Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

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

Pat: Pat McClain. Thanks for joining us.

Scott: Yep. We're glad you are here with us as we are now into May 2024.

Pat: And I want to talk about a couple of things today on the show, Scott. This one came out a couple of weeks ago. It's been working itself through the press. It was in our industry press before it then hit "The Wall Street Journal" and then the local press, but how IRAs will now have to be...IRAs, individual retirement accounts, that are coming from a 401(k) have to be held to a fiduciary standard. We're going to spend a couple of times, a couple of minutes on that. And if that doesn't keep you listening, I don't know what will. It's interesting though. And I don't know actually how I feel about this or how they can actually enforce it.

Scott: I would agree with both those statements.

Pat: Yes. So we'll talk about that and we're going to take some calls. If you'd like to join the show, 833-99-W-O-R-T-H. And we'll get you on the air. We'll schedule time for you to join us to have a nice little chat.

Scott: That's a nice chat.

Pat: Nice chat.

Scott: Well, and you know, market volatility has certainly returned, right?

Pat: Yes.

Scott: And we look at the latter part of 2023, the first quarter of 2024, everything looked so rosy. And regardless of what happened, markets were going up. And then...

Pat: Inflation. Interest rates.

Scott: ...maybe the feds aren't going to cut the interest rates six times. Maybe they're not going to come three times. Wait, maybe the feds only going to have one rate cut. Wait, maybe the feds not going to cut rates at all. And then we look at, if you look at what happened, the growth of the first quarter, below expectations. What is it, 1.5, 1.6%, the GDP for the first quarter of...? So the economy is slowing.

Pat: And then what's happening in Europe and the fed completely disconnected on like the global economy. It's like everyone's in it for themselves. They're not coordinating between the U.S.... There's oftentimes coordination between Europe, essentially their feds...

Scott: Their central bank...

Pat: ...their central bank and our central bank. And everyone else now is like, "We're just going to go our own way." It's a tough environment.

Scott: And inflation ticked up a little with 3.7%. I think we're looking at the...inflation's up, growth's down. That's not a good combination when you've got...

Pat: Inflation's up, growth's down. Turmoil in the streets. Walking the Golden Gate Bridge.

Scott: Oh, man. You read some of those students... You know, it's funny that these elite universities, all these protests, and then you read some of the accounts of what these kids are saying. You're like, "How did you make it to that school? Is this our brightest and best? You have no idea what you're talking about."

Scott: I don't believe half of those people actually protesting are from the schools.

Scott: Well, I remember when I was in college and it was my girlfriend's roommate, the organization of some sort of something or other. She was telling me that, they were having a protest meeting in their apartment. And, "Okay, Thursday at 3:00, we're going to meet outside Burger King," or whatever it was, "We're going to protest." And one says, "What is it we're protesting again?" She'd tell me the story. I thought it was the funniest. "What is it we're protesting again?"

Pat: "I need to read up on this."

Scott: "I guess my life has been so good. I'm at this university. I'm just hanging out in my apartment in the afternoon. I don't have to work. I got everything paid for."

Pat: "...and everything, like, we're going to protest."

Scott: "Protest about something."

Pat: Anyway, so we're going to talk about the IRAs. And then I want to talk a little bit about the ARK funds from Cathie Wood from two perspectives. One is how when it was doing really, really well, they just kept rolling out new ARK fund after new ARK fund after new ARK fund, which reminded me of Janus funds.

Scott: Back in the '90s.

Pat: In the 90s. So we're going to spend a couple minutes on that. And we're going to take a call.

Scott: I guess most listeners are like, "Janus funds in the '90s, I don't even know what you're talking about."

Pat: Okay, we'll talk about it. We'll explain it.

Scott: All right. Let's start off here in Ohio talking with Adam. Adam, you're with Allworth's "Money Matters."

Adam: Hey, guys, good to talk to you.

Pat: Thank you.

Adam: Yeah. So I'm calling in, I'm hoping to get some help figuring out the best way as far as taxes, I think, to not only plan for retirement, but also hopefully save for my kids' college funds...

Pat: Okay.

Adam: ...when we start that. So our situation right now, I have one amazing wife...

Scott: How old are you?

Adam: ...two beautiful children. Sorry, say that again.

Pat: Wait, an amazing wife...

Scott: An amazing wife, two beautiful children.

Pat: And two beautiful children.

Scott: I'm extremely handsome.

Adam: Yeah. I don't have much great stuff to say about myself, but they're so great.

Pat: Okay. How old are you?

Adam: I'm 27. I'm working as a nurse right now.

Pat: And how old are your beautiful children?

Adam: My beautiful children are three and almost two. And we actually have a third on the way right now.

Pat: Wow. Congrats.

Adam: Thank you.

Pat: And your spouse, does she work outside of the home?

Adam: She works as a real estate agent part-time. So she's a Schedule C employee. That kind of muddies the waters a little bit as far as figuring stuff out.

Pat: Got it.

Adam: So I work as a nurse right now. I take home maybe $100,000 a year or so, which is definitely way more than we need to live off of. So I've been maxing out my Roth IRA each year. I've been doing that for about the past three years now.

Pat: Roth IRA?

Adam: Roth IRA, yes. But with my wife being a Schedule C employee, I didn't know if it makes sense for her to...for us to be maxing out hers versus mine.

Scott: How much did she make last year, net?

Adam: Not very much. Maybe in the 20s, $20,000 to $30,000 range.

Scott: Okay. But you haven't put a Roth IRA for her?

Adam: No, she actually does not have an IRA at all. So she used to be a teacher. So she has a few very small educational retirement funds.

Scott: Yeah, 403(b)s.

Adam: But we've kind of combined those in there.

Scott: And do you participate in your employer's 401(k)?

Adam: I do not.

Scott: Do they have a match?

Adam: So I'm actually working as a travel nurse right now. So I work for a different hospital, different company every few months. So it really didn't make sense to [inaudible 00:07:12.484] and change it over.

Pat: Are you employed by the hospital or are you employed by an agency?

Adam: I'm employed by an agency to work at the hospital.

Pat: All right. Well, there's a good chance the agency has a 401(k) with a match. It's probably a better chance that they do than they don't. Because you stay employed by the agency and they just move you around to the hospitals, correct?

Adam: For the most part, but I also balance between agencies because depending on what needs different hospitals have, I might actually have to jump agencies to get better pay...

Scott: Regardless.

Adam: ...depending on what hospital I'm into.

Pat: Okay. And how much insurance do you have on yourself?

Adam: As far as life insurance?

Pat: Yes.

Adam: And then maybe that could be the next question I have next time I call in is what kind of life insurance I should get because I have zero.

Pat: Okay. Well, we're not going to talk about the rest of the stuff until you buy some life insurance.

Adam: So you think that should be my first step?

Pat: Oh, I wouldn't even... I'd hang up the phone and I would get online and I would buy $1.5 million of a 20-year level term.

Adam: Okay.

Pat: You've got a three-year-old...you've got a three-year-old, a two-year-old, and one on the way.

Adam: Yes.

Pat: You are the provider. You. You. Right? Something happens to you...

Scott: Something happens and your wife doesn't have the help anymore to even keep her real estate business going.

Pat: Right. This is completely dependent. And this...by the way, you are a normal 27-year-old.

Scott: No, because normal 27-year-olds aren't married with two and a half kids at this point anymore. That was the norm 25 years ago.

Pat: Okay.

Scott: Thirty years ago.

Pat: But you're the normal person with a couple kids. Most people just completely go right to the savings. Like, how can I save more? How do I pay less in taxes? And forget about the life insurance. The life insurance.

Adam: Yeah, which I defnitely did. I skipped right over it.

Pat: Correct. A million and a half-life insurance, 20-year level term. Start with that. Start with that.

Scott: And the reason we're so adamant, we've been in this industry long enough. We've sat beside the table of people widowed trying to figure out how do we make the finances stretch because we've got kids at home.

Pat: I remember telling a kid that they couldn't go to the college that their father told them that they could go to because there was not enough money and the mother and the daughter crying in front of me saying, "But my dad made this promise." And I said, "That's good. I'm glad your dad made this promise. There is not the resources with these four kids for you to all go to college if you go to this one." Helped them write letters for financial aid and appeals to alumni because the father had... It's everything. The second thing you should do is actually build up a liquid savings account in a high-yield account. How much money do you have in liquid savings?

Adam: Probably about 17K. All right.

Pat: I'd push it...

Adam: in a high-yield money market [inaudible 00:10:20.389].

Pat: I'd push it to about $35,000.

Scott: Yeah. I mean, something happens and suddenly you can't work for a year.

Pat: Yes. Disability insurance as well. So do those. Continue the Roth IRA.

Scott: Does the traveling nurse...

Pat: I've got to imagine that they.

Scott: You're not traveling though, are you? With your family?

Adam: So I try not to travel very far. I stay within my state for the most part. I don't typically go cross-country. So I mean, I only work three days a week. So I'm able to be home a lot.

Pat: Okay.

Scott: Got it. That's why you're doing it.

Pat: Okay. So, do those things. Continue the Roth IRA, right? And that should be all equities, by the way, all equities. Then buy that life insurance. Look at a disability policy of some sort. And then...

Scott: Hopefully your employer provides some.

Pat: Hopefully.

Scott: I would check that.

Pat: And then get $35,000 actually in that high-yield savings account. Just go online and use a high-yield savings account. When you do that, call us back.

Adam: All right. That sounds good. I will do that, guys.

Scott: By the way, Adam, you're doing great. Unless you've got $120,000 of consumer debt that you haven't told us about.

Pat: I assume you don't have a lot of consumer debt.

Adam: No, just my house for the most part.

Scott: Perfect.

Adam: Yeah, that's pretty much it.

Scott: And how long did you buy your house?

Adam: I think we're going about three years now. So we've got a pretty good interest rate. Got a pretty good price on it. We definitely bought the right time, which I'm thankful for.

Pat: Okay. And by the way, I'm a fan of a lot of what Dave Ramsey says. But the idea that he wants people to pay down their home super quick...

Scott: Yeah, I don't agree with that.

Pat: ...I don't agree with that.

Scott: Particularly for people that are financially responsible like you.

Pat: Correct.

Pat: Like you. So don't make any extra payments on your home. Make the minimum payment on your home. Once you get all that insurance done and the 35 grand, call us back. And we'll walk you through the next step.

Adam: I will do, guys.

Pat: I appreciate it.

Adam: Thank you so much for the help.

Pat: And congrats on the baby, the new baby.

Adam: Thank you.

Scott: Yeah, that's pretty awesome.

Pat: Yeah.

Scott: But I tell you what, it is always a challenge when looking at life insurance. And I'll never forget years ago, this was a woman I was referred. It was a friend of mine. Hey, a good friend's dying of cancer. Would you mind meeting with his wife? I'm trying to think of if I met with her before he passed. Maybe it was right after he passed. He had just passed. And I think there was maybe 600 grand, 700 grand of life insurance proceeds. She hadn't worked outside of the house for a number of years.

Pat: Oh. A couple kids at home?

Scott: Yeah. Oh, yeah. And the reason I'm telling you the story is she had talked to some other advisor. This was in the '90s before the dot com. Talked to some other advisor about how she's going to be fine. And here's how much money she can expect each month. And then she met with me. And my answer was, you're going to have to go back to work. You're going to have to figure out a career again for yourself. You cannot afford to stay home. She didn't like my advice. And I don't know what happened.

Pat: She used the other advisor.

Scott; I guess she used the other one. And then she went back to work anyway because...

Pat: Because it was in the '90s. In the '90s, I remember advisors saying, "Oh, you can expect 15% returns." I'm like, what?

Scott: Yeah, short-term bias, right?

Pat: Yes.

Scott: Like, whatever happened recently, we're going to assume that's going to continue forever.

Pat: Forever.

Scott: Yeah.

Pat: And look at this spreadsheet.

Scott: That's why we're big believers in having some term life insurance when you've got kids at home.

Pat: Yeah, we've seen it. So talking about short-term bias, I had mentioned earlier in the show, we were going to talk about Cathie Wood's ARK Fund. And ARK...

Scott: A-R-K.

Pat: A-R-K.

Scott: I think she was the first...or not the first, but one of the first actively managed ETFs, Exchange Traded Funds, which are very similar to mutual funds, but slightly different.

Pat: Yes. They're just priced throughout the day, essentially. And you can actually use derivatives on them as well. But otherwise, they look like mutual funds. So big holdings of Tesla, Zoom, Roku, the things that have been on fire. And what's interesting is this article came out and said there has been a great outflow of money from her ARK funds.

Scott: Well, at its peak, Pat, in early 2021, $59 billion were in the funds. And today it's $11 billion.

Pat: Right. But what was interesting is this one fund that they started when their ETF was doing well, they started rolling out other ones. And this reminded me of the Janus funds in the 1990s.

Scott: Well, it's like...think about it as any business. You've got some product, you've got these loyal customers that love your product. You're like, "Hmm, can I have another product that might be of interest to them?"

Pat: And then you create another beanie baby.

Scott: I've been selling suits, but maybe they want a tie as well.

Pat: Or we've got the Princess Diana beanie baby. Let's get the giraffe. Right? So it's brand extension is all it is. It's marketing. It's brand extension.

Scott: Right, so think of it as a business.

Pat: They're taking the brand and they're trying to sell you more. And if they have different names, then maybe you'll feel that you're getting something different. But unfortunately, most of the ARK funds held very, very similar...there wasn't a different thesis behind the investment for each one of the ARK funds. So people would buy two, three different times.

Scott: It was based upon Cathie Wood, who she was like, for a brief moment of time, I guess some sort of investment guru on momentum stocks. And valuations don't really matter because of something, I never quite understood her philosophy.

Pat: Even saying that in five years, Tesla should be worth $2,000 a share, which is just mind-boggling. As of the printing of this particular article, it was down 40% for the year. But what made me think about this is what we've talked about time and time again, Scott. First of all, I talked to Scott before we got on the show today and I said, "Did you see this article?" And he said, "Yes." I said, "Does this remind you of a couple of things?" One, it reminded me of the Janus funds in the '90s because they rolled out all these different funds that were tech funds. And Janus was an old...I don't know if they're around anymore.

Scott: Janus Henderson.

Pat: Janus Henderson.

Scott: The only reason I know is because I was in Denver walking down the street and I saw the sign on the building.

Pat: Oh, in Cherry Creek.

Scott: Was it in Cherry Creek?

Pat: Yeah, in Cherry Creek. That's right. But Janus was actually...

Scott: We both have kids in Denver. That's why we know it was Cherry Creek.

Pat: Yeah, correct. I have a son that lives in Denver.

Scott: And my daughter lives in Denver.

Pat: So it reminded me of Janus funds, which by the way, Janus funds actually started as the vision of Standard Pacific Railroad, if you want to ask where it started. But when they were doing really well in the '90s because it was all tech, they just rolled out more and more funds. The other thing it reminded me is, and we've talked about this on the air, which is returns to investors, not returns of funds. Because funds will actually tell you how the fund did. What we want to know is how did the investor do? Not how did the fund do, how did the investor do?

Scott: And here's why that... And you're like, what is the difference? The difference is, like for example, a spokesman for ARK's value creation said it was evidenced by the flagships fund, 109% return since its inception in 2014. Which isn't that great, by the way. Ten years, 7% annualized return. I don't know exactly what the S&P did though.

Pat: Yeah, but it isn't mind-boggling.

Scott: You certainly weren't compensated for the risk. But people started throwing money and not when it was down, but when it suddenly became hot. So my guess is...

Pat: They bought at the top.

Scott: ...the 109% return had probably already taken place before the average investor actually bought the fund.

Pat: Before they hyped the heck out of it. Before the ARK Funds hyped the heck out of it. And Cathie Wood was all over all the financial talking heads on TV and in "The Wall Street Journal." So it reminded me...

Scott: And if you did the analysis, my bet is that more people lost money. Well, no analysis needed for that. More people lost money in her fund. The question is, was there actually a degradation of value?

Pat: As more money went in?

Scott: I bet that on a net, she's lost money.

Pat: The average investor.

Scott: Because all this looks at is you put a dollar in at the start...

Pat: At the beginning.

Scott: ...at the beginning, what's a dollar worth today? But maybe I had a dollar for a few years and then suddenly there was a billion dollars thrown in. And then it fell back to two dollars.

Pat: And we know that people...actually, from peaking at $59 billion in early 2021 is now $11 billion they're managing. So that tells us that people put money in when it was popular and took money in out when it was bad. And by the way, we're not saying that it's either a good or bad fund. She's doing what she does. She's doing what she does.

Scott: Well, we never recommend it for any of our clients.

Pat: We haven't. But I'm not saying...she's doing what she does, which is she picks high-risk-momentum-type stocks. And she has the returns that say I pick high-risk-momentum-type stocks.

Scott: This article in the Journal, it highlighted a couple of people. I'm always curious to the people who would say, "Oh, yeah, you go ahead and print my story." So, you know, here's a 63-year-old accountant who...

Pat: Recently sold at steep losses.

Scott: But here's another one. It's, "I'm now down about 50% to 60% in all my accounts. I'm not sure how to move on three years later."

Pat: Right. So?

Scott: And the point is, I think we're not bringing this up to pick on Cathie Wood.

Pat: It's the investor.

Scott: Completely agree.

Pat: It's the investor. The investor got enamored with the story and ignored the risk.

Scott: Yeah. And maybe went on Reddit and started listening to...

Pat: Whatever hype was out there was out there, ignored the risk. Right? "What's going well will always do well. What's going poorly will always do poorly." None of that's true. This shall pass. The good times will pass. The bad times will pass. The good investor stays invested in a portfolio that is designed for a reason. Portfolios are designed to satisfy your need. Right? Look, if I want income or do I want growth or do I want growth and income?

Scott: And it's looking at that need and then it is building the most risk-efficient, minimize risk as much as possible, having the highest probability for success.

Pat: And tax efficient. Risk efficient and tax efficient.

Scott: Combined at the same time.

Pat: Yes.

Scott: And something like this fund is not. I mean, highly risky.

Pat: Highly risky.

Scott: And I read these accounts from people and I have no empathy or sympathy for them. I don't.

Pat: A little. Just a little.

Scott: All right. Maybe a little.

Pat: Just give me a little.

Scott: I probably feel more sorry for someone who'd never saved a dime their whole life, lived recklessly, and is poor at their old age than someone who...

Pat: Okay. Well, I'm not going to go there with you.

Scott: I don't know. I mean, I feel bad for anyone who makes financial... We've all made financial mistakes.

Pat: I feel bad for the Uber driver that's telling me about Bitcoin. I feel bad for them. I feel bad for them.

Scott: All right. I do too. Fair point.

Pat: Right? They buy the hype. Look, you buy the hype. ARK Funds, "Let's just create more of them. We can sell more of the same stuff to the same people."

Scott: And this ship's sailed, right? So this...

Pat: It's done.

Scott: Yeah, no one's going to be talking about this fund or her five years from now.

Pat: We might be the very last people to talk about it.

Scott: But there will be something else. There'll be another Cathie Wood. There'll be another ARK Fund where people want to, "It's doing great. You've got to get in on this. You're kidding me, the thing went up 72%." I don't know what it went up, but I'm just saying, "It's up 72%. And it's just starting because look at what they're doing and all this stuff. The next year's going to be even better."

Pat: Yes. Yes.

Scott: "And you can retire younger and earlier than you're planning and all that stuff." So let's go back to calls here, Pat, because we got some calls here. We're talking to Roz. Roz, you're with Allworth's "Money Matters."

Roz: Hi, good afternoon.

Scott: Hi, Roz.

Roz: I am 63 years old. I am still working and I have a pension and I have a, obviously, social security. I don't have tons of money, but I feel like I'll be comfortable. But what I'm asking about, and I know it's not necessarily something you can answer directly, but just kind of a rule of thumb. When is it...what's a good way to determine when it's time to retire, other than that you're tired of working?

Pat: Oh, oh, I can answer.

Roz: When should I pull that trigger?

Pat: Oh, yeah, yeah, I can answer. Not even a rule of thumb. I mean, we can answer directly if you've got a couple of minutes to go through some numbers.

Roz: Sure.

Scott: Well, you mean when... I'm confused on the question, or your responses because there's two factors at play. One is, do we have the financial resources? And for some people that never comes, and for some people that comes way before normal retirement age. And then the other second thing is, are we are in a stage in life where we want to leave this career to do nothing or to move on to something else, right?

Pat: Yes, either which way we can answer that. Okay. Right. So let's just go through the economics of it, the finances of it. How much do you make now?

Roz: I make about a gross, about $108,000 a year.

Pat: And how much are you putting in your 401(k) as a percentage of your pay?

Scott: Or dollar.

Pat: Or dollar amount.

Roz: Well, just this month I maxed it out at, I think about $33,000 or something like that. I just increased the amount. I think I was doing $24,000 before that.

Pat: Okay. We're going to go with $24,000. All right.

Roz: All right. Is that 9,000? And what will your monthly pension be?

Roz: $7,000 gross.

Pat: And how much money do you have saved in your 401(k) or IRAs?

Scott: That's a nice pension.

Roz: My 401, and this is from memory, I think it's about $300,000. I have a really tiny ROTH IRA, which is just like $26,000.

Pat: And money in the bank?

Roz: Money that's earmarked for some other things. So not a lot.

Pat: Do you own a home?

Roz: Yes.

Pat: And is it paid?

Roz: No, it's not paid for. I have like $250,000 on a mortgage right now.

Scott: Well, Roz, your pension income is going to be more than what your take-home pay is now.

Pat: That's right.

Scott: It's actually... If you take $108,000 and $24,000, which you had been saving, subtract that, that's 84 grand.

Pat: And then you...

Scott: Which is what your pension is.

Pat: So when you take what you're paying into Social Security...

Scott: You won't have to pay that once you retire.

Pat: And disability benefits and all those other little things in there, it's about 9,000. You can retire comfortably on that $ 7,000-a-month pension.

Scott: Your pension will be worth more than what you're currently taking home without Social Security.

Pat: Without Social Security. Are you eligible for Social Security?

Roz: I am. And yeah, I have either mine or I could take my late husband's until mine grew more.

Pat: That's right. That's the way you want to go. The latter. And when I asked about the mortgage, you were going to throw in a "but" there. I kind of heard something. Do you plan on moving or...?

Roz: No. No. No. My hesitation was the money I have in the bank right now is from a refinance to upgrade the house.

Scott: To do upgrades on your existing house or to sell the house and...?

Roz: Yes.

Scott: Oh, do upgrades. Okay.

Roz: Yeah.

Pat: Yep. You can retire comfortably. Yeah.

Roz: Okay.

Scott: Yeah. So at this point, you're working because you want to, not because you have to.

Pat: Comfortably. That's without even touching your 401(k). Yeah. Or your social security.

Scott: Your first check in retirement is going to be worth more than your take home is now and a pension that's guaranteed the rest of your life based upon the information you told us.

Roz: Nice. Thank you.

Scott: Yeah. All right.

Pat: Well, we didn't do anything. We just answered the question. I wasn't the one that worked.

Scott: Yeah, for an organization that had a nice pension.

Pat: It has a nice pension. I assume that you work for a utility or a government.

Roz: Exactly.

Pat: There we go. There we go. Yep. Yep. You're comfortable. You're comfortable.

Pat: And when you mentioned you took some money out on the mortgage, is that a recent refinance? Was that a full refinance or a partial finance or...?

Roz: It was in 2020. It was a full...

Pat: All right. Beautiful. Interest rates somewhere around 3%.

Roz: Three and a quarter.

Pat: There you go. Perfect. Enjoy. Retire. Go back and live nicely.

Scott: I appreciate the call, Roz.

Pat: Congrats.

Scott: And we're continuing in Ohio talking to Ellen. Hi, Ellen. You're with Allwoth's "Money Matters."

Ellen: Specific question about when you would recommend a person looking at annuities. So I am 64. I'll be 65 in March. My plan had been to stop working when I turned 65. That may or may not happen, but I'll at least go down in hours. I will be not working as much when I turn 65. And right after the 1st of the year, I'm going to be getting approximately two years worth of income from a deferred comp plan from my company. And taking that money is what I'm wondering, would it be a good idea to put into an annuity? I haven't thought about annuities for 15 years or so. And I had heard at that time huge fees that the brokers would receive. And so I said, no, never going to be interested, put it to the back of my mind. And now that I have the specific circumstance coming up, I'm wondering. I've heard that annuities have kind of changed over time, and maybe it's not the huge fees anymore, and maybe it is something that I should be considering.

Scott: What is it you're hoping an annuity would provide for you?

Ellen: Stability of inflow. I'm a very conservative person. I think I have fine enough money and everything. I'm a good saver. You will definitely say that when you hear. But I'm also very conservative, old-fashioned, just want to have that security of knowing that there's money coming in.

Scott: So what do you have in savings? 401(k), IRA, what have you saved up?

Ellen: In my retirement account, I have about $1.5 million.

Scott: And how's that invested?

Ellen: Primarily, that would probably be at this point in time about 75% mutual funds. There's a reason. Because you need to know I have about $900,000 in cash and cash equivalents right now. That number's gone up a lot recently. I haven't had that much money in cash. But I have a lot of cash that I've been starting to put in my retirement that I shouldn't have to touch for quite some time. I've put more of that into mutual funds.

Pat: And you said recently that all of a sudden there's a lot more money in cash. What has happened recently that has caused a spike in your cash holdings?

Ellen: Two things primarily. Part owner in a company for a couple of years now. And I moved from Colorado, cost of living and housing prices is a lot higher there than it is in rural Ohio where I currently am. Okay. I got a lot of money out of real estate.

Pat: And do you own your primary residence now?

Ellen: Yes.

Pat: And how much money do you think you're going to need to live on?

Ellen: I'm cheap and conservative. I could live on very little, but $50,000 a year, $60,000 a year sounds fine.

Scott: And what's your health like relative to other 64-year-old women?

Ellen: It's probably decent. It's average. I'd say I have longevity in my family side for females. So I've got good genes. If I could just be a little more active and lose some weight, I'd probably be healthier. But it's probably average I'd say.

Pat: And single?

Ellen: Yes.

Scott: You might be a good candidate for an immediate annuity. In this market. A year ago, rates have been so low for a while, I've just been like, "It's not a very good time to lock your money in for the rest of your life." But...

Pat: How much after-tax dollars will come out in 2024?

Ellen: For the deferred comp or in total?

Pat: No. Well, this is yeah, you were talking about a non-qualified deferred compensation plan, I assume.

Ellen: Yeah.

Pat: That's going to spring at the time that you lower your, right? How much money will come out?

Ellen: Yeah. After tax $250,000.

Pat: Yeah, it wouldn't bother me. I can see...

Scott: An immediate annuity.

Pat: An immediate annuity.

Ellen: Which means what exactly?

Scott: You give up... Well, this is...so there's pluses and minuses. You give up control of that dollar. In return... It's like buying a monthly pension.

Pat: It's like you went to work. It's like taking this non-qualified deferred compensation and converting it to a monthly pension.

Ellen: Okay.

Scott: And a year ago, the rates wouldn't have been attractive. They're much more attractive today.

Ellen: Okay.

Pat: You're only doing it to make yourself feel good though.

Ellen: Yeah.

Pat: Yeah.

Scott: That's the only reason you're doing it. Don't buy an equity index annuity or you don't need a variable annuity.

Pat: You don't need to do this. I mean, look, we could take that 250 grand. You drop it on top of the cash that you have. Now you're at $1.15 million. We add it up, it's all $2.65 million. What was your income last year?

Ellen: Well, my wage is 175,000, but my taxable adjusted growth income is just under 500,000.

Pat: Okay. Yeah, you're doing it to make yourself feel good.

Ellen: Okay.

Pat: Look, I can make an argument...

Scott: Because you can be really conservative in parts of your portfolio.

Pat: That's right.

Scott: You might want to do either kind of a...you don't want to be a hundred percent conservative in everything.

Pat: But by the way, you kind of got it backwards a little bit here too.

Scott: What's backwards?

Pat: She's got all the equities in her retirement plan and you've got all your taxable stuff outside and it should be actually the opposite. And the reason is that income that's being derived from your cash... Let's say we put a bond, a conservative bond portfolio, average length, medium length bond, intermediate length bond portfolio in there. That's going to be taxed as ordinary income as it comes off versus if you had reversed it and put that in your IRA and the equities tax managed outside, they're going to receive not only a step-up in basis at death, but you're going to have capital gains when you go to sell them.

Scott:And very little in the way of taxable distribution.

Pat: And very, very little bit on...

Scott: And their qualified dividends that even the ones that are, so

Pat: Yeah. So you've kind of got it backwards. Well, not kinda, you got it backwards. And so, you know, quite frankly, have you ever used a qualified advisor before?

Ellen: No.

Pat: You need...

Scott: Just have a couple of conversations with one.

Pat: Yeah. Go pay them for a financial plan and...

Scott: Have a couple of conversations, find someone you like and trust.

Pat: I mean, I've known you for what? How long have we been going in here? Four minutes, five minutes, maybe. Right. And, and you look at it, you're like, oh, great saver. You said you were a good saver. I liked the fact that you actually asked about the annuity. Yeah. I could argue for or against it. Economically, it's not going to make a bit of difference. I don't think I...if you were my sister, I'd say that don't bother, but your portfolio needs to be tweaked.

Scott: If your portfolio was much smaller, there actually might be a larger opportunity to use an annuity.

Pat: Oh, there's no question. There's no question. So if you look at how much of your...

Scott: If you didn't have any buffer, but you've got a lot of buffer.

Pat: Yeah. And then your income, you need $50,000 a year to live on. Your social security is going to provide $35,000 of that. Right?

Ellen: Yeah.

Pat: So yeah, I mean, I think that you should actually take more income than 50 grand out to live on. I think you should live it up a little bit. Buy yourself, you know, whatever you guys buy in Ohio, what is it corn? What is it? Chili? You guys eat chili with spaghetti?

Scott: What is that weird chili they have in Ohio?

Pat: Skyline Chili.

Scott: Is that what they call it?

Ellen: Yes. Skyline. Yeah.

Scott: Yeah. Get yourself some extra Skyline.

Pat: Get yourself...

Scott: That's going to be contrary to the things she said.

Pat: I think she said she's trying to lose some weight. You get them on the spaghetti noodles and then they put the cheese.

Scott: I don't know why they call it chili.

Pat: I don't know either.

Scott: I love local traditions. I must say.

Pat: Yes, but not that one.

Scott: Oh, come on. Anyway. All right.

Pat: Good luck to you. Pay an advisor to just...or have a couple of conversations with them.

Scott: Wish you well, Ellen.

Ellen: All right. Thank you very much.

Scott: And we're in California. Talk with Tony. Tony, you're with Allworth's "Money Matters."

Tony: Hey, how's it going?

Scott: Good.

Tony: Yeah, I just had a quick question for you.

Scott: Yes, sir.

Tony: So my grandfather passed away about a year and a half ago. And he had everything in a family trust. And the only one on the family trust was my father. So my father was planning on, or so he says, gifting this one account that he has to me and my brother, splitting in half. But we were kind of wondering how we go about that and not get hit with a bunch of taxes.

Pat: Well, unless it's an IRA or an annuity...

Scott: You won't have any taxes.

Pat: ...or savings bonds.

Scott: The only taxes you would have would be whatever the change in value. Actually, yeah, whatever the change in value of the stocks were with the portfolio from the date your dad inherited. Assuming it was in a revocable trust when he received it.

Tony: Well, because it was in a trust and then they...

Scott: There's different kinds of trusts. So odds are it was in a revocable trust, a living trust. There's a chance it was in some sort of bypass trust that would not receive a step-up basis. But high probability it was in a typical trust that your father received it. From a tax basis, it was all those securities were stepped up to the fair market value. So any tax you would have due would only be...it would be a gain or loss from the date your dad inherited those assets.

Tony: All right. Because it's not even... I think now we finally have it in my dad's name. Because it's taken about a year. I mean, we kind of didn't do anything for about a year. And then the last six months, we've kind of been working on it. So we were trying to transfer the account from my grandfather straight into my name.

Pat: Yeah, that wouldn't work. That wouldn't work.

Tony: They wouldn't do that.

Pat: No, no, they wouldn't do that. That's right. That's right. That's right. And where does your dad keep the money? Is it like Fidelity or Charles Schwab or?

Tony: It's in Ameriprise.

Pat: Okay, easy enough. So just you and your brother go open Ameriprise accounts.

Tony: Yeah, we already have Ameriprise accounts.

Pat: Then just...

Scott: What's the problem?

Pat: Your dad just signs transfer paperwork to transfer the money 50-50 into you and your brother's name. Easy. Take a day.

Tony: That's what we were hoping but their people are saying, "Oh, there might be a big tax or something."

Pat: How much is it?

Tony: It's about $800,000.

Pat: And is it in an IRA?

Tony: No, I mean, I think most of it is stocks and the rest [crosstalk 00:40:47.229].

Scott: And is your dad's estate worth more than 6 or 7 million dollars?

Tony: No.

Scott: There's nothing to worry about.

Pat: The only...just write this down. If it's an IRA, an annuity, or in savings bonds, you have to worry about taxes. If it's not, easy.

Scott: You don't have to worry about it. In California, there's no sort of...there's no federal tax that you have to pay nor is there any estate taxes.

Pat: Yeah. The only taxes that you will owe is if you sell any of those securities, if there's capital gains from the date that your father inherited to the date he gifted you, you would be responsible for that. And that would be what's called a change in your cost basis. So, no. So just remember, if it's an IRA, it's an annuity, or savingsbonds, you need to take steps or you will have to pay taxes.

Scott: But if it's not, there's nothing.

Pat: Frankly, it wouldn't even be you that had to pay the taxes. It'd be your dad. So thanks, Dad.

Scott: Yes. All right. Appreciate the call. Well, Pat, I know we had made some mention of discussing...

Pat: This fiduciary.

Scott: Yeah. I say we talk about it on our next week.

Pat: Yeah, let's talk about it next week.

Scott: It's so exciting.

Pat: It is. And by the way, a couple of weeks ago, I mentioned an app that I was going to talk about. I've gotta...

Scott: Oh, you never did.

Pat: And I never did. And I got an email that said, "Hey..."

Scott: What's the app?

Pat: It's called Libby? Libby. L-I-B-B-Y. You need to get a library card to get it. Hundreds, if not thousands, of magazines, newspapers, and books. It's completely free. You check them out. I'm reading a brand new John Grisham book. I went on there and said, I would like this. And they said, when it gets returned, we will let you know.

Scott: Returned? There's a finite number of digital subscriptions.

Pat: Yes. And then it lets me read the John Grisham book.

Scott: You need a library card?

Pat: You need to have a library card and you go get your library card. You go on the app. It's like you're going to a digital library. Magazines free.

Scott: Is it a for-profit company this Libby?

Pat: I have no idea. I was reading Vanity Fair the other day.

Scott: Of course you were.

Pat: It's got some great articles in it.

Scott: The title itself sounds a little odd. Anyway, it's been great being here with you. We'll see you next week. This has been Scott Hanson and Pat McClain of Allworth's "Money Matters."

Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.