Tax-Loss Harvesting, Smart Business Sale Planning, Direct Indexing, and Lump-Sum Strategies
On this week's Money Matters, Scott and Pat explore the benefits of tax-loss harvesting during volatile markets. Then, they’re joined by Simone Devenny, Head of Private Wealth Strategies at Allworth, to dive into key financial strategies for entrepreneurs and business owners, including tax optimization, estate planning, and succession strategies. Finally, they answer listener questions on topics like lump-sum payments, Direct Indexing, and how to manage tax-deferred savings.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain, thanks for joining us.
Scott: That's right, as we talk about financial matters. Both myself, my co-host, both financial advisors, helping people with their finances...
Pat: For many, many years.
Scott: ...financial planning and all that stuff in this program. And we've got...not only have some good callers lined up, we've got an attorney who we're going to spend a little bit of time on some things that business owners could be planning ahead of a sale. Like what are some things to be thinking about to get ready if they're going to sell their business? And the reality is, we've seen it, Pat, like, people start a business, run the business. Maybe their hope was that the kid would take it over one day. Maybe their kid has no interest. Maybe their kid's been working in the business, but it's a little apparent that...
Pat: The son or daughter doesn't have the ability to run the business. And that then the business needs to be sold. Because in most circumstances, not in all, but in most circumstances, it's the highest portion of that person's or that family's net worth is the business itself.
Scott: Yeah. 90...I mean, I don't know what percent of the time, but I mean..
Pat: It's gotta be 90-plus.
Scott: ...it's not uncommon when you see someone whose business is worth $4 million and they've got $80,000 in savings.
Pat: Oh, not at all. Not at all.
Scott: Or $40 million and they've got $80,000 in savings. That's true. Exactly. Exactly. Hey, there are some things you could be doing in the midst of the market turmoil.
Pat: Oh, that are extremely positive for you.
Scott: Yes. And one of which is tax loss harvesting. And that term alone, you think, well, who wants losses in their portfolio?
Pat: I do.
Scott: You don't want a loss in your portfolio, but if you have something temporarily declined in value...
Pat: You're going to recognize that loss.
Scott: It'd be nice if you can lock that loss in to offset gains of other things.
Pat: You don't inherently purchase something because you expect a loss in it. That is not investing, but inevitably, if you're an investor, you're going to own something outside of an IRA or a qualified plan that has lost value. And you have two choices. One is you can just continue to hold it. The other is you can sell it, recognize the loss for tax purposes and purchase something similar, but not identical on the same day that you...right? You can't buy the same thing because then it's called the wash rule and you can't recognize the loss.
Scott: And it's really easy to do if you...Let's say you invested January 1st of this year in just even some ETFs, it'd be easy to swap some things out, take some losses, but at the beginning...As we were preparing for the show, I said to Pat, I said, "It's really hard to do on things that you've owned for years and years." And you said, "Oh no, I just encountered..."
Pat: Oh, just saw one, which is a pretty big account. It was north of $5 million. They had had the same advisor for the last, I don't know, 20-some-odd years, purchasing the same mutual funds from the same family, right, and dividend reinvestment. So what is dividend reinvestment?
Scott: What percentage was in this one particular mutual funding?
Pat: Family or...?
Scott: Family.
Pat: I think it was 70%-plus.
Scott: Was this like old front-loaded mutual funds that were sold...that was how things were done 30 years ago?
Pat: Like, you mean the American funds like when you and I started, like that?
Scott: Something like that.
Pat: Was that, right? Yes, it was something like that. It was old school, this is how we do it old school. We don't change. We dividend reinvest because it's the best thing ever. Look, so dividend reinvestment in the last 12 months, lost money. You take a loss, you sell that portion of the portfolio. So what is dividend reinvestment?
Scott: Well, the dividends that the mutual fund, in this case was a mutual fund or ETFs or stocks, you reinvest it back within itself...
Pat: Which is, they pay out.
Scott: Not always the best thing to do. In a tax-deferred account, it doesn't. [inaudible 00:04:56.478] it's fine. Makes sense. In an account that's outside of retirement accounts where you're trying to minimize taxes, it's usually not the best thing to do.
Pat: Yes, it's lazy. It's lazy. That's what it is, right? Because...
Scott: Well, it is easy, yes.
Pat: It is easy.
Scott: A lot of stocks used to have the DRPs, dividend reinvestment plans, right, in them.
Pat: Yes. Yes. Anyway. So if you've got an opportunity to recognize losses, and it's right there on your statement, if you're managing your own portfolio, then it's easy to see...
Scott: Or your advisor. And you can allocate which shares you want to sell. You own 100 shares and you say, "I want to sell the 2 shares that were purchased on these dates."
Pat: Yes. And that way you can recognize the loss on those. So in a downturn market...
Scott: And you can sell it and then buy something very similar that same day. So you're not out of the market.
Pat: But not identical.
Scott: Yeah. You're not out of the market.
Pat: Yes. So it makes sense. And if you've got a good advisor, they're doing that for you anyway.
Scott: So yeah. We got some great calls lined up, but before we go to the calls, we're talking with Allworth's head of private wealth strategies, Simone Devenny. And Simone's been on the program, I don't know, two or three times, I guess. So Simone, thanks for taking some time to join us.
Simone: Thrilled to be here. How you doing, guys?
Scott: Good. I'm glad you're thrilled.
Simone: I'm always thrilled. Oh no, always thrilled when I'm talking to you.
Scott: Thrilled. Okay. Good. So by formal training, you're an attorney, but you spend most of your career helping higher-net-worth folks minimize taxes, do the right kind of planning, and some advanced strategies with their oftentimes family business, etc., right?
Simone: That's right.
Scott: All right.
Pat: How many nut jobs have you had to work with in the last 20 years, Simone?
Simone: I mean...
Pat: Like crazy rich people, like crazy rich people.
Simone: Crazy rich, like crazy rich together, meaning like insanely rich or crazy and rich?
Pat: Crazy and rich.
Simone: All of them. I'm just kidding. I'm just kidding. No, I've gotten to work with all kinds of people. And as we know, the world is filled with all types of different people and crazy is how we perceive it. But I would actually say most business owners are the right kind of crazy. They tend to be risk takers. They tend to be builders. They tend to have a vision that a lot of the rest of us might not. Although I know you have that vision, the two of you. But yeah, the best kind of crazy, I've seen a lot of them. I've worked with all kinds of different people and seen many, many, many types out there.
Pat: And the reason I asked the question, myself, I loved working with business owners as well because I find them just a little bit out there, just a little bit like they don't view the world the way the rest of us do normally.
Scott: Well, they're normally not rule followers in the sense that they typically weren't the best students growing up in high school...
Pat: Check.
Scott: ...that went to the top schools. Right? Those go into leadership management and oftentimes business owners, they do things a little bit differently. And oftentimes they weren't that excited about formal education and didn't go to the top schools. Sometimes they did, but oftentimes not. I'm sure you can attest to that, Simone.
Simone: Yeah, I think a lot of times we're talking about people...It reminds me of, I think it was Mother Teresa or someone who said, "Be the change you wish to see in the world." And I think a lot of times we're talking about people who are creative and they want to see something that isn't out there yet and they'll go out there and do it. And a lot of times that means there's not a playbook necessarily, they're building it as they go. So definitely a little bit of a different mindset than your kind of, you know, more typical employee of a company.
Scott: Yeah. So what are some planning techniques that some of these business owners should be considering as they're contemplating their business sales? So maybe they're not sure if they're going to be selling their business yet or not, but they're getting up an age. They know that they have to do some sort of succession planning. Otherwise, someone else is going to do the planning for them. So what are some things they should be paying attention to?
Simone: Yeah, I think that's a great question, Scott. And I think, you know, gosh, I find myself throwing around a lot of expressions that I can't attribute to anyone in particular, but another one that I heard recently is, "Start before you're ready." And I think that when we think about a business owner selling his or her business, I think maybe the best advice we can give is start preparing before you're ready. You know, a lot of times you think about businesses transition ownership for a number of reasons. It can be by decision, right? But it can also be by death, by divorce, by disability. There are factors that we can control, factors we can't control. But I think the best advice for any business owner is whether or not you already have a sense of precisely how you would ideally like to exit the business and sell it, start preparing now. And I think what that means is, you know, there are a number of things to do. Obviously, we think about all kinds of considerations.
Number one, obviously, you know, on the wealth management side of things, we want to be prudent about structuring things from a tax perspective. And often that involves pretty significant pre-planning. So we also want to think about, how do we maximize what we're actually going to receive when we sell the company? So even pre-tax, right, how do we maximize that number? How do we think about, you know, if we want to transition the business maybe to our employees, things like an ESOP? But I think that no matter what a business owner hopes to achieve, you know, it's really important to start being intentional and thinking through all of the possibilities very early on. Part of the reason for that is there are opportunities to structure businesses pre-sale and often significantly pre-sale that can dramatically reduce the tax implications of that sale. A lot of times you'll hear the guidance out there, start preparing to sell your business one to two years before. I would actually say, start thinking about it more than five years before. There's some special rules out there under the tax code with certain types of businesses that can, you know, save you tens of millions of dollars in tax if you structure more than five years pre-sale. So I'll pause there and see if there's anything you want to expand on.
Scott: Give us some examples of someone you've worked with the last few years or whatever on some advanced planning that you did prior to sale and what the implications were for their, you know, eventual process.
Simone: Yeah. I'll give you a good one. So, and actually, I think this kind of dovetails nicely. I think right now we've got some concerns about the volatility in the market. You know, we've talked about some planning opportunities that exist, for example, when the economy is not strong, right? I can tell you a story of a family business. And this was...I think it was paint. I think they manufactured paint. But this particular family had been thinking for a long time, many, many years, about how and when to sell the business and how to properly structure that. And what this family did is actually in a very recessionary period when, you know, home building was down and the economy was depressed, what they did is they set up some trusts for the benefit of the next generation. They transferred the ownership of the company into those trusts while the company was not doing well. And then many years later when they sold the company, all of the proceeds of that sale, and we're talking about a very high-figure sale, are now excluded from the owner's taxable estate. So there's not going to be an estate tax implication if you do this right. This is an invisible transaction for income tax purposes. So that would be one example.
Pat: So they used up their unified credit, right?
Scott: Part of it, yeah.
Pat: Or part of it.
Scott: That's just the amount that we can transfer at our death or while we're alive without any estate or gift tax.
Pat: But they did it in a place in the economy which was super favorable to them.
Simone: That's right.
Pat: Super favorable.
Scott: Yeah. And you might have a business right now, something similar. The hard thing though, Simone, is to actually do it in a time like that because we don't know what the future's going to be and you're thinking...
Simone: Well, this is where the pre-planning comes in, Scott. So you know when we said not 1 to 2 years, but let's start thinking 5, 10 years before. And the reason why is we know that the economy is cyclical. And so, just like with investing, if we have a long enough horizon, our opportunities are going to be better. So, you know, I think some advice to business owners, all business owners who are contemplating an exit at any time is number one, get a valuation done of your business. This is one of the first things we tell business owners to do. Go out there, find an accounting firm, a CPA firm, a business valuations firm, and obtain a valuation so that you know what that business is actually worth at this present time. Again, a valuation during a down market is really great for transferring assets out of your taxable estate.
Pat: It's incredible.
Simone: Right? So, there are a lot of reasons, but we always say, no matter what you're doing, prior to a business sale, you want to have a valuation because that allows you to undertake whatever type of estate and trust and tax planning you need to do. But that's sort of, you need to have that in hand. Another thing that we would tell business owners is, you know, look, a business owner is generally focused on one thing and that is their business, right? I mean, we see a lot of dedication. We see a lot of, you know, sleepless nights and people pouring their lives into these businesses. But sometimes, you know, you're so head down in the business that you're not thinking about...you know, you're thinking about now, you're thinking about the future state of the business. Most business owners actually aren't thinking about their own personal enrichment. They're thinking about the business.
But what we want to say, is okay, you know, make sure you surround yourself with advisors. Oftentimes, you can have a board with outside advisors, you know, who can really help you take a step back and have a look at, you know, how are we going to best position this business to be as strong as possible prior to a sale? I mean, there are things like not just the valuation, but, you know, looking at obtaining what's called a quality of earnings report, right? You know, really arm yourself as the business owner with the best information that you can about your business so that you're well-positioned to negotiate, you know, when you're ready to engage in the sale process.
Pat: And Simone, this is my general view of this. I have a number of friends that own businesses, some quite, quite successful. And when I talk to them about, you know, planning, they always tell me, "Well, I never plan on selling the business." I'm like, "Well, how's that work?" "I just never plan on selling it." Like, "So you're going to die with this thing?"
Simone: I was going to say, it's like my former estate planning life, people who think, well, you know, I'm never going to become disabled or pass away. And it's like, well, you know, odds aren't so good there.
Pat: Yeah. So do people not engage in...do they not engage in this kind of practice because they're afraid that it's going to push them into a sale?
Simone: Yeah. I think, look, there's a lot of psychology behind this, right? There's a lot of psychology behind this. I think by nature...and I always hate to make generalizations, okay. But by nature, business owners, entrepreneurs like to be in control, right? They like to be in control. And in fact, in many ways...I mean, I could get super philosophical about this, but in many ways, when we're building something, it's the opposite of thinking about, you know, decay or death or anything. We want to build, we want to move forward, we're in growth mode, right, and it's keeping us very much alive. So the idea, a lot of times for people, you know, selling or parting with their business in any way, almost represents like a figurative, you know, checking out of life or a death, right? And people don't like to think about that. You know, but I think what we really need to be mindful of is, look, I think I mentioned it earlier, whether we like it or not, there are circumstances in this life that are beyond our control, disability, death, divorce, you know, these types of things. And I don't have percentages or numbers. And in fact, after this call, I may go do some research, but I'm very curious to know how many business owners actually transition or sell their business in the way that they choose rather than having something happen to them. I think that'd be an interesting stat to come armed with next time.
Pat: You know, Scott and I have sold...well, we sold the reverse mortgage company.
Scott: A couple businesses.
Pat: Yeah, we sold a couple businesses a couple times. And the way I described it was the same...I have four children. I felt this almost the same way when my first child went to college as I did when I sold...
Scott: Elation?
Pat: No, kind of like you knew it was going to happen, you're a little bit sad, it's the end of an era, but at the same time, it's just all part of life. And when we took private equity for the first time, for Allworth, the emotion was almost the same as when I dropped my first child off at college, which was a little sad, but at the same time, it was a little exciting.
Scott: A little different than selling your business and walking away, taking on equity and selling.
Pat: That's probably true. That's true.
Scott: So real quick...
Simone: You've both been through it, right? You've both been through it. I think, look, there's a big component of this which is very much an emotional component that people don't think about. And I think you just said it right. Someone's devoted their life to creating something, or it's like raising children or building a business, there are a number of things, and stepping away is a challenge. And actually, there are those types of factors that we often encourage clients to think about prior to selling the business. It's not just about the money. It's about who are you going to be if you are not the person running this business anymore, the owner of the business anymore? But we also think, by the way, with great planning and a healthy financial outcome, what we often see is entrepreneurs, business owners channeling the energy that they brought to their business and they now have really carte blanche to go in a new direction and reinvent themselves. And typically, they'll have the funds.
Pat: They have carte blanche to drive their families crazy by spending all that time at home.
Simone: No, no, this is how we help people think through...My mother-in-law, by the way, when I got married, she said, I have one piece of advice for you. They've been married probably 60, 70 years. She said, "For better or for worse, but never for lunch."
Pat: That's right. That's right.
Simone: And so I think oftentimes post-sale, especially if it's going to be the type of situation where the business owner steps away, a lot of times people will channel that into a new endeavor. It might be a philanthropic endeavor. It might be building something to solve a problem that they've seen. Most of the time, people who built successful businesses aren't just going to go out and just spend every day playing golf. Maybe some days, but not every day.
Pat: That is correct.
Scott: All right. Simone, thanks for taking some time.
Pat: Simone, as always, thanks for being part of the team at Allworth. And thank you for the advanced planning that you work with our hundreds of advisors across the U.S.
Scott: Yeah. And appreciate your time, Simone.
Simone: Thank you very much to both of you. And again, I really was thrilled to be here, guys. Have a good day. Take care.
Scott: Thank you. And I've been in some client meetings with Simone and she's got...there's a bunch of different, kind of, advanced strategies that...every situation is so unique.
Pat: Yes. And then our job is to take all the tools that are available and apply it appropriately.
Scott: And every tool, there's a positive and a...right? There's consequence. You do this, here's the good, here's the downside.
Pat: Yes. And it's trying to figure out which...kind of putting a puzzle together, what's going to make the most sense for you personally.
Scott: All right, we're going to take some calls. We're talking with Trevor. Trevor, you're with Allworth's "Money Matters."
Trevor: Hey, guys. Hey, thanks for having me on. And I just want to say how much I appreciate you guys. I grew up in a family that really struggled financially. So for a long time, I had kind of a negative relationship with money. But I think this podcast is really one of the catalysts that totally changed my perspective. And it's really been the highlight of my week for the past probably 10 years. So thank you guys.
Scott: Holy smokes, that's the nicest comment I've ever received.
Pat: Trevor, how old are you?
Trevor: I am 39.
Pat: Oh, wow. And thank you for the compliment. Yeah, look, you know, we all have a relationship with money, right? And I know I grew up in a family...I don't know what yours was like, Trevor, but there wasn't a lot sloshing around that place. And I know Mr. Hanson...
Scott: I had a tree-trimming business...I mean, I did that too, but a paper route, not because I enjoyed delivering papers. I needed the money. There's no extra money for anything.
Pat: Yeah, yeah, I get it. So how can we help, Trevor?
Trevor: Yeah. So I called you guys for advice a few years back because I was leaving a government job to start a small technology company. And fortunately, I'm on the opposite end of that now. So our company was just acquired by a larger company about a week ago. So I've come into a little bit of money. I mean, it's not tens of millions, but to me, it's a lot. So I was kind of just wanting to get your opinion on what I should do with it.
Pat: Tell us about the rest of your life.
Trevor: Yeah, so quick rundown. I'm 39. My wife's 38. She has a great stable career. We have no kids. Our financial situation between retirement savings, between IRAs, 401(k)s, brokerage, we've got about $900,000 in equities, and this is all prior to the sale, and then about $50,000 cash. Other than that, we have no debt. We also don't own a house. I don't think I mentioned we don't have kids. So our life is pretty simple in that regard.
Pat: What's your wife's income?
Trevor: About $130,000.
Pat: And what's your plan after this? Are you continuing on with the company? Are you going to do something different or you don't know?
Trevor: Yeah, so I'm continuing on for a while, for as long as they want me. There is a little bit of an earn-out, which hopefully will get. Maybe, maybe not, we'll see. So my plan is to stick around for a while. But I also kind of have the entrepreneurial bug a little bit now. Some kind of itching to explore some other ideas as well.
Pat: What is your income from the job today? Not the lump sum, but the income.
Trevor: It'll be about $150,000.
Pat: How much money are you walking with pre-earn-out?
Trevor: So pre-earn-out, the gross is about $1.2 million. And the majority of that is taxable capital gains.
Pat: Got it.
Scott: Will that be this year, 2025?
Trevor: Yeah, unfortunately, an installment sale type of arrangement wasn't going to work. So it's all going to be just for this year.
Scott: Which I actually like that. I like that, the fact that it's...What's the earn-out look like if you hit all the numbers? And I assume it's a 24, 36-month earn-out?
Trevor: Yeah, it's 24, but it's kind of prorated or in-phase. So it's potentially up to another million dollars over the next year.
Pat: Wow, that's a big earn-out.
Trevor: Yeah, it's a long story, but it was the best deal for us at the time. So whether we get any of the earn-out or not, it was still a good deal for us. So that was kind of why.
Pat: Yeah, you've sold it at eight times your income, which isn't bad for a company that's relatively new.
Scott: Yeah, congrats. Good for you. it's pretty exciting.
Pat: Yeah, and by the way, there's probably some big hurdles in that million dollar earn-out. So swing at it and if it doesn't happen, it doesn't happen.
Scott: Kudos to you. How fun is this though?
Pat: Oh, it's so much fun. Scott and I have started a number of companies together. We started, I think five, three of which we talk about. [crosstalk 00:26:30.930] It doesn't always work. So are you going to buy a house anytime soon?
Trevor: That's a great question. So we've owned in the past and we're kind of between houses right now. We have a tendency to not stay in one place for too long. So I think that's been the main reason. And, you know, with having the startup the last couple years, I just haven't had the stability. So I'm kind of on the fence. I'm not itching to buy anytime soon, so...
Pat: Do you believe that...
Scott: Think you'll start another company?
Pat: Do you believe that you'll procreate in the future?
Trevor: We're not planning on it. It seems unlikely. I mean, you never know, but unlikely.
Pat: All right. And then Scott, your question?
Scott: Yeah. Do you think you'll start another company?
Trevor: I would like to. I've got another, kind of, project in the works that hopefully will go somewhere. So yeah, that's my eventual goal. I think that's my longer-term plan.
Pat: This last company that you were in the ground floor, were you part of the formation of it or did you grow it after it was...did you join after it was formed?
Trevor: Yeah, I was one of the two co-founders.
Pat: Cool. Okay. And how did you finance this one?
Trevor: It was bootstrapped.
Pat: Okay. All right. I love it. What a great story.
Scott: What's your question?
Pat: Yeah, what's the question?
Trevor: Yeah. So with that, you know, just the lump sum that I got, I'm trying to figure out what to do with it. And I'm not...you know, I've got it basically sitting in a money market right now. I'm just trying to get your opinion on it.
Scott: If I were 39 again and it were me, I'd put it in the treasury bills right now.
Pat: I'd do half of it.
Scott: Half in treasuries and what else?
Pat: I'd invest the other half for the long term in a direct index.
Scott: I wouldn't because who knows what you're going to need for your next company.
Pat: I know that. That's what my thought is though. Right?
Trevor: Yeah. It's interesting, I wasn't actually expecting you guys to go the treasury bill route. Yeah. My first instinct was kind of just, you know, try to figure out maybe what I need to seed this other company and then throw the rest kind of just into...
Scott: When did you start this company?
Trevor: End of 2020.
Scott: Okay. So five years you created...in addition to making some salary, you created $1.2 million bucks for yourself. You got another idea. You think this other idea is better than the previous idea?
Trevor: You know, I think it is, but I guess time will tell.
Scott: So I mean, the way for true wealth is not investing in index funds or anything. It's in your own career, in your own business.
Pat: But he's got a track record now and he can raise capital much easier this time than he would have been last time. And so Scott, what I'm saying is I'd sweep half and call it long-term savings and it's not touchable, that's for my retirement. The other half I'd leave in the game. And then anything from the earn-outs, I'd actually leave in the game.
Trevor: Okay. Yeah. And that's why I wanted to talk to you guys because I was...
Scott: No, I mean, I'm with you in that because you're saying instead of putting off...because things don't always work out, right?
Pat: Well, and the problem he has is that he started a company and it's really, really difficult to go back and go to work for someone else after you've lived in that adrenaline-filled cage for a year or two or three.
Trevor: Yeah. I just got out of a corporate meeting and I was struggling a little bit.
Pat: Oh, you're kidding.
Trevor: Got to get back into that.
Pat: I've never done that before. Oh my, we sold a company to Genworth, which was a spin-off of GE. Oh my, I got to tell you, Trevor, it was pure pain to sit in a meeting with these guys from corporate. Oh, it was awful. I actually...
Scott: We didn't last very long.
Pat: We were there...we actually pushed our earn-out forward and got out in less than a year. We were supposed to have a two-year earn-out.
Scott: I think four months.
Pat: Oh, it was so bad.
Scott: Three, four months.
Pat: Yeah. So I feel what you're going through.
Scott: We didn't get a dime of the earn-out, by the way.
Pat: We didn't get any of the earn-out, but they were jerking us around all the way through.
Scott: Well, be careful. I think there was some NDAs or something. I know that was a long time ago, but...Come after me.
Pat: You think any of those people are still around?
Scott: No. No.
Pat: Remember they talked about their MBAs all day?
Scott: Yeah, yeah.
Pat: Anyway. Yeah, I like the idea and I'd use it directly...
Scott: So the idea behind this is allocate some...and I agree with Pat, allocate some portion. What of this do you want to have for your long-term, to increase...
Pat: You and your wife.
Scott: Yeah. Your base there. Then what do you want to put at risk for the next business? Whatever you're going to put at risk, I'd just have it in treasuries or money market account or something along those...assured CDs or something.
Pat: Not CDs. But I would take that $600,000 and call it retirement. I would put it either...you could fund Roth IRAs, do whatever you need to do on that side to make it more efficient, but the rest of it I'd use direct indexing.
Scott: But if you think it's going to take more cash than that to get this thing going, or if you had the cash, you can hire some people quicker and run quicker and faster, then I would start with that number first.
Pat: That's right. I'd use 100% of the earn-out to push towards the treasuries in order to do that. But remember, it's so much easier to raise capital on your second time at bat rather than the first time.
Scott: Absolutely.
Trevor: Yeah. I appreciate that. I really hadn't even thought of that. I do have a quick question on direct indexing if you have time. I've heard you guys talk about that quite a bit. I don't have an advisor. I've just been managing stuff through Vanguard as the institution. I went to Vanguard and was looking at direct indexing, and it kinda seemed like it was all through...all the information was for advisors. Is that something that people can directly access?
Scott: Yes, you can. I don't know if that particular company has it for...
Pat: Yeah, but any big of the large custodians, you actually can, and they charge...
Scott: I think Schwab advertises it.
Pat: Yeah, and Fidelity.
Trevor: Okay. That's fantastic. I really appreciate the advice.
Pat: Listen, congrats. How did it feel when you took the offer from the corporate overlords?
Trevor: The due diligence took so long that I think by the time it was over, it was more of a release. I did splurge and buy new brake pads for my 10-year-old truck [crosstalk 00:33:25.181].
Pat: We're going to tell you a story, though. Scott and I sold this company to...like I said, it was a spin-off of GE. It was called Genworth, and it was a company that Scott and I had started and sold within...
Scott: Three-and-a-half years.
Pat: Okay, within four years. It was a reverse mortgage company. It didn't have anything to do with our investment advisory firm. We just did it on the side. It grew quite quickly. We had 200-plus employees when we sold. We're in the room, and they're transferring money over to the accounts, and we're just state school kids, right? We're just like, we don't know what we're doing, the whole thing. These guys are sitting around this big conference table, and they move the money over, and they're like, "What are you going to do with that money?" What did you say to them, Scott?
Scott: I'm buying a new bicycle. That's all I wanted. I wanted a new road bike.
Pat: Yeah, a nice bike.
Scott: A nice road bike.
Pat: A nice bike.
Scott: I want a new road bike.
Pat: And they're staring at Scott, and then they're like...they come to me, and they're like, "What are you going to do with the money, Pat?" I said, "I'm going to get HBO and Showtime." Which may have been one of the reasons we didn't last long with that corporation.
Scott: Maybe the smart-aleck responses were given on the first seconds after closing.
Pat: Don't do that.
Scott: At least mine was somewhat sincere.
Pat: Mine wasn't.
Scott: Do you listen to the podcast "Built to Sell?"
Trevor: Yeah, actually, I heard about that from you guys.
Pat: "How I Built That."
Scott: "Built to Sell."
Pat: "Built to Sell?"
Scott: "Built to Sell."
Trevor: You listen to both? Both of those I heard about from you guys.
Scott: Oh yeah, they're great.
Trevor: They're fantastic.
Scott: They just did some really interesting...
Pat: It's called what, "Built to Sell?" I've never even heard of it.
Scott: Oh, it's awesome. You hear about this one...I appreciate the call.
Pat: Call us anytime. Call me when you start your next company. I'm interested.
Scott: This guy's life became miserable after he sold his business for millions of dollars. They've got all kinds of different...they're mostly smaller businesses, about the kind of size of Trevor here. They talk about their process of they started a business, they sold it, how the process went. What's life for them working now?
Pat: Are most of them happy or...?
Scott: Yeah.
Pat: Except for this one guy?
Scott: Oh, super interesting. Which is why he focused on him, the unhappy person.
Scott: I listened to it several times.
Pat: "Built to Sell." All right, got it.
Scott: John Worrillow, I actually interviewed him, the host. I'm doing a book on selling your business to private equity or private equity-backed firms and he was a good person to talk with.
Pat: Yeah, and you're still working on it?
Scott: Yeah, with Forbes Books.
Pat: Oh, how's it going?
Scott: It's going.
Pat: All right. Let me know when you...
Scott: When I interview you?
Pat: Don't interview me. Don't interview me.
Scott: All right. Talking now with John in California. John, you're with Allworth's "Money Matters."
John: Well, hello.
Scott: Hey, John.
Pat: Hi, John.
John: First, I want to say thank you. I called two years ago and I told you a story about my 50-year-old wife who, on her birthday, decided she wanted to have a baby. And then you told me about getting Social Security when she turned 62. Well, she just turned 62 and we've been collecting Social Security on behalf of our kids. So I really appreciate that advice you gave. Money in my pocket.
Pat: Yeah, listen, they set up the rules.
Scott: They set up the rules.
Pat: They set up the rules.
Scott: Well, good, good. And so you have a...
John: I have an 11-year-old. My wife's 62, I'm 60, and our kid is 11.
Pat: Oh, very nice. Very nice. And so we have lots of adventures.
Pat: All right. Well, it's good to catch up. Do you have any questions for us?
Scott: I'm 58 and my youngest is 14 and I feel...man, I've been a parent a long time.
John: Well, I still got enough energy to chase him, but it takes a little more effort. My question is I'm getting ready to retire from CalSTRS and I've been with them for 25 years as an elementary school teacher.
Pat: Oh, wow.
John: But I also taught college in the evenings and all of the college contributions were covered under CalSTRS as well. But they didn't count to my service credit. They were put into what they call a supplement savings account. The supplement savings account is worth $317,000.
Scott: Holy smokes. You taught a lot.
John: Well, I love college. College is awesome. I teach music. I'm a lucky duck. So the decision-making, when you're sitting there at the STRS desk, they kind of just throw a bunch of numbers at you and ask you what you want to do. I need to decide how to take that $317,000. I can take it as a lump sum payment. I can roll it over into some vehicle because it's pre-tax money. They will offer me payouts over a 3, 5, or 10-year period, a monthly payout, or they'll offer me a lifetime annuity.
Pat: Okay. Let's just go with the 10-year. So what is the...because that's an easy one to calculate. What we're looking for is an internal rate of return on that $317,000 to determine whether you should take a pension or a lump sum. So if they paid it out beginning, what, next year, today...?
John: Yes. If I retired today, they would pay me $3,651 a month.
Pat: For 10 years?
John: For 10 years.
Pat: Scott?
Scott: I'm working on it.
Pat: Thanks. So what this is, what we're trying to do is we're calculating...
Scott: How much was the monthly again?
Pat: It's $3,651 for 10 years beginning now. So what that means is we're doing a calculation that if I took $317,000 and I put it in a new account and I paid out $3,651 a month for 10 years, what rate of interest do I need to earn on that money so that at the end of 10 years it is zero? Because what you're doing is you're exchanging $317,000 for a stream of payments for 10 years. And we know it's not a zero interest rate. My guess is it's probably 6.5%, but Scott's actually doing the math. And what determines whether you take the pension or lump sum is that, well, not only that, but that interest rate that's internal. So if it's a low one and you think you can do better, then you actually take the lump sum. What other assets do you have outside of this?
John: I have about half a million dollars in a 403(b) account, about $135,000 in a Roth IRA, and about $85,000 in a brokerage account.
Pat: All right. Is your house paid for?
John: My house is worth $1.2 million and we owe $400,000 and we're on a 15-year, 2% mortgage.
Pat: All right. Makes sense.
John: And then we have a vacation home that's paid off.
Pat: And is the vacation home a rental or just a vacation home?
John: No, it's just a vacation home.
Pat: All right. And does the wife work outside of the home?
John: She's recently retired from STRS.
Pat: Okay, so she's got a pension as well. So you've done that math.
John: Her pension is about $94,000 a year.
Pat: And how much will your pension be?
John: My pension will be about $72,000 a year.
Pat: And did both of you take a full joint and survivor? Which means that on her pension, if she dies, you get the same amount that she's getting?
John: No, actually, we're both half.
Pat: Okay. So you took half.
John: We took half.
Pat: Got it.
John: Hey, I figured out what you're asking.
Pat: Okay. Do you have life insurance on yourself at all?
John: I have $450,000 of life insurance.
Pat: And your wife?
John: $300,000.
Pat: Perfect. All right. You guys are in good shape. What's the number, Scott?
Scott: It looks like it's about 6.8%.
Pat: I said 6.5% was my guess. So what this means is if you took this as a lump sum and invested it, you would roll it into an IRA. You said you're 60 now?
John: That's correct.
Pat: And you received more than 6.8% over the long term, then you're better off taking this. And I know exactly what I would do. Scott, you looked at me like this is a no-brainer.
Scott: No, I was running the numbers and didn't hear the rest of his financial situation. So I don't know what I would advise.
Pat: He's got $500,000 in a 403(b), $155,000 in Roth, $85,000 in a brokerage, owns a home at $1.2 million, $400,000 of debt, vacation home. The kid is young, but between the two of them, they have approximately $160,000 in pension and they took both joint and survivors at 50%. I'd roll this thing into an IRA and not touch it.
Scott: I would too.
Pat: I wouldn't touch it until I was 75. I might use it to pay for the kid's education.
John: Well, yeah.
Pat: But you don't need the income now, right? You're going to be able to live quite comfortably on those pensions, correct?
John: That's correct, sir.
Pat: And so the idea of actually then adding it to my taxable income rather than deferring it, and the rate of return that you need to receive is greater than 6.8%, which, look, if it's properly invested...
Scott: Over a long period of time.
Pat: Over a long period of time. I wouldn't expect that you're going to...other than maybe use some of it for college education, I wouldn't...But you're a music teacher. He's probably going to go to school on a music scholarship. Yeah, I would absolutely roll this into an IRA and invest it.
John: Right on.
Pat: And I'd put that 403(b) and that $500,000 in a 403(b), and this $317,000 in the same IRA. And if you're not comfortable managing it, hire a firm to do so. Don't buy any exotic index annuities or any of that other crap. You're just going to be...you're going to invest it the same way that CalSTRS has it invested.
John: Got it.
Scott: Similar.
John: Well, awesome.
Pat: Not identical. Similar, but not identical.
John: All righty.
Pat: All righty?
John: Well, thank you very much.
Pat: All right, congrats.
Scott: All right, John, appreciate it.
Pat: Congrats on the retirement. And what grade do you teach in elementary school?
John: I teach kindergarten.
Scott: Oh my goodness.
Pat: And then you go into college...
John: I'm a music kindergarten teacher.
Pat: You're not a music teacher in kindergarten.
John: No, I teach kindergarten, but I do a lot of music in my class. But then in the nighttime, I go teach college. And the clientele is kind of the same because the little kids and the grownups are excited to be there. They're excited about being in school. So it's a lot of fun.
Pat: How long have you been a kindergarten teacher?
John: Twenty-two years.
Pat: You must be one of the most patient men I have ever met. Is that a fair statement or do you just come home and lose it at home?
John: Not here. I'm patient. I feel that I'm cool with tying shoes and helping kids put on their coats.
Pat: How awesome. Well, thank you.
Scott: Yeah, for sure.
Pat: Thank you for your service.
John: Thank you.
Scott: All right. I wish you well, John. We appreciate the call. We're talking now with Michael. Michael, you're with Allworth's "Money Matters."
Michael: Hi, Scott and Pat. Thanks for taking my call. So my question is, I'm a millennial and I'm only really familiar with retirement horror stories. What are some things that millennials should be doing to ensure a successful and comfortable retirement?
Pat: Remind me, a millennial, what age group is that?
Michael: I'm 31, so I think the age bracket is 28 to 45 or something.
Pat: Okay. All right. Thank you. I meant that seriously because I can't ever keep track of these Gen X, Gen Z...
Scott: When you say a horror story, what's a horror story? People hate their retirement or don't have enough money?
Michael: Well, I think our country just loves to push the narrative of you're not saving enough or there's retirees retiring with only Social Security, which obviously isn't enough. So I've only ever heard of people not ever having enough money for retirement.
Scott: There's plenty of those.
Michael: Yeah. So my question is, what do millennials need to be doing now? Because retirement isn't going to just manifest by doing nothing.
Pat: Got it. Got it. Got it. Got it. So look...
Scott: I don't think it's that complicated.
Pat: It's not. But let's step back for a second. What happens is I've had many, many clients over the years, been doing it for almost 35 years, more than 35 years, that have come to me and said, "I don't think I have enough to retire." And the first thing we look at is what's going on out of the house, not what's coming in. Because if you don't have a lot going out of the house, you don't need a lot coming in. All right. And where you live really matters, right? If you're living in a small town in Iowa and your house is paid for, and you're growing your own food, and you don't travel, and you don't line it up, then...
Scott: I don't think it's...it's pretty dang basic.
Pat: But how do you save?
Scott: Save 10% of your income. If you do that right out by the time you're an adult...if you save 10% of your income as soon as you're an adult until the time retirement age, you're going to have plenty of money saved for retirement. Ten percent. I ran the numbers for some of my 17-year-old high schoolers, she had to find an online program, and maybe it's 12%, but she went a little higher.
Pat: I would say 15%. I tell my kids, "Save 15%."
Scott: Okay.
Pat: They're not used to living on anything anyway.
Scott: Save 10% to 15%.
Pat: Okay, we'll go with that.
Scott: If you can do it through your employer's plan, all the better because it comes out of your...But that's key. If you do that and avoid consumer debt, credit cards...
Pat: Consumer debt, cars...
Scott: ...anything that depreciates...
Pat: Cars, credit cards, appliances, don't buy the insurance on the appliance, right? you go to Amazon...
Scott: Well, the consumer debt's going to kill you. And then get your home paid out. Buy a home and have it paid out by the time you hit retirement age.
Pat: That's it.
Scott: That's it.
Pat: And make sure you've got, if you have children, life insurance.
Scott: I mean, those are the biggies. Avoid debt, save first, get your home paid out by the time you hit retirement. Michael?
Michael: Okay. Yeah, that sounds good.
Pat: Are you doing that?
Michael: I'm contributing to a 401(k). I just got a new job, so I'm in the process of rolling that over and I don't have any consumer debt. I don't have student loans.
Scott: Good.
Michael: And I don't own a house.
Scott: Do you want to own a house at some point in time?
Michael: Yes, I very much do.
Pat: Yeah. And oftentimes it just depends where you're living. You know, if you're on the East Coast or the West Coast, it's much more difficult to do that. But yeah, 100% of your 401(k) should be in equities, all stock. Put 15% in...
Scott: All stock.
Pat: ...all stock. All stock.
Scott: I'm 58. My 401(k) is still 100% stock.
Pat: Sixty-two, 401(k), 100% stock. Has been since the day I opened it.
Michael: I did not know that, but I will switch my allocations.
Scott: I mean, the way we look at it, you've got 30-plus years before you're going to spend those dollars.
Pat: Before you start spending them.
Scott: Yeah. So who cares what the value is worth next year or the year after?
Pat: The year after. Who cares? It doesn't matter.
Scott: You care about what's going to give you the highest probability of a nice size account at age 60, 65. That's going to be having to all in...
Pat: We missed one. If given the opportunity, marry money.
Scott: Should have started with that one. He's kidding, Michael. He's kidding.
Pat: I'm joking. But my grandmother used to say...
Scott: Appreciate the call.
Pat: ...it's just as easy to fall in love with someone who's rich as it is poor.
Scott: Not really, because there's not that many rich...How many rich girls did you know? Actually, I grew up in a neighborhood...
Pat: Wait a minute. I'm trying to think.
Scott: Exactly none. I went to high school in Torrance.
Pat: You were right next to Pacific Palisades, right?
Scott: No, Palos Verdes.
Pat: Oh, got it.
Scott: So Chuck Norris lived a quarter-mile from my house. His neighborhood is very different than the neighborhood I grew up in. So anyway, I had a bunch of friends...We lived in a 900-square-foot little tiny house. I had a bunch of friends that lived in big houses, their families were quite successful doing whatever they did. And I remember having...I was having lunch...I was in high school. I'm having lunch with these two girls. I must have been, like, a senior because I don't know how I get money for lunch and...
Pat: I was surprised that you were having lunch with girls.
Scott: I'm just trying to show off. No, but the two were talking and the one said something about she'd never been to Europe. And the other girl's, "You've never been to Europe?" "No." "Jamie, you're kidding. Literally, you've never been to Europe?" And I remember watching this conversation like, what planet are you girls from? No one in my neighborhood's ever been to Europe.
Pat: You're like, we've never been out of the neighborhood. "You've never been to Europe? "
Scott: "Never? "
Pat: "You mean literally never? "
Scott: That's exactly what the conversation was.
Pat: "Oh my God." Is that what it sounded like?
Scott: That's exactly what it was.
Pat: Because they were Valley girls, right? Was that about the same time?
Scott: That wasn't the Valley though.
Pat: Oh, I don't know anything.
Scott: Anyway, I don't know why I went there.
Pat: Anything south of the grapevine is Disneyland to me.
Scott: Okay. Well, as we are wrapping up, Pat, we've got a webinar, this asset protection strategies for high-net-worth households. So this is really about, how do we think about protecting our assets? I'm doing the webinar along with Vicki Bogner. She's Allworth's head of wealth planning. And it's really designed for those that have $2 million or more of investable assets. But during the webinar, we're going to talk about some equity diversification strategies. How to really optimize our fixed income portfolio, the piece that we've got from fixed income. Look at some tax-efficient investment strategies.
Pat: Which, by the way, tax-efficient investment strategies, when I sit down with clients, it is the number one...with people that are coming to see us for the first time, it is the number one thing that people are missing is these tax investment strategies. They're not tax efficient.
Scott: Well, the traditional brokerage firms, they state, "We do not provide tax advice," which is a mistake. My opinion, we do provide tax advice. We have CPAs on staff, part of our planning.
Pat: It's where you actually add a lot of alpha.
Scott: We're going to talk about the role of private markets, and some alts, and wealth preservation, and some strategies for estate planning and trust. So these are our May webinars: Wednesday, May 14th at noon Pacific, Thursday, May 15th at noon Pacific, Saturday, May 17th at 9 a.m. Pacific. And you're going to get more information and register at allworthfinancial.com/workshops. And I'm getting a flash on my thing, "Provide call-in number and email for the show. "
Pat: So if you'd like to call the show...
Scott: Was that meant to pop up?
Pat: ...833-99-WORTH. That's 833...
Scott: If you want to be on it, we'd love to take calls, or send us an email, questions@moneymatters.com. We'll schedule a time for you to be on with Pat and myself. So anyway, appreciate you being part of Allworth's "Money Matters." This is Scott Hanson and Pat McClain. We'll see you later.
Man: 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.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain, thanks for joining us.
Scott: That's right, as we talk about financial matters. Both myself, my co-host, both financial advisors, helping people with their finances...
Pat: For many, many years.
Scott: ...financial planning and all that stuff in this program. And we've got...not only have some good callers lined up, we've got an attorney who we're going to spend a little bit of time on some things that business owners could be planning ahead of a sale. Like what are some things to be thinking about to get ready if they're going to sell their business? And the reality is, we've seen it, Pat, like, people start a business, run the business. Maybe their hope was that the kid would take it over one day. Maybe their kid has no interest. Maybe their kid's been working in the business, but it's a little apparent that...
Pat: The son or daughter doesn't have the ability to run the business. And that then the business needs to be sold. Because in most circumstances, not in all, but in most circumstances, it's the highest portion of that person's or that family's net worth is the business itself.
Scott: Yeah. 90...I mean, I don't know what percent of the time, but I mean..
Pat: It's gotta be 90-plus.
Scott: ...it's not uncommon when you see someone whose business is worth $4 million and they've got $80,000 in savings.
Pat: Oh, not at all. Not at all.
Scott: Or $40 million and they've got $80,000 in savings. That's true. Exactly. Exactly. Hey, there are some things you could be doing in the midst of the market turmoil.
Pat: Oh, that are extremely positive for you.
Scott: Yes. And one of which is tax loss harvesting. And that term alone, you think, well, who wants losses in their portfolio?
Pat: I do.
Scott: You don't want a loss in your portfolio, but if you have something temporarily declined in value...
Pat: You're going to recognize that loss.
Scott: It'd be nice if you can lock that loss in to offset gains of other things.
Pat: You don't inherently purchase something because you expect a loss in it. That is not investing, but inevitably, if you're an investor, you're going to own something outside of an IRA or a qualified plan that has lost value. And you have two choices. One is you can just continue to hold it. The other is you can sell it, recognize the loss for tax purposes and purchase something similar, but not identical on the same day that you...right? You can't buy the same thing because then it's called the wash rule and you can't recognize the loss.
Scott: And it's really easy to do if you...Let's say you invested January 1st of this year in just even some ETFs, it'd be easy to swap some things out, take some losses, but at the beginning...As we were preparing for the show, I said to Pat, I said, "It's really hard to do on things that you've owned for years and years." And you said, "Oh no, I just encountered..."
Pat: Oh, just saw one, which is a pretty big account. It was north of $5 million. They had had the same advisor for the last, I don't know, 20-some-odd years, purchasing the same mutual funds from the same family, right, and dividend reinvestment. So what is dividend reinvestment?
Scott: What percentage was in this one particular mutual funding?
Pat: Family or...?
Scott: Family.
Pat: I think it was 70%-plus.
Scott: Was this like old front-loaded mutual funds that were sold...that was how things were done 30 years ago?
Pat: Like, you mean the American funds like when you and I started, like that?
Scott: Something like that.
Pat: Was that, right? Yes, it was something like that. It was old school, this is how we do it old school. We don't change. We dividend reinvest because it's the best thing ever. Look, so dividend reinvestment in the last 12 months, lost money. You take a loss, you sell that portion of the portfolio. So what is dividend reinvestment?
Scott: Well, the dividends that the mutual fund, in this case was a mutual fund or ETFs or stocks, you reinvest it back within itself...
Pat: Which is, they pay out.
Scott: Not always the best thing to do. In a tax-deferred account, it doesn't. [inaudible 00:04:56.478] it's fine. Makes sense. In an account that's outside of retirement accounts where you're trying to minimize taxes, it's usually not the best thing to do.
Pat: Yes, it's lazy. It's lazy. That's what it is, right? Because...
Scott: Well, it is easy, yes.
Pat: It is easy.
Scott: A lot of stocks used to have the DRPs, dividend reinvestment plans, right, in them.
Pat: Yes. Yes. Anyway. So if you've got an opportunity to recognize losses, and it's right there on your statement, if you're managing your own portfolio, then it's easy to see...
Scott: Or your advisor. And you can allocate which shares you want to sell. You own 100 shares and you say, "I want to sell the 2 shares that were purchased on these dates."
Pat: Yes. And that way you can recognize the loss on those. So in a downturn market...
Scott: And you can sell it and then buy something very similar that same day. So you're not out of the market.
Pat: But not identical.
Scott: Yeah. You're not out of the market.
Pat: Yes. So it makes sense. And if you've got a good advisor, they're doing that for you anyway.
Scott: So yeah. We got some great calls lined up, but before we go to the calls, we're talking with Allworth's head of private wealth strategies, Simone Devenny. And Simone's been on the program, I don't know, two or three times, I guess. So Simone, thanks for taking some time to join us.
Simone: Thrilled to be here. How you doing, guys?
Scott: Good. I'm glad you're thrilled.
Simone: I'm always thrilled. Oh no, always thrilled when I'm talking to you.
Scott: Thrilled. Okay. Good. So by formal training, you're an attorney, but you spend most of your career helping higher-net-worth folks minimize taxes, do the right kind of planning, and some advanced strategies with their oftentimes family business, etc., right?
Simone: That's right.
Scott: All right.
Pat: How many nut jobs have you had to work with in the last 20 years, Simone?
Simone: I mean...
Pat: Like crazy rich people, like crazy rich people.
Simone: Crazy rich, like crazy rich together, meaning like insanely rich or crazy and rich?
Pat: Crazy and rich.
Simone: All of them. I'm just kidding. I'm just kidding. No, I've gotten to work with all kinds of people. And as we know, the world is filled with all types of different people and crazy is how we perceive it. But I would actually say most business owners are the right kind of crazy. They tend to be risk takers. They tend to be builders. They tend to have a vision that a lot of the rest of us might not. Although I know you have that vision, the two of you. But yeah, the best kind of crazy, I've seen a lot of them. I've worked with all kinds of different people and seen many, many, many types out there.
Pat: And the reason I asked the question, myself, I loved working with business owners as well because I find them just a little bit out there, just a little bit like they don't view the world the way the rest of us do normally.
Scott: Well, they're normally not rule followers in the sense that they typically weren't the best students growing up in high school...
Pat: Check.
Scott: ...that went to the top schools. Right? Those go into leadership management and oftentimes business owners, they do things a little bit differently. And oftentimes they weren't that excited about formal education and didn't go to the top schools. Sometimes they did, but oftentimes not. I'm sure you can attest to that, Simone.
Simone: Yeah, I think a lot of times we're talking about people...It reminds me of, I think it was Mother Teresa or someone who said, "Be the change you wish to see in the world." And I think a lot of times we're talking about people who are creative and they want to see something that isn't out there yet and they'll go out there and do it. And a lot of times that means there's not a playbook necessarily, they're building it as they go. So definitely a little bit of a different mindset than your kind of, you know, more typical employee of a company.
Scott: Yeah. So what are some planning techniques that some of these business owners should be considering as they're contemplating their business sales? So maybe they're not sure if they're going to be selling their business yet or not, but they're getting up an age. They know that they have to do some sort of succession planning. Otherwise, someone else is going to do the planning for them. So what are some things they should be paying attention to?
Simone: Yeah, I think that's a great question, Scott. And I think, you know, gosh, I find myself throwing around a lot of expressions that I can't attribute to anyone in particular, but another one that I heard recently is, "Start before you're ready." And I think that when we think about a business owner selling his or her business, I think maybe the best advice we can give is start preparing before you're ready. You know, a lot of times you think about businesses transition ownership for a number of reasons. It can be by decision, right? But it can also be by death, by divorce, by disability. There are factors that we can control, factors we can't control. But I think the best advice for any business owner is whether or not you already have a sense of precisely how you would ideally like to exit the business and sell it, start preparing now. And I think what that means is, you know, there are a number of things to do. Obviously, we think about all kinds of considerations.
Number one, obviously, you know, on the wealth management side of things, we want to be prudent about structuring things from a tax perspective. And often that involves pretty significant pre-planning. So we also want to think about, how do we maximize what we're actually going to receive when we sell the company? So even pre-tax, right, how do we maximize that number? How do we think about, you know, if we want to transition the business maybe to our employees, things like an ESOP? But I think that no matter what a business owner hopes to achieve, you know, it's really important to start being intentional and thinking through all of the possibilities very early on. Part of the reason for that is there are opportunities to structure businesses pre-sale and often significantly pre-sale that can dramatically reduce the tax implications of that sale. A lot of times you'll hear the guidance out there, start preparing to sell your business one to two years before. I would actually say, start thinking about it more than five years before. There's some special rules out there under the tax code with certain types of businesses that can, you know, save you tens of millions of dollars in tax if you structure more than five years pre-sale. So I'll pause there and see if there's anything you want to expand on.
Scott: Give us some examples of someone you've worked with the last few years or whatever on some advanced planning that you did prior to sale and what the implications were for their, you know, eventual process.
Simone: Yeah. I'll give you a good one. So, and actually, I think this kind of dovetails nicely. I think right now we've got some concerns about the volatility in the market. You know, we've talked about some planning opportunities that exist, for example, when the economy is not strong, right? I can tell you a story of a family business. And this was...I think it was paint. I think they manufactured paint. But this particular family had been thinking for a long time, many, many years, about how and when to sell the business and how to properly structure that. And what this family did is actually in a very recessionary period when, you know, home building was down and the economy was depressed, what they did is they set up some trusts for the benefit of the next generation. They transferred the ownership of the company into those trusts while the company was not doing well. And then many years later when they sold the company, all of the proceeds of that sale, and we're talking about a very high-figure sale, are now excluded from the owner's taxable estate. So there's not going to be an estate tax implication if you do this right. This is an invisible transaction for income tax purposes. So that would be one example.
Pat: So they used up their unified credit, right?
Scott: Part of it, yeah.
Pat: Or part of it.
Scott: That's just the amount that we can transfer at our death or while we're alive without any estate or gift tax.
Pat: But they did it in a place in the economy which was super favorable to them.
Simone: That's right.
Pat: Super favorable.
Scott: Yeah. And you might have a business right now, something similar. The hard thing though, Simone, is to actually do it in a time like that because we don't know what the future's going to be and you're thinking...
Simone: Well, this is where the pre-planning comes in, Scott. So you know when we said not 1 to 2 years, but let's start thinking 5, 10 years before. And the reason why is we know that the economy is cyclical. And so, just like with investing, if we have a long enough horizon, our opportunities are going to be better. So, you know, I think some advice to business owners, all business owners who are contemplating an exit at any time is number one, get a valuation done of your business. This is one of the first things we tell business owners to do. Go out there, find an accounting firm, a CPA firm, a business valuations firm, and obtain a valuation so that you know what that business is actually worth at this present time. Again, a valuation during a down market is really great for transferring assets out of your taxable estate.
Pat: It's incredible.
Simone: Right? So, there are a lot of reasons, but we always say, no matter what you're doing, prior to a business sale, you want to have a valuation because that allows you to undertake whatever type of estate and trust and tax planning you need to do. But that's sort of, you need to have that in hand. Another thing that we would tell business owners is, you know, look, a business owner is generally focused on one thing and that is their business, right? I mean, we see a lot of dedication. We see a lot of, you know, sleepless nights and people pouring their lives into these businesses. But sometimes, you know, you're so head down in the business that you're not thinking about...you know, you're thinking about now, you're thinking about the future state of the business. Most business owners actually aren't thinking about their own personal enrichment. They're thinking about the business.
But what we want to say, is okay, you know, make sure you surround yourself with advisors. Oftentimes, you can have a board with outside advisors, you know, who can really help you take a step back and have a look at, you know, how are we going to best position this business to be as strong as possible prior to a sale? I mean, there are things like not just the valuation, but, you know, looking at obtaining what's called a quality of earnings report, right? You know, really arm yourself as the business owner with the best information that you can about your business so that you're well-positioned to negotiate, you know, when you're ready to engage in the sale process.
Pat: And Simone, this is my general view of this. I have a number of friends that own businesses, some quite, quite successful. And when I talk to them about, you know, planning, they always tell me, "Well, I never plan on selling the business." I'm like, "Well, how's that work?" "I just never plan on selling it." Like, "So you're going to die with this thing?"
Simone: I was going to say, it's like my former estate planning life, people who think, well, you know, I'm never going to become disabled or pass away. And it's like, well, you know, odds aren't so good there.
Pat: Yeah. So do people not engage in...do they not engage in this kind of practice because they're afraid that it's going to push them into a sale?
Simone: Yeah. I think, look, there's a lot of psychology behind this, right? There's a lot of psychology behind this. I think by nature...and I always hate to make generalizations, okay. But by nature, business owners, entrepreneurs like to be in control, right? They like to be in control. And in fact, in many ways...I mean, I could get super philosophical about this, but in many ways, when we're building something, it's the opposite of thinking about, you know, decay or death or anything. We want to build, we want to move forward, we're in growth mode, right, and it's keeping us very much alive. So the idea, a lot of times for people, you know, selling or parting with their business in any way, almost represents like a figurative, you know, checking out of life or a death, right? And people don't like to think about that. You know, but I think what we really need to be mindful of is, look, I think I mentioned it earlier, whether we like it or not, there are circumstances in this life that are beyond our control, disability, death, divorce, you know, these types of things. And I don't have percentages or numbers. And in fact, after this call, I may go do some research, but I'm very curious to know how many business owners actually transition or sell their business in the way that they choose rather than having something happen to them. I think that'd be an interesting stat to come armed with next time.
Pat: You know, Scott and I have sold...well, we sold the reverse mortgage company.
Scott: A couple businesses.
Pat: Yeah, we sold a couple businesses a couple times. And the way I described it was the same...I have four children. I felt this almost the same way when my first child went to college as I did when I sold...
Scott: Elation?
Pat: No, kind of like you knew it was going to happen, you're a little bit sad, it's the end of an era, but at the same time, it's just all part of life. And when we took private equity for the first time, for Allworth, the emotion was almost the same as when I dropped my first child off at college, which was a little sad, but at the same time, it was a little exciting.
Scott: A little different than selling your business and walking away, taking on equity and selling.
Pat: That's probably true. That's true.
Scott: So real quick...
Simone: You've both been through it, right? You've both been through it. I think, look, there's a big component of this which is very much an emotional component that people don't think about. And I think you just said it right. Someone's devoted their life to creating something, or it's like raising children or building a business, there are a number of things, and stepping away is a challenge. And actually, there are those types of factors that we often encourage clients to think about prior to selling the business. It's not just about the money. It's about who are you going to be if you are not the person running this business anymore, the owner of the business anymore? But we also think, by the way, with great planning and a healthy financial outcome, what we often see is entrepreneurs, business owners channeling the energy that they brought to their business and they now have really carte blanche to go in a new direction and reinvent themselves. And typically, they'll have the funds.
Pat: They have carte blanche to drive their families crazy by spending all that time at home.
Simone: No, no, this is how we help people think through...My mother-in-law, by the way, when I got married, she said, I have one piece of advice for you. They've been married probably 60, 70 years. She said, "For better or for worse, but never for lunch."
Pat: That's right. That's right.
Simone: And so I think oftentimes post-sale, especially if it's going to be the type of situation where the business owner steps away, a lot of times people will channel that into a new endeavor. It might be a philanthropic endeavor. It might be building something to solve a problem that they've seen. Most of the time, people who built successful businesses aren't just going to go out and just spend every day playing golf. Maybe some days, but not every day.
Pat: That is correct.
Scott: All right. Simone, thanks for taking some time.
Pat: Simone, as always, thanks for being part of the team at Allworth. And thank you for the advanced planning that you work with our hundreds of advisors across the U.S.
Scott: Yeah. And appreciate your time, Simone.
Simone: Thank you very much to both of you. And again, I really was thrilled to be here, guys. Have a good day. Take care.
Scott: Thank you. And I've been in some client meetings with Simone and she's got...there's a bunch of different, kind of, advanced strategies that...every situation is so unique.
Pat: Yes. And then our job is to take all the tools that are available and apply it appropriately.
Scott: And every tool, there's a positive and a...right? There's consequence. You do this, here's the good, here's the downside.
Pat: Yes. And it's trying to figure out which...kind of putting a puzzle together, what's going to make the most sense for you personally.
Scott: All right, we're going to take some calls. We're talking with Trevor. Trevor, you're with Allworth's "Money Matters."
Trevor: Hey, guys. Hey, thanks for having me on. And I just want to say how much I appreciate you guys. I grew up in a family that really struggled financially. So for a long time, I had kind of a negative relationship with money. But I think this podcast is really one of the catalysts that totally changed my perspective. And it's really been the highlight of my week for the past probably 10 years. So thank you guys.
Scott: Holy smokes, that's the nicest comment I've ever received.
Pat: Trevor, how old are you?
Trevor: I am 39.
Pat: Oh, wow. And thank you for the compliment. Yeah, look, you know, we all have a relationship with money, right? And I know I grew up in a family...I don't know what yours was like, Trevor, but there wasn't a lot sloshing around that place. And I know Mr. Hanson...
Scott: I had a tree-trimming business...I mean, I did that too, but a paper route, not because I enjoyed delivering papers. I needed the money. There's no extra money for anything.
Pat: Yeah, yeah, I get it. So how can we help, Trevor?
Trevor: Yeah. So I called you guys for advice a few years back because I was leaving a government job to start a small technology company. And fortunately, I'm on the opposite end of that now. So our company was just acquired by a larger company about a week ago. So I've come into a little bit of money. I mean, it's not tens of millions, but to me, it's a lot. So I was kind of just wanting to get your opinion on what I should do with it.
Pat: Tell us about the rest of your life.
Trevor: Yeah, so quick rundown. I'm 39. My wife's 38. She has a great stable career. We have no kids. Our financial situation between retirement savings, between IRAs, 401(k)s, brokerage, we've got about $900,000 in equities, and this is all prior to the sale, and then about $50,000 cash. Other than that, we have no debt. We also don't own a house. I don't think I mentioned we don't have kids. So our life is pretty simple in that regard.
Pat: What's your wife's income?
Trevor: About $130,000.
Pat: And what's your plan after this? Are you continuing on with the company? Are you going to do something different or you don't know?
Trevor: Yeah, so I'm continuing on for a while, for as long as they want me. There is a little bit of an earn-out, which hopefully will get. Maybe, maybe not, we'll see. So my plan is to stick around for a while. But I also kind of have the entrepreneurial bug a little bit now. Some kind of itching to explore some other ideas as well.
Pat: What is your income from the job today? Not the lump sum, but the income.
Trevor: It'll be about $150,000.
Pat: How much money are you walking with pre-earn-out?
Trevor: So pre-earn-out, the gross is about $1.2 million. And the majority of that is taxable capital gains.
Pat: Got it.
Scott: Will that be this year, 2025?
Trevor: Yeah, unfortunately, an installment sale type of arrangement wasn't going to work. So it's all going to be just for this year.
Scott: Which I actually like that. I like that, the fact that it's...What's the earn-out look like if you hit all the numbers? And I assume it's a 24, 36-month earn-out?
Trevor: Yeah, it's 24, but it's kind of prorated or in-phase. So it's potentially up to another million dollars over the next year.
Pat: Wow, that's a big earn-out.
Trevor: Yeah, it's a long story, but it was the best deal for us at the time. So whether we get any of the earn-out or not, it was still a good deal for us. So that was kind of why.
Pat: Yeah, you've sold it at eight times your income, which isn't bad for a company that's relatively new.
Scott: Yeah, congrats. Good for you. it's pretty exciting.
Pat: Yeah, and by the way, there's probably some big hurdles in that million dollar earn-out. So swing at it and if it doesn't happen, it doesn't happen.
Scott: Kudos to you. How fun is this though?
Pat: Oh, it's so much fun. Scott and I have started a number of companies together. We started, I think five, three of which we talk about. [crosstalk 00:26:30.930] It doesn't always work. So are you going to buy a house anytime soon?
Trevor: That's a great question. So we've owned in the past and we're kind of between houses right now. We have a tendency to not stay in one place for too long. So I think that's been the main reason. And, you know, with having the startup the last couple years, I just haven't had the stability. So I'm kind of on the fence. I'm not itching to buy anytime soon, so...
Pat: Do you believe that...
Scott: Think you'll start another company?
Pat: Do you believe that you'll procreate in the future?
Trevor: We're not planning on it. It seems unlikely. I mean, you never know, but unlikely.
Pat: All right. And then Scott, your question?
Scott: Yeah. Do you think you'll start another company?
Trevor: I would like to. I've got another, kind of, project in the works that hopefully will go somewhere. So yeah, that's my eventual goal. I think that's my longer-term plan.
Pat: This last company that you were in the ground floor, were you part of the formation of it or did you grow it after it was...did you join after it was formed?
Trevor: Yeah, I was one of the two co-founders.
Pat: Cool. Okay. And how did you finance this one?
Trevor: It was bootstrapped.
Pat: Okay. All right. I love it. What a great story.
Scott: What's your question?
Pat: Yeah, what's the question?
Trevor: Yeah. So with that, you know, just the lump sum that I got, I'm trying to figure out what to do with it. And I'm not...you know, I've got it basically sitting in a money market right now. I'm just trying to get your opinion on it.
Scott: If I were 39 again and it were me, I'd put it in the treasury bills right now.
Pat: I'd do half of it.
Scott: Half in treasuries and what else?
Pat: I'd invest the other half for the long term in a direct index.
Scott: I wouldn't because who knows what you're going to need for your next company.
Pat: I know that. That's what my thought is though. Right?
Trevor: Yeah. It's interesting, I wasn't actually expecting you guys to go the treasury bill route. Yeah. My first instinct was kind of just, you know, try to figure out maybe what I need to seed this other company and then throw the rest kind of just into...
Scott: When did you start this company?
Trevor: End of 2020.
Scott: Okay. So five years you created...in addition to making some salary, you created $1.2 million bucks for yourself. You got another idea. You think this other idea is better than the previous idea?
Trevor: You know, I think it is, but I guess time will tell.
Scott: So I mean, the way for true wealth is not investing in index funds or anything. It's in your own career, in your own business.
Pat: But he's got a track record now and he can raise capital much easier this time than he would have been last time. And so Scott, what I'm saying is I'd sweep half and call it long-term savings and it's not touchable, that's for my retirement. The other half I'd leave in the game. And then anything from the earn-outs, I'd actually leave in the game.
Trevor: Okay. Yeah. And that's why I wanted to talk to you guys because I was...
Scott: No, I mean, I'm with you in that because you're saying instead of putting off...because things don't always work out, right?
Pat: Well, and the problem he has is that he started a company and it's really, really difficult to go back and go to work for someone else after you've lived in that adrenaline-filled cage for a year or two or three.
Trevor: Yeah. I just got out of a corporate meeting and I was struggling a little bit.
Pat: Oh, you're kidding.
Trevor: Got to get back into that.
Pat: I've never done that before. Oh my, we sold a company to Genworth, which was a spin-off of GE. Oh my, I got to tell you, Trevor, it was pure pain to sit in a meeting with these guys from corporate. Oh, it was awful. I actually...
Scott: We didn't last very long.
Pat: We were there...we actually pushed our earn-out forward and got out in less than a year. We were supposed to have a two-year earn-out.
Scott: I think four months.
Pat: Oh, it was so bad.
Scott: Three, four months.
Pat: Yeah. So I feel what you're going through.
Scott: We didn't get a dime of the earn-out, by the way.
Pat: We didn't get any of the earn-out, but they were jerking us around all the way through.
Scott: Well, be careful. I think there was some NDAs or something. I know that was a long time ago, but...Come after me.
Pat: You think any of those people are still around?
Scott: No. No.
Pat: Remember they talked about their MBAs all day?
Scott: Yeah, yeah.
Pat: Anyway. Yeah, I like the idea and I'd use it directly...
Scott: So the idea behind this is allocate some...and I agree with Pat, allocate some portion. What of this do you want to have for your long-term, to increase...
Pat: You and your wife.
Scott: Yeah. Your base there. Then what do you want to put at risk for the next business? Whatever you're going to put at risk, I'd just have it in treasuries or money market account or something along those...assured CDs or something.
Pat: Not CDs. But I would take that $600,000 and call it retirement. I would put it either...you could fund Roth IRAs, do whatever you need to do on that side to make it more efficient, but the rest of it I'd use direct indexing.
Scott: But if you think it's going to take more cash than that to get this thing going, or if you had the cash, you can hire some people quicker and run quicker and faster, then I would start with that number first.
Pat: That's right. I'd use 100% of the earn-out to push towards the treasuries in order to do that. But remember, it's so much easier to raise capital on your second time at bat rather than the first time.
Scott: Absolutely.
Trevor: Yeah. I appreciate that. I really hadn't even thought of that. I do have a quick question on direct indexing if you have time. I've heard you guys talk about that quite a bit. I don't have an advisor. I've just been managing stuff through Vanguard as the institution. I went to Vanguard and was looking at direct indexing, and it kinda seemed like it was all through...all the information was for advisors. Is that something that people can directly access?
Scott: Yes, you can. I don't know if that particular company has it for...
Pat: Yeah, but any big of the large custodians, you actually can, and they charge...
Scott: I think Schwab advertises it.
Pat: Yeah, and Fidelity.
Trevor: Okay. That's fantastic. I really appreciate the advice.
Pat: Listen, congrats. How did it feel when you took the offer from the corporate overlords?
Trevor: The due diligence took so long that I think by the time it was over, it was more of a release. I did splurge and buy new brake pads for my 10-year-old truck [crosstalk 00:33:25.181].
Pat: We're going to tell you a story, though. Scott and I sold this company to...like I said, it was a spin-off of GE. It was called Genworth, and it was a company that Scott and I had started and sold within...
Scott: Three-and-a-half years.
Pat: Okay, within four years. It was a reverse mortgage company. It didn't have anything to do with our investment advisory firm. We just did it on the side. It grew quite quickly. We had 200-plus employees when we sold. We're in the room, and they're transferring money over to the accounts, and we're just state school kids, right? We're just like, we don't know what we're doing, the whole thing. These guys are sitting around this big conference table, and they move the money over, and they're like, "What are you going to do with that money?" What did you say to them, Scott?
Scott: I'm buying a new bicycle. That's all I wanted. I wanted a new road bike.
Pat: Yeah, a nice bike.
Scott: A nice road bike.
Pat: A nice bike.
Scott: I want a new road bike.
Pat: And they're staring at Scott, and then they're like...they come to me, and they're like, "What are you going to do with the money, Pat?" I said, "I'm going to get HBO and Showtime." Which may have been one of the reasons we didn't last long with that corporation.
Scott: Maybe the smart-aleck responses were given on the first seconds after closing.
Pat: Don't do that.
Scott: At least mine was somewhat sincere.
Pat: Mine wasn't.
Scott: Do you listen to the podcast "Built to Sell?"
Trevor: Yeah, actually, I heard about that from you guys.
Pat: "How I Built That."
Scott: "Built to Sell."
Pat: "Built to Sell?"
Scott: "Built to Sell."
Trevor: You listen to both? Both of those I heard about from you guys.
Scott: Oh yeah, they're great.
Trevor: They're fantastic.
Scott: They just did some really interesting...
Pat: It's called what, "Built to Sell?" I've never even heard of it.
Scott: Oh, it's awesome. You hear about this one...I appreciate the call.
Pat: Call us anytime. Call me when you start your next company. I'm interested.
Scott: This guy's life became miserable after he sold his business for millions of dollars. They've got all kinds of different...they're mostly smaller businesses, about the kind of size of Trevor here. They talk about their process of they started a business, they sold it, how the process went. What's life for them working now?
Pat: Are most of them happy or...?
Scott: Yeah.
Pat: Except for this one guy?
Scott: Oh, super interesting. Which is why he focused on him, the unhappy person.
Scott: I listened to it several times.
Pat: "Built to Sell." All right, got it.
Scott: John Worrillow, I actually interviewed him, the host. I'm doing a book on selling your business to private equity or private equity-backed firms and he was a good person to talk with.
Pat: Yeah, and you're still working on it?
Scott: Yeah, with Forbes Books.
Pat: Oh, how's it going?
Scott: It's going.
Pat: All right. Let me know when you...
Scott: When I interview you?
Pat: Don't interview me. Don't interview me.
Scott: All right. Talking now with John in California. John, you're with Allworth's "Money Matters."
John: Well, hello.
Scott: Hey, John.
Pat: Hi, John.
John: First, I want to say thank you. I called two years ago and I told you a story about my 50-year-old wife who, on her birthday, decided she wanted to have a baby. And then you told me about getting Social Security when she turned 62. Well, she just turned 62 and we've been collecting Social Security on behalf of our kids. So I really appreciate that advice you gave. Money in my pocket.
Pat: Yeah, listen, they set up the rules.
Scott: They set up the rules.
Pat: They set up the rules.
Scott: Well, good, good. And so you have a...
John: I have an 11-year-old. My wife's 62, I'm 60, and our kid is 11.
Pat: Oh, very nice. Very nice. And so we have lots of adventures.
Pat: All right. Well, it's good to catch up. Do you have any questions for us?
Scott: I'm 58 and my youngest is 14 and I feel...man, I've been a parent a long time.
John: Well, I still got enough energy to chase him, but it takes a little more effort. My question is I'm getting ready to retire from CalSTRS and I've been with them for 25 years as an elementary school teacher.
Pat: Oh, wow.
John: But I also taught college in the evenings and all of the college contributions were covered under CalSTRS as well. But they didn't count to my service credit. They were put into what they call a supplement savings account. The supplement savings account is worth $317,000.
Scott: Holy smokes. You taught a lot.
John: Well, I love college. College is awesome. I teach music. I'm a lucky duck. So the decision-making, when you're sitting there at the STRS desk, they kind of just throw a bunch of numbers at you and ask you what you want to do. I need to decide how to take that $317,000. I can take it as a lump sum payment. I can roll it over into some vehicle because it's pre-tax money. They will offer me payouts over a 3, 5, or 10-year period, a monthly payout, or they'll offer me a lifetime annuity.
Pat: Okay. Let's just go with the 10-year. So what is the...because that's an easy one to calculate. What we're looking for is an internal rate of return on that $317,000 to determine whether you should take a pension or a lump sum. So if they paid it out beginning, what, next year, today...?
John: Yes. If I retired today, they would pay me $3,651 a month.
Pat: For 10 years?
John: For 10 years.
Pat: Scott?
Scott: I'm working on it.
Pat: Thanks. So what this is, what we're trying to do is we're calculating...
Scott: How much was the monthly again?
Pat: It's $3,651 for 10 years beginning now. So what that means is we're doing a calculation that if I took $317,000 and I put it in a new account and I paid out $3,651 a month for 10 years, what rate of interest do I need to earn on that money so that at the end of 10 years it is zero? Because what you're doing is you're exchanging $317,000 for a stream of payments for 10 years. And we know it's not a zero interest rate. My guess is it's probably 6.5%, but Scott's actually doing the math. And what determines whether you take the pension or lump sum is that, well, not only that, but that interest rate that's internal. So if it's a low one and you think you can do better, then you actually take the lump sum. What other assets do you have outside of this?
John: I have about half a million dollars in a 403(b) account, about $135,000 in a Roth IRA, and about $85,000 in a brokerage account.
Pat: All right. Is your house paid for?
John: My house is worth $1.2 million and we owe $400,000 and we're on a 15-year, 2% mortgage.
Pat: All right. Makes sense.
John: And then we have a vacation home that's paid off.
Pat: And is the vacation home a rental or just a vacation home?
John: No, it's just a vacation home.
Pat: All right. And does the wife work outside of the home?
John: She's recently retired from STRS.
Pat: Okay, so she's got a pension as well. So you've done that math.
John: Her pension is about $94,000 a year.
Pat: And how much will your pension be?
John: My pension will be about $72,000 a year.
Pat: And did both of you take a full joint and survivor? Which means that on her pension, if she dies, you get the same amount that she's getting?
John: No, actually, we're both half.
Pat: Okay. So you took half.
John: We took half.
Pat: Got it.
John: Hey, I figured out what you're asking.
Pat: Okay. Do you have life insurance on yourself at all?
John: I have $450,000 of life insurance.
Pat: And your wife?
John: $300,000.
Pat: Perfect. All right. You guys are in good shape. What's the number, Scott?
Scott: It looks like it's about 6.8%.
Pat: I said 6.5% was my guess. So what this means is if you took this as a lump sum and invested it, you would roll it into an IRA. You said you're 60 now?
John: That's correct.
Pat: And you received more than 6.8% over the long term, then you're better off taking this. And I know exactly what I would do. Scott, you looked at me like this is a no-brainer.
Scott: No, I was running the numbers and didn't hear the rest of his financial situation. So I don't know what I would advise.
Pat: He's got $500,000 in a 403(b), $155,000 in Roth, $85,000 in a brokerage, owns a home at $1.2 million, $400,000 of debt, vacation home. The kid is young, but between the two of them, they have approximately $160,000 in pension and they took both joint and survivors at 50%. I'd roll this thing into an IRA and not touch it.
Scott: I would too.
Pat: I wouldn't touch it until I was 75. I might use it to pay for the kid's education.
John: Well, yeah.
Pat: But you don't need the income now, right? You're going to be able to live quite comfortably on those pensions, correct?
John: That's correct, sir.
Pat: And so the idea of actually then adding it to my taxable income rather than deferring it, and the rate of return that you need to receive is greater than 6.8%, which, look, if it's properly invested...
Scott: Over a long period of time.
Pat: Over a long period of time. I wouldn't expect that you're going to...other than maybe use some of it for college education, I wouldn't...But you're a music teacher. He's probably going to go to school on a music scholarship. Yeah, I would absolutely roll this into an IRA and invest it.
John: Right on.
Pat: And I'd put that 403(b) and that $500,000 in a 403(b), and this $317,000 in the same IRA. And if you're not comfortable managing it, hire a firm to do so. Don't buy any exotic index annuities or any of that other crap. You're just going to be...you're going to invest it the same way that CalSTRS has it invested.
John: Got it.
Scott: Similar.
John: Well, awesome.
Pat: Not identical. Similar, but not identical.
John: All righty.
Pat: All righty?
John: Well, thank you very much.
Pat: All right, congrats.
Scott: All right, John, appreciate it.
Pat: Congrats on the retirement. And what grade do you teach in elementary school?
John: I teach kindergarten.
Scott: Oh my goodness.
Pat: And then you go into college...
John: I'm a music kindergarten teacher.
Pat: You're not a music teacher in kindergarten.
John: No, I teach kindergarten, but I do a lot of music in my class. But then in the nighttime, I go teach college. And the clientele is kind of the same because the little kids and the grownups are excited to be there. They're excited about being in school. So it's a lot of fun.
Pat: How long have you been a kindergarten teacher?
John: Twenty-two years.
Pat: You must be one of the most patient men I have ever met. Is that a fair statement or do you just come home and lose it at home?
John: Not here. I'm patient. I feel that I'm cool with tying shoes and helping kids put on their coats.
Pat: How awesome. Well, thank you.
Scott: Yeah, for sure.
Pat: Thank you for your service.
John: Thank you.
Scott: All right. I wish you well, John. We appreciate the call. We're talking now with Michael. Michael, you're with Allworth's "Money Matters."
Michael: Hi, Scott and Pat. Thanks for taking my call. So my question is, I'm a millennial and I'm only really familiar with retirement horror stories. What are some things that millennials should be doing to ensure a successful and comfortable retirement?
Pat: Remind me, a millennial, what age group is that?
Michael: I'm 31, so I think the age bracket is 28 to 45 or something.
Pat: Okay. All right. Thank you. I meant that seriously because I can't ever keep track of these Gen X, Gen Z...
Scott: When you say a horror story, what's a horror story? People hate their retirement or don't have enough money?
Michael: Well, I think our country just loves to push the narrative of you're not saving enough or there's retirees retiring with only Social Security, which obviously isn't enough. So I've only ever heard of people not ever having enough money for retirement.
Scott: There's plenty of those.
Michael: Yeah. So my question is, what do millennials need to be doing now? Because retirement isn't going to just manifest by doing nothing.
Pat: Got it. Got it. Got it. Got it. So look...
Scott: I don't think it's that complicated.
Pat: It's not. But let's step back for a second. What happens is I've had many, many clients over the years, been doing it for almost 35 years, more than 35 years, that have come to me and said, "I don't think I have enough to retire." And the first thing we look at is what's going on out of the house, not what's coming in. Because if you don't have a lot going out of the house, you don't need a lot coming in. All right. And where you live really matters, right? If you're living in a small town in Iowa and your house is paid for, and you're growing your own food, and you don't travel, and you don't line it up, then...
Scott: I don't think it's...it's pretty dang basic.
Pat: But how do you save?
Scott: Save 10% of your income. If you do that right out by the time you're an adult...if you save 10% of your income as soon as you're an adult until the time retirement age, you're going to have plenty of money saved for retirement. Ten percent. I ran the numbers for some of my 17-year-old high schoolers, she had to find an online program, and maybe it's 12%, but she went a little higher.
Pat: I would say 15%. I tell my kids, "Save 15%."
Scott: Okay.
Pat: They're not used to living on anything anyway.
Scott: Save 10% to 15%.
Pat: Okay, we'll go with that.
Scott: If you can do it through your employer's plan, all the better because it comes out of your...But that's key. If you do that and avoid consumer debt, credit cards...
Pat: Consumer debt, cars...
Scott: ...anything that depreciates...
Pat: Cars, credit cards, appliances, don't buy the insurance on the appliance, right? you go to Amazon...
Scott: Well, the consumer debt's going to kill you. And then get your home paid out. Buy a home and have it paid out by the time you hit retirement age.
Pat: That's it.
Scott: That's it.
Pat: And make sure you've got, if you have children, life insurance.
Scott: I mean, those are the biggies. Avoid debt, save first, get your home paid out by the time you hit retirement. Michael?
Michael: Okay. Yeah, that sounds good.
Pat: Are you doing that?
Michael: I'm contributing to a 401(k). I just got a new job, so I'm in the process of rolling that over and I don't have any consumer debt. I don't have student loans.
Scott: Good.
Michael: And I don't own a house.
Scott: Do you want to own a house at some point in time?
Michael: Yes, I very much do.
Pat: Yeah. And oftentimes it just depends where you're living. You know, if you're on the East Coast or the West Coast, it's much more difficult to do that. But yeah, 100% of your 401(k) should be in equities, all stock. Put 15% in...
Scott: All stock.
Pat: ...all stock. All stock.
Scott: I'm 58. My 401(k) is still 100% stock.
Pat: Sixty-two, 401(k), 100% stock. Has been since the day I opened it.
Michael: I did not know that, but I will switch my allocations.
Scott: I mean, the way we look at it, you've got 30-plus years before you're going to spend those dollars.
Pat: Before you start spending them.
Scott: Yeah. So who cares what the value is worth next year or the year after?
Pat: The year after. Who cares? It doesn't matter.
Scott: You care about what's going to give you the highest probability of a nice size account at age 60, 65. That's going to be having to all in...
Pat: We missed one. If given the opportunity, marry money.
Scott: Should have started with that one. He's kidding, Michael. He's kidding.
Pat: I'm joking. But my grandmother used to say...
Scott: Appreciate the call.
Pat: ...it's just as easy to fall in love with someone who's rich as it is poor.
Scott: Not really, because there's not that many rich...How many rich girls did you know? Actually, I grew up in a neighborhood...
Pat: Wait a minute. I'm trying to think.
Scott: Exactly none. I went to high school in Torrance.
Pat: You were right next to Pacific Palisades, right?
Scott: No, Palos Verdes.
Pat: Oh, got it.
Scott: So Chuck Norris lived a quarter-mile from my house. His neighborhood is very different than the neighborhood I grew up in. So anyway, I had a bunch of friends...We lived in a 900-square-foot little tiny house. I had a bunch of friends that lived in big houses, their families were quite successful doing whatever they did. And I remember having...I was having lunch...I was in high school. I'm having lunch with these two girls. I must have been, like, a senior because I don't know how I get money for lunch and...
Pat: I was surprised that you were having lunch with girls.
Scott: I'm just trying to show off. No, but the two were talking and the one said something about she'd never been to Europe. And the other girl's, "You've never been to Europe?" "No." "Jamie, you're kidding. Literally, you've never been to Europe?" And I remember watching this conversation like, what planet are you girls from? No one in my neighborhood's ever been to Europe.
Pat: You're like, we've never been out of the neighborhood. "You've never been to Europe? "
Scott: "Never? "
Pat: "You mean literally never? "
Scott: That's exactly what the conversation was.
Pat: "Oh my God." Is that what it sounded like?
Scott: That's exactly what it was.
Pat: Because they were Valley girls, right? Was that about the same time?
Scott: That wasn't the Valley though.
Pat: Oh, I don't know anything.
Scott: Anyway, I don't know why I went there.
Pat: Anything south of the grapevine is Disneyland to me.
Scott: Okay. Well, as we are wrapping up, Pat, we've got a webinar, this asset protection strategies for high-net-worth households. So this is really about, how do we think about protecting our assets? I'm doing the webinar along with Vicki Bogner. She's Allworth's head of wealth planning. And it's really designed for those that have $2 million or more of investable assets. But during the webinar, we're going to talk about some equity diversification strategies. How to really optimize our fixed income portfolio, the piece that we've got from fixed income. Look at some tax-efficient investment strategies.
Pat: Which, by the way, tax-efficient investment strategies, when I sit down with clients, it is the number one...with people that are coming to see us for the first time, it is the number one thing that people are missing is these tax investment strategies. They're not tax efficient.
Scott: Well, the traditional brokerage firms, they state, "We do not provide tax advice," which is a mistake. My opinion, we do provide tax advice. We have CPAs on staff, part of our planning.
Pat: It's where you actually add a lot of alpha.
Scott: We're going to talk about the role of private markets, and some alts, and wealth preservation, and some strategies for estate planning and trust. So these are our May webinars: Wednesday, May 14th at noon Pacific, Thursday, May 15th at noon Pacific, Saturday, May 17th at 9 a.m. Pacific. And you're going to get more information and register at allworthfinancial.com/workshops. And I'm getting a flash on my thing, "Provide call-in number and email for the show. "
Pat: So if you'd like to call the show...
Scott: Was that meant to pop up?
Pat: ...833-99-WORTH. That's 833...
Scott: If you want to be on it, we'd love to take calls, or send us an email, questions@moneymatters.com. We'll schedule a time for you to be on with Pat and myself. So anyway, appreciate you being part of Allworth's "Money Matters." This is Scott Hanson and Pat McClain. We'll see you later.
Man: 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.