it comes from is that insurance company actually goes and borrows the money. Borrows the money. And then pays it back to itself over the length of the contract, which is why there's a surrender charge there.

Scott: When someone says that's not going to cost you anything.

Pat: The reason the surrender charge there is that if you get out of your annuity contract early, they get to recapture that commission that was paid out.

Scott: And the surrender penalty is probably pretty similar to what the commission is.

Pat: Very, very similar than that present value of that is. Right? So they can sell these products without those surrender charges.

Scott: So when you say you're conflicted on the Department of Labor now being a regulatory body on IRAs that were established from 401(k)s, you're conflicted because you think it's good because it's going to stop...

Pat: This type of behavior.

Scott: Yeah, that type of behavior.

Pat: But couldn't FINRA have done the same thing? Couldn't the insurance industry? So now what happens is a whole new body comes into it because they want to fight against it. That's what I'm...All right. Well, you do have a point. Had the other regulatory bodies did their job, yes, we wouldn't be here. The Department of Labor wouldn't be doing this. Or maybe they would anyway.

Scott: I mean...

Pat: Maybe they would anyway.

Scott: But I've read some stuff from the Department of Labor that some find zero value in financial advisors. All they think is that financial advisors are just a net negative.

Pat: We feel the same about each other. Hence the tension between business and government.

Scott: Hey, but we're going to take calls here in a minute. But before we do, Pat, a couple of weeks ago, there was a...Lena Khan, the FTC...

Pat: Oh, yes.

Scott: ...came out with the non-competes, eliminating non-competes, which I thought was really interesting. And I followed this before. I remember actually talking to an elected official and I said, I think it's a real problem when you have people that are very low-skilled trades that have two issues, one is non-competes.

Pat: It's terrible.

Scott: The second is you make it so difficult to get licensed that you're limiting...I mean, people that can...

Pat: Practice their trade.

Scott: But clearly it's a problem in many parts of the country where people have these non-competes. They're not serious skilled people. They're just basic jobs. And they have these non-competes where they can't quit and go and work across the street for a competitor. But there's other jobs that it's pretty important.

Pat: Oh, correct. So if you're running strategy at a technology company, a non-compete might be pretty important. Right? You're running strategy at Google, Meta, small company, little niche player, not big yet. And you're the head of, you know, HR even, or strategy, versus my son...

Scott: And paid well.

Pat: And my son was asked...he went to work as a manager, a regional manager at a landscaping, a large landscaping. They asked him to sign a non-compete. And my son said, "Are you out of your mind?" And they came back and said, "You know, we never enforce these. In fact, we don't even know how we would." But if you want the job, you need to sign the non-compete. And I said to my son, "I'd take the risk. I'd sign the non-compete knowing that they can't enforce the non-compete."

Scott: A lot of them aren't enforceable anyway.

Pat: That's right.

Scott: But most people don't have the finances to try to fight.

Pat: That's a good point. That's a good point.

Scott: Anyway, it'll be interesting to see how this...if the government has the power, some agency...agencies just get bigger and bigger. That's why we're conflicted about the Department of Labor.

Pat: That's right.

Scott: What's next?

Pat: That's right.

Scott: They're going to come and regulate my house.

Pat: Actually, those are called permits. And they do.

Scott: Dang. There was a case, though, not long ago where these excessive permit fees were whacked down. It's more like they said it treated like a tax. It was actually a tax disguised as a permit fee. Anyway, we got some calls here. So let's take some calls. Starting off in Utah with Stephen. Stephen, you're with Allworth's "Money Matters."

Stephen: Yes. Hi.

Pat: Hi, Stephen.

Stephen: Thanks very much for taking my call.

Scott: Yeah. Thanks for calling.

Stephen: Yeah. So sadly, my father passed away last month. And I'm here in Utah helping my mom out and have a question for you as we're considering next steps for her financially.

Scott: All right. Great. Sorry about that.

Stephen: Yeah. Thank you. So he had a pension, but no survivor benefit. So my mom's income has suddenly dropped from about $5,000 or $6,000 a month down to zero. She is 85 years old. She has no debt. Her total assets are $160,000 in life insurance, $110,000 in savings, and her home that she owns is worth about $750,000.

Scott: And no mortgage?

Stephen: No mortgage. That's right. She owns it outright.

Pat: And Social Security benefit?

Stephen: No. He was a teacher in California, so he didn't pay into Social Security.

Pat: I was afraid of that.

Scott: I had a client like this years ago. You take a survivor benefit...Here's why I don't like...some people sell this kind of pension maximum thing. You take the maximum pension.

Pat: That's probably what this life insurance proceeds are from, huh?

Scott: Yeah. It's not enough to replace.

Pat: But anyway...

Stephen: Actually, yeah, that was a separate policy that my brother helped her out with a long time ago.

Scott: Okay, whatever. Here's where we are, right?

Stephen: Yeah, yeah, exactly. And she spends...I think roughly she spends about $50,000 a year. And her desire is to continue living in her house independently if she can. My question, yeah, I was just wondering if you had any guidance as to whether or how she might be able to accomplish that financially? I mean, her savings and life insurance, I'm thinking might last her five or six years. [crosstalk 00:18:50.578]

Scott: This is my mom, right? And if I were in this situation, I would do one of two things. One is I'd do just what you're thinking. We've got five years, let's just take money out of the life insurance and the savings. And then get a reverse mortgage four or five years down the road. Or get a reverse mortgage today.

Pat: And how many beneficiaries are there to your mother's estate?

Stephen: There are six of us kids. So, yeah.

Scott: I mean, this is like a poster case for reverse mortgages.

Pat: Yes, this is it.

Scott: So Pat and I were in that industry years ago, and our slogan there was changing lives. Because it would be, this would be the typical reverse mortgage person, right? Someone widowed. They want to stay in the same house. Don't have a lot of other options.

Pat: Age in place. They call it aging in place.

Scott: But I would spend down, at least use the life insurance first.

Pat: Yeah, how's her health?

Stephen: So her mom lived to over 100. I don't think...she does have some slight heart problems. But other than that, she's pretty healthy.

Scott: I don't think I'd do anything for about a year.

Pat: I wouldn't either.

Scott: Because sometimes when there's a situation like this, the surviving spouse figures out their path forward, creates a new life for themselves. Can have a flourishing next part of their life. And other times spouses start going downhill quickly after this.

Pat: Sometimes they decide that, hey, you know, I'm going to move into an in-laws quarters at one of my six children's homes. I've seen that a number of times, or relocate. Is the family surrounding her there in...? You guys are in Utah. Surrounding her in Utah?

Stephen: Yeah, one of the siblings is here in Utah. And others are in California and Washington. And we're a close family and all willing to help if she needs it. But it seems like she should be able to...

Scott: I mean, the life insurance, I would think of this as a blessing. This is going to provide two to three years worth of expenses.

Pat: And put it in a high yield money market account. Have the monthly distributions come over to her checking account that she can live on. And I would not do anything for, I agree with Scott...

Scott: Replicate the pension.

Pat: The net of the pension.

Scott: Yes. Have the same amount dropping in her checkbook.

Pat: The net of the pension.

Scott: If she needs a couple bucks more, a couple bucks more.

Pat: And then wouldn't do a thing for over a year. Not a thing. I certainly wouldn't go first thing to a reverse mortgage. I'd wait at least a year.

Scott: But that could be a great option down the road to enable her to be in the house until she's 100.

Pat: There's no question.

Stephen: Okay. Would it be best to hold off on the reverse mortgage until she's got just a year or two of savings remaining?

Scott: Yes.

Pat: There's two reasons. One, you can get a reverse mortgage at any time. So let's assume that home prices stay where they're at and interest rates stay where they're at, she can borrow more the older she gets.

Scott: Because it's based on life expectancy. Not hers necessarily, just a typical 85-year-old's life.

Pat: You can borrow more the older you get. The other thing is, you're just waiting to see where she lands in the next year, year and a half. What's her state of mind? Where does she really want to be? Does she really want to be in this home? Does she want to be into a smaller home? Does she want to be closer to one child or the other?

Scott: It'll take at least a year for that.

Pat: And there's other ways you could do it. If there's six kids, many of them have done well financially. And I have done this for some of my aging clients, which is I have one of the children to actually support the parents. And we put a lien against the house for that amount of money so that we don't actually have to go through the reverse mortgage process.

Scott: That creates its own financial dynamics.

Pat: That creates its own financial dynamics.

Scott: Sometimes reverse mortgage is the way to go.

Pat: And sometimes to keep it separate from the family. But I've done it both ways. But I still wouldn't do anything. I wouldn't do anything for probably 18 months.

Scott: There's no reason she can't stay in this house until her dying day.

Pat: That's right. So assure her that, she'll be fine. The assets are there, it's the liquidity of the biggest asset, which is the home. But 18 months, 12, 18 months, just reassess it. And then, you know, if she's like, "Oh, I'm going to stay here forever," she's in good health in 15 months...

Scott: And maybe you can look at a reverse mortgage then.

Pat: ...then look at a reverse mortgage then.

Stephen: Okay. Great. So I do have...if you have time, I have one more question that's simpler than this.

Scott: Sure.

Stephen: Great. Thank you. So this one is actually for myself. I like the idea of turning my portfolio over to a fiduciary such as Allworth to manage when I retire. And of course, I see you and Allworth as very trustworthy, but what if you had a rogue employee? And I've been a longtime listener, first-time caller, and I don't think I've heard this question. So maybe that makes me paranoid. But would it be possible for a rogue employee to steal or provide false statements, something, you know, a la Bernie Madoff? I guess maybe I'm a little nervous because that would be my entire life savings in the fiduciary.

Scott: I mean, we have a lot...particularly an organization our size, we have 400 employees. We have lots of checks and balances. We have director of cybersecurity that monitors not just outside threats, but also what's going on inside. And we have dual factor authentication or whatever they call it.

Pat: Dual factor authentication. And then we custody at third parties.

Scott: Charles Schwab, Fidelity.

Pat: We're not custodying in-house. We don't worry as much about that as we worry about advisors...when I think of an advisor going rogue, it's when they're starting to make investment recommendations that go beyond the risk level of a client. And we monitor that as well. But even if that happened to you, the company would be responsible. If an employee went rogue, Allworth would still be responsible for reimbursing any money that was taken because they're an employee of Allworth. I've never actually really thought about an employee going rogue like that.

Scott: Oh, no, we have because you...I mean, there's lots of checks and balances to make sure that you don't have some employee signing a withdrawal, changing address, having some withdrawal money, have a check sent to their house or something. There's lots of checks and balances.

Pat: There, but Allworth is financially responsible if something like that were to happen. And the whole thought of it just sickens me. But thanks for the question.

Scott: There are some crazy people out there.

Pat: But there are. I mean, but it's much more difficult...

Scott: In an organization our size.

Pat: Yes, than it is with a three or four person organization. Which, by the way, Bernie Madoff was. That whole investment scheme was actually run by less than a half dozen people. The whole thing was run by less than a half dozen. He owned another company that didn't have anything to do with his investment advisory firm, and he showed that as this is the world. But when people gave him money, it was less than a half dozen people that were actually controlling the money. But anyway, and good luck with your mom.

Scott: Yep, yep. Appreciate the call, Stephen. We're heading now to California and talking with Martin. Hi, Martin. You're with Allworth's "Money Matters."

Martin: Hey, guys. How you doing?

Scott: Wonderful.

Martin: Great. I've got a question. I know you were in the business before about reverse mortgages.

Pat: We were. It's been a while, though. It's been what, 15 years?

Scott: Anyway, what's your question?

Pat: We'll do our best.

Martin: Okay, great. Thanks. Well, I was thinking about getting one. I really don't need it. My needs are pretty simple and my wants are pretty simple as well. So I'm living on current Social Security, a small pension, and my RMDs for my IRA. I'm 78 years old, and I was just thinking, the house is paid for. I really don't have any debt. So, I was thinking maybe to grab some of the money out of the house and maybe just...and I was wondering, and I can't get a clear answer on this, if you can take out the mortgage, but leave it in like a line of credit that doesn't get charged any interest.

Pat: Yeah, that's how they work. That's one option.

Martin: Oh, okay.

Pat: And what's the size of your IRA that you're taking the RMD on?

Martin: About a million.

Pat: And tell us about the beneficiaries of your estate.

Martin: I'm widowed, and everything goes to her two children.

Scott: Before I did a reverse mortgage, I think I would take more money out of the IRA.

Pat: I absolutely would take more money out of the IRA.

Scott: Because you don't have any design for the money, right?

Pat: And there's a cost. They're not cheap. It probably costs you 15 grand to set it up. So if you said, "Listen, Pat, Scott, I'm going to climb Everest because it's been my lifetime goal..."

Scott: "And it's going to cost me 80 grand or 100 grand," or whatever ridiculous.

Pat: "And then from there, I'm going to go see..."

Scott: I'm gonna still say take it out of the IRA.

Pat: "I'm going to fly to Nova Scotia to see the total eclipse of the sun."

Scott: On a private jet.

Pat: That's a Carly Simon song, by the way.

Martin: That's kind of where I'm going is that, you know, it's just something there. And I would maybe need it down the road because I don't have any long-term care.

Pat: Well, then get it down the road.

Scott: I would...look, so if I would...How much is your home worth?

Martin: About $1.2 million.

Scott: Okay. If I were you, I would think of the back of my mind, I've got $1.2 million in my house that I could access either while I'm still healthy and I could do a reverse mortgage down the road and take some equity or if something happens and I need long-term care, I could access the capital in that house at that time. And I wouldn't bother with the reverse mortgage today because you're just going to pay a bunch of costs for something you don't need, and the reality is...

Pat: Spend some of that IRA.

Scott: Yeah, spend some more of the IRA. And the reality is if you needed long-term care, you probably wouldn't get a reverse mortgage to pay for it either. You would probably sell the home and go into a long-term care facility and use the proceeds of that. Because they call the...they'll sell off the house in a reverse mortgage...

Scott: Once you move out.

Pat: ...once you move out. So, unless you've got some sort of desire that you're going to go out and change your lifestyle in a radical way, there's no reason to get a reverse mortgage. None. I couldn't make a single argument.

Scott: Oh, I can make an argument. You get the line of credit, and I'm assuming it still works this way, that grows each year. So let's assume that the real estate market in California is peaked and property values no longer increase, you do a reverse mortgage, the line of credit increases each year.

Pat: All right. And I will counter that. [crosstalk 00:31:14]

Scott: I don't think...

Pat: Counter the argument. Interest rates go down by a 1% and he can borrow that much more money.

Scott: Totally agree with you.

Pat: Still doesn't matter.

Scott: I wouldn't do it.

Pat: Don't do it. Don't do it. And don't talk to anyone that wants you to do it either.

Scott: The salesman, saleswoman.

Pat: The salespeople.

Martin: Yeah. It's like an annuity, right? Yeah.

Pat: Look, you've got plenty of assets. You were just talking about a way to tap into one. I just keep it in the back of your mind, that's your option down the road and allow yourself to spend some more of that money in your retirement account.

Martin: All righty.

Pat: All right?

Martin: All right.

Pat: Wish you well, Martin.

Martin: I'm gonna go out and buy that new Corvette then. Thank you.

Scott: Okay. If that's what you want, go for it.

Pat: My guess is you haven't driven Corvettes your entire life.

Martin: Yeah. I've got one at 60 years old.

Scott: Oh, you've got a beautiful one.

Pat: And you've owned it for how many years?

Martin: Fifty.

Pat: There you go.

Martin: Fifty-five, actually.

Pat: Wow. You didn't even throw that asset into this mix. What's a 60-year-old Corvette worth?

Martin: Oh, it's kind of...it's not...

Pat: It's not pristine.

Martin: It's not a daily driver, but it's not a show car. Let's put it that way.

Scott: Got it. Got it. Got it. Got it.

Pat: Yeah. You're fine.

Scott: You're fine.

Pat: Actually at 78, you don't buy it. You just go finance a new Corvette with the longest loan you possibly can.

Scott: Like a 20-year loan on a [crosstalk 00:32:55]

Pat: A 20-year loan on a car.

Martin: Hey, I like that idea. Get my payments down.

Pat: Oh, no. Then get buried in it.

Scott: Oh gosh.

Pat: Thanks Martin.

Martin: Thank you.

Pat: I appreciate it.

Scott: We go on and on. We're now talking with Bill. Bill, you're with Allworth's "Money Matters."

Bill: Hi ,guys. Thanks for taking my call.

Pat: Yes, sir.

Bill: I am 70 years old. I've been retired for six years now. And what came in the mail was the 457(b) statement, which has a big pile of money in it, which we don't need to use. And so I'm 70. I'm thinking RMDs down the road, whenever that comes up, it's like 72 or 73 now, I get confused. And my first thought is to, when the time comes, just bite the bullet and pay the taxes and go on with our life. But I got a lot of money.

Pat: How much is...how much is it in a...you said 457(b), is it a 403(b) or 457, which one?

Bill: It's a 457(b).

Pat: Okay. Thank you. And how much money is in it?

Bill: $580,000.

Pat: And how much money do you have in IRAs?

Bill: That's something I never, ever...we never, ever did an IRA. Never, ever.

Pat: Okay. That's fine.

Bill: I got a defined pension and our combined pension is about $103,000 a year. Because we didn't need it, we of course took Social Security at 67 and 66. So that's $61,000 a year rolling in. We don't have any house payment, the house is paid off. And we got other money in the banks, $174,000 in banks and credit unions. And then I inherited a brokerage account of $113,000 from my mom a couple of years ago. So that's just sitting there. So I'm running up against the...I gotta do something, I suppose.

Scott: Well, you don't have to, I mean...so, I mean, your required minimum distribution is going to be roughly $21 grand, $22 grand, something like that if you had to do it today. So let's assume you're 73 and it starts, your options at that point is, one, you can say, I'm going to have this go to a charity or charities. If that's the case, it's not taxable at all to you, your requirement of distribution. You can do up to $100,000 a year doing that. Option B is you pay the taxes, send the IRS their tax money and you do whatever you feel like doing with it. You can stick it in your brokerage account, stick it in the bank, you can spend it, or you could convert some now to a Roth IRA prior to, but it's not going to make a bit of difference.

Pat: I wouldn't do any of that.

Bill: I've kind of thought about that because I've listened to you guys a lot and I go, well, it's kind of...I'm not waffling, it's just that it's...

Pat: It doesn't make any difference for you.

Bill: No.

Pat: It won't move your tax bracket one way or the other.

Scott: If you did any Roth conversions.

Pat: Yes. It's not going to do anything one way or the other.

Scott: So pay him now or pay him later.

Pat: That's right. Actually, I wouldn't...I got to tell you, I wouldn't go through the hassle of converting to a Roth. No, I wouldn't. And if you give any money to charities at all, you want to do it out of your RMD.

Bill: And can I also start education accounts for my grandkids?

Pat: You can, but it's not going to help you tax-wise.

Bill: No, but it makes me feel better.

Pat: Yes. No, that would be great. Yes. No, that would be a wonderful thing. Because, you know, you're in a situation, and this is a great place to be, right? And obviously you've worked hard and get to this place, but you're 70, most of your life's behind you. Hopefully you've got a couple more decades, nobody really knows. But you and your wife, like we've got more assets than we need, what a wonderful opportunity for you to say, I want to help with my grandkids however you feel like helping them.

Bill: Yeah, exactly. I'm going to say that.

Pat: And there's something to be said about doing it while you're here and can watch it and enjoy it as opposed to...

Scott: Better from a...

Pat: ...being super tight with the buck and then the kids inherit a bunch at your death.

Scott: Yeah. Better from a warm heart than a cold hand.

Bill: No kidding. We've lived so long on the save, save, save mode that it's hard to get into spend a little bit mode.

Scott: It is.

Bill: Although we did redo the bathroom finally.

Scott: Oh, and I'm glad to hear that, Bill. I do have a question for you though. I do have a question for you. On the brokerage account, when you inherited it, did you reallocate it or did you leave it just exactly what it was?

Bill: Pretty much where it was. And it's gone up a little bit, but not much.

Pat: You need to reallocate that. You need to reallocate it. You should have done it the day you received it, inherited it, because there was no tax implications in doing it. So you need to just scrub that thing down and...

Scott: Ninety-nine percent confident that it came from some other bypass trust that didn't receive a step up basis, but less than 1% of the time.

Pat: And I'm 99% confident that you would benefit from a reallocation of that if you're like anyone else that inherits money. And the money in the bank, the $174,000, do you have it in a high-yield money market account?

Bill: Yeah. Pretty much. One's in the bank, some's in the credit union. It's kind of spread out.

Pat: Yeah. Right. Yeah. You should be getting 4% to 5% on that right now.

Bill: Yeah. That's about what it is.

Pat: Perfect. Perfect. The only thing I'd look at is the brokerage and I love the idea of funding the 529. In fact, keep it in your name. If you keep it in your name, then if the kids need to qualify for a benefit at some point in time, and you can actually name your children or...your children, the grandchildren's parents as a beneficiary on it when you die so that they can take over it.

Scott: Let's talk now with Charlie. Charlie, you're with Allworth's "Money Matters."

Charlie: Hey, Pat and Scott. Thanks for taking my call.

Pat: Hi, Charlie.

Charlie: Hey, My question is centered around Social Security and taking it early, more specifically around the true up for any excess income penalty that you might get while taking such, if you take it early, you know, that 50% hit that you take.

Pat: You're talking about if you still have wage or self-employment income, the limits, and if you surpass those limits.

Charlie: Correct. Correct. From what I read that the limits are $22,300 for this year that you can make that and anything above that you start getting your penalty.

Pat: That's correct.

Charlie: But I've also heard or read that there's a true up once you do turn full retirement age.

Pat: The year of.

Charlie: The year of you turn full retirement age. And I guess my question is if you...Another rule of thumb that I've heard y'all say is, if you plan to make over $100,000 a year, take Social Security as early as possible. Or, in other words, if you are going...if you don't need the money to retire on, go ahead and take it.

Pat: It's the second one. $100,000 wouldn't be necessarily my number. So what's your situation?

Charlie: Okay. So I'm 63 and currently retired. My wife plans to retire when she's eligible in about two years. Investments, we have IRAs are around $3 million of which about $400,000 is in Roth, brokerage, about $1 million and equities, real estate and other investments, about $700,000. Currently, we're living on about $120,000 a year and that's mineral, royalties, dividends, rent, and about 1% IRA withdrawal. And I did make some salary last year.

Scott: How much salary did you make last year?

Charlie: I made $22,000. So I would still be under that threshold this year if I made the same amount, but I'm actually thinking about going and actually getting a job. And I'm in the technology field. I was retired out of the technology field. And so it's possible I could make some decent money.

Scott: So if you're considering going back to work, I would not start Social Security. I mean, every month you wait, it's worth a little bit more. Yes, you're in one of those estates that I think, you know, 15 years now, might you be subject to some reduction? Maybe. Right? Well, we're all subject to a reduction unless Congress steps up and does something. But let's assume they exclude you from that something that they might do. If I were in your situation, thinking I might go back to work, I wouldn't start Social Security. Because what'll happen is they'll stop paying it to you. It's going to create an administrative headache for you.

Pat: I agree with Scott.

Scott: If I know the retirement...I know normal retirement age, I would only take it if I was for sure, completely certain I wasn't going to work.

Charlie: Okay. And that's what I've seen. And I've heard, take it if you don't need it, but then what I've seen is people that are working, they don't take it. And I didn't know if that true up it's actually a true...you know.

Pat: I don't know. When you say true up, I don't quite understand.

Scott: So let's assume you're making $30,000 a year and you lose $10,000 or whatever a year in benefits or $5,000...

Pat: Yeah. It comes back to you at some...

Scott: ...it comes back to you later when you fully retire.

Pat: Yes. Okay.

Scott: It's not lost and gone forever.

Pat: That's right. That's right. Before full retirement age, I'm in complete agreement with Scott, if I thought there was even a 50% chance I would go back to work, I would not take it.

Bill: Okay.

Pat: On this size of estate, you're just creating administrative work for yourself that...

Scott: With the Social Security Department.

Pat: Which it's hard to imagine a better time.

Scott: Can you imagine having to go in and have a conversation with them about this?

Charlie: Oh no, no, I can't. No. Okay. And that's what I was wondering because what I've seen is that people just don't take it if they're still working.

Scott: That's right.

Charlie: And so...

Scott: Until they're full retirement age. Until full retirement age.

Charlie: Okay. Or you truly stop working, one or the other.

Scott: That's correct. That's correct.

Charlie: Okay. That was my question.

Scott: All right, Charlie, we wish you well.

Pat: I appreciate the call. I'm trying to think of, Scott, if I've ever had a client that did the true up. Yeah. Yeah.

Scott: Oh, yeah. No, I've had clients go back to work.

Pat: Yeah. It was a pain.

Scott: It's an administrative pain. You want to avoid it. If you think you're going to keep working, don't claim it.

Pat: Yeah. It's like going down to the DMV.

Scott: And oftentimes the reality is people with higher net worth, they still...part of the reason they have a high net worth is oftentimes they've worked hard and oftentimes they continue to work in their 60s, and it doesn't take that much work to generate $22,000 a year for someone that's of a high net worth.

Pat: That's correct.

Scott: Who's qualified.

Pat: That's right. It might be a small consulting gig and you're above that.

Scott: Well, hey, that's about all the time we're going to do today.

Pat: And if you've liked our show at all, please go to your favorite podcast and rate it. Yep. That would be great. And recommend it to your friend.

Scott: And if you want to join us for a question, send us an email, questions@moneymatters.com, we'll get you on the air, questions@moneymatters.com. See you next week. This has been Scott Hanson and Pat McClain of Allworth Financial.

Male Speaker: 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.