Self-Insuring for Long-Term Care, Rebalancing Inherited Portfolios, and Smarter Wealth Moves
On this week’s Money Matters, Scott and Pat tackle three critical financial planning decisions for high-net-worth investors. First, they break down whether it’s better to self-insure for long-term care or rely on costly, often restrictive hybrid policies. Next, they explain how to rebalance an inherited portfolio, especially when legacy holdings no longer align with your goals or risk tolerance. Then, they dive into how to finance a vacation home wisely—weighing the risks of portfolio loans, capital gains exposure, and over-leveraging in retirement. You’ll also hear a sharp analysis of gold’s recent surge—and why emotional investing often backfires.
Packed with real-life caller scenarios and expert financial guidance, this episode is a must for anyone focused on smart wealth management, legacy planning, and minimizing risk.
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.
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Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah, glad to be with you as we talk about financial matters and talk a little bit about what happens, what's going on in the marketplaces, and how to make good choices with your finances. And of course, taking your calls, answering your questions on things that you're dealing with.
Pat: You know, we talked about this a couple of months ago about how the market seems to be immune to certain behaviors. And so, I'm always amazed. Amazon Web Services goes down.
Scott: Yeah, that's what? A week and a half ago or something.
Pat: Yeah. And the market, it's up that day. But I'll give Amazon a lot of credit. They were very transparent about what happened. They came out and said, "Look, we weren't hacked. No one got into our systems that blew us up, or maybe they did. We don't know." But the market, that was a big deal in my mind. Because of how many businesses...
Scott: I didn't even view it as a big deal. I thought that's a short-term glip.
Pat: I understand. But if it had been hacked and people could go in there and start turning off services to businesses, airlines, financial institutions.
Scott: Yeah, I think those are just short-term things though, right? So, if it's a short-term and you think it's just a one-off, it's a short-term, then the belief would be that it's not going to have any impact on the long-term prospects of the company.
Pat: I believe that.
Scott: I think that's why the markets can ignore something like that. Unless it's a sign of something lurking beneath the surface that we haven't really discovered. Like to your point, being able to hack is easier than we'd thought, and...
Pat: Yeah, is there a Trojan horse in your system somewhere? But it amaze me. Goes on with this tariff stuff, but no one really knows what's going on with tariff. I mean, no one does.
Scott: Trump knows what's going on with tariffs.
Pat: No, no, no. Or is there something you want to talk about?
Scott: We can start with calls, but I do want to talk about gold. Let's just go to calls and then we'll talk about gold.
Pat: I'd love to talk about gold. Because it's on a tear.
Scott: And seems like every talk show, every television thing you look at, they're pitching gold and why you should be buying gold.
Pat: We will not be pitching it on this show.
Scott: But I want to talk about how gold has performed over the last 50 years and talk about some other periods of time, just so that you will have your eyes completely wide open, should you choose to go buy gold today.
Pat: Thank you.
Scott: Besides jewelry.
Pat: Yes. Although, it's a strange thing with the diamonds now.
Scott: What's going on with diamonds?
Pat: Well, because the fake ones are so good. I said to my wife, "Why would you ever buy a real diamond again?" I said, "Look, you..." I said to my wife...
Scott: Particularly your wife, she's married to a, I hate to say it, prominent financial guy who's been somewhat successful in life. People would just assume she would be wearing real diamonds.
Pat: That was my argument exactly, Scott. I said, "As long as you're not bling like they're 10 carats. But if you got a nice diamond necklace, everyone's going to assume it's real." And that's...
Scott: I've never seen your wife wearing fancy jewelry anyway, though. That's not your wife. No bling. Your wife is not a bling.
Pat: No.
Scott: Not a bling, no.
Pat: People listen, "Now, what's McClain's wife look like?"
Scott: All dolled up. With a bling, expensive purse.
Pat: We have a friend that is into expensive purse. We went on vacation with her and she went purse shopping. It was interesting.
Scott: Did she bring multiple purses on vacation?
Pat: Oh, yes.
Scott: So, they would have the bag for the outfit.
Pat: Well, I think she only brought two or three. But I asked her, I said, "What's this fascination with these $5,000, $8,000 purses? What's that? What's the fascination? I don't understand it.
Scott: And her response was?
Pat: She likes them.
Scott: Oh, well, there we go. And if she could afford them, I guess, have a purse, or whatever.
Pat: Her husband just tolerates it. He's like, "Yeah, okay, whatever."
Scott: Anyway, we're distracted again. Now, we're talking about...
Pat: Let's go to the calls. Let's talk to Cathy.
Scott: ...you're rich friends, your rich friends you go on vacation with them.
Pat: I don't know how rich they are.
Scott: If you're spending 5 grand on a purse or 8 grand on a purse, imagine you're doing fairly well.
Pat: Yeah, he's got an interesting job. He hedges risk in the bond markets through options with clients like mortgage companies.
Scott: And sells his services to?
Pat: Mortgage companies, banks. Short term risk in the bond markets, hedge strategies. Not his own position, he just brokers the deals. Interesting.
Scott: Well, I guess, he does well enough to buy a $5,000 handbag.
Pat: Oh, he loves it when the bond market's in chaos.
Scott: Yeah, because that's what he prints money on.
Pat: Yeah, boy.
Scott: All right, let's go to the calls here. If you want to join us, you've got a question for us, we'd love to talk to you. Send us an email, questions@moneymatters.com. We'll set up a time to have a conversation. Let's talk with Jim. Jim, you're with Allworth's "Money Matters".
Jim: Good morning.
Pat: Hi.
Scott: Morning.
Jim: How are you, guys?
Pat: Fantastic.
Scott: Good. What can we do to help?
Jim: I am calling, I would like a little bit of your advice or direction on long-term care planning, whether or not to buy long-term care insurance or not.
Scott: And how old are you?
Jim: I am 55 years old and my wife is 57.
Scott: Okay. And what are your thoughts?
Jim: And I just needed to check. Yeah, so, well, my thought is that I tend to think more that I should self-insure. I got a quote from...
Pat: Okay, good.
Jim: Yeah, I actually got kind of like the whole-life-type quote and then the term-life-type quote. The whole-life-type quote...
Scott: Let us know what these are, because long-term care insurance premiums have gone through the roof the last decade.
Pat: Sure, long-term care. But there are long-term care policies embedded in life insurance policies that may or may not make sense.
Jim: Right. So, this was a whole life type of... I call it the whole life because... You know what I'm talking about. So, it was $130,000 premium. The immediate benefit was $333,000 lifetime shared between my spouse and I, and it paid $5,000 a month. It escalated, guaranteed on both the lifetime benefit and the monthly benefit at 3% anyway.
Scott: Okay. But it's $330,000 lifetime cap.
Pat: Yeah, and $130,000 premium at a 55-year-old.
Scott: Okay, keep going.
Jim: Correct. And then it was a three month retention. And once you hit the three month, when it passed your 90 days you got the...
Pat: The benefits.
Jim: ...it went back to the first day. And it was a cash policy, so you didn't actually have to be in a facility. It was as long as you qualified two out of five of the daily living that you couldn't get, they paid you the check.
Pat: Okay. That was my next question.
Jim: Okay. And then in the presentation, of course, they're going to show you out at, you know, tapping the benefit at 75 or 80 or whatever, that type of thing. So, you're like, hey, at this point you're at $12,000 a month and you have a $900,000 benefit.
Pat: Okay, because of the 3% increase.
Scott: But is that $330,000 lifetime cap, does that also have a 3% inflation increase?
Jim: Yes. Yep.
Scott: Okay.
Jim: So, that's how it got to there.
Scott: Good. Before you said that, I think this thing's a garbage plan because...
Jim: Yeah, right, right, right.
Scott: I haven't ran the numbers, but I'm just going in my head thinking of it.
Pat: All right, so keep going. I love the fact that you started with self-insure versus pay someone else to take the risk, because that's what the question is. That's what you're trying to figure out is, do I pay to push this risk to someone else, or I keep it all in-house? Okay, so give us the other scenario.
Jim: Okay. So, then what became relevant to me was, okay, well, what's my current financial status? What's my projected financial status? What's my burn rate in retirement? And then that kind of dictates, right?
Pat: That's right.
Jim: Okay, so here's where I'm at today. My wife works in the school district, so she's got a pension that comes. And as far as assets, we have in qualified plans, 401(k)s, etc., $2.8 million. In brokerage accounts, we have $2.5 million. We have a little over $600,000 in cash. We have a primary home that's worth $1.3. We owe $500,000 on it. We have a rental that's worth about $800,000 that's free and clear. And we have another rental that's worth about $550,000 that has a $200,000 mortgage on it.
Pat: What's the value of the first rental?
Jim: The first rental is $800,000. And then...
Pat: And you said the value of your home was how much?
Jim: $1.3. Both of them have no mortgage.
Scott: And are you working today?
Jim: Yes.
Scott: And what's your family income?
Jim: So, I'm self-employed on a consulting firm. And so, it kind of fluctuates around. Last couple years, about $600,00 or p0,000.
Pat: And how much longer do you plan on working?
Jim: That's an age-old question that you guys have kind of already, at least, in some part, made a decision on in terms of how you're exiting your business, right?
Pat: Yes.
Jim: And so, what I have is, I own a consulting company where I work for wireless carriers. And so, I have all these contracts that are very difficult to get with very large clients. And...
Pat: Yep. You're site locator?
Jim: Yeah.
Pat: Okay.
Jim: Yep. And then we do the A&E side of this. So, my background is an attorney. I got into this post-the-global financial crisis, and was fortunate enough to turn into this chunk of business.
Scott: You enjoy what you're doing?
Jim: Yeah, yeah, I do. You know, there's always, clients are great, as you guys know, and sometimes. clients are a bummer.
Scott: You can say that about everything in life.
Jim: Exactly, right?
Pat: All right, so you're business...
Scott: Sometimes my marriage is great and sometimes it's a...
Pat: For a consultancy firm, you're in a really good position because this is actually something that you could sell for multiples of revenue. In fact, I have a client that sold one. If I gave you his name, you'd know who he was, but I'm not going to do that. And he had built it up to, he had like 30 or 40 employees, and he sold it to the second generation for multiples of revenue.
Scott: So, here's the... You have enough assets to sell. So, you got roughly $7 million. A 4% distribution rates, $280,000.
Pat: And you're only 55.
Scott: So, if both you and your wife required long-term care today, your estate, $280,000 would be enough to cover it. If you wanted 24 hour in home care, maybe it'd be a little bit more than that, but you could still go decades before you blew through all your cash.
Pat: And the way to think about these policies is, because of that $130,000, if it generated 5% returns, that's $6,500 a year. The way these policies are structured is they take that interest off that because you don't see that cash value ever increasing. It stays the same. And they use the first $130,000 to pay that $330,000 lifetime benefit. So, you're really only getting $200,000 of benefit of what you're paying $6,500 a year for, which is a 5% return on that $130,000.
Jim: Yeah, I want to make sure that we're on the same page on that one piece. So, on this particular quote that I was given, both the monthly pay and the total lifetime benefit increase 3% annual.
Pat: No, I understand that. I understand that.
Jim: Okay, good. Okay.
Pat: I understand that. But the way they're actually paying for it internally, because they have a cost associated with that pure insurance side, which is, if you go into a long-term care facility...
Scott: They have to pay it out.
Pat: ...they have to pay it out. How do they pay that? Well, they actually just don't pay you any interest on the $130,000 that you're putting in the account. And that's your deductible, if you will. So, if you die and never use any of the benefits, well, then you get your $130,000 back. But if you use any of the benefits, that actually comes right off there. So, the $130,000 is a prepaid deductible with a refunded option on it.
Scott: Essentially.
Pat: And the excess income that it earns, so the 5% we're just using a market rate, 5% would be equivalent of $6,500 a year. And that $6,500 is right now paying for the $200,000 of pure insurance. That's the way... You know, you've got a mind for numbers in the locality. So, as they're setting aside their reserve on the other side, you look at it and say, "Well, how are they doing this?" And this is how they're doing it. If you think about it from their economics, I don't think you have any reason to buy any insurance.
Scott: Here's what I don't like about this, the lifetime cap, $330,000.
Pat: But it...
Scott: Not counting your home, you have roughly $7 million of investments.
Pat: And he's 55.
Scott: What's...? And the Delta is $200,000. So, you're buying $200,000 worth of insurance.
Pat: Yeah, you have no need for this. You're 55. And you're in your prime earning years. All that education, all those days in law school...
Scott: Yeah, yeah, yeah, that's right, all the relationship.
Pat: ...all that stuff. This is it. Between now and the age of 65, you earn more money in this 10-year period than you probably have your whole lifetime. You're in your prime. You've got the intelligence. You've got the emotional intelligence. You got the focus. You got the relationships.
Scott: If this policy had a lifetime benefit, that'd be one thing. Because that's...
Jim: It does have a lifetime benefit.
Scott: It's capped.
Jim: Well, it's capped, but the cap increases by 3%.
Scott: Okay, yeah, I understand.
Pat: But still...
Jim: But we're still... I'm with you guys, right? No matter... I can't help but think of it like a businessman, right? Like, okay, well...
Scott: Of course.
Jim: ...I'm not a fan of whole life. That whole... Yes, there's a certain position and a certain type of estate and value and all that stuff for that stuff can play in. But for the normal person, term life, right, and invest those...
Scott: Agreed.
Jim: ... balance of those dollars is the way to go, right? So, I can't help but think of it when I look at these two policies.
Scott: They don't... Here's the risk. A risk isn't a short-term stay that's going to cost $330,000. The risk is you have some strange health occurrence, and now, someone needs to take care of you for the next 25 years. This policy does not solve that.
Jim: That's right. That's right.
Pat: If you came back and your net worth was $1.5 million, I'd probably say, yeah, this isn't a bad deal for you.
Scott: Or, if you're like, "I really would feel really good about having it..."
Pat: Then do it.
Scott: Go and buy it. I don't own one.
Pat: But the economics behind it says you don't need it. These are the true cost. It does have the 3%, but if we can only look at it today, what's the cost of this? The cost today is $6,500 a year for $200,000 worth of benefit at your age and your wife's age of 55 and 57. The insurance company says, "Hey, they're not going to really need this, actually, based on morbidity tables, till they're 75." So, we're at 20 years, for your wife, we're at 18 years at $6,500 a year at current rates. You do the math. That's $100,000.
Jim: Oh, I did it. What I did is I just took the $130,000, right? Because I could just take that out of my cash. How would I pay the insurance company? Well, I'd pay it out of my cash, right? So, I'd take that. I'd go put that in the S&P 500. Twenty, twenty-five years, it's a million, million three, or a million four or something like that. With a 10% return, 8% is like $900, right?
Pat: That's right.
Jim: So, the only thing I'm dealing with is some tax issues if I withdraw it.
Pat: Yeah. But then you just direct indexing and don't worry about it. But your point is exactly taken, which is you're buying $200,000 worth of benefit. You can easily self-insure, easily, easily.
Scott: Yeah, I agree.
Pat: I mean, by the time you go to retire, your net worth will be... Let's say you work till you're age 60. If you sell the business, your net worth is...
Scott: Who knows.
Pat: ...probably north of $12 million?
Jim: Yeah.
Pat: You did the projections.
Scott: With that and selling the... I mean, yeah.
Pat: You did the projections.
Scott: And the risk is something happens to you or your wife today that requires a 25-year stay and full care, and this policy does not solve for that.
Jim: That's right. Yeah, yeah. I like that thinking. It doesn't take care of the short-term.
Scott: You can fund a short-term. Frankly, you can fund a long-term. You could fund a 25-year one.
Pat: You're insured for something that... All right, we answered that question. But on a personal basis, Scott and I own a couple commercial properties. If you want to contact me and put a cell tower, I have a 100% open door.
Scott: Actually, for the right price, you could put it in my backyard.
Pat: Correct.
Scott: I don't know how the neighbors will like it, but...
Jim: They won't like it, but I do have to tell you, I listened to the show when that gentleman that called up with the contract, he had a cell tower on his property, and he had offered to sell it. Your guys' advice was to sell it.
Scott: Was that bad advice?
Jim: No, it wasn't bad advice. It was interesting for it to show up and so tied into what I know and do. Because I've dealt with lots of owners who've sold off. And I actually, frankly, through the years, have had numerous landlords ask me my opinion on them. And I'm always kind of like an investor myself.
Scott: It's like personal needs. It's all their own personal needs.
Jim: Exactly, 100%. And I'll just add a little bit of relevancy to this comment, because here recently, due to the Elon Musk fighting spectrum that was owned by Dish Wireless, he managed to get Charlie to tap out of the business and sold off all the spectrum, $17 billion of it worth to AT&T and $17 billion to SpaceX. So, if you had that tower with that dish lease, you thought just got your bump that you're going to have for X amount, it's now gone, right?
Pat: Yeah. Yeah, exactly.
Scott: Interesting.
Pat: And by the way, on these, my buildings, where you put these towers, you're gonna have to disguise them as trees or water. Or what do they do on Highway 80 down from Sacramento to San Francisco? They disguise them as water towers?
Jim: Yeah, sure. Yeah, they do that, yeah.
Scott: Oh, I haven't noticed that.
Pat: You can't even tell them.
Jim: I like the man who just wants the cash, doesn't care.
Scott: Oh, Pat says that now.
Pat: No, no, no. If you disguise it as a tree, you could put it in Scott's backyard. So, appreciate the call.
Scott: Thanks, Jim. Wish you well.
Jim: Thank you very much. Have a great day.
Scott: Yeah, I think about insurance, like when you... We all have insurance for a variety of purposes. And insurance costs have gone up dramatically on auto, home, just lots of different areas. Insurance costs have gone up for multiple reasons that we're not going to get into. But I like to think about, what do I want to self-insure and what do I want the... My homeowner's insurance, I get the largest deductible I can. Some years it's been $50,000, that high, and it depends on the policy and trying to renew it and that sort of stuff.
Pat: With a big umbrella, too.
Scott: So, first of all, I get a really large deductible because I'm thinking, something small happens. I'm not going to bother filing a claim. For one thing, it's just going to make my insurance premiums go up because now I've got a claim on the house. So, like, same thing with my automobile. I think I have a $5,000 deductible. My daughter was in an accident and the collision place said something about, "Oh, it's too bad you have such a high deductible." I'm thinking, "Maybe for this year. Yeah, that's right." If I look at my whole life, I think I'm saving money. I know I'm saving money because I know how insurance works. But things like an umbrella policy, that you brought up liability, that's a big claim. The larger your estate, the more liability coverage you should have, just an umbrella policy.
Pat: Yeah. If you get sued, one of the first things an attorney does is does an asset search on you. It's like, "Is this guy worth being sued?"
Scott: Yeah, because if there's no money, they're not going to bother.
Pat: Yeah, if there's no coverage, you can't get blood out of a stone. Anyway, so back to these cellular towers. My wife and I were driving down to San Francisco Bay Area and I pointed one out to her.
Scott: I haven't noticed the water towers.
Pat: And I said, "That's a cellular." And she said, "There's no way that's a cellular." I said, "No, no, that's a cellular tower."
Scott: Isn't that funny? It's just because what people are comfortable with and used to that because every town essentially, flat towns had water towers.
Pat: Because you didn't have electric pumps to create this. And I said, no one's building a brand new water tower. Farmers out there are like, "Oh, we should build a water tower." They're not doing it. And I shouldn't say that. Some municipalities do it in order to ensure the water supply because gravity works, whether the electricity is on or off. That's a weird thing about gravity.
Scott: Thank you for sharing your knowledge of water distribution. I'm going to start looking now for water towers, which ones are phony.
Pat: Yeah, there we go. Good times.
Scott: Good times. I love little businesses like that, though. I'd love to actually talk to more about his business. I always find it fascinating. There are so many little businesses. That's why when you talk to people... You've heard the show long enough say, don't come to someone like us to get wealthy. Wealth is created in your career. Either you're really great at something or you start a business or you're lucky enough to work for a company that goes through the roof.
Pat: That's it. Or you marry it or you inherit it.
Scott: All right, those.
Pat: But even when you marry it, it's not really yours.
Scott: But there's lots of little businesses like that.
Pat: They're highly profitable.
Scott: That are highly profitable.
Pat: Which, by the way, private equity is rolling those up.
Scott: They roll up everything.
Pat: Everything. Pool services, lawn services, and pest services. Our pest guys just got sold to a private equity firm.
Scott: I've done quite a bit of research in this area because of the book that I'm working on.
Pat: And what other industry?
Scott: Every industry you can imagine. Anything that has recurring revenue.
Pat: And Scott, tell us about the book you're working on.
Scott: The title of the book is...
Pat: The working title or you think it's the final?
Scott: Actually, last night I got the final... It's with Forbes Books. I got the final manuscript. It's all copy edited and everything. I've got to do the final sign off.
Pat: Really? You're that far along?
Scott: Yeah.
Pat: Well, thanks for sharing.
Scott: But it's not going to come out until next year.
Pat: Can I read it before it comes out?
Scott: Well, if you're nice. The private equity advantage, balancing price, terms, and legacy when selling your business. And it's designed for all these smaller businesses. No one gets out of here alive. So, either someone who owns a business chooses their own succession or someone else is going to choose it for them, right? And there's so much private equity cash in the industry right now. I mean, it's floating around in every industry that there's a lot of consolidation and people need to make wise choices. So, the book is essentially all the things one must consider when selling either to private equity or private equity-backed firm.
Pat: And you interview people that have sold?
Scott: I interviewed a bunch of people and did the research on the various industries. And it's things such like, how do you design the terms? Like, how many years do they pay you out over? Because there's always that kind of adage that a buyer will pay any price you want if they can control the terms. I'll give you a billion dollars for your business if I don't have to pay in 100 years.
Pat: Yeah, yes, yes. Yeah, right?
Scott: Take it to an extreme.
Pat: And I take a portion of the income and then I give it back to you every year.
Scott: There's just a lot of moving parts. How do you how do you hire an investment banker or a broker to help your business? How do you think about the taxes? How do you design the deal? How do you know when it's the right time? What's the difference between selling to private equity versus a firm that's backed by private equity? When does a strategic buyer make more sense?
Pat: And why you should or shouldn't sell to internal? You touched on that?
Scott: Touched a little on that. Yeah, yeah.
Pat: I'm looking forward to it. Why didn't you interview me for the book?
Scott: I've been interviewing you for 30 years. I know your thoughts.
Pat: I kind of feel disappointed now.
Scott: No, it's been a fun project because, I think a lot of people know, Allworth a lot of our growth has come through finding firms to partner with us. So, how many? Forty-some-odd firms have joined us, which is the best way for us to find talent. That's why we've got such great advisors.
Pat: Yeah, absolutely.
Scott: Because there's people that partner with us.
Pat: And to grow your own, but it takes a while to grow an advisor.
Scott: And it's one of these, like, so many industries right now that just things could be done better if there's a large firm... Even these little pest companies, a lot of them could just operate better.
Pat: Yes, more systems design.
Scott: With good systems in place.
Pat: Economies of scale.
Scott: Yeah, anyway, let's talk with Bonnie. Bonnie, you're with Allworth's "Money Matters".
Bonnie: Hi. I have a question for you. My husband and I just inherited $2 million in mostly oil stocks and Vanguard mutual funds. And we are thinking of buying a vacation home that we could also use as a rental when we are not there. But I was wondering what you think about getting a portfolio loan instead of selling off stocks to buy the house.
Pat: Okay, so is this inside of an IRA or outside of an IRA?
Bonnie: Outside.
Scott: And who passed away?
Bonnie: My husband's father.
Scott: And were these assets held still by your father or in an irrevocable trust? Or were these assets put in some sort of an irrevocable trust years ago where you might have some capital gain implications if you sell today?
Bonnie: Yes, unfortunately, they were put in an irrevocable trust years ago. So, we will have to use... Actually, my stepmother passed away, but his father passed away 13 years ago.
Pat: Oh, god it.
Bonnie: And so, we have to use the stepfather.
Scott: And state limits for less than, this was funded 13 years ago.
Bonnie: Yes.
Pat: And then put in a life estate for his stepmother, and now, it has come to you?
Bonnie: Yes, so we have to go back to 13 years ago to confirm...
Scott: So, your cost basis is probably $700,000, $600,000.
Bonnie: Yeah. Something around there, yeah, or about a million. I think it's doubled. I'm not sure.
Scott: And what's your family income today?
Bonnie: Well, we're both retired, and so, we have about $10,000 a month coming in from pensions and Social Security and those kind of things. Yeah, we don't have much of a... We had good pensions, and so, we don't have much like an IRA or any other savings by ourselves.
Scott: But you got good income. And how old are you both?
Bonnie: 73.
Pat: And how are you going to pay the interest on the portfolio loan, or are you just going to let it accumulate inside of the portfolio?
Bonnie: We were thinking of letting the dividends pay the interest.
Pat: And how much dividends does this generate, the portfolio?
Bonnie: About $4,500 a month, $5,000 a month, something around there.
Scott: If it were me, I would sell the positions, pay the taxes, and then use the after-tax proceeds to buy.
Pat: Only to mitigate risk. Yeah, to mitigate. So, here's what we know, the little bit that we talked to you, that you don't have a big investment account outside of this, correct?
Bonnie: Correct.
Pat: Either an IRA. But by the way, the $10,000 a month is a lot of money. You'd have to have about $2 million set aside in order to generate that sort of income. Some of it comes from Social Security and some of it comes from pension, I get that.
Bonnie: That's correct.
Pat: I don't know if I could...
Scott: And what's the margin requirement on this?
Bonnie: Well, they're quoting me...
Scott: Fifty percent?
Bonnie: Yeah, 55%, I think.
Pat: And what interest rate, 8.5%, 9%?
Bonnie: Eight percent.
Scott: Okay. So, you've got $2 million, you take a $750,000 loan, what's it take for the market to get a margin call? And then what happens?
Bonnie: Yeah, I know, I know. That's the scary part. The other...
Pat: So, a 30% decline in the portfolio would push that margin to 1.35 and at 55% on $2 million it'd be 1.1, so you'd have a margin call of $250,000 of this portfolio fill, in which case, you wouldn't be able to make the margin call and then they would start...
Scott: Matter of fact, it would be 20-somewhat percent you're going to be having a margin call, which is a very normal fluctuation in the market.
Pat: That's right. So, I like the idea of selling it. I like the idea of selling it. Then the second question is, how much is maintenance and insurance? Assume that it generates almost no income, right? And the risk in vacation homes right now isn't whether you could rent them or not, it's whether that the municipality that you actually live in...
Scott: Is going to allow for it.
Pat: ...will allow for it. So, Scott and I used to... You know, just some background, right? Scott and I own...
Scott: By the way, but we'll get into detail, but the reality is you're in your early 70s, you inherited $2 million. You're like, "Well, what a wonderful thing. This can let us buy a vacation home." And you don't know if you've got another 20 years or 2 years, right? I mean, that's... So, you're thinking, "What a great opportunity." And I would agree, what a great opportunity. $2 million was given to you to choose to do with how you want. So, the question is, if we're going to get the vacation home, what are the risks there? What's the cost? What are the risks? And how do we make sure that...? I mean, I would hate to see that this portfolio with such...
Pat: I would take it now. I agree with you. I would just sell it off now. I wouldn't even... Because originally I thought, "Well, what happens if they get a loan on the house, and then pay it over time?"
Scott: Your sister doing this, she'd be like, "Just pay the capital gain tax and then move on."
Pat: That's right. That's exactly... I was just going through my thought process.
Scott: And I would look at...
Bonnie: So, you don't think getting a loan... Because the other option was we would just take $300,000 or $250,000, and get a $500,000 loan, a mortgage, and let the dividends pay that mortgage. But we wouldn't be taking so much of the stock if we just took...
Pat: I understand, but at the end of the day, you're just slowing the transfer of the money from the brokerage account into the...
Scott: If your goal is to die with as much money as possible, don't buy the vacation home. If your goal is to... If you want to say, "Let's take some of these dollars and use it for our own personal benefit during our lifetime," the best way to go about that, in my opinion, would be to sell those assets to generate the cash required to purchase that home.
Pat: That's the one with the least amount of risk as well.
Scott: Correct. Why you want to take a bunch of risk at this stage in your life? I could only imagine... I'm just thinking, if I were in a position where I took this loan, I bought this house, the market goes through a normal correction, which they do, and I get a margin call and they're like, "You need to either come up with 50 grand or we're going to sell some of your stock." And then two weeks later, another margin call. I'm just thinking, the angst.
Pat: But Scott, we're past that. Her second question was, what happens if they take a 250 grand...
Scott: So they get to pay the loan.
Pat: ...and then a $500,000 loan? What you're doing at that point in time, is you're just slowly moving the money from the brokerage account into the vacation home. I could make an argument that you got a 30-year loan on that. And I could make an argument for that.
Scott: Yes, I would like that much more than the borrowing on the securities.
Pat: The security thing's off the table. The decision's already been made there. The question is, now, do we do it in one foul swoop, or do we do it over a series of years? I could make an argument for 50% loan on the property and 50% out of the account. Just recognize the risks associated with it. I certainly could make that argument. But the capital gains are going to exist forever, by the way.
Scott: There's no step up basis.
Pat: There's no step up basis for this.
Scott: That already happened 13 years ago.
Pat: So, I got to tell you, I'd pay...
Scott: I would clean up the portfolio because I guarantee you, the securities you own today are not the securities that anyone would recommend for you today. I don't know what they are, but they were designed, this was an old portfolio.
Pat: I would do it all in one foul swoop and use this as an opportunity to clean up the portfolio. What that means is, when we say clean up the portfolio...
Scott: You sell those things that you wouldn't buy today.
Pat: That's right. And you don't pay any attention to which one has the cost basis in it. You go in and you reconstruct the portfolio as you would today with the existing loan.
Scott: In large part because the step up basis already occurred. It's not like we can say, "Well, I know it's not perfect, but I'm going to hold it because when I die, the cap gains are forgiveness.
Pat: It's already done.
Scott: Because we've always...
Pat: I would go to a qualified advisor and take it off.
Scott: And to your point on renting, there's a chance that... We've seen this. We've seen...
Pat: Scott and I owned a vacation rental together in Lake Tahoe Basin. And what we saw in the Lake Tahoe... Where are you calling from?
Bonnie: Well, the vacation home is in Alaska. So, yeah.
Pat: All right, probably different.
Scott: Okay, well, you're not going to know...
Pat: No, you're in a different position.
Scott: No one's going to... And by the way...
Pat: You don't have to worry about that.
Scott: Yeah, you don't have to worry about it in Alaska.
Pat: I mean, I don't think. I don't know [inaudible 00:37:10.159].
Scott: It's usually these very sought after, that people are getting priced out. The locals can't afford to live there anymore.
Pat: In the Tahoe Basin...
Scott: And the communities are trying to figure out, how do we deal with this? And some communities are saying, "We're going to charge you an extra tax. If you don't occupy it 50% of the time, you're going to pay an extra tax or we're not going to let you rent it. You can only rent it to locals," and all kind of things.
Pat: I have some friends with two houses on the beach, and the neighborhood said, "You can only own one rental house now." But I think it's a great idea. I think it's... And I would use it as an opportunity to clean up the portfolio. And where in Alaska, by the way.
Bonnie: Well, it's two hours north of Anchorage in a small little town. It's got a view of Denali. It's beautiful.
Pat: Beautiful.
Scott: Oh, beautiful. Beautiful.
Bonnie: Yeah.
Scott: Bonnie, just because you inherited these dollars does not mean you need to make your life more complicated either. So, the portfolio does not need to be complicated. Design the portfolio that's going to be best for you and your husband.
Pat: And how often would you use this house as a vacation, for you personally?
Bonnie: Yeah, we've kept kids up there. We'd use it a couple of times, a couple of months here in the winter, a couple of months in the summer, a couple of months in the fall. But then the rest of the time, the summer is the best time to rent. People also go up there in the winter from Anchorage and look at the Northern Lights and ski.
Pat: Yeah, I like the idea, but I wouldn't put any risk in it. I would just take the money out.
Scott: If it were me, I would pay cash for the thing. Just make my life... And you'd still have over a million dollars in secured savings that you didn't have before. It just reduces your risk that much.
Pat: If you made enough rental income to support the house, perfect. And the thing I love most about Alaska, you walk 10-feet off a major trail and you are part of the food chain.
Bonnie: We are very proud.
Scott: Hey, Bonnie, wish you well.
Bonnie: Thanks so much. Okay, bye-bye.
Pat: All right, these are interesting. We love Alaska.
Scott: I've been three times.
Pat: Oh, really?
Scott: Yeah. It's the only place my kids ever asked if they could go there twice.
Pat: Really?
Scott: We've got the kids up there twice. Hey, at the beginning of the program, we'd mention gold. And people are excited about gold right now because gold is up 50% this year, something crazy. Like it's just gone up and up and up. We've had other times like this that we've had these huge runups in gold, '89 to... I'm sorry, '79 to '80, and 2010 to 2012. Other times when the gold has shot up dramatically.
Pat: And like 25%, 30%, 40% runups.
Scott: Yes. But then we've seen after that, many years, they fall in value, gold falls in value, and it takes many years to recover. In its peak in 1980, had you bought gold in 1980... Supposed to be great inflation had, right? When did we have high inflation?
Pat: '79 through the '82, was it?
Scott: Through the '80s, we had high inflation. The latter part of the '80s got under control. But it peaked in 1980 before inflation got really bad. It fell 50%. It took 25 years to get back to that high.
Pat: Twenty-five years.
Scott: Twenty-five years. And if you want to look at it on a purchasing power equivalent in 1980 dollars, it just hit that value earlier this year.
Pat: Forty-five years.
Scott: Correct. So, when people talk about this great hedge for inflation, I don't know who made that up, but historically speaking, it certainly doesn't look like that to me.
Pat: Yeah. And one of the reasons gold may actually be surging is lack of confidence in the U.S. dollar. So, reserves are beginning to stockpile gold. And gold is one of the most difficult asset classes to actually redistribute because it has to be physically moved. And it has to physically... Like, if I bought... Let's say I'm the Bank of...
Scott: I don't know, Zimbabwe.
Pat: ...Portugal, and I don't want my dollars anymore and I think, "Well, I'm going to put some gold in here." I have to actually charter a jet and put security to move that gold from point A to point B. It's a strange, strange thing. And this driving gold may be a complete reaction to the U.S. dollar. We don't know.
Scott: We don't know. Wish I knew.
Pat: Well, of course, you wish you knew.
Scott: Just I just think a lot of people are going to get hurt. Be careful. Be careful. If you want to own a little gold, own a little gold, but don't expect it's going to solve all your financial problems. I want to let everyone know we've got... I don't know how many of our listeners have joined our webinars, but we've had thousands, maybe tens of thousands view our webinars, and they're pretty good. So, this one is our year-end portfolio moves for $2 million-plus investors. So, if you've got more than $2 million in investable assets, this is just some year-end moves. I'm doing the webinar along with Simone Devenny, who's our head of private wealth strategies. She's an attorney that's spent her career on larger estates, helping them reduce taxes essentially.
So, during this year, we're going to discover the moves that sophisticated investors make before December 31st to optimize growth, reduce tax liability, and maximize their philanthropic impact, and how that can help on a tax. They're not generic tips. They're proven strategies for serious investors building serious wealth. And the webinars are going to be Wednesday, November 12th at 10 a.m. Pacific, Thursday, November 13th at noon Pacific, Saturday, November 15th at 9 a.m. Pacific. And for more information and to register, go to allworthfinancial.com/workshops, and you'll be glad to join. And it's our time...
Pat: Yes, it's the perfect time of the year to do it.
Scott: I'm doing this individually with two of my clients right now. We do it every year about this time. We actually make decisions, year-end decisions, and set the portfolio up, including Roth conversions and gifting strategies to donor advised funds, all that stuff. It's just a normal part of the financial planning. And the higher the net worth, the more important it is.
Pat: I would agree.
Scott: Unless you like paying taxes.
Pat: Nobody likes paying taxes.
Scott: I would be curious to see how much voluntary tax has been given on an annual basis, 0.00001% of the treasury.
Pat: Yes, for sure.
Scott: Anyway, we're out of time. Scott Hanson and Pat McClain here with you, Allworth's "Money Matters". We'll see you next week.
Automated Voice: 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 a state-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: Yeah, glad to be with you as we talk about financial matters and talk a little bit about what happens, what's going on in the marketplaces, and how to make good choices with your finances. And of course, taking your calls, answering your questions on things that you're dealing with.
Pat: You know, we talked about this a couple of months ago about how the market seems to be immune to certain behaviors. And so, I'm always amazed. Amazon Web Services goes down.
Scott: Yeah, that's what? A week and a half ago or something.
Pat: Yeah. And the market, it's up that day. But I'll give Amazon a lot of credit. They were very transparent about what happened. They came out and said, "Look, we weren't hacked. No one got into our systems that blew us up, or maybe they did. We don't know." But the market, that was a big deal in my mind. Because of how many businesses...
Scott: I didn't even view it as a big deal. I thought that's a short-term glip.
Pat: I understand. But if it had been hacked and people could go in there and start turning off services to businesses, airlines, financial institutions.
Scott: Yeah, I think those are just short-term things though, right? So, if it's a short-term and you think it's just a one-off, it's a short-term, then the belief would be that it's not going to have any impact on the long-term prospects of the company.
Pat: I believe that.
Scott: I think that's why the markets can ignore something like that. Unless it's a sign of something lurking beneath the surface that we haven't really discovered. Like to your point, being able to hack is easier than we'd thought, and...
Pat: Yeah, is there a Trojan horse in your system somewhere? But it amaze me. Goes on with this tariff stuff, but no one really knows what's going on with tariff. I mean, no one does.
Scott: Trump knows what's going on with tariffs.
Pat: No, no, no. Or is there something you want to talk about?
Scott: We can start with calls, but I do want to talk about gold. Let's just go to calls and then we'll talk about gold.
Pat: I'd love to talk about gold. Because it's on a tear.
Scott: And seems like every talk show, every television thing you look at, they're pitching gold and why you should be buying gold.
Pat: We will not be pitching it on this show.
Scott: But I want to talk about how gold has performed over the last 50 years and talk about some other periods of time, just so that you will have your eyes completely wide open, should you choose to go buy gold today.
Pat: Thank you.
Scott: Besides jewelry.
Pat: Yes. Although, it's a strange thing with the diamonds now.
Scott: What's going on with diamonds?
Pat: Well, because the fake ones are so good. I said to my wife, "Why would you ever buy a real diamond again?" I said, "Look, you..." I said to my wife...
Scott: Particularly your wife, she's married to a, I hate to say it, prominent financial guy who's been somewhat successful in life. People would just assume she would be wearing real diamonds.
Pat: That was my argument exactly, Scott. I said, "As long as you're not bling like they're 10 carats. But if you got a nice diamond necklace, everyone's going to assume it's real." And that's...
Scott: I've never seen your wife wearing fancy jewelry anyway, though. That's not your wife. No bling. Your wife is not a bling.
Pat: No.
Scott: Not a bling, no.
Pat: People listen, "Now, what's McClain's wife look like?"
Scott: All dolled up. With a bling, expensive purse.
Pat: We have a friend that is into expensive purse. We went on vacation with her and she went purse shopping. It was interesting.
Scott: Did she bring multiple purses on vacation?
Pat: Oh, yes.
Scott: So, they would have the bag for the outfit.
Pat: Well, I think she only brought two or three. But I asked her, I said, "What's this fascination with these $5,000, $8,000 purses? What's that? What's the fascination? I don't understand it.
Scott: And her response was?
Pat: She likes them.
Scott: Oh, well, there we go. And if she could afford them, I guess, have a purse, or whatever.
Pat: Her husband just tolerates it. He's like, "Yeah, okay, whatever."
Scott: Anyway, we're distracted again. Now, we're talking about...
Pat: Let's go to the calls. Let's talk to Cathy.
Scott: ...you're rich friends, your rich friends you go on vacation with them.
Pat: I don't know how rich they are.
Scott: If you're spending 5 grand on a purse or 8 grand on a purse, imagine you're doing fairly well.
Pat: Yeah, he's got an interesting job. He hedges risk in the bond markets through options with clients like mortgage companies.
Scott: And sells his services to?
Pat: Mortgage companies, banks. Short term risk in the bond markets, hedge strategies. Not his own position, he just brokers the deals. Interesting.
Scott: Well, I guess, he does well enough to buy a $5,000 handbag.
Pat: Oh, he loves it when the bond market's in chaos.
Scott: Yeah, because that's what he prints money on.
Pat: Yeah, boy.
Scott: All right, let's go to the calls here. If you want to join us, you've got a question for us, we'd love to talk to you. Send us an email, questions@moneymatters.com. We'll set up a time to have a conversation. Let's talk with Jim. Jim, you're with Allworth's "Money Matters".
Jim: Good morning.
Pat: Hi.
Scott: Morning.
Jim: How are you, guys?
Pat: Fantastic.
Scott: Good. What can we do to help?
Jim: I am calling, I would like a little bit of your advice or direction on long-term care planning, whether or not to buy long-term care insurance or not.
Scott: And how old are you?
Jim: I am 55 years old and my wife is 57.
Scott: Okay. And what are your thoughts?
Jim: And I just needed to check. Yeah, so, well, my thought is that I tend to think more that I should self-insure. I got a quote from...
Pat: Okay, good.
Jim: Yeah, I actually got kind of like the whole-life-type quote and then the term-life-type quote. The whole-life-type quote...
Scott: Let us know what these are, because long-term care insurance premiums have gone through the roof the last decade.
Pat: Sure, long-term care. But there are long-term care policies embedded in life insurance policies that may or may not make sense.
Jim: Right. So, this was a whole life type of... I call it the whole life because... You know what I'm talking about. So, it was $130,000 premium. The immediate benefit was $333,000 lifetime shared between my spouse and I, and it paid $5,000 a month. It escalated, guaranteed on both the lifetime benefit and the monthly benefit at 3% anyway.
Scott: Okay. But it's $330,000 lifetime cap.
Pat: Yeah, and $130,000 premium at a 55-year-old.
Scott: Okay, keep going.
Jim: Correct. And then it was a three month retention. And once you hit the three month, when it passed your 90 days you got the...
Pat: The benefits.
Jim: ...it went back to the first day. And it was a cash policy, so you didn't actually have to be in a facility. It was as long as you qualified two out of five of the daily living that you couldn't get, they paid you the check.
Pat: Okay. That was my next question.
Jim: Okay. And then in the presentation, of course, they're going to show you out at, you know, tapping the benefit at 75 or 80 or whatever, that type of thing. So, you're like, hey, at this point you're at $12,000 a month and you have a $900,000 benefit.
Pat: Okay, because of the 3% increase.
Scott: But is that $330,000 lifetime cap, does that also have a 3% inflation increase?
Jim: Yes. Yep.
Scott: Okay.
Jim: So, that's how it got to there.
Scott: Good. Before you said that, I think this thing's a garbage plan because...
Jim: Yeah, right, right, right.
Scott: I haven't ran the numbers, but I'm just going in my head thinking of it.
Pat: All right, so keep going. I love the fact that you started with self-insure versus pay someone else to take the risk, because that's what the question is. That's what you're trying to figure out is, do I pay to push this risk to someone else, or I keep it all in-house? Okay, so give us the other scenario.
Jim: Okay. So, then what became relevant to me was, okay, well, what's my current financial status? What's my projected financial status? What's my burn rate in retirement? And then that kind of dictates, right?
Pat: That's right.
Jim: Okay, so here's where I'm at today. My wife works in the school district, so she's got a pension that comes. And as far as assets, we have in qualified plans, 401(k)s, etc., $2.8 million. In brokerage accounts, we have $2.5 million. We have a little over $600,000 in cash. We have a primary home that's worth $1.3. We owe $500,000 on it. We have a rental that's worth about $800,000 that's free and clear. And we have another rental that's worth about $550,000 that has a $200,000 mortgage on it.
Pat: What's the value of the first rental?
Jim: The first rental is $800,000. And then...
Pat: And you said the value of your home was how much?
Jim: $1.3. Both of them have no mortgage.
Scott: And are you working today?
Jim: Yes.
Scott: And what's your family income?
Jim: So, I'm self-employed on a consulting firm. And so, it kind of fluctuates around. Last couple years, about $600,00 or p0,000.
Pat: And how much longer do you plan on working?
Jim: That's an age-old question that you guys have kind of already, at least, in some part, made a decision on in terms of how you're exiting your business, right?
Pat: Yes.
Jim: And so, what I have is, I own a consulting company where I work for wireless carriers. And so, I have all these contracts that are very difficult to get with very large clients. And...
Pat: Yep. You're site locator?
Jim: Yeah.
Pat: Okay.
Jim: Yep. And then we do the A&E side of this. So, my background is an attorney. I got into this post-the-global financial crisis, and was fortunate enough to turn into this chunk of business.
Scott: You enjoy what you're doing?
Jim: Yeah, yeah, I do. You know, there's always, clients are great, as you guys know, and sometimes. clients are a bummer.
Scott: You can say that about everything in life.
Jim: Exactly, right?
Pat: All right, so you're business...
Scott: Sometimes my marriage is great and sometimes it's a...
Pat: For a consultancy firm, you're in a really good position because this is actually something that you could sell for multiples of revenue. In fact, I have a client that sold one. If I gave you his name, you'd know who he was, but I'm not going to do that. And he had built it up to, he had like 30 or 40 employees, and he sold it to the second generation for multiples of revenue.
Scott: So, here's the... You have enough assets to sell. So, you got roughly $7 million. A 4% distribution rates, $280,000.
Pat: And you're only 55.
Scott: So, if both you and your wife required long-term care today, your estate, $280,000 would be enough to cover it. If you wanted 24 hour in home care, maybe it'd be a little bit more than that, but you could still go decades before you blew through all your cash.
Pat: And the way to think about these policies is, because of that $130,000, if it generated 5% returns, that's $6,500 a year. The way these policies are structured is they take that interest off that because you don't see that cash value ever increasing. It stays the same. And they use the first $130,000 to pay that $330,000 lifetime benefit. So, you're really only getting $200,000 of benefit of what you're paying $6,500 a year for, which is a 5% return on that $130,000.
Jim: Yeah, I want to make sure that we're on the same page on that one piece. So, on this particular quote that I was given, both the monthly pay and the total lifetime benefit increase 3% annual.
Pat: No, I understand that. I understand that.
Jim: Okay, good. Okay.
Pat: I understand that. But the way they're actually paying for it internally, because they have a cost associated with that pure insurance side, which is, if you go into a long-term care facility...
Scott: They have to pay it out.
Pat: ...they have to pay it out. How do they pay that? Well, they actually just don't pay you any interest on the $130,000 that you're putting in the account. And that's your deductible, if you will. So, if you die and never use any of the benefits, well, then you get your $130,000 back. But if you use any of the benefits, that actually comes right off there. So, the $130,000 is a prepaid deductible with a refunded option on it.
Scott: Essentially.
Pat: And the excess income that it earns, so the 5% we're just using a market rate, 5% would be equivalent of $6,500 a year. And that $6,500 is right now paying for the $200,000 of pure insurance. That's the way... You know, you've got a mind for numbers in the locality. So, as they're setting aside their reserve on the other side, you look at it and say, "Well, how are they doing this?" And this is how they're doing it. If you think about it from their economics, I don't think you have any reason to buy any insurance.
Scott: Here's what I don't like about this, the lifetime cap, $330,000.
Pat: But it...
Scott: Not counting your home, you have roughly $7 million of investments.
Pat: And he's 55.
Scott: What's...? And the Delta is $200,000. So, you're buying $200,000 worth of insurance.
Pat: Yeah, you have no need for this. You're 55. And you're in your prime earning years. All that education, all those days in law school...
Scott: Yeah, yeah, yeah, that's right, all the relationship.
Pat: ...all that stuff. This is it. Between now and the age of 65, you earn more money in this 10-year period than you probably have your whole lifetime. You're in your prime. You've got the intelligence. You've got the emotional intelligence. You got the focus. You got the relationships.
Scott: If this policy had a lifetime benefit, that'd be one thing. Because that's...
Jim: It does have a lifetime benefit.
Scott: It's capped.
Jim: Well, it's capped, but the cap increases by 3%.
Scott: Okay, yeah, I understand.
Pat: But still...
Jim: But we're still... I'm with you guys, right? No matter... I can't help but think of it like a businessman, right? Like, okay, well...
Scott: Of course.
Jim: ...I'm not a fan of whole life. That whole... Yes, there's a certain position and a certain type of estate and value and all that stuff for that stuff can play in. But for the normal person, term life, right, and invest those...
Scott: Agreed.
Jim: ... balance of those dollars is the way to go, right? So, I can't help but think of it when I look at these two policies.
Scott: They don't... Here's the risk. A risk isn't a short-term stay that's going to cost $330,000. The risk is you have some strange health occurrence, and now, someone needs to take care of you for the next 25 years. This policy does not solve that.
Jim: That's right. That's right.
Pat: If you came back and your net worth was $1.5 million, I'd probably say, yeah, this isn't a bad deal for you.
Scott: Or, if you're like, "I really would feel really good about having it..."
Pat: Then do it.
Scott: Go and buy it. I don't own one.
Pat: But the economics behind it says you don't need it. These are the true cost. It does have the 3%, but if we can only look at it today, what's the cost of this? The cost today is $6,500 a year for $200,000 worth of benefit at your age and your wife's age of 55 and 57. The insurance company says, "Hey, they're not going to really need this, actually, based on morbidity tables, till they're 75." So, we're at 20 years, for your wife, we're at 18 years at $6,500 a year at current rates. You do the math. That's $100,000.
Jim: Oh, I did it. What I did is I just took the $130,000, right? Because I could just take that out of my cash. How would I pay the insurance company? Well, I'd pay it out of my cash, right? So, I'd take that. I'd go put that in the S&P 500. Twenty, twenty-five years, it's a million, million three, or a million four or something like that. With a 10% return, 8% is like $900, right?
Pat: That's right.
Jim: So, the only thing I'm dealing with is some tax issues if I withdraw it.
Pat: Yeah. But then you just direct indexing and don't worry about it. But your point is exactly taken, which is you're buying $200,000 worth of benefit. You can easily self-insure, easily, easily.
Scott: Yeah, I agree.
Pat: I mean, by the time you go to retire, your net worth will be... Let's say you work till you're age 60. If you sell the business, your net worth is...
Scott: Who knows.
Pat: ...probably north of $12 million?
Jim: Yeah.
Pat: You did the projections.
Scott: With that and selling the... I mean, yeah.
Pat: You did the projections.
Scott: And the risk is something happens to you or your wife today that requires a 25-year stay and full care, and this policy does not solve for that.
Jim: That's right. Yeah, yeah. I like that thinking. It doesn't take care of the short-term.
Scott: You can fund a short-term. Frankly, you can fund a long-term. You could fund a 25-year one.
Pat: You're insured for something that... All right, we answered that question. But on a personal basis, Scott and I own a couple commercial properties. If you want to contact me and put a cell tower, I have a 100% open door.
Scott: Actually, for the right price, you could put it in my backyard.
Pat: Correct.
Scott: I don't know how the neighbors will like it, but...
Jim: They won't like it, but I do have to tell you, I listened to the show when that gentleman that called up with the contract, he had a cell tower on his property, and he had offered to sell it. Your guys' advice was to sell it.
Scott: Was that bad advice?
Jim: No, it wasn't bad advice. It was interesting for it to show up and so tied into what I know and do. Because I've dealt with lots of owners who've sold off. And I actually, frankly, through the years, have had numerous landlords ask me my opinion on them. And I'm always kind of like an investor myself.
Scott: It's like personal needs. It's all their own personal needs.
Jim: Exactly, 100%. And I'll just add a little bit of relevancy to this comment, because here recently, due to the Elon Musk fighting spectrum that was owned by Dish Wireless, he managed to get Charlie to tap out of the business and sold off all the spectrum, $17 billion of it worth to AT&T and $17 billion to SpaceX. So, if you had that tower with that dish lease, you thought just got your bump that you're going to have for X amount, it's now gone, right?
Pat: Yeah. Yeah, exactly.
Scott: Interesting.
Pat: And by the way, on these, my buildings, where you put these towers, you're gonna have to disguise them as trees or water. Or what do they do on Highway 80 down from Sacramento to San Francisco? They disguise them as water towers?
Jim: Yeah, sure. Yeah, they do that, yeah.
Scott: Oh, I haven't noticed that.
Pat: You can't even tell them.
Jim: I like the man who just wants the cash, doesn't care.
Scott: Oh, Pat says that now.
Pat: No, no, no. If you disguise it as a tree, you could put it in Scott's backyard. So, appreciate the call.
Scott: Thanks, Jim. Wish you well.
Jim: Thank you very much. Have a great day.
Scott: Yeah, I think about insurance, like when you... We all have insurance for a variety of purposes. And insurance costs have gone up dramatically on auto, home, just lots of different areas. Insurance costs have gone up for multiple reasons that we're not going to get into. But I like to think about, what do I want to self-insure and what do I want the... My homeowner's insurance, I get the largest deductible I can. Some years it's been $50,000, that high, and it depends on the policy and trying to renew it and that sort of stuff.
Pat: With a big umbrella, too.
Scott: So, first of all, I get a really large deductible because I'm thinking, something small happens. I'm not going to bother filing a claim. For one thing, it's just going to make my insurance premiums go up because now I've got a claim on the house. So, like, same thing with my automobile. I think I have a $5,000 deductible. My daughter was in an accident and the collision place said something about, "Oh, it's too bad you have such a high deductible." I'm thinking, "Maybe for this year. Yeah, that's right." If I look at my whole life, I think I'm saving money. I know I'm saving money because I know how insurance works. But things like an umbrella policy, that you brought up liability, that's a big claim. The larger your estate, the more liability coverage you should have, just an umbrella policy.
Pat: Yeah. If you get sued, one of the first things an attorney does is does an asset search on you. It's like, "Is this guy worth being sued?"
Scott: Yeah, because if there's no money, they're not going to bother.
Pat: Yeah, if there's no coverage, you can't get blood out of a stone. Anyway, so back to these cellular towers. My wife and I were driving down to San Francisco Bay Area and I pointed one out to her.
Scott: I haven't noticed the water towers.
Pat: And I said, "That's a cellular." And she said, "There's no way that's a cellular." I said, "No, no, that's a cellular tower."
Scott: Isn't that funny? It's just because what people are comfortable with and used to that because every town essentially, flat towns had water towers.
Pat: Because you didn't have electric pumps to create this. And I said, no one's building a brand new water tower. Farmers out there are like, "Oh, we should build a water tower." They're not doing it. And I shouldn't say that. Some municipalities do it in order to ensure the water supply because gravity works, whether the electricity is on or off. That's a weird thing about gravity.
Scott: Thank you for sharing your knowledge of water distribution. I'm going to start looking now for water towers, which ones are phony.
Pat: Yeah, there we go. Good times.
Scott: Good times. I love little businesses like that, though. I'd love to actually talk to more about his business. I always find it fascinating. There are so many little businesses. That's why when you talk to people... You've heard the show long enough say, don't come to someone like us to get wealthy. Wealth is created in your career. Either you're really great at something or you start a business or you're lucky enough to work for a company that goes through the roof.
Pat: That's it. Or you marry it or you inherit it.
Scott: All right, those.
Pat: But even when you marry it, it's not really yours.
Scott: But there's lots of little businesses like that.
Pat: They're highly profitable.
Scott: That are highly profitable.
Pat: Which, by the way, private equity is rolling those up.
Scott: They roll up everything.
Pat: Everything. Pool services, lawn services, and pest services. Our pest guys just got sold to a private equity firm.
Scott: I've done quite a bit of research in this area because of the book that I'm working on.
Pat: And what other industry?
Scott: Every industry you can imagine. Anything that has recurring revenue.
Pat: And Scott, tell us about the book you're working on.
Scott: The title of the book is...
Pat: The working title or you think it's the final?
Scott: Actually, last night I got the final... It's with Forbes Books. I got the final manuscript. It's all copy edited and everything. I've got to do the final sign off.
Pat: Really? You're that far along?
Scott: Yeah.
Pat: Well, thanks for sharing.
Scott: But it's not going to come out until next year.
Pat: Can I read it before it comes out?
Scott: Well, if you're nice. The private equity advantage, balancing price, terms, and legacy when selling your business. And it's designed for all these smaller businesses. No one gets out of here alive. So, either someone who owns a business chooses their own succession or someone else is going to choose it for them, right? And there's so much private equity cash in the industry right now. I mean, it's floating around in every industry that there's a lot of consolidation and people need to make wise choices. So, the book is essentially all the things one must consider when selling either to private equity or private equity-backed firm.
Pat: And you interview people that have sold?
Scott: I interviewed a bunch of people and did the research on the various industries. And it's things such like, how do you design the terms? Like, how many years do they pay you out over? Because there's always that kind of adage that a buyer will pay any price you want if they can control the terms. I'll give you a billion dollars for your business if I don't have to pay in 100 years.
Pat: Yeah, yes, yes. Yeah, right?
Scott: Take it to an extreme.
Pat: And I take a portion of the income and then I give it back to you every year.
Scott: There's just a lot of moving parts. How do you how do you hire an investment banker or a broker to help your business? How do you think about the taxes? How do you design the deal? How do you know when it's the right time? What's the difference between selling to private equity versus a firm that's backed by private equity? When does a strategic buyer make more sense?
Pat: And why you should or shouldn't sell to internal? You touched on that?
Scott: Touched a little on that. Yeah, yeah.
Pat: I'm looking forward to it. Why didn't you interview me for the book?
Scott: I've been interviewing you for 30 years. I know your thoughts.
Pat: I kind of feel disappointed now.
Scott: No, it's been a fun project because, I think a lot of people know, Allworth a lot of our growth has come through finding firms to partner with us. So, how many? Forty-some-odd firms have joined us, which is the best way for us to find talent. That's why we've got such great advisors.
Pat: Yeah, absolutely.
Scott: Because there's people that partner with us.
Pat: And to grow your own, but it takes a while to grow an advisor.
Scott: And it's one of these, like, so many industries right now that just things could be done better if there's a large firm... Even these little pest companies, a lot of them could just operate better.
Pat: Yes, more systems design.
Scott: With good systems in place.
Pat: Economies of scale.
Scott: Yeah, anyway, let's talk with Bonnie. Bonnie, you're with Allworth's "Money Matters".
Bonnie: Hi. I have a question for you. My husband and I just inherited $2 million in mostly oil stocks and Vanguard mutual funds. And we are thinking of buying a vacation home that we could also use as a rental when we are not there. But I was wondering what you think about getting a portfolio loan instead of selling off stocks to buy the house.
Pat: Okay, so is this inside of an IRA or outside of an IRA?
Bonnie: Outside.
Scott: And who passed away?
Bonnie: My husband's father.
Scott: And were these assets held still by your father or in an irrevocable trust? Or were these assets put in some sort of an irrevocable trust years ago where you might have some capital gain implications if you sell today?
Bonnie: Yes, unfortunately, they were put in an irrevocable trust years ago. So, we will have to use... Actually, my stepmother passed away, but his father passed away 13 years ago.
Pat: Oh, god it.
Bonnie: And so, we have to use the stepfather.
Scott: And state limits for less than, this was funded 13 years ago.
Bonnie: Yes.
Pat: And then put in a life estate for his stepmother, and now, it has come to you?
Bonnie: Yes, so we have to go back to 13 years ago to confirm...
Scott: So, your cost basis is probably $700,000, $600,000.
Bonnie: Yeah. Something around there, yeah, or about a million. I think it's doubled. I'm not sure.
Scott: And what's your family income today?
Bonnie: Well, we're both retired, and so, we have about $10,000 a month coming in from pensions and Social Security and those kind of things. Yeah, we don't have much of a... We had good pensions, and so, we don't have much like an IRA or any other savings by ourselves.
Scott: But you got good income. And how old are you both?
Bonnie: 73.
Pat: And how are you going to pay the interest on the portfolio loan, or are you just going to let it accumulate inside of the portfolio?
Bonnie: We were thinking of letting the dividends pay the interest.
Pat: And how much dividends does this generate, the portfolio?
Bonnie: About $4,500 a month, $5,000 a month, something around there.
Scott: If it were me, I would sell the positions, pay the taxes, and then use the after-tax proceeds to buy.
Pat: Only to mitigate risk. Yeah, to mitigate. So, here's what we know, the little bit that we talked to you, that you don't have a big investment account outside of this, correct?
Bonnie: Correct.
Pat: Either an IRA. But by the way, the $10,000 a month is a lot of money. You'd have to have about $2 million set aside in order to generate that sort of income. Some of it comes from Social Security and some of it comes from pension, I get that.
Bonnie: That's correct.
Pat: I don't know if I could...
Scott: And what's the margin requirement on this?
Bonnie: Well, they're quoting me...
Scott: Fifty percent?
Bonnie: Yeah, 55%, I think.
Pat: And what interest rate, 8.5%, 9%?
Bonnie: Eight percent.
Scott: Okay. So, you've got $2 million, you take a $750,000 loan, what's it take for the market to get a margin call? And then what happens?
Bonnie: Yeah, I know, I know. That's the scary part. The other...
Pat: So, a 30% decline in the portfolio would push that margin to 1.35 and at 55% on $2 million it'd be 1.1, so you'd have a margin call of $250,000 of this portfolio fill, in which case, you wouldn't be able to make the margin call and then they would start...
Scott: Matter of fact, it would be 20-somewhat percent you're going to be having a margin call, which is a very normal fluctuation in the market.
Pat: That's right. So, I like the idea of selling it. I like the idea of selling it. Then the second question is, how much is maintenance and insurance? Assume that it generates almost no income, right? And the risk in vacation homes right now isn't whether you could rent them or not, it's whether that the municipality that you actually live in...
Scott: Is going to allow for it.
Pat: ...will allow for it. So, Scott and I used to... You know, just some background, right? Scott and I own...
Scott: By the way, but we'll get into detail, but the reality is you're in your early 70s, you inherited $2 million. You're like, "Well, what a wonderful thing. This can let us buy a vacation home." And you don't know if you've got another 20 years or 2 years, right? I mean, that's... So, you're thinking, "What a great opportunity." And I would agree, what a great opportunity. $2 million was given to you to choose to do with how you want. So, the question is, if we're going to get the vacation home, what are the risks there? What's the cost? What are the risks? And how do we make sure that...? I mean, I would hate to see that this portfolio with such...
Pat: I would take it now. I agree with you. I would just sell it off now. I wouldn't even... Because originally I thought, "Well, what happens if they get a loan on the house, and then pay it over time?"
Scott: Your sister doing this, she'd be like, "Just pay the capital gain tax and then move on."
Pat: That's right. That's exactly... I was just going through my thought process.
Scott: And I would look at...
Bonnie: So, you don't think getting a loan... Because the other option was we would just take $300,000 or $250,000, and get a $500,000 loan, a mortgage, and let the dividends pay that mortgage. But we wouldn't be taking so much of the stock if we just took...
Pat: I understand, but at the end of the day, you're just slowing the transfer of the money from the brokerage account into the...
Scott: If your goal is to die with as much money as possible, don't buy the vacation home. If your goal is to... If you want to say, "Let's take some of these dollars and use it for our own personal benefit during our lifetime," the best way to go about that, in my opinion, would be to sell those assets to generate the cash required to purchase that home.
Pat: That's the one with the least amount of risk as well.
Scott: Correct. Why you want to take a bunch of risk at this stage in your life? I could only imagine... I'm just thinking, if I were in a position where I took this loan, I bought this house, the market goes through a normal correction, which they do, and I get a margin call and they're like, "You need to either come up with 50 grand or we're going to sell some of your stock." And then two weeks later, another margin call. I'm just thinking, the angst.
Pat: But Scott, we're past that. Her second question was, what happens if they take a 250 grand...
Scott: So they get to pay the loan.
Pat: ...and then a $500,000 loan? What you're doing at that point in time, is you're just slowly moving the money from the brokerage account into the vacation home. I could make an argument that you got a 30-year loan on that. And I could make an argument for that.
Scott: Yes, I would like that much more than the borrowing on the securities.
Pat: The security thing's off the table. The decision's already been made there. The question is, now, do we do it in one foul swoop, or do we do it over a series of years? I could make an argument for 50% loan on the property and 50% out of the account. Just recognize the risks associated with it. I certainly could make that argument. But the capital gains are going to exist forever, by the way.
Scott: There's no step up basis.
Pat: There's no step up basis for this.
Scott: That already happened 13 years ago.
Pat: So, I got to tell you, I'd pay...
Scott: I would clean up the portfolio because I guarantee you, the securities you own today are not the securities that anyone would recommend for you today. I don't know what they are, but they were designed, this was an old portfolio.
Pat: I would do it all in one foul swoop and use this as an opportunity to clean up the portfolio. What that means is, when we say clean up the portfolio...
Scott: You sell those things that you wouldn't buy today.
Pat: That's right. And you don't pay any attention to which one has the cost basis in it. You go in and you reconstruct the portfolio as you would today with the existing loan.
Scott: In large part because the step up basis already occurred. It's not like we can say, "Well, I know it's not perfect, but I'm going to hold it because when I die, the cap gains are forgiveness.
Pat: It's already done.
Scott: Because we've always...
Pat: I would go to a qualified advisor and take it off.
Scott: And to your point on renting, there's a chance that... We've seen this. We've seen...
Pat: Scott and I owned a vacation rental together in Lake Tahoe Basin. And what we saw in the Lake Tahoe... Where are you calling from?
Bonnie: Well, the vacation home is in Alaska. So, yeah.
Pat: All right, probably different.
Scott: Okay, well, you're not going to know...
Pat: No, you're in a different position.
Scott: No one's going to... And by the way...
Pat: You don't have to worry about that.
Scott: Yeah, you don't have to worry about it in Alaska.
Pat: I mean, I don't think. I don't know [inaudible 00:37:10.159].
Scott: It's usually these very sought after, that people are getting priced out. The locals can't afford to live there anymore.
Pat: In the Tahoe Basin...
Scott: And the communities are trying to figure out, how do we deal with this? And some communities are saying, "We're going to charge you an extra tax. If you don't occupy it 50% of the time, you're going to pay an extra tax or we're not going to let you rent it. You can only rent it to locals," and all kind of things.
Pat: I have some friends with two houses on the beach, and the neighborhood said, "You can only own one rental house now." But I think it's a great idea. I think it's... And I would use it as an opportunity to clean up the portfolio. And where in Alaska, by the way.
Bonnie: Well, it's two hours north of Anchorage in a small little town. It's got a view of Denali. It's beautiful.
Pat: Beautiful.
Scott: Oh, beautiful. Beautiful.
Bonnie: Yeah.
Scott: Bonnie, just because you inherited these dollars does not mean you need to make your life more complicated either. So, the portfolio does not need to be complicated. Design the portfolio that's going to be best for you and your husband.
Pat: And how often would you use this house as a vacation, for you personally?
Bonnie: Yeah, we've kept kids up there. We'd use it a couple of times, a couple of months here in the winter, a couple of months in the summer, a couple of months in the fall. But then the rest of the time, the summer is the best time to rent. People also go up there in the winter from Anchorage and look at the Northern Lights and ski.
Pat: Yeah, I like the idea, but I wouldn't put any risk in it. I would just take the money out.
Scott: If it were me, I would pay cash for the thing. Just make my life... And you'd still have over a million dollars in secured savings that you didn't have before. It just reduces your risk that much.
Pat: If you made enough rental income to support the house, perfect. And the thing I love most about Alaska, you walk 10-feet off a major trail and you are part of the food chain.
Bonnie: We are very proud.
Scott: Hey, Bonnie, wish you well.
Bonnie: Thanks so much. Okay, bye-bye.
Pat: All right, these are interesting. We love Alaska.
Scott: I've been three times.
Pat: Oh, really?
Scott: Yeah. It's the only place my kids ever asked if they could go there twice.
Pat: Really?
Scott: We've got the kids up there twice. Hey, at the beginning of the program, we'd mention gold. And people are excited about gold right now because gold is up 50% this year, something crazy. Like it's just gone up and up and up. We've had other times like this that we've had these huge runups in gold, '89 to... I'm sorry, '79 to '80, and 2010 to 2012. Other times when the gold has shot up dramatically.
Pat: And like 25%, 30%, 40% runups.
Scott: Yes. But then we've seen after that, many years, they fall in value, gold falls in value, and it takes many years to recover. In its peak in 1980, had you bought gold in 1980... Supposed to be great inflation had, right? When did we have high inflation?
Pat: '79 through the '82, was it?
Scott: Through the '80s, we had high inflation. The latter part of the '80s got under control. But it peaked in 1980 before inflation got really bad. It fell 50%. It took 25 years to get back to that high.
Pat: Twenty-five years.
Scott: Twenty-five years. And if you want to look at it on a purchasing power equivalent in 1980 dollars, it just hit that value earlier this year.
Pat: Forty-five years.
Scott: Correct. So, when people talk about this great hedge for inflation, I don't know who made that up, but historically speaking, it certainly doesn't look like that to me.
Pat: Yeah. And one of the reasons gold may actually be surging is lack of confidence in the U.S. dollar. So, reserves are beginning to stockpile gold. And gold is one of the most difficult asset classes to actually redistribute because it has to be physically moved. And it has to physically... Like, if I bought... Let's say I'm the Bank of...
Scott: I don't know, Zimbabwe.
Pat: ...Portugal, and I don't want my dollars anymore and I think, "Well, I'm going to put some gold in here." I have to actually charter a jet and put security to move that gold from point A to point B. It's a strange, strange thing. And this driving gold may be a complete reaction to the U.S. dollar. We don't know.
Scott: We don't know. Wish I knew.
Pat: Well, of course, you wish you knew.
Scott: Just I just think a lot of people are going to get hurt. Be careful. Be careful. If you want to own a little gold, own a little gold, but don't expect it's going to solve all your financial problems. I want to let everyone know we've got... I don't know how many of our listeners have joined our webinars, but we've had thousands, maybe tens of thousands view our webinars, and they're pretty good. So, this one is our year-end portfolio moves for $2 million-plus investors. So, if you've got more than $2 million in investable assets, this is just some year-end moves. I'm doing the webinar along with Simone Devenny, who's our head of private wealth strategies. She's an attorney that's spent her career on larger estates, helping them reduce taxes essentially.
So, during this year, we're going to discover the moves that sophisticated investors make before December 31st to optimize growth, reduce tax liability, and maximize their philanthropic impact, and how that can help on a tax. They're not generic tips. They're proven strategies for serious investors building serious wealth. And the webinars are going to be Wednesday, November 12th at 10 a.m. Pacific, Thursday, November 13th at noon Pacific, Saturday, November 15th at 9 a.m. Pacific. And for more information and to register, go to allworthfinancial.com/workshops, and you'll be glad to join. And it's our time...
Pat: Yes, it's the perfect time of the year to do it.
Scott: I'm doing this individually with two of my clients right now. We do it every year about this time. We actually make decisions, year-end decisions, and set the portfolio up, including Roth conversions and gifting strategies to donor advised funds, all that stuff. It's just a normal part of the financial planning. And the higher the net worth, the more important it is.
Pat: I would agree.
Scott: Unless you like paying taxes.
Pat: Nobody likes paying taxes.
Scott: I would be curious to see how much voluntary tax has been given on an annual basis, 0.00001% of the treasury.
Pat: Yes, for sure.
Scott: Anyway, we're out of time. Scott Hanson and Pat McClain here with you, Allworth's "Money Matters". We'll see you next week.
Automated Voice: 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 a state-planning attorney to conduct your own due diligence.