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May 27, 2023 - Money Matters Podcast


On this week’s Money Matters, Scott and Pat discuss market reaction to debt ceiling talks.  Then, a 59-year-old wants to know whether she should invest money in real estate instead of putting it into her retirement account. You’ll hear Scott and Pat help a California woman with a question about prepaying taxes. Finally, a retiree from Iowa wonders whether he is being too aggressive with his portfolio.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's CEOs Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here.  You can also be on the air by emailing Scott and Pat at

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Narrator: 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 Hansen 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," Scott Hansen.

Pat: And Pat McClain.

Scott: Glad you are joining us today as we talk about financial matters, help you make wise choices with your finance. Hopefully, have a little more confidence in your financial picture.

Pat: And little financial peace.

Scott: Yeah. Here we are at the, we are at the door of the debt limit.

Pat: Right now.

Scott: Being breached. Congress went home for the weekend.

Pat: I thought that was actually pretty good.

Scott: What?

Pat: That Congress went home for the weekend.

Scott: Why? What do you mean?

Pat: Come on.

Scott: I thought the whole thing's a bit ironic, this whole discussion. I think, how many times have we increased it? Like 60-some times, right? But was put in for a reason. Congress put this in to keep spending in check, right?

Pat: That was the idea.

Scott: It's kinda like sitting down with your spouse and saying, "Hey, let's make sure that our credit card balances never get beyond this. "And then, well, we really wanna go to Disneyland. [crosstalk 00:01:29.490] So let's push it and push it, push it.

Pat: Yes. It's, I was thinking about it this morning, it's such a political game. It is 100% political. It's telegraphing how people feel, how the politicians feel about things. And the markets react to it both negative and positively, like bam, bam.

Scott: It's been... All in all, it's a pretty good week for the stock market.

Pat: Yes. Yeah. It's, the markets are thinking, wow! The markets are reacting this quickly to something that is, everyone knows it's going to be solved at some point in time.

Scott: That's correct. Nobody has any real...if people are really worried, we would've seen it in the financial markets.

Pat: Yes, yes.

Scott: I mean, I saw some article about people are selling their short term treasuries to buy something else.

Pat: They were buying Microsoft bonds. And I thought, what are you talking about? They were talking about selling government bonds and buying high quality corporates because they felt there was more safety.

Scott: Let's assume that no deal gets done, and suddenly we're missing whatever payments that, and coming up with some sort of program, how do we continue paying interest or how do, whatever. And the financial markets react. Congress and the administration can come up with something within a matter of hours. It's not right, they're not gonna sit and watch everything burn.

Pat: I mean, they're not worried about, obviously, they're not worried enough about it to actually stay in Washington, DC over the weekend to try to hammer something out.

Scott: No, they're not worried about it. I saw an interesting article, before we take some calls, and we will take some calls today, but this was just a reminder to me. And Pat, if you remember back in about a decade ago, Congress passed a bill to make it easier for small companies, for investors to invest in smaller businesses without having to be accredited investors, and without having to go through the normal process they would have to go through.

Pat: The company, so they waived a bunch of the rules around what's available to non-accredited investor. And an accredited investor is someone that neither has a certain level of income or certain level of net worth or can prove that they have education background that would qualify them otherwise if they didn't hit the net worth or the income goals.

Scott: And what we saw was a lot of these, like real estate investors raising money to buy commercial property or strip malls or apartment buildings. Even so, I'd heard advertisements on the radio. They were, some of these companies were paying talk show hosts to pitch. I always thought it was interesting, these are pretty relatively small investments, not like they're making a pitch for Vanguard or Fidelity or Charles Schwab. Like these were...

Pat: I mean, I'd, listen to one and the gentleman's, one of the commercials I was thinking, he said, we've invested over $40 million, and I thought $40 million in a real estate fund is not a lot of money.

Scott: No, it's funny.

Pat: But if you're an inexperienced investor or didn't know and someone threw out 40 million, you must think 40 million.

Scott: So here's where we're starting to see some cracks in this. In both commercial property as well as in apartments, and probably even more so in apartments. And these were designed, these basically an investor would say, hey, we're gonna buy this apartment building and you put in some money, and you're gonna be a part owner. And they're, essentially, they're limited partners. So when you become an investor, it's not like when you, you mention Microsoft, it's not like you buy a share in Microsoft, now you're part owner Microsoft. And you can sell this share any moment.

Pat: Yeah, it's traded.

Scott: With here you're a limited partner. You don't have the same kind of protections you do as when a publicly traded company like Microsoft, of knowing what's going on. You tend to rely upon the person who set it up, which these people are called syndicators. Here's what's amazing to me, real estate syndicators raised over $100 billion from investors from 2020 to 2022.

Pat: That's a lot of money.

Scott: When interest rates were super low, right? And it's not that the majority of these apartment buildings were not financed with 30-year mortgages at fixed rates.

Pat: Oftentimes there could be interest only or variable rate, or what they call balloons. And a balloon is, we're gonna amortize it over a 15- or 30-year period. So your payment's gonna look like, but it's going to reset in three, five or seven years, at which point in time you need to refinance it. And when that reset happens, when that reset happens, who knows what the cost of money is gonna be.

Scott: We've already seen some apartment buildings going into foreclosure. And it's looking like the large part, these are these syndicators, they're small-time investors that are getting burned on this.

Pat: And why do they go into foreclosure? Well, if they expected the rents to increase, continue to increase by 3%, 5%, 6%, 7%, and they didn't increase, they stopped, so we've seen a definite, you know, slowdown or even a complete stop of increasing rents. And then the cost of money goes up. Then all of a sudden these deals have negative cash flow. And so they have two choices. One is to go back to the original investors and ask for money, or the other thing that they could do is just hand the building back to the bank. And that's what's happening is the buildings are going back to the banks. And so these limited partners, and these are unbelievably the amount of solicitations that takes place on social media around these. There's a gentleman in the industry, and I can't speak to whether he is a good investor or a bad investor, but his name is Grant Cardone.

Scott: How do you remember the guy's name?

Pat: Oh, because I did some research on him. His name is Grant Cardone, and he shows him flying around in a private jet talking about how much money he makes, and he calls it 10X, like 10 times your money. Not your money, well, maybe your money, no one really knows what's...

Scott: Is 10X his money?

Pat: He's gonna do 10X. And these are real estate syndications. And this is, we're just seeing the tip of the iceberg here.

Scott: So, as an example, let's say apartment complex is $100 million. A syndicator will say, "I'll tell you what, we're gonna go out and raise 40 million, we're gonna finance the rest with debt. Or we'll raise 30 million, finance the rest with debt." The syndicator typically gets somewhere between 2% and 5% of the funds that are raised. And oftentimes will get a management fee of maybe a couple percent to run...

Pat: Or profit participation. Or the really nasty ones are actually selling their own properties into their own syndications. So they go out and buy an apartment building for $20 million or build one, and then they turn around, they do it themselves, right? Then they turn around and they sell it to their syndication at a marked up price.

Scott: Before, when you invest in something like this, when you're a limited partner, you need to understand what the risks are and how do you ever get out? Because a lot of investors are losing everything in these things. Not all these syndications are gonna blow up.

Pat: That's right.

Scott: Right, so there's some that are gonna work out just fine.

Pat: But some will not.

Scott: But some, and some have not, they're folding now. And I'm reading these stories about these people had pretty much all their retirement dollars in this thing, and now it's worthless.

Pat: You know, Scott, I talk to people all the time.

Scott: But they said, I mean, they're being pitched on... I could just read this one story. This this couple invested 75 grand, which I imagine was probably the majority of the dollars they had, in a 706-unit apartment complex in Houston, what could go wrong? The complex was selling for 76 million, and the syndicator told investors with rent increases they can more than double their money in three to five years. So you're gonna get rents, gonna double your money in three to five years, except when you don't and the syndication blows them up and the bank takes the...

Pat: And you're out everything.

Scott: Everything. It's all because of debt. If there was no debt on these, everyone would be fine.

Pat: Oh, they'd be able to live through the cycle.

Scott: Yeah. Right? And it's the, and frankly, the apartment owners that have long-term debt, fixed rate debt, they're gonna weather this just fine.

Pat: They'll be fine.

Scott: It's the balloon payments, like it's an interest-only for three years or that sort of thing.

Pat: Or reset or...

Scott: Or variable. The rates are totally adjustable. And now you can't raise the rents high enough to make your interest payments.

Pat: It's, and they open it up to smaller investors, they changed the rules. The regulators changed the rules to make it more accessible. Which actually just...

Scott: I remember at the time I was talking about this is not gonna end well for people.

Pat: But, you know, people have this affinity for real estate, which I don't quite get. People ask me...

Scott: They forget about the debt that cuts both ways.

Pat: Someone said to me, "Why, I only invest in real estate." And I said, "Well, why?" "Well, because real estate always does well." I'm like, "Nope, no, it actually doesn't." And by the way, they said, "Well, you don't like real estate," and I'm like, "No, no, I like real estate, but I like other investments as well." And so it is okay to own real estate, but it shouldn't be all you own.

Scott: It's okay to own stocks, it shouldn't be all you own.

Pat: It shouldn't be all you own, right? It's okay to own a lot of different things. Don't fall in love with your investments. Don't put out a hypothesis that this asset class will always do better than that other asset class. By the way, over the long term most equity asset classes will...they'll do fine over the long term, as will real estate.

Scott: I think the challenge at I see of some of these smaller investors, it's, they, I mean, let's assume somebody's got kind of a mediocre job, mediocre wage, mediocre life, let's say. I mean, right, I mean, and they see these opportunity, they see these wealthy people living these large lifestyles and Gucci handbags selling for $10,000 a bag or whatever stupid thing, right? Crazy thing. And like this is their chance maybe to participate in some of that. That's what I think, that's what drives a lot of this, right?

Pat: Well, of course. And we could think back a different, what was the theme four years ago? The Iraqi dinar was, right?

Scott: And look, the reason I wanted to discuss that is not because I'm worried about people investing in apartments today, it's that there's gonna be something new, and if you wanna take a chance on something, just make sure you can afford to lose it.

Pat: It's okay. Just recognize the risk.

Scott: Yeah. All right, let's take some calls here. 833-99-WORTH gets you onto Allworth's "Money Matters." Let's talk with Echo. Echo, you're with Scott Hanson and Pat McClain.

Echo: Hello.

Pat: Hi.

Echo: Hi. Yeah, I have been listening to your show for years and I really enjoy it.

Scott: Thank you.

Echo: I learn a lot from you guys. I really appreciate you guys, so.

Pat: Well, thank you.

Scott: Well, thank you.

Pat: How can we help?

Echo: Yeah. So I have a question, some questions. I want to know how to maximize my investments. We are doing really well overall financially. This year, we invest about $80,000, you know, 401(k), 403(b), other retirement account. But then I was thinking maybe get into more real estate, maybe reduce my retirement contribution and stack up more cash, maybe get into more real estate. I want to get a kind of idea from you guys, so what do you guys think?

Pat: And when you said more real estate, it leads me to believe that you have some already.

Echo: Yeah, well, our primary home and also we have a duplex, and both are paid off.

Pat: Okay. And how old are you and your spouse?

Echo: I am 59, my husband is 48.

Pat: And how much money do you have in retirement plans?

Echo: About 900,000.

Pat: And will either or both of you be receiving a pension when you're retired?

Echo: We both do. Yeah, we both do. So when we retire, I think we both, we don't need to touch the retirement account basically.

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

Echo: About 120,000.

Pat: And what kind of...and you own a duplex now.

Scott: And it's paid for?

Echo: Yes.

Pat: And it's paid for?

Echo: Yes.

Pat: And are you thinking of buying another duplex or a rental home or what kind of real estate?

Echo: Rental.

Scott: And you wanna, so you're considering this, why? Is this a diversification tool, do you think that you're gonna make more money on this than you would in your other investments?

Echo: I guess with the inflation, with the uncertainty of the economy, have a real piece of real estate will help with the, I guess, secure our financial situation.

Pat: And how big of a, how much money were you looking to spend on? Have you identified a property yet, or is this just theoretical at this point in time?

Echo: With the market now, at least 600,000, I think.

Pat: Okay. And then you'd use some debt.

Echo: No debt.

Scott: Where did you get the 600,000?

Echo: Oh, no, no, I'm talking, I mean, oh, sorry, I misunderstood you. You asked that I get into probably 600 to 700,000.

Pat: Okay. And you would use debt, you'd use that $120,000 in cash as a down payment and then finance the rest?

Echo: No, probably, I would probably 70,000, because I wanted 50,000 in emergency. You know with the duplex, our own home, feels more secure with the $50,000 in the emergency fund.

Pat: So you'll put 10% down?

Echo: Something like that.

Scott: I don't know what kind of finance you're gonna get.

Pat: Yeah, so what, your question to us is, is this a good idea or not?

Echo: Yes. Maybe like, you have reduced investment and then stack up more cash to do it, or, but then I'm thinking about my age, you know, I don't know. If you are...

Scott: If you're my sister, I would say absolutely don't bother with this.

Pat: And why is that, Scott?

Scott: You'll reduce what's going into the 401(k). Stock prices are down, what, 25%, 30% from their peak. Real estate prices have barely budged.

Pat: That's right.

Scott: The cost of money is about double on financing. I don't, if you put 10% down, you're not gonna...the interest rate's gonna be terrible.

Pat: So that question.

Scott: And I think if you go the next decade out, like you've already got a whole, you've got a duplex that's paid for. If you're my sister I'd say, I think you'll have a better return long term, like sticking with a strategy here.

Pat: If she could get a property that is either cash flow positive.

Scott: That's not what she's talking about, she's talking about reducing her money going into retirement.

Pat: I understand that. If she could get a property that is cash flow positive or just break even, as long as you did not reduce your contributions to your 401(k) or 403(b), I don't think it would be a bad idea. Recognizing there's risk in there, there's a lot more risk. And which is funny to me, because you don't have any debt on your primary residence or your investment real estate now, which tells me that you're probably a little bit risk-averse. And you're 59 years of age, and now you're talking about adding significance amount of risk relative to where you are today.

Echo: Okay.

Scott: With debt.

Pat: With debt. Well, that's what, yeah, the risk is gonna come from the debt, or the fact that the tenant is gonna sit empty for a period of time. So, I don't know why you would do it. I think that you're actually on a pretty good glide path to retirement.

Scott: I can't see how this makes your financial life better the next decade.

Pat: I'm gonna go with you on that.

Scott: Or your life as a whole, better the next decade.

Pat: I'm gonna go with you on that, Scott. I don't understand, it seems exactly the opposite of how you're actually managing your situation now, by adding all kinds of debt.

Scott: If home prices were in the tank, we're not there yet. Maybe we will be, maybe we won't be, I don't know. But they haven't dropped much. So it's not like it's a great buying opportunity in real estate right now.

Pat: That's right.

Echo: Yeah, that's why I'm thinking if I can stack up more cash, not like buying right now, but stack more cash in the next three to five years and hopefully the market, I don't know how the market will go.

Pat: Three to five years is a long time. I would not lower your contributions to your 401(k) and 403(b). Would not, absolutely not do that. If you wanna stack up cash and then a buying opportunity comes along, maybe, you know, it depends on where are interest rates and how it, depends on any one particular piece of property. But you're adding risk to your portfolio at a time where it doesn't seem like you need to.

Echo: I don't need to. I guess, I try to maybe kinda greedy to get more out of what I have.

Scott: But like, that's the assumption that you're gonna earn more by doing that than you are in with what you're currently doing in your 401(k). And assuming you've got a large chunk in equities owning companies, like nobody knows the future, right? But if we look over history, when you own a broad basket of U.S. companies, over the long term, they do six to seven percentage points above that of the rate of inflation, much greater than real estate. Now you can look at some outlying if you owned a house on the beach and whatever, that'd be a different story. But, like the typical real estate. And, like it is just, I think part of it right now is the stock market's been in a bit of a funk. You're looking at it like, I haven't made money in my 401(k), maybe I just need to look at alternatives. And I always like to remind myself and others, I started in this industry in July of 1990 and the Dow Jones Industrial Average at that time was roughly 2,600, 2,600. Today it's roughly 33,000. With that, we went through the financial crisis, the .com blowup, all kinds of other horrible markets. And I think just because we're in a bad market doesn't mean that you should throw in the towel on a long-term investment strategy that's proven very well for many Americans.

Pat: And the reason real estate can do well over time is because of the leverage of debt. And the higher the costs, the money, the lower the return on the real estate. That's just, I mean, we just talked about these apartment buildings that, I couldn't understand, I don't, if you were sitting in my office with any one of our advisors, we would say to what end? What are you trying to achieve here? And it seems to me adding more risk, which is what this is, significant amount of risk to your life and your lifestyle, age 59 and a half or 59, and the game's almost done for you. You've got a pension, you've got plenty of money, you've got no debt. I'd leave it alone.

Echo: Okay.

Pat: I would let sleeping dogs lie.

Scott: I don't see how this is gonna make, I don't know how this is gonna make your lifestyle any better.

Echo: Okay, that sounds good. Yeah, I don't want to get back into debt. It's that the stress of having debt is just, I just enjoy the peace now without debt.

Pat: Imagine what happen. You borrow, you know, you're talking about borrowing $600,000 and all of a sudden you get a bad tenant in there and then you have to evict them and then you gotta replace all the appliances that they stole.

Scott: And you still have to make your monthly...

Pat: And then you'd have to pay the payment.

Scott: Seven thousand a month.

Pat: And then you've gotta rehab it and put more money into it.

Scott: Yeah, I think actually if you ran the numbers of what it would cost you on financing today, particularly if you only put 10% down, I don't know what kind of rates you're gonna get. In this market, interest rates on a...

Pat: On a rental.

Scott: No, I mean, I don't know, but I can't imagine it being very good.

Pat: Yeah. So appreciate the call.

Scott: Yeah, thanks, Echo. Well, it's interesting Pat, because we were just talking about real estate and like you asked the question, why is it that people are enamored with real estate? Like what is it about? And I just think it's that they can understand it better, right? So when you've got a rental, let's say you have a rental house, right? And you've got a tenant in there and it's 10 minutes from your house. You can drive over and check on your investment. You know it's there, there's the tenant paying the rent, if they don't pay the rent you can evict that tenant and get a new tenant. It's really easy to understand.

Pat: And you're not getting the statement once a month telling you what the value of the real estate is. So you have a tendency to believe that it is not fluctuating in price because there'll never know.

Scott: You never think, oh my gosh, I lost $8,000 on my house today.

Pat: That's right, right?

Scott: You look at your 401(k) and think holy crud, look how much money I lost today.

Pat: Right, I mean, there used to be this guy that would do this radio show and he talked about real estate and that there was no correlation, and what do you call it? Uncommon. Like it's not tied to anything. Just because it doesn't price doesn't mean that it doesn't move up and down in value. Just because you don't know the price doesn't mean it doesn't move up and down in value. You're just not reminded of it. So real estate has a tendency to look like a safer investment because there's no secondary market for your particular piece of real estate that you're pricing it against.

Scott: And they all take, it takes, whether you've got a property manager, it all takes time. Look, we both have...

Pat: I spent time on it this week.

Scott: And, yes, but there may be, look, there may be some good buying opportunities coming up. We'll see.

Pat: We'll see.

Scott: You know what's perplexing is that, actually I don't know if it is perplexing, but you hear about these, like California for example, where we reside, there's a housing shortage. At the same time, there's population decline. Is that just because there's more, and which I mean, I've seen the studies, there are more single-person households today than there used to be, so more people are living alone. I don't know if there's, more people have second homes.

Pat: And I've never thought about it.

Scott: We have a housing shortage, housing crisis at the same time we have population decline.

Pat: Yeah. I think it probably has more to do with geography than any anything else. The house is, there's probably not a housing shortage. There's not enough houses in the places where people wanna live.

Scott: But that would, if that's the case, then there would be other areas where there are ghost towns.

Pat: There are.

Scott: Okay, they're not very big ghost towns.

Pat: But there are, there are. Yeah.

Scott: Anyway, I mean real estate's, we're big fans of people owning their primary residence, we're big fans of having that paid off by the time they hit retirement so they don't have to worry about making those mortgage payments. There's always exceptions to those rules, of course. And look, there are times when I think real estate can be a great investment. Usually when you're at retirement age, getting into that age, and you're already financially secure, most people don't really wanna add on the complexity of something additional like that. Or most certainly debt.

Pat: Even on an investment?

Scott: Well, that's probably the biggest thing. Yeah.

Pat: Yeah, if that last caller said she had $500,000 in cash, we'd be like, go for it.

Scott: Probably would've changed the situation.

Pat: Of course 100%. Would've been cash flow positive day one.

Scott: That's right.

Pat: Anyway, we're taking a quick break. Stick around for more Allworth's "Money Matters."

Narrator: Can't get enough of Allworth's "Money Matters," visit to listen to the "Money Matters" podcast.

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

Pat: Pat McClain. Thanks for sticking with us. Let's go to the calls here, talking with Dave in Ohio. Dave, you're with Allworth's "Money Matters."

Dave: Hey, guys, how are you?

Scott: Wonderful. How you doing Dave?

Dave 1: Good. So, hey, I've got a Social Security question.

Scott: All righty.

Dave 1: I am 65 years old. My FRA is January of 2024. I plan on retiring probably around this time next year. My check the box is make it to my FRA to qualify for my...

Scott: Full retirement age.

Dave 1: Full retirement age, right? So my question is, when do I take Social Security? I've talked to a number of different people on this. At one point I was leaning towards just waiting till I'm 70 to get that nominal 8% increase every year. But my wife is 66, she's worked only part-time. She waited to her FRA, and gets roughly like 1,000 bucks a month now. So when I crunch some numbers, it seems like my break even on this thing, because she'll get half of mine when I get my FRA, when I achieve that.

Scott: Did she wait until her, did she start hers at her full retirement age or she started early?

Dave 1: Yes, sir. Nope, she started at her full retirement age. So I'm just, you know, my break even I think is somewhere around 82 or 83 years old. So, talking to one of my tax guys, he says, you know what, he said, he says, I'm taking mine as soon as I hit my FRA. I think I'm gonna be, I want the money, I'm gonna take it and run, then I don't have to worry about if Congress tweaks Social Security in any way. You know, we all don't think it's gonna go away. It might be adjusted, what have you. But, so I'm kind of leaning right now that I don't really need the money. I mean, my net worth is about 4 million. My house is paid for, I don't have any debt.

Pat: How much will your income be in retirement without this Social Security?

Dave 1: How much will my income be without Social Security?

Pat: When you retire.

Scott: You have a pension?

Dave 1: I don't have a pension, I just have the really, a 401(k), I have investments, almost 100% of my worth is in the stock market, stocks or bonds. So I'm guessing with dividends, you know, I'll just throw out a number, 30,000 or 40,000.

Pat: Okay. And how, what...

Scott: How much is in your 401(k), IRAs, retirement plans?

Pat: Thank you, Scott.

Dave 1: 3.9 million.

Scott: All right, so it's almost all. All right, so here's a couple things that you should consider. One is, if your income is only gonna be $30,000 or $40,000 a year in retirement, and you can live on that.

Pat: Until required of minimum distributions.

Scott: Until required minimum distributions. You wanna start a Roth, and you've said you've had conversations with your tax advisor. I assume that the tax advisor had said that you should be looking at Roth conversions the minute you retire.

Dave 1: So I do have some money. Of that 3.9 there's probably, I don't know, maybe I'll say 100,000 of it is in a Roth.

Pat: It's the minimal?

Dave 1: Yeah, it's minimal.

Scott: So here's what I find. Dave, so you've asked people for opinions, right? Your tax guy gave you an opinion and call our radio show, you're gonna get our opinion. But there are software programs designed to run a variety of scenarios, where you can run different scenarios. And the thing that, the reason we asked how much you have in your 401(k), it's not really a ticking time bomb because it's not a bad outcome. But it's that, that 4 million, roughly 4 million in retirement accounts, when that retired minimum distribution kicks in, you're gonna be looking at 150,000, 200,000. If you don't take any distributions between now, the growth on that, you might be $200,000 in required minimum distributions from that.

Pat: And so...

Dave 1: Okay. You guys are right, and I apologize. I told you the wrong information. I rolled over my IRA, so I really have, I'll say, I've got one that I rolled over that I got about 1.4, my current one's got about 5. So really only 2 million is in...

Pat: Okay. Still an issue.

Dave 1: There's 1,500,000 in a brokerage account. But you're right, I mean you're right, there's 2 million for sure.

Pat: Yeah, still an issue, still an issue.

Scott: Look, if you enjoy managing the funds yourself and you're just like, I don't really wanna go talk to an advisor, hire an advisor just on a fee basis to run the different calculations. It'll take into all the various tax brackets. Because you can run a variety of different what-if scenarios. That's what I would do.

Pat: Which actually, so the way we, I mean, the way we do it, we actually have Social Security planning software and we use that in addition to financial planning software. We actually run multiple scenarios to show what happens if you're living off Social Security and not taking distributions from your IRA, or if you're taking distributions from your IRA and not taking Social Security or a combination of the two. And what you do is you look out 10 years and you don't worry about the break even on the Social Security, you worry about the net worth, your overall net worth in a 10-year period, and that's the indicator as to when you should actually start taking distributions from there.

Scott: That's one indicator.

Pat: A indicator, right? So if you have a normal life expectancy, I gotta tell you, I would go with your accountant and probably take it sooner rather than later.

Scott: But you would run the numbers before you...

Pat: I certainly would run the numbers.

Scott: I would run the numbers.

Pat: The higher the net worth, the more inclined you should be to take it, because there is going to be a change in Social Security, there's no question. And who are they gonna take that benefit from?

Scott: We don't know that. But we know though, we know there'll be a reduction.

Pat: That's right.

Scott: It's already in the law.

Pat: Yeah. So, anyway.

Dave 1: So there will be a reduction for people that are...

Scott: No, no. There's, it currently, the way it's structured currently, when the Social Security trust fund runs out, they'll have to do a reduction, across the board reduction, which is scheduled to be about 23% right now across the board. So Congress, if Congress does nothing by 2033 or 2032 or 2034, it's going to be, there will be a reduction. We believe Congress is gonna step in and do something. They're not gonna take money away from...

Pat: Poor people. Whose benefit are they gonna touch, someone that has a lot of money like you, Dave, or someone that has nothing and relies on that for 100% of their income?

Scott: But we've discussed this.

Pat: Many, many times.

Scott: Anyway, appreciate the call, Dave. And again, if I were in your situation, I would pay for someone to actually run the numbers, who's competent and can help you out there. Let's talk with Ruth in California. Ruth, you're with Allworth's "Money Matters."

Ruth: Hi, Scott. Hi, Pat.

Scott: Hi, Ruth.

Ruth: Thank you for taking my call.

Scott: Thank you.

Ruth: My husband and I are both retired, and this year we are kind of struggling with trying to figure out how much to prepay in taxes. Since you don't have an employer withholding taxes, we know how to get the money to them because we have, he has a small pension and Social Security, you can have taxes withheld from that.

Scott: You do or do not have taxes withheld?

Ruth: Say that again?

Scott: You have taxes or do not have taxes withheld?

Ruth: We do. We have, so we actually retired and started Social Security last year, but we had a huge income because we sold a rental last year. So last year we way overpaid taxes and got a huge refund back. But now that we don't have any extraordinary income, just Social Security and some pension and investment income, is kind of trying to figure out how much to prepay so that we are not getting hit with penalties and interest when we're filing the taxes for next year.

Scott: Who did your tax return last year?

Ruth: We actually used TurboTax. I know that that's not as good as a CPA. I am actually retired, did bookkeeping most of my life, so I understand taxes a lot, but I could not find any websites that I can actually plug numbers in.

Scott: Here's gonna get you pretty dang close. Go to TurboTax and enter, even if it's 2022 taxes and maybe they haven't updated yet, it's gonna be close enough. Go in and enter what your income's going to be for the year. Pretend like it's the full year.

Pat: Just like it's a brand new tax return, and you're actually running what's called a proforma hypothetical. And you just plug in, this is my income, this is pension, this is Social Security, this is the distributions from IRAs, and it will give you a number at the end.

Ruth: Okay.

Scott: And then work it back, and then that'll tell you how much you should have withheld from your pension or Social Security.

Ruth: Because when I was going around in circles, like the IRS website wasn't super clear on what I...

Scott: You're gonna get within 95% going this route.

Pat: Just use last year's, you know, interpreter.

Scott: And if I were in your situation, I would figure out like whatever I'm gonna owe. And I'd say, all right, between the last six months of this year, how much should I have withheld from my Social Security and my pension so I don't have to worry about paying quarterly taxes?

Pat: And then next year you do the same thing.

Ruth: So next year will be a little easier, because again this year is gonna send precedence for next year.

Pat: That's right.

Ruth: Okay, I appreciate that. I know that with investment income, it's not always predictable. I can go on the website is Schwab, that we have our stuff and it tells you how much they expect it to be. So since that part of it is unpredictable, do we just way overpay or do we do quarterly estimated payments based on which they actually pay us?

Scott: How much do you have in your investment account that's not tied to retirement accounts that's triggering a taxable distribution to you?

Ruth: Well I can tell you what it says, the estimated investment income for this year is 29,000 in taxable accounts. Because I just looked that up.

Scott: And what's the account balance? Somewhere around a million?

Ruth: I believe so.

Scott: Okay.

Ruth: I didn't just look at that, I looked up the investment income because I can check that easily.

Pat: Understand that. So I'd be comfortable using that as a placeholder.

Scott: And paying quarterly.

Pat: And paying quarterly. Well, I wouldn't pay quarterly, because I just would over-withhold. Why?

Scott: Because, how large are your pensions and Social Security?

Ruth: The pensions are small. It's about 14, just over 14,000. Social Security is just about 31,000. My husband is older than I am, he did a file and suspend, so he turned 70 in December and he'll refile. So next year his Social Security will be a little bit higher, but.

Scott: And that $29,000 of dividends and interest that are being taxable to you, are you taking any of that or is it just reinvested in your account?

Ruth: Right now it's just being reinvested because we're just living off of some cash that we set aside to get us through, you know.

Scott: I would not have the things reinvested back in the same positions because, just from a tax standpoint, whenever you go to sell something, it can be more complicated, particularly at this point. And you're probably. So if you have that money dropping into your checking account to spend, then I'd say have, just increase your withholdings. But if it's just accumulating in that account, there's no sense taking a reduction of... I don't know you well enough to know, right?

Pat: And the reason, Scott, quarterly is kind of a hassle and if you can just over withhold, if you withhold from the pension, we're all gonna end up at the same place.

Ruth: Right.

Scott: Well, it depends if Ruth and her husband have...say, "We better not go out to eat this week because our retirement income's not that much because we had more dollars withheld, so our brokerage account keep compounding on itself." Then I would say don't pay the court leaves as opposed to.

Pat: All right, so what you are trying to do is describe human behavior where I'm believing everything is rational.

Scott: Correct.

Ruth: I'm a more rational person, you know?

Pat: Yeah, I agree with Scott. Just have the money thrown into your cash and pay quarterly or withhold, it doesn't much matter. And people freak out on their taxes way too much about whether they get, they have to write a check at the end of the year.

Scott: Well, no one wants a negative surprise.

Ruth: I'm not so worried about the check at the end of the year, I just don't wanna have penalties and interest.

Scott: It's not, and even the interest isn't that much, I mean, it's...

Pat: So anyway, but just, that's how you figure it out.

Ruth: I have to say in general, I think most people will be surprised when they hit retirement age and they don't realize that, hey, taxes are not automatically withheld from any pensions or Social Security, and you have to actually, you know, set that up yourself and think ahead.

Scott: Oh, absolutely.

Pat: Yeah. Well, I mean, yeah. But they can be withheld, Ruth. So like clients who work with us, this is one of the, we factor that in from day, it's part of the retirement plan process. But even then, most people want, they go into retirement, and appreciate the call, Ruth, they go into retirement and they're like, how much money do I have to spend on a monthly basis? That's what most people really care about, right? And so you tend to kind of work backwards into that, and assuming there's enough assets there, you have some amount of money distributed from accounts and transferred to checking accounts each month. And if there's taxes due, then there's taxes withheld.

Scott: Can I explain the point? Look, every time we cut...

Pat: Like in this situation here, like with Ruth, we would probably say let's have some, if your account generates $30,000 a year in interest, why don't we take a couple thousand of it and have it go to your checking account?

Scott: That's right.

Pat: That will increase the withholdings from your, on your pension or Social Security.

Scott: As long as you're spending the money, as long as you're maintaining your lifestyle, that's your point, right?

Pat: As long as you're maintaining your lifestyle.

Scott: And that's how most people want their retirement income to be though. They want cash into their account on a monthly basis, right? So they can pay their bills and all whatever. And they don't wanna have to worry about paying quarterly taxes. And most of the time you can structure it that way. Sometimes you still have to pay quarterly depending on things, but. Or sometimes people say, I just remember years ago, Pat, my wife worked at Intel before we had kids, and had our business going, and I had paying quarterlies, and she had a relatively entry level job outta college. And I went to her and I said, hey, babe, I said, instead of paying quarterlies, we can just have like half your paycheck, go and pay taxes. We'd only been married a year or two, right? And she, that didn't go over so well.

Pat: Well we didn't pay quarterlies when my wife was working, and she had no, basically no paycheck, all of her money went to pay taxes. But the difference probably between your wife and my wife is my wife is an accountant. So she understood at the end of the day, it...

Scott: My wife did have a degree in finance. She just didn't like the concept of working and not having a paycheck.

Pat: I get that.

Scott: So rational or not. I mean, if you, and it's funny, Pat, you look at, there's behavioral economists, like we can't take out our human nature from all of our planning. And I think one of the reasons we enjoy taking calls on this program and we encourage people to be part of the program is because we all get a bit of a window into other people's psyche. And it's not only how they've done with their finances and what they're currently doing, but it's how they're thinking about it, and how they've structured their lives in such a way.

Pat: Well, a good investor actually has a, good investor has a view of their own psyche and what their biases are in terms of how they invest and how they are spending. A good investor, actually, I have biases.

Scott: They know their strengths and weaknesses.

Pat: Oh, I absolutely have biases. And so what happens is when you're making investments, you actually have to, you know, be aware of those biases and have a tendency to say, you know, my biases might lead me in this direction.

Scott: Yeah. All right. Let's go to Iowa, talk with Dave. Dave, you're with Allworth's "Money Matters."

Dave 2: Oh, great. Thanks for taking my call guys.

Scott: Thank you.

Dave 2: I've got like three podcasts that are my go-to's, and you guys are my go-to for finance, I really enjoy your show.

Scott: Oh wow. Thank you.

Dave 2: Probably listening for a couple years. So anyway.

Scott: Appreciate that.

Dave 2: I guess my question is really gonna kind of center around, I guess, am I investing correctly with my short-term money? So, let me kind of give you a background about what's going on though first. I'm 60, my wife is 59 and we're retired. No debt. And we've got money in a few different places, I guess our tax advantage accounts, I've got the 401(k) and the Roth. 401(k), we've got about 1.9 million, and that guy in the Roths, about 300,000. All of that is really aggressively invested, like 90%, 95% equities, mostly index funds, that kind of thing. It's invested so aggressively because we don't plan on pulling that thing out until we have to, which is 12, 13 years. So, that's kind of what's...

Scott: And even then it's just a little amount you're gonna take, it's not like you're gonna spend it all.

Dave 2: Right, right, exactly. And then the second piece is our brokerage account, which is, we got about $2 million in that. Now, the tricky part there is, I kind of run a bucket, kind of a bucket portfolio. I got my aggressive money, and then I've got our more short-term money. Our short-term money, there's quite a bit in there though. And mostly because we're 60 and we're not gonna be drawing Social Security, or we don't plan on doing it until full retirement age, but I know you guys have thoughts on that. But anyway, so that's still seven years away, and I sleep pretty well at night knowing that I don't have to worry about money, you know, going up or down in that bucket for the next, you know, several years,

Pat: How much money is in that $2 million in the brokerage, how much money is in short-term?

Dave 2: In short-term it's 700,000. But I've got it broken down in three places. And, I got CDs, and they're running about 3.5% to 5%. And then I've got, that's 350,000. We've got 180 in our money market, and that's in Fidelity Net. Right now that's bringing in about 4.9%. I know that can change. And then the third bucket is just cash, and there's 125 in there, but the only reason it's that high is I just had a CD mature about a month ago, and I've just been kind of waiting until this phone call to talk to you guys about that. But I normally don't keep that much money in cash.

Scott: And what do you spend a year?

Dave 2: We spend on the high side about 60,000. We can spend it all, we can pay all of our bills for under 50, and then we'll take a couple trips and, you know, if we have some unexpected things come off. So expenses aren't very high.

Scott: I'm guessing you don't buy your wife the latest Gucci handbag at Christmas time for $10,000.

Dave 2: No.

Scott: I just read an article this week about how much people spend on handbags, and I find that stuff just bizarre to me.

Dave 2: Well, no, we're more the other way. It's like she'll say, oh, I just bought a purse for 50 bucks. She'll like justify it to me. So we're definitely not that guy.

Pat: And, are there any other assets outside of this? And you own your own primary residence, any other assets outside of what this, you just went through? So we, right now with the way you described it, you've got $4.2 million of investible assets, of which a large percentage of it is equities. It doesn't sound like you have much medium-term bond or anything like that. It's either long or short, right? We're either in equities or we're in cash.

Scott: And do you have children?

Dave 2: They're both grown. They're off the payroll.

Scott: What's your main question?

Pat: Yeah, what's your question for us?

Dave 2: Well, my main question is, I'm looking at this bucket one, and I see these CDs earning 3.5% to 5%, and I'm thinking, gosh, is that a bad place to put it? I mean, where would I put it short term to get more than that? I know that can change next year, but it doesn't seem like I'm being overly conservative by just keeping that bucket one with that much money in it, we have to earn that kind of thing.

Scott: Well, here's how, I mean, here's how I look. You spend 60,000 a year, you have 700,000 in cash, right? So, I mean, even if you didn't touch anything else and had everything else reinvested, like, you've got more than a decade before you have to look. So even though you've got a lot in equities, like, if you still, you just said you sleep good at night, there's nothing wrong with that. Look, over the next 20 years that'll serve you very well.

Pat: You know what's wrong with your portfolio, Dave?

Dave 2: I don't spend enough money.

Pat: Thank you.

Scott: Well, I was gonna approach it a different way. Like, one thing I think, it's not how you have the dollars allocated, it's, I think, what might be helpful for you and your wife is to look at, what do you want these dollars to do? Like what is...

Pat: What's the objective?

Scott: Because you can't take them with you, right? So we're all gonna die. You're relatively young still, so you have a lot of time ahead of you. But you've already know that you've accumulated more than you're gonna ever spend in your lifetime. You can just continue to build your net worth, and you know, be worth, you know...

Pat: Twenty million.

Scott: Whatever.

Pat: It's not gonna matter.

Scott: Twenty million, and you leave it to the local something or other.

Pat: Or the kids or wherever.

Scott: Or I'll do the kids. Or you could say, let's help the kids a little now on some things. Or you can say, you know, we're really passionate about this particular cause or that cause. Maybe have a few dollars go to those causes? You can do any of those things, you have the luxury because you've saved well and you live below your means and you're not...

Pat: I would encourage spending money. I would encourage you to actually spend significantly. Like half as much as more as you're spending now.

Scott: But that might not make them, that might not bring them joy or peace.

Pat: Scott, I said encourage. I didn't say, I don't think it, of course, it may not bring them peace, right? But every journey starts somewhere.

Dave 2: Yeah. I think a lot of it, most of this is gonna end up going to the kids eventually. And part of me is like, you know, I want them one day say, hey, we got a bunch of money here. But at the same time, I kind of wanna get the money to them, you know, as they're young adults so they can enjoy it.

Scott: I think that's brilliant, personally.

Dave 2: Yeah, I just think. I don't want them to be 50 thinking, what the heck was I doing when I was 30, you know, with this money. So, that's kind of where I'm at on a big piece of it. But I, you know, we do wanna kind of step up the travel a little bit, or you know, maybe upgrade like into a different house one day, or just move.

Scott: Perfect, perfect. You've put yourself in...did you inherit any of this or was this all just saved?

Dave 2: This, saved.

Scott: I knew you, I knew that.

Pat: But there's nothing wrong with your portfolio allocation of what your original question was, there's nothing wrong with it. I'm 60, I am 60 and I have 100% of my 401(k) is equities, 100%.

Dave 2: Okay.

Scott: I'm 56, 100% of mine is in equities.

Pat: And I can't ever imagine...

Scott: My Roth, my 401(k), my IRAs.

Pat: I can't ever imagine a time in my life where it won't be exactly that.

Dave 2: Okay. That's kinda where I'm feeling.

Pat: I'm comfortable with it. I've got enough cash set aside that if I need to get it income, I can get it income. There's nothing wrong. You know, the portfolios are built for you. And it's, you know, you're not using any leverage, you know, you're fine, you've been a long-term investor, you understand the market, we don't believe that you're gonna react negatively to a 30% downturn in the market. You're gonna stay through, live through it.

Scott: Living through it now.

Pat: Yeah, yeah. So I think it's perfect.

Dave 2: Okay. I try to look at these, I look at these things as uncomplicated as possible, where I know a lot of people that don't and they're still working, you know. Like, you know, it's just, seems like overcomplicated sometimes.

Scott: I would 100% agree with you that. And particularly as people that net worth grows and they think just because they have more money, they need to have a more sophisticated portfolio. So, which is not the case.

Pat: And your short term money's fine too.

Dave 2: Okay. And that was my thing, I'm just looking at that thinking, you know...

Scott: Well the only reason you have CDs yielding 3.5 is because you've owned them for a while. If you had investing cash, you're gonna get a little better rate on them.

Pat: Yeah, your cash portion of your portfolio is fine.

Dave 2: Okay. What I kind of do is, I go from CDs and then I would push them into the money market, and then push that into the cash, and then push that into the checking account. So the CDs are kind of kinda long obvious, so, okay.

Pat: Perfect.

Dave 2: So I may just go ahead and put another, buy another ladder, another CD then if I can get over 5% on it.

Scott: That's right.

Dave 2: Okay. It just seems like CDs are, people think they're too safe, but right now I'm looking at it thinking, gosh, why not?

Scott: It's a great percentage of your portfolio. I think it makes some sense for you.

Pat: There's nothing wrong with it at all

Scott: You're comfortable with it, and I think it's served you well. And obviously you've done a great job saving and you're a great investor. As you said, the portfolio is designed for the investor. We're outta time, it's been great being with you. Hey, if you enjoyed this, forward this on to a friend and say, "Hey, check these guys out," we'd appreciate that. We'll see you next week. This has been Allworth's "Money Matters."

Narrator: 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.