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Voiceover: 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-W-O-R-T-H.

Scott: Welcome to Allworth's "Money Matters." I'm Scott Hanson.

Pat: I'm Pat McClain. Thanks for joining us.

Scott: Right. Myself and my co-host here, we're both financial advisors, certified financial planner, and charter financial consultant. We spend our weekdays with people like yourself on the broadcast on the weekends to be your financial advisors on the air. And glad to be here with you all. I'm glad you're joining us. We get a good program today, as usual. We'll have some calls, talk about some things going on the market. We'll talk with our chief investment officer briefly to get the latest on interest rates.

Pat: So, I was just thinking about the titles, this charter financial consultant and certified financial planner. Okay. That's great. The titles are good, but what makes...what I think makes a good advisor is real-world experience, not just the education.

Scott: It's interesting. So, just this week, I had a 45-minute interview with an independent research firm from the Certified Financial Planner board.

Pat: Okay.

Scott: That went, in my opinion, as a leader of an organization in the CFP people. And the reason I'm bringing this up is because on your topic, I said something to the effect of, look, I don't really care about the CFP designation per se. It's the fact that it demonstrates that someone is proficient in several disciplines around financial planning that are important, right?

Pat: Yes.

Scott: And just because somebody...and also my beef was, just because someone's a CFP does not mean they act in the client's best interest of a fiduciary standard. Still a lot of 'em sell products.

Pat: Or that they understand the psychological, emotional, and life of a client and the decision-making that goes into their money. I guess it's easy for me to say because I've been doing it for 30 years. So, that's in all fairness.

Scott: And it gets easier.

Pat: Well, you've seen more things, right? You see more things.

Scott: When you've personally lived through some bear markets.

Pat: Oh, a number of bear markets.

Scott: I remember someone years ago, they were, maybe they were with one of the big banks or whatever, but he said what he loved about the investment management business, he says, there's nothing quite as humbling as losing someone's money.

Pat: It's true.

Scott: Right? And, you know, typically, losses are temporary if someone's well diversified, but it's always...

Pat: There are always periods of time when the accounts [crosstalk 00:03:20.119].

Scott: All the accounts go down, they go down.

Pat: And it's pretty brutal. Yes. And then they go up and there's a new high watermark.

Scott: You've had it too, where people are in shock or, like, really nervous and they got to guide them through.

Pat: Or just shut down. And I was talking to a financial advisor, a young one, a gentleman I saw at the...met him at the gym, we were talking. And I said, "You know, make your clients some money." And I said, "And better yet, stop them from doing things to themselves that are irreversible that will damage their financial lives forever." And he said to me, "That's our job, isn't it?" And I thought, "You'll do well."

Scott: That's our job.

Pat: You'll do well, you'll do well.

Scott: Yeah. You're gonna make your wealth in your career or you maybe get lucky enough to get an inheritance. But most likely, it'll be in your career.

Pat: And it will be over...

Scott: And through savings or [crosstalk 00:04:12.220].

Pat: ...long periods of business.

Scott: Yes.

Pat: And not making silly mistakes with your money. And we're gonna talk about, later on the show, these SPACs that were all the rage two years ago. You wanna talk about it now or take some time?

Scott: We'll take Andy Stout, our chief investment officer because he's sitting here waiting dutifully. Andy, thanks for taking some time to join us.

Andy: Thanks, Scott and Pat.

Scott: All right. So, interest rate hikes. What's the market right now on future interest rates hikes? And the reason I ask what's the market because there's ways you can look to see what kind of wagers. It's not that different than the sports betting, I suppose, at Vegas. You can see what wagers people are doing in the future. So, thanks for taking some time, Andy.

Andy: Yeah. Just like in Vegas when people place bets, and that's how you figure out, you know, the Kings have a 3-point, you know, spread to win or something like that...

Scott: No, we lost...

Andy: ...same thing's true in the financial market.

Scott: ...Sacramento Kings. It worked the other way around, Andy. But thank you for...

Andy: I was trying to be kind.

Scott: I know. Okay. I appreciate it.

Pat: So, how does it work then, the futures?

Andy: So, we use what's called Fed fund futures, which are securities at trade at levels where the Fed funds rate is where people think it might be at upcoming meeting dates when the Fed meets. And right now where the Fed funds rate is, which is the short-term interest rates that banks can borrow from each other, and that's what the Federal Reserve controls, which is our nation's central bank, it's sitting right now in a target range of 5% to 5.25%.

So, they did hike about a week-and-a-half or so ago. And now what happens in the future? Well, it'll obviously depend on what the economy and how that develops and inflation develops. But what the market is pricing in, based on where essentially Wall Street traders are buying and selling Fed-funded futures, we are expected to have no more rate hikes in this cycle. The cycle is expected to be done. And between now and next January, they've priced in four-quarter-point rate cuts or one full percentage point because they get the target range to 4 or to 4.25%.

Pat: Wow. That's a big move, isn't it?

Andy: I think what it is, I think it's a medium-sized move, and here's why I say that. I think it's really a balance of two possible scenarios. The first scenario is where inflation stays elevated and we don't have a severe credit crunch. In that situation, the Fed probably does not cut rates at all. Now, if we have a very bad credit crunch where the economy locks up, liquidity crisis, and things like that, well then the Fed will probably cut possibly more than that full percentage point. So, it's almost like it's the middle point of those scenarios that are probably the two most likely scenarios in a lot of analysts' minds right now.

Pat: So, when we talk... Well, two things. One is inflation seems to be all over the board, depending upon whether you're looking at the service sector or commodities or it seems to be...

Scott: Or rents.

Pat: Or rent. It seems to be all over the board. So, it's probably hard to put a nail in that. And the other is the liquidity crisis. When you look at these collateralized loan obligations and then the small banks, regional banks and what's happening to them, you've gotta believe that there's gonna be, at least I believe that there's gonna be pressure on credit facilities coming forward. Your thoughts?

Andy: Well, I think, you know, the biggest risk is in that banking industry, like you were saying there, Pat, when we think about what the banks are doing in light of everything going on, essentially what we're seeing is we're seeing tighter lending standards. So, the availability for businesses and individuals to borrow, it's going to become more constrained than it already is.

So, not just the cost of borrowing, which is the level of interest rates, but it's the availability to borrow is also constraining. And that's going to have a negative economic impact. And that's why you're seeing a lot of people call for a recession later this year. And if you look at where the average economist has a prediction out there, they're expecting negative growth in the second half of this year.

And even the Federal Reserve staff, not the Fed voting members, but their staff, or their lackeys, for lack of a better term, they actually said there's a good chance for a mild recession this year as well. And I think you are going to see pressure in those credit facilities, you know, like you were talking about, especially in the riskier ones where it's tied to economic growth and you see lending frees up and businesses might not be able to roll over their debt, which could cause essentially, I don't wanna say a liquidity crisis, but a liquidity's scare for sure. And it may get a little bit worse. And I wouldn't be surprised if it gets worse before it gets better from where we're at right now, even though we've already seen more bank failures in dollar terms this year than in 2008.

Pat: And touch on the inflation for a second, your thoughts.

Andy: So, if you look at inflation, CPI, it's 5% on a year-over-year basis higher. And, you know, it's certainly come down from its peak last June of 9.1%. And we do expect it to start to come down even more because shelter, which makes up about 34% of total inflation, that's starting to finally come down as well. And the reason for that is these lease agreements that are getting reworked on a continuous basis, there's not as much...as many more price increases expected to be pushed into them. So, a lot of the price increases on the shelter side for the leases have already made their way in. So, we expect that to come down a little bit.

So, when we look at inflation, you know, we certainly look at it, you know, at a few different levels, right? We can look at goods inflation, we can look at energy, we can look at food, and we can look at services. And the one thing that's really caught the Fed's attention lately is what's called super core inflation, which is core services ex-shelter. And that's still running... It's come down a little bit. So, that's good.

And the Fed likes to look at that because it shows the level of how entrenched inflation is in the broad economy. And that has come down on the most recent release that we saw this week. But it's still probably a little bit too high for the Fed and there's still some pressure in some other areas that the Fed's not liking from an inflation perspective. So, I don't see the CPI level really getting much lower than 3.5% come year end on a year-over-year basis.

Pat: And unemployment?

Andy: Is there a question behind that, or...?

Pat: I like listening to you. I learn something every time. So, it seems that the recent unemployment numbers that we're actually starting to see is softening in the job market. Do you think that's gonna hold or continue, or...?

Andy: I think that probably does hold, and you can see that by looking at the job cut announcements. So, there's a firm out there called Challenger that tracks the job cuts and it continues to show a pretty strong increase, especially in the technology sectors where you're seeing a big part of it. And you are starting to see those weekly jobless claims, which are people filing for unemployment benefits, you know, start to take higher and higher.

And so, on those shorter-term data points, like the weekly jobless claims, yes, we're certainly seeing some weakness. Haven't seen as much weakness in the monthly jobs report. That's a big one that one keys in on. So, we did get that report last week, and what it showed, that employers added 250,000 jobs. That was a lot better than expected. However, the prior two months were revised lower by 149,000. So, kind of net-net, a little bit weaker than what was expected. But it's still growth and it's still showing some stability out there.

And when we look at the unemployment rate, that was probably a little bit stronger because that actually dropped from 3.5% to 3.4%. And that happened even as the labor force participation rate, which is people looking for jobs, essentially, remained constant where it was. So, when we look at all of that together, you know, it shows a weakness coming in these shorter-term indicators, which I do believe will flow through to the monthly jobs report. And I would expect that the employer, new jobs that they add, will start to come down in the months ahead, especially because banks are tightening lending standards and making it harder for businesses to attain loans and consumers to obtain loans. And that's going to lower the overall demand.

Pat: Which therefore will slow inflation.

Andy: In theory, yes.

Pat: Okay.

Scott: Well, in theory. Hey, Andy, really appreciate you taking some time to join us.

Pat: It's always a pleasure speaking with you.

Scott: But Andy is our chief investment officer, not an economist per se. I know sometimes we ask you for your prediction on things.

Pat: It's the nature.

Scott: Yeah. Thanks, Andy.

Pat: So, appreciate your time.

Andy: Thank you.

Scott: Yeah. What's interesting is that... So, the Fed funds rate, 5% to 5.25%, so short-term money's 5% to 5.25%, 10-year treasury bonds are 3.5% roughly.

Pat: Which tells you that the market's betting that inflation's going to go away.

Scott: Correct.

Pat: That's what it's...

Scott: No one's betting that long-term it's gonna be there, right? Otherwise, [crosstalk 00:13:29.764]...

Pat: Otherwise...

Scott: ...higher rates.

Pat: Yeah. Otherwise, we have an inverted yield curve.

Scott: Well, we have one now. It's pretty significant.

Pat: Oh, it's big.

Scott: Yeah. It's big.

Pat: You know, what's amazing to me is I have a son that's shopping for a home. In Denver and parts of the country, we've seen a very big softening, a drop in residential real estate, but in parts of the country...

Scott: Not all markets.

Pat: But not all markets.

Scott: Not Denver.

Pat: Not even a little.

Scott: Not even a little.

Pat: Like, things are going off the same day. Like, listed last Friday. He makes a full offer bid on it. Nope. Goes for overmarket over listing.

Scott: The housing market's really odd right now because everyone's got these long-term mortgages, right?

Pat: So, no one's...

Scott: First of all, if you're a first-time home buyer, money's expensive. So, now instead of 2.75%, you're at 6.5% roughly, 6.25%, somewhere in that range right now. So, the same payment's substantially higher, maybe 35%, 40% higher than it was. And then if you're thinking about doing a move-up...

Pat: Like, this is more than the cost of the home because of the cost of borrowing is significant.

Scott: Right. Our mortgage is gonna go from 1,800 bucks a month to $4,200 a month and we're only gaining 25% more house, or whatever, right?

Pat: That's right. At the same time, the cost of renting appears to be dropping relatively quickly.

Scott: Disconnect.

Pat: And there's a disconnect, which is...

Scott: There's a disconnect.

Pat: ...look, if my rent was going up and the housing prices were going up, you could kind of justify it.

Scott: Makes sense.

Pat: But if I'm renting and I see that staying the same or dropping, you're like, "What's the hurry?"

Scott: Well, in the last several years, not that we can predict the future, but just with real estate prices, like as long as rents are going up, you would expect property values to go up. Very different than in the early 2000s, the housing bubble, when rents were flat for several years and homes, like, doubled in value.

Pat: Well, I mean, especially in the apartment, these collateralized mortgage obligations, which is securitized mortgages, which are people that buy an apartment who borrow [crosstalk 00:15:51.395]...

Scott: With a variable rate mortgage.

Pat: ...with variable rate mortgage, $88 billion...

Scott: Would you have the risk tolerance to have a variable rate mortgage on an apartment building?

Pat: You've gotta be one of the most optimistic people alive. Do you believe that...

Scott: That's kinda like saying, "You know, I'm gonna forego the fire insurance to save a few bucks."

Pat: Yeah, exactly. Which is, I'm gonna enter into this thing because the cost of money, and sometimes the margins are so thin and they figure, "You know, I borrowed enough, I've got so little money in..."

Scott: There you go.

Pat: "Right? I might..."

Scott: And every investment I have is in a separate LLC. So, if goes bankrupt, it's... And I have no personal guarantee, so what do I care?

Pat: Yeah, and I've got...

Scott: Yeah. I guess it's [00:16:29.384].

Pat: And I've got $10 million in on a $100 million building and, you know? So, 42% of this $88 billion is tied to apartment buildings and they're coming due right now, right now. I was talking to a commercial real estate agent and he was telling me stuff is coming to the market right now with these balloons coming due and that people bought the property five or seven years ago and the balloons are coming to right now and...

Scott: Right.

Pat: Right now. And they're calling, not only listing, they're just calling people that owned commercial real estate saying, "Hey, any way you're interested in taking a look at this thing?" And he's like, "No one's biting." Well, that is leverage for you, isn't it?

Scott: Interesting times. Cuts both ways. The borrower is the slave to the lender.

Pat: It is leverage.

Scott: Let's go to the calls here. If you wanna be part of our program, we love taking your calls. And you could line up a call with us either by calling this number or you can send an email at questions@moneymatters.com, questions@moneymatters.com. And our contact number is 833-99-WORTH. We're talking to Bob in California. Bob, you're with Allworth's "Money Matters."

Bob: Hi, guys. I retired from the State of California in December. And the question that I have is I had...well, they're still working on my last paycheck and separating my lump sum for a year's worth of leave that I had. And [crosstalk 00:18:13.732].

Scott: They still haven't figured it out?

Bob: Seems to be problems between my department and the state controller. And they sent some checks, didn't send some other. They had to be redeposited. And I'm still waiting...

Scott: Sorry. It's mid-May, you retired in December?

Bob: Yes.

Scott: Pat, can you imagine this happening at a private company?

Pat: I just can't imagine all the penalties and fines that would come with not paying it.

Scott: If you were a private company.

Bob: [crosstalk 00:18:43.753].

Pat: If you were a private company.

Scott: Anyway.

Pat: Anyway. That's for another show.

Bob: [crosstalk 00:18:48.312]. So, the question I had is the monies to go into the savings plus account that the state has. And I have a 401(k), a 401(k) Roth, 457, and 457 Roth in there. And was wondering, it's still a good idea to keep the money in there or to move it out of there into...

Pat: How old are you?

Bob: Sixty-eight.

Pat: It doesn't matter. Well, moving the money out would give you a broader selection, but they have a self-directed brokerage window on these, but they're probably more expensive to use than if you were to use a private company. But in terms of tax...

Bob: [crosstalk 00:19:33.572].

Scott: The only real benefit, in my opinion, you have by having dollars in here, is you don't have to worry about someone selling you some high-priced investment because you've got the limited options in the plan.

Pat: Okay. Well, let's assume that Bob is past that. Okay. So, if you're past that, you can still build a...you could probably build a portfolio at the same cost, maybe even less cost with some ETFs today than you could have in the past. I know what I would do with that.

Scott: Well, of course, you wouldn't leave it in there.

Pat: Absolutely. And part of it is, just for ease of management, just take the 457 and the 401k, move 'em to an IRA, and take the Roth side of them, move it to a Roth IRA, name the beneficiaries. And the cost is...

Scott: It's clearly a lot easier when someone passes away if it's in an IRA.

Pat: Oh, night and day.

Scott: Because we deal with that.

Bob: That's another story for me because my son had a 401(k) plan, didn't work out to be too much. So, 15 years ago, we just said, "Nah, we're not gonna worry about that." The insurance plan took a whole lot more of that, that he paid $250,000 versus the $40,000 that was in there. And then a year ago, the plan calls up and says, "Hey, we got this money here and it's now worth $130,000."

Pat: Well, that would've done the same thing in an IRA. He just had it invested correctly and let it go, let it ride. So, that was just... I mean, that didn't have anything to do with whether it was in a 401(k) or an IRA because the investment selection is the same. So, but just for ease...

Bob: He didn't have a beneficiary named. So, it's gotta go through probate 15 years later.

Pat: Okay.

Scott: Oh, wow.

Bob: That's a little fun. Took a year to get through stuff in Texas and I finally was appointed the administrator.

Scott: Sorry you lost your son.

Pat: Sorry to hear that. So, to that point, it is so much easier in an IRA at death to...just the ease of management. So, the cost you're going to... My bet is that you're gonna get it to the same or lower cost if you do it correct, and that just at death, it's so much easier if it's an IRA and a Roth IRA versus four accounts and you're of age that it doesn't really matter.

Bob: Yeah. It's coming soon. Yeah, because the other part there is an old, old rule that I was using, do not put all your eggs in one basket. So, you kind of keep it separated. And then of course, I have money in two other firms, one is TD Ameritrade, and that's being absorbed into Schwab, who was my other basket of which I had funds.

Scott: But you wanna address this basket thing?

Pat: Yeah. It's different than say having your money in, let's say Charles Schwab's bank or Silicon Valley Bank's bank, when those are just essentially a custodian, a brokerage firm to hold your investments. So...

Scott: They're bookkeepers, that's probably a good way to put it. But they're bookkeepers. Your assets are not an asset of that firm. So, when people say put all your eggs in one basket, if you have a diversified portfolio inside that basket, that's what it means. Whether you have TD Ameritrade, Charles Schwab, Pershing...

Pat: Vanguard.

Scott: Whoever be the custodian that...

Pat: Even if I owned the Vanguard Total Market ETF, I had my life savings in there, I would still have hundreds of companies in there.

Scott: That's right. So, I wouldn't be having my eggs in one basket.

Pat: Yeah. So, just for ease, there's no reason to have it all over the place. I would make the argument that you should only have three accounts. You should have an IRA, a Roth IRA, and a brokerage account.

Scott: And a brokerage account. Unless there's some separate assets there, then you might have some separate.

Pat: Yeah. If you inherited some money or were gifted some money and you might have a separate, but that's all you need. Any more than that, you're making it complicated.

Scott: Yeah. Appreciate the call, Bob. And it's interesting, Pat, we had years ago, and I don't remember... Every once in a while, this guy would call, he was one of the executives for the state of California's 401(k) plan. Remember that he would call? And he was usually complimentary. But this one conversation he called and he says, I don't know why he says, "I think it's wrong that financial advisors typically encourage people to move money from their 401(k) to an IRA." Right?

So, we had the call and we're having... So, we're on the radio show here having the conversation. And at the time, it's public information if you wanna see how the moneys are allocated. Eighteen percent of the portfolio was in cash. So, I said...because he... Okay, maybe there are lower cost options than people might have on the outside, but the fact that 18% of people's retirement savings is in cash, I said, "None of our clients have it, unless they're planning on spending it all next year."

Pat: It makes no sense.

Scott: It made no sense. And it's because they didn't have any... For many people, they choose their 401(k)s by looking at the list, and I guess I'll put 20% here, and 30% here, and at least what did well last year. It's not built up any sort of fashion design to help with their overall financial plan like when they're gonna retire, what income needs might they need, what cash lump sums might they need at retirement, right? Most people don't invest their 401(k).

Pat: And my guess is that in a...

Scott: I think I won the argument when I like...the benefit of an advisor helping.

Pat: My guess is that after a down year, if you look at the one-year returns and they're all negative, except for cash, that a lot more money actually goes to cash than should.

Scott: They also say that whatever the listing at the top is tends to get more assets.

Pat: Makes sense.

Scott: It's the first one you've got there. So, I just think it's funny.

Pat: I don't know, just the fact that one of the main executives in charge of the 401(k) plan was trying to make a statement of why it's best to leave the dollars in there from an asset allocation standpoint, clearly some work could be done to improve that for their members. You would hope.

Scott: One would hope.

Pat: All right. We're gonna take a quick break and we will come back with some more calls and some more talk.

Scott: This is all Allworth's "Money Matters."

Voiceover: Can't get enough of Allworth's "Money Matters," visit allworthfinancial.com/radio to listen to the "Money Matters" podcast.

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

Pat: Pat McClain. And let's give our numbers out.

Scott: We just did.

Pat: When? 833-99-WORTH.

Scott: I just think it's dead. Most of our listeners of our podcasts know.

Pat: And our numbers actually on there.

Scott: It's on there.

Pat: You're right.

Scott: I mean, I know [crosstalk 00:26:35.143].

Pat: We still use a toll-free number too.

Scott: They're all toll-free, aren't they?

Pat: Yeah. That's the whole point. Why are we picking up the charge? We're paying more money.

Scott: I've had lots of phone discussion in my house the last few weeks because my 12-year-old has no phone. She's probably the last one of her friends with no phone. And I know there's some parents that their kids at 10 years old sleep with their iPhone so they can wake up in the middle of the night and see how many likes they have on their social media posts and do TikTok and all that other stuff. And we've taken a different approach. But it's the point now where it's like it's becoming a pretty good inconvenience for me. Like...

Pat: Get her a flip phone.

Scott: We had for the one that's now 15. But I think we came to a solution because I was looking at it and stripping it down, Apple Watch was our solution. We'll see how long that lasts.

Pat: How long that lasts.

Scott: We'll see how that lasts.

Pat: I'm gonna give it less than six weeks before it's either broken or lost.

Scott: You're probably right.

Pat: My daughter would tell me that they could text blind on their phones.

Scott: On the whole flip phones?

Pat: Yes. On the flip phones. So, she said everyone in the classroom wore these...they wore sweatshirts with their pocket in front and so they'd have their hands in their pocket in class...

Scott: So, they can text each other.

Pat: So, they could text.

Scott: And how would they read the texts?

Pat: I don't know.

Scott: Now, you're [inaudible 00:28:05.679].

Pat: At the end of class, they got 28 texts they gotta read. Like, it's [crosstalk 00:28:13.897].

Scott: Anyway, I don't know.

Pat: But it's phones... Anyway, so we're gonna pick up the charge for the phone call if you wanna call and chat.

Scott: Let's take calls. We're talking to Tim. Tim, you're with Allworth's "Money Matters."

Tim: Good day, gentlemen. And thank you for taking my call and picking up the charge.

Pat: Appreciate that.

Tim: Hey, I wanted to ask you, I have about...or my wife and I have probably about a little over $250,000 in capital gains on our home. It's a home that we're gonna stay in for, you know, the foreseeable future. We love the place and everything else. We're gonna stay there for as long as we can. But it is a home on property.

And in my planning, my thought process is of course, the deduction for capital gains is $500,000 if you're married, $250,000 if you're a single person. And, you know, more than likely, via the actuaries, I'll be the first one to pass away. And my wife and, you know, I'm obviously planning, you know, several years down the line, hopefully, and my wife will end up selling the house and then moving on. Is there anything I can do to...because by that time, I'm sure, there will be more than $250,000 in capital gains, is there anything I can do at this point in time in terms of, I don't know, putting it in a certain type of title or something like that to protect her down the line?

Scott: Protect her from capital gains?

Pat: Capital gains. Yeah. So, here's what I...

Scott: Congress has already done it for you.

Pat: Yeah. Here's what I want you to do, is not worry about it because she'll receive what's called a step-up in basis.

Scott: So, let's say you paid $100,000 for this house on property, right?

Pat: And it's worth $10 million when you die.

Scott: Ten million bucks. Any gain, any gain is stepped up to the fair market value for capital gains purposes, stepped-up basis...

Tim: Got it. Got it.

Pat: On the date of death. And that's just not your home.

Scott: That's any asset.

Pat: That's any asset.

Scott: Just about any asset.

Tim: Oh, okay. I was unaware of that. I figured if she was on title, which she is, that she wouldn't...you know, that the step-up rule wouldn't apply. If that applies, perfect.

Pat: Yeah. As long as it's titled correctly.

Tim: Okay. Yeah.

Pat: Yeah. If it was...

Tim: [crosstalk 00:30:27.626].

Pat: Yeah. And you're in California community property state, if it was in her name only and you passed away, then there'd be no step-up basis because it's your asset that she would inherit because if it was in her name, she wouldn't be inheriting it. But you bring up a really good point because we see this quite often where people have in their minds this tax obligation on any asset. And I'll see where people will come into the office and mom and dad are getting older, and the kids go to mom and dad and say, "Hey, we need to worry about taxes. Move this into my name today and gift it to me. And that way, we get to avoid taxes." And you're like...

Scott: It's the worst thing, right?

Pat: The worst thing you can do.

Tim: Right. Because you're not getting that step up when they do pass away.

Pat: That's right.

Tim: Now, we have it in...I actually haven't quite completed the process yet and that's why I was holding off until I talked to you. I'm actually gonna put the house in our trust name. Does that make a difference?

Pat: No, it follows title into the trust.

Scott: And we're not attorneys, so this isn't tax advice. Consult your own tax...

Pat: Talk to a qualified attorney. But from our little knowledge in doing this, you should not worry about this at all.

Tim: Excellent. Excellent.

Pat: And the step-up applies to almost all assets, but not...99% of all assets.

Tim: Perfect. Perfect. You guys nailed it.

Scott: Thanks, Tim.

Pat: Welcome.

Scott: You know, it's interesting, Pat, I appreciate the call, Tim, like, we'll have older clients, right? I know you've got some clients, same thing I do, where there's pieces in their portfolio that aren't necessarily ideal. Like, if there was no tax implications, you'd sell it immediately.

Pat: That's right.

Scott: If it was in a retirement account, you would've sold it years ago. But it's still fairly good. Maybe it was a higher-expense mutual fund that they had bought 25 years ago. But the capital gain is such that if you sell it today, you're gonna incur a tremendous gain. So, you're like, we're gonna wait until one of you passes away. If it's a couple or if there's inheritance, let's just wait till someone passes away. These dollars aren't...you're not gonna spend anyway because then we could avoid the taxes. And to that point, when you inherit any sort of asset, whether you're a spouse or a child or whatnot, typically, it gives you a tremendous opportunity to rebuild the portfolio with no tax considerations.

Pat: You do it almost immediately.

Scott: Most of the time, you should.

Pat: And where you get pushback is...

Scott: Well, dad always loved this company. He said, "Never get rid of Woolworth, never sell JCPenney." Whatever.

Pat: Yeah. This Montgomery Ward stock is the best, right? And you see it all the time where... And the stock doesn't know you own it. The stock doesn't care. It is an asset. And you shouldn't fall in love with anything that can't love you back, which includes any asset. Any asset. So, we see it all the time and you see people gift things that they shouldn't gift. The only time you've got highly appreciated assets, if you're charitably inclined, those are the first things that go out of the portfolio.

Scott: Yep. All right. Let's continue. We're gonna talk with Mark. Mark, you're with Allworth's "Money Matters."

Mark: Hey, excellent. Thanks for taking my call.

Scott: Hi, Mark.

Mark: So, my question is I'm looking for the best option for bridging our cash flow requirements in order to maximize our social security benefits.

Together: Okay.

Mark: And so, a little background. We know that our budget expenses are about 220k a year. I'm retired at 64, my wife will be retiring in two years. We both have a pension.

Pat: How old is she?

Mark: She's 62.

Pat: Okay.

Mark: So, we'll both have a pension that sums up to about $120,000. And we have a 401(k) combined of about $3.6 mil with outside equities of about $700,000. So, the question, you know, with all the finally CDs are coming up a little bit, and the question was how do I allocate enough cash flow to get us to 70?

Pat: So, the first of all, the question is... We can answer the question.

Scott: Let's answer the question.

Pat: We'll answer the question and then we will make an argument as to why you should not wait.

Scott: Or maybe you shouldn't wait.

Pat: Or maybe you should split the difference. How much would your social security benefit be if you were both to take it today?

Mark: Oh, today.

Pat: Today.

Mark: It'd probably be combined, about $4,600.

Pat: Okay.

Mark: And then if we waited, it would be in the neighborhood of $8,300.

Pat: And so, between the two, so we're looking up...and the 220 is gross or net, your expenses?

Mark: That includes paying taxes.

Pat: Okay. So, if you were to take it today, what we're trying to make up is approximately $45,000 a year in income off of $4.3 million, which is, you know, easy, super, super easy, 1%. So, obviously, you have enough money to retire.

Scott: I'd just take a distribution from your 401(k).

Pat: What's your income now? You're retired, what's your spouse's income?

Mark: About $100,000.

Scott: I mean, if you took 3%, it's gonna make up the...

Pat: That's how you would bridge to the difference.

Mark: Oh, okay. Now [crosstalk 00:36:40.719].

Scott: That exactly right because if it was a smaller number, maybe I wouldn't be suggesting that. But if you were 72 today and had required minimum distributions, 75 now that's being pushed, right, your required minimum of distributions would be about $135,000.

Pat: So, you would just take it from that. And that would be easy. Now, let's talk about whether you should defer social security or not, because on paper, assuming you have a normal life expectancy, everything else being equal, it makes sense to defer social security benefits.

Scott: Well, I don't know because the way the law is currently written, when the trust fund is depleted, which is sometime 2032, 2033, 2034, somewhere in that, it's around 10 years from now.

Pat: Everything else being equal, which means that social security, we know it's going to be there for me regardless.

Scott: But it's across-the-board reduction right now of about 26%.

Pat: So, today...

Scott: That's statutory, that's the law currently.

Pat: So, Mark, let's pretend today that you opened the Wall Street Journal and it said the Social Security Trust Fund is out of money. Actually, we could open the paper today and we'd actually read the same thing. It would just say the government. But the Social Security Trust Fund is out of money. Oh. And by the way, there's a 26% reduction across the board for everyone, everyone, regardless of income or the size of your benefit. So, they look at Mark and they go, "Well, Mark, he's getting...and his wife we're getting $55,000 a year, we're gonna cut theirs by 26%. Oh. And that..."

Scott: Or they're getting 80-some thousand a year if he waits.

Pat: That's right. Or there's the lady who is widowed who is 75 that's getting $1,200 a year or a month, $14,000 a year. We're gonna cut hers by approximately 25%. What do you think the government's gonna do?

Mark: Right. They're gonna cut mine before hers.

Scott: I mean, we don't know. Like, we don't know. But what we do know, assuming your pension is from a solvent...it's from the state of California or it's from a private company?

Mark: AT&T.

Scott: Okay.

Pat: Okay. Which actually they just...that pension was just taken over, sold off to another [crosstalk 00:39:24.321].

Scott: Yeah. There's cash. It's fully funded.

Pat: It's fully funded.

Scott: So, your income is once you have these required minimum distributions, which is real, right, your income's $250,000 a year minimum.

Pat: So, when you look at the math, it says...

Scott: So, we know, we know Congress will have to act, and whoever the president is that time, will have to sign into law a change in our social security to deal with this shortfall.

Pat: Unless they increase.

Scott: Well, they can do it a number of different ways. They can increase taxes on their current workers.

Mark: Right.

Scott: There's probably a limit that can go. They could eliminate any sort of cap. So, regardless of how much you make, they could start taxing
a capital gain tax if you've saved too much. Who knows what they're gonna do? Right? And they can also say, "Let's make this somewhat needs-based."

Pat: And by the way, there is history of making social security needs-based. You go back 30 years ago, social security income was never taxed. And then they started taxing 50% of the income at limits of what, $32,000 for a couple?

Scott: And the argument there was they said, "Well, the employer is paying tax. There's no tax deduction...there's a tax deduction for the employer, but not for the employee. So..."

Pat: But they didn't do it across the board, they did it needs-based. So, you can make the argument...

Scott: That is correct.

Pat: ...right? And then a few years later, they said, "It didn't seem to be too bad. Let's start taxing 85% of social security benefits for couples with incomes over $44,000." By the way, never adjusted for inflation. That number has never been adjusted but for inflation. So, the idea that they're not going to actually somehow touch the benefits, it's a fallacy. They've done it already because they've already taxed certain people for social security benefits and not others.

Scott: And you see it in Medicare.

Pat: So, look, I'm 60 and my beautiful wife, holy smokes.

Scott: What?

Pat: It's her birthday this week.

Scott: Wait, next week?

Pat: Don't forget that one.

Scott: That's hilarious.

Pat: We've had the discussion when she doesn't work outside of the home when she's 62, regardless of what my income is, we're taking social security the minute it's offered. Regardless. Because I feel strongly that they're going to cut social security benefit sometime in my lifetime and I will be first on, fortunately, fortunately, I've gotta say that, never imagine that I'd worry about things like this, but I think you should worry about the same things. Like, forget the math. What we're talking about is legislative risk in the portfolio.

Scott: And here's the reality, Mark. You might not feel that wealthy because it's always the next guy that's wealthier, the next couple or the next...right? But if you look at retirees, the majority of retired Americans rely upon social security for the majority of their income.

Mark: Right.

Scott: You're wealthy. So, you called to say how to bridge that if you're still intent on waiting until age 70 then...

Pat: Seventy-five or whatever. Seventy, yes.

Scott: Seventy. Then I would just take a distribution from the 401(k).

Pat: But I wouldn't do that either. I'd start Social Security as soon as you possibly could.

Scott: Assuming you know you're not gonna go back to work because you've only been retired a few months. Are you confident you're not going back to work?

Mark: Right. Nope.

Scott: You're sure.

Mark: Definitely. I love retirement.

Scott: Okay.

Mark: [inaudible 00:43:08.965].

Pat: You're good at it then?

Mark: Yes.

Pat: Yeah. So, my recommendation would just take it, and if you think about it, think about it as a bond, as a...

Scott: Or any other investment

Pat: ...stream of income, right?

Scott: What's the likelihood that this is...that stream of income's gonna kick in? What risks are there that would impair that stream of income? And by the way, the greater the risk is that the income will be hurt in latter years, the bigger your desire should be to take the income as early as possible.

Mark: Right. Because the cash flow is required earlier while I'm still active.

Pat: Yeah. I mean, you're gonna be fine either way. You'll be fine either way. If social security didn't exist at all, you'd be fine. The question is, over your lifetime and your spouse's lifetime, what will be the likelihood that you're going to get the most money out of Social Security? And if there is no legislative risk to that...

Scott: Then wait till age 70.

Pat: Then wait till age 70.

Scott: It's not a legislate, it's a statutory risk.

Pat: But, Scott, we don't know...

Scott: We know Congress passed...

Pat: The statutory.

Scott: Right now, everyone in government's afraid to touch social security.

Pat: It's the third rail.

Scott: And the Democrats are saying, "Oh, the Republicans." So, no one's gonna do anything until the final moment. I mean, look at right now we've got the debt ceiling, right?

Pat: Like, this snuck up on us.

Scott: So, they're not gonna act until the final moment. There's no political [crosstalk 00:44:47.130].

Pat: There's no upside.

Scott: No. There's no upside. There's none.

Pat: Yeah. Especially if you look over at France and they're trying to move that age.

Scott: Oh, my gosh.

Mark: So, the corollary...

Scott: They're not gonna mess with the masses.

Mark: If I do decide to take social security, that answers the question. If I decide to go into the 401(k), then we get taxed at the 24% level versus capital gains off of my outside investments, which would be [crosstalk 00:45:17.354].

Scott: I'm worried about required minimum distribution if you keep letting that thing cook.

Pat: I would make the argument that that portfolio outside the brokerage account should be heavily invested in tax-efficient equities and that you would probably never touch that in your whole lifetime, and that would receive a step up in basis at your death. I would make...

Scott: Unless he's got a need for a motor home or you need a big cash infusion.

Pat: And I would treat that 401(k) IRA as the source of income and I'd have most of my bonds inside of that.

Mark: Which I do.

Pat: And every year, I would actually, once your wife retires, I would actually take the money out of there and then see how much we could drive into a Roth conversion

Scott: And I'd move the 401(k) to an IRA. It's just so you can have a monthly income drop into your checking account just [crosstalk 00:46:08.365].

Pat: But you would still do the math every year for a Roth conversion on that, some portion of it.

Mark: Right. Right. Yeah. Well, we've got, yeah, 600,000 in Roth already.

Pat: Perfect. Well, get some more.

Scott: Get some more money in there.

Pat: And that's actually what...by the way, that would be the place that if I had a motor home purchase, I'd take it out of the Roth.

Mark: Ah, okay.

Pat: I would allow that brokerage account. I would pretend it didn't exist and I would... You're looking at me for...

Scott: Yeah. Well, all the laws can change in this. Stepped-up basis can change, so could a tax-free inheritance of Roth, that can change. It can all change, right? All right. And again, I mean... And so, part of this is trying to diversify our tax strategy as well, right?

Mark: That's right.

Scott: Because we don't know what's gonna happen in the future.

Mark: Exactly.

Pat: But you've done great. Great saver. What's it feel like to be rich and retired?

Mark: It doesn't feel rich.

Scott: Like I said, right? Doesn't feel rich. There's other people just like, "Oh, my gosh, he's so lucky."

Pat: Yeah. Well, I don't think that luck had a lot to do with...

Scott: I'm just telling you.

Pat: That's what they're thinking. Although I don't know what they're thinking, but some, I'm sure, are thinking that.

Scott: Appreciate the call, Mark. It's funny, I was talking to some family members, we were talking about the lottery. It was one of those times it was hundreds of millions of dollars. And I said something to the fact of like, I said, "I don't think I'd wanna win the lottery." And my family member says, "Well, it looks to me like you already have."

Pat: Really?

Scott: And I said, "Excuse me."

Pat: It's time for you to leave now.

Scott: Look, I moved to Sacramento. I had debt, I didn't have a penny in my name. I rented a bedroom for $300 a month. There were months I didn't have the cash to pay the rent and I took cash advance on my credit cards.

Pat: Yeah, I remember...

Scott: That's how broke I was at that time.

Pat: ...when I met you, you were living in that fireman's bedroom.

Scott: That's exactly right. And I could have went and got a job that paid me a wage and could have a sales job at Pepsi or something like my buddy did in a company car and all that. And I wouldn't have to work. But I had a different vision for myself. And so, the fact that I... So, I won the lottery. Like, look, I've been... Trust me, I feel super grateful, but it's not exactly like winning the lottery.

Pat: Did you...?

Scott: Mark worked. It wasn't luck...

Pat: Oh, correct.

Scott: ...that he ended up saving over 4, almost $5 million in retirement.

Pat: Let me ask you a question. Did you respond to that or did you just let it go that it looks like you won the lottery? Did you respond to your relative or did you just let it slide?

Scott: No, I responded.

Pat: You did.

Scott: I don't think I quite unleashed like I just did right this moment.

Pat: All right. But they probably don't listen to the podcast anyway.

Scott: No.

Pat: I would've ignored it.

Scott: Well, you're a higher individual than I am.

Pat: Finally...

Scott: You've got a stronger moral compass. You're more confident in your own self. You're not so concerned about what others think about you.

Pat: Finally, after 30 years, we get to the truth. Thank you.

Scott: The truth is, I didn't particularly care for this. It was actually someone was dating this person.

Pat: Oh, is that right?

Scott: Yeah. And the person kind of annoyed me. Maybe you don't have any family members that annoy you, Pat.

Pat: No. My family, they're perfect.

Scott: Anyway, let's move on.

Pat: Let's talk about the debt ceiling here, because the Republicans and Democrats keep pointing fingers at each other.

Scott: Well, the reality is they have to... I mean, the reason they put...the Congress put a debt ceiling in the first place is to slow down spending, to force the politicians to come together, to come up with some sort of compromise to keep spending lower.

Pat: Everyone needs to come to the table.

Scott: Since 1960, and this is Jason Scott, our multimedia producer was kind of sending me this tidbit. Since 1960, Congress has acted 78 separate times to permanently raise, temporary extend or revise the definition of the debt limit. This has been done 49 times under Republican presidents and 29 times under Democratic presidents.

Pat: So, it's not new.

Scott: Seventy-eight times.

Pat: It's not new.

Scott: And I remember when the government shut down, what, 20 years ago when it was...

Pat: Oh, it was very, very hard on certain industries.

Scott: Oh, yeah, for sure.

Pat: Oh, I mean, anything that was a highly regulated industry. It was very, very difficult on those industries.

Scott: Yeah. What do you think's gonna happen? We've got a couple weeks.

Pat: I actually haven't given it much thought. I mean, there's lots of verbose chest puffing, we're not gonna give anything.

Scott: For sure, on both sides.

Pat: They're gonna come to a compromise.

Scott: Before the end of the month?

Pat: Yes. Or just extend it slightly further. Give it three more months or something.

Scott: The idea of allowing in this economy for a government shutdown after...

Pat: It's a game of chicken right now, isn't it?

Scott: Yeah. After the COVID and all the damage that has been done economically, psychologically to the economy and the people, obviously, which is the economy, what do you think's gonna happen?

Pat: I don't know. I'm not terribly worried one way the other. I think it'll all be kind of an interesting thing to watch regardless. We'll get through this.

Scott: We will get through this.

Pat: Whether it's a mess or we say all right through it, I mean we'll get through this.

Scott: This too shall pass.

Pat: Yeah. And there's some beauty in our system of government. I frankly like gridlock because I don't know if we need that many more laws. But anyway, it doesn't tend to bug me that much. Anyway, it's been great. Thanks for [inaudible 00:52:13.205]. Oh, and by the way, if you've enjoyed this shit podcast, will you please give us a review?

Scott: Yeah. Just wherever you get this.

Pat: Well, even if you haven't enjoyed it, will you please give us a review?

Scott: And by the way, we do pre-record these. So, this show was recorded on Thursday. And if you wanna be part of our program, wanna be a guest, just send us an email, questions@moneymatters.com

Voiceover: 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.