November 23, 2024 - Money Matters Podcast
Nuances of HSAs, managing pensions and Social Security, and tax planning for high-income earners.
On this week's Money Matters, Scott and Pat explore the intricacies of Health Savings Accounts (HSAs) and their value as a financial tool. They tackle listener questions, including one about ensuring financial stability for a younger spouse and another on optimizing Social Security benefits for long-term security. Later, in a lively discussion with Allworth's Director of Client Experience, Victoria Bogner, they examine the potential impact of political changes on tax policies, interest rates, and Social Security. They also discuss how tariffs and trade disputes impact the economy and highlight the importance of tax planning for high-income earners.
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.
Transcript
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 being here.
Scott: That's right. Both myself and my co-host, we're both financial advisors and we spend our weekdays with people like yourself. Some weekdays. And we broadcast on the weekends to be your financial advisors on the air. We cover all things financial. We got a good program today as typical. There's some callers that we're looking forward to chatting with.
Pat: Talk about some year-end planning. Let's talk a little bit about HSAs, Health Savings Accounts.
Scott: Did I tell you about, I thought mine was, that I'm talking about that I thought that was drained out?
Pat: No.
Scott: I'm going to start there.
Pat: Oh yeah, you didn't. No, you didn't.
Scott: So I get up, all right.
Pat: Let's explain what a Health Savings Account is. Let's start there.
Scott: Health Savings Account, I look at it like it's another IRA. So a Health Savings Account, if you have a high deductible plan, health insurance plan through your employer, which most employers, it's now an option. And depending on your health situation, it may or may not make sense for you. For a lot of people, it makes sense because the concept with the high deductibles is...
Pat: You have more control. You can manage it.
Scott: And even sometimes with the high deductible plans, they might cover an annual physical or something like that. But you can put in several thousand dollars a year into contributions.
Pat: It's the exact opposite of a HMO, Health Maintenance Organization.
Scott: And so I participated in an HSA since they first came out, whatever, how many years ago?
Pat: Twenty years ago.
Scott: Maybe it wasn't quite that long, but whatever, a long time, a long time. And it used to be just a couple thousand you could put in. And now it's like, I don't know, eight or nine thousand bucks. It's a combination between what your employer contributes and what you contribute. And you get a tax deduction for what you contribute. It grows tax-deferred. If it's used for medical expenses, withdrawals are tax-free.
Pat: So it acts very similar to a Roth IRA.
Scott: Correct. Right? And no, an IRA, it's better because you get the deduction. You get a tax deduction for it.
Pat: And you don't have to, you're not required to spend it.
Scott: That's correct.
Pat: You can pay for your deductibles out of your pocket and allow that to grow.
Scott: So how I've done it over the years, I've paid all of my medical expenses out of pocket. And you can, you can just simply hold on to all your receipts that you've paid over the years and sometime later in life, take a one-time lump sum. And this is all to reimburse me for all these bills I've had. So you can, you can enable these dollars to continue to grow.
Pat: And you can invest them like you would a regular IRA or any other investment.
Scott: That's exactly right. So and the way it typically works is you'll have like a bank account. You can get a debit card with it if you want. And I always think you're best just to let it grow. So I've always let mine grow.
Pat: And I have for the last six, seven years. My wife was not on board when I originally proposed the idea. She's like, "Why would I do that?" But it took a couple of years and then...
Scott: She saw the way it makes some sense.
Pat: Yeah. So we invest it.
Scott: So I've had my account for many years and, the way it's set up, there's like a savings account and an investment account. They're two separate accounts, but it's all under one thing. Right? And I get up in the morning and I see an email that they attempted to process my electronic funds transfer into my account. But something went wrong, or something along those lines.
Pat: From the employer.
Scott: No, from the account. The HSA company said we tried to, we struggled with your request to transfer money out of your account to this...
Pat: Oh, so like you're afraid someone hacked you?
Scott: Someone did.
Pat: Okay.
Scott: Attempted. So I go online and it says... I'm trying to talk to somebody, but at first I'm listening and I'm like, "How much is in my account?" Like $3,000.
Pat: So you thought, "Oh, smokes."
Scott: Exactly. It's many times more than 3000 in there. Right? And like, oh my goodness. And then I could hear about withdrawals, all these, they had a withdrawal. Anyway, so I finally talked to somebody and, sure enough, someone tried and attempted to do a withdrawal on it. Fortunately, the company had stopped it. But you know, like most people, you can get lazy with your passwords. I certainly am on a lot of stuff. Like there's a combination of sorts that I use for lots of things.
Pat: Yeah, like Netflix.
Scott: That got hacked too. It was a mess. But like my financial accounts now, I have very complicated passwords. I know they have two-factor authenticity. They'll send you the text or whatever.
Pat: Which is great.
Scott: Yeah. But you know, this is my own personal experience.
Pat: Is that the first time someone tried to hack one of your accounts?
Scott: Yeah, like that. They had submitted a withdrawal request and the company was about ready to process it and then they said...
Pat: Something fishy.
Scott: Something's fishy. And fortunately, when I called, they had already caught it. It already went to some fraud detection department or whatever.
Pat: It's amazing.
Scott: And I don't know if they got my password somewhere.
Pat: I don't know. Where do you keep your, you keep it on your phone, don't you?
Scott: Like in the notes section? I would never do something like that.
Pat: You don't. Really?
Scott: I've got a couple there. Not too many.
Pat: Hopefully not important ones.
Scott: Not my money. Yeah. Not my money one. I do have like my credit card, but I don't, that's my credit card passwords. Actually, you could probably find those. Well, what are you going to do? If you're fraudulent, then I'm on the hook for 50 bucks with the credit cards company.
Pat: Okay.
Scott: Have you ever had, you know, someone hacks, use your credit card?
Pat: Yeah, it happens all the time. They'll call and say, "Hey, are you in Sheboygan at Home Depot trying to buy a power tool?"
Scott: Yeah, because I typically go to buy power tools in Sheboygan.
Pat: Yes, yes, yes. Want to take some calls?
Scott: Yeah, we'll take some calls and then we're going to talk with Vicki Bogner as well. But let's take some calls. We're talking with George in Colorado. George, you're with Allworth's Money Matters.
George: Hi, how are you doing?
Scott: Hi, George.
George: Thanks for taking my call.
Scott: Yes, sir.
George: So my question is, I have a younger wife who's about 22 years younger than me. And I just want to see if my plan for her after I'm gone kind of makes sense.
Scott: Good.
George: I always learn something from you guys.
Scott: How old are you, George?
George: Sixty-three.
Scott: Okay.
George: And she's 40. Well, I'm turning 63 this month. Anyways, so I'll give you some information. I get about $124,000 a year in pensions. Sixty percent of that is taxed. I could start taking Social Security now, which is about a little over $2,000 or wait till 70 and it's $3,600. My wife, she can, after I'm gone, she can collect up to $72,000, it looks like, in guaranteed pensions. And then when she turns 60 to 67, looks like $18,000 to $34,000 a year from what I can see online.
Scott: Okay. From where?
Pat: From the pension.
George: Well, it's part of the survivor benefits plan.
Scott: Got it.
Pat: It's commingled with Social Security benefit.
Scott: Got it.
Pat: Until full retirement age. Okay.
George: Well, the $72,000 is survivor benefit plan and then another program through the VA. So there's that. And then that, in addition, when she gets to 60, she can start collecting Social Security, depending if she wants to wait or need it or not.
Pat: Is this a state pension?
Scott: Safety worker.
George: Federal, military, retirement.
Pat: All of it?
George: Well, the SBP part. And then the VA, if you die from something you acquired during the military, or you have a high enough rating, then your spouse gets an additional $2,000 a year, it looks like. I mean a month.
Pat: Were you married when you took the pension?
George: I was married, no, yes. Yes, I was. Sorry. I was married a long time, like 18 years.
Pat: Okay. To your wife.
George: Yeah.
Pat: Who's 41. You were married when you took the pension.
George: Right.
Pat: Okay, okay, perfect, thanks. I was just wondering if we should ask for a reset and we can't. Okay, keep going.
George: Okay. And so, you know, I have about $150,000 in life insurance. Can't get any more. They won't sell me anything else. We have about $200,000 in IRAs, $60,000 for my wife, $140,000 for me, which kind of planned on just leaving for her 20 years down the road, because we don't really need money now. We haven't had investments and thought about converting that to Roth slowly. We have 80 acres of mixed agricultural recreation land, and the value of that is hard to predict, but you know, it could be a lot, or it could be not. And we have a home in a foreign country. So, and that's kind of where we're at.
Pat: And where are you living now?
George: Colorado.
Pat: And do you own a home there?
George: Yeah. It's not paid for.
Pat: Say that again?
George: That's not paid for. The land's someplace else.
Pat: Okay. Tell us about the primary residence.
George: It's a home in Colorado. It's worth about, well, I don't know, they say it's worth about $700,000 and we owe about $440,000 on it.
Pat: If you were to pass away, would your wife keep that?
George: I think so, yeah. I mean, she would get that yearly money and then she would, I mean, we got a great interest rate when we got it. But also, I'm thinking she could, you know, use the life insurance until she sold, you know, the land if she needed to, to pay it off.
Pat: How much is the land worth?
Scott: He doesn't know.
George: Well, I think it's worth $400,000 to $700,000 based on, you know, how you split it up and how you sell it. Land, you know, is variable.
Scott: You get hit by a bus today, or like Pat likes to say, you get hit by an Amazon van because they're much more prevalent.
Pat: The chances of you getting hit by a bus are...
Scott: That might be unfair to Amazon. The delivery van, because they're everywhere now.
Pat: That's right. And you can't even tell.
Scott: For whatever reason, we had four different Amazon packages delivered yesterday.
Pat: At four different times.
Scott: I don't know if there are four different times, but I'm like, who's ordering what?
Pat: None of them were even for you.
Scott: No, of course not. I'm like, this is getting out of control.
Pat: But you didn't say anything, did you?
Scott: No, but it's dangerous walking on the streets because all the delivery van. Anyway, that's a stupid side of the story. Something happens to you today, your wife's going to be fine because of the survivor pension she's got. It's a good-sized pension. In addition to what you had stated, between the IRAs, the life insurance, you get that, I mean, the mortgage could be paid off if that was the choice at some point in time, or there's quite a bit of equity in the house and there's equity in that land.
Pat: And that ignores, you said you own property overseas as well, correct?
George: Yeah, that's probably only worth $50,000. She could go live there.
Scott: Two things. One is, like, if something happened to you today, yes, she would be fine financially. If she went and talked to a financial advisor, they would say, "Look, you're going to be fine financially." The second thing is, from a realistic standpoint, there's not a lot of other planning we can do unless you said, "I want to have a lesser lifestyle today to ensure that my wife is better off when I'm gone." Other than that, she's fine.
George: Yeah.
Pat: Perfectly fine. Yeah, more than fine.
Scott: I think you're good. I wouldn't worry.
Pat: Do you have children from this marriage?
George: Oh, yeah. We got two teenagers. One's getting set to go to college pretty quick, and the other one will probably go to college too. One's a senior in high school, the other's a sophomore.
Pat: And are you working now?
George: No, I haven't worked since 2023.
Pat: All right. How is that, I mean, being home with those two teenagers?
Scott: Not a normal retirement.
George: Well, they're gone. They're teenagers. And then we moved to Colorado to get around.
Scott: How old are they? You haven't collected Social Security yet, right?
George: No, I'm debating.
Pat: Oh, you want to. You want to start it right now.
Scott: Your kids could be collecting it.
George: Why?
Pat: Because your kids, you get it for the benefit of the kids.
George: They don't get anything.
Pat: Oh, they certainly do.
Scott: If you're over age 60, collecting, 62 collecting benefits, if you are collecting Social Security benefits and you have dependent children, they get benefits.
George: What?
Pat: Yes. Yes. Aren't you glad you called?
Scott: That's what we came at the very end of the call.
George: I always learn something from you guys.
Pat: You want to start it tomorrow.
George: Well, the youngest one...
Pat: Can you still back? I don't think they'll back pay it, but you start it tomorrow. It doesn't matter as long as they're under age 18.
Scott: How old are they?
George: One's 15. She turned 15 in February. The other one is 17.
Pat: Go, go!
Scott: Isn't there some additional benefit if they go to college too?
Pat: I don't know the answer to that. I don't know the answer to that. Hang up this phone, get in your car, drive down to the Social Security Administration, apply for today.
George: Well, last time they almost wanted to put me in jail. Well, they didn't say that.
Pat: Well, that's a different story altogether.
Scott: I don't know if we want to go there.
Pat: You're going to have to call another radio show to discuss that.
George: Let me ask you something. I thought you only get Social Security for your kids if like you die like this.
Scott: No. If you're on retirement benefits and you have minor children, minor dependents...
Pat: Like we've had, we've encouraged people to adopt grandkids.
Scott: Yes, because it's kind of rare being in your 60s with teenagers. But there are people that are taking care of their grandkids and we show them the numbers. Like, if you adopt them and now they're your children, not just someone, a grandkid, then you can start receiving Social Security benefits as long as they're on receiving Social Security.
Pat: That's right. You want Social Security right now. Right now.
Scott: Yeah. Now.
George: That's something I didn't know.
Pat: Well, that's why you call.
Scott: Appreciate the call, George. And by the way, if you're listening and thinking, why are these, from a taxpayer standpoint, I certainly don't like the concept, but the reality is we all navigate whatever Congress, the game they play, they set up for us. We go to play Monopoly with my kids, these are the rules. Whether we like the rules, not the rules, we all, these are the rules. Can we swap houses to get a hotel? All that kind of garbage. Congress sets up the rules. It's our opportunity to navigate the rules.
Pat: Let me ask you a question. When you're swapping a hotel or a house for a hotel...
Scott: I have not played in a decade.
Pat: With Monopoly, do you explain to your kids how the 1031 exchange works?
Scott: Actually, I take the house when they're not looking.
Pat: I tell you what, Scott, I grew up in a family of five kids, four boys. There was never a Monopoly game that didn't end up in a fistfight. Never. And we played it.
Scott: A fistfight.
Pat: A fistfight. I mean, not a fight, not an argument.
Scott: Beat the crap out of my brother. Why? Because he landed in Park Place again?
Pat: You're starting to win. You're kind of rubbing it in their face a little bit. You're pushing it. Next thing you know, the board's in the air. Fists are flying.
Scott: Where are you in the relation to the other boys?
Pat: I was third.
Scott: Oh, right in the middle then.
Pat: Yeah, yeah. And then Doug Malo, the kid down the street, holy smokes.
Scott: All right.
Pat: What do you mean all right?
Scott: We're going to move on.
Pat: Okay. A little therapy here for me.
Scott: I think it'll take a little more than that. Let's talk now with Alicia in Colorado. Hi, Alicia. You're with Allworth's Money Matters.
Alicia: Hi. Thank you and good morning.
Scott: Good morning.
Alicia: So, just to give you a background. I'm a 62-year-old federal employee. I'll be retiring in four months. I have, I think, a lot of things in order. I have a trust set up. I have lifetime long-term care. And I have lifetime medical through the federal government. I have 1.4 million in my TSP. My question is, and I get rental income, that basically covers my mortgages. And my investment property brings in enough money to cover expenses and mortgages. I refinance to take out money out of my investment property for cost runs for remodel of my primary home. My money, I'm planning to leave to family members and a significant amount to charity.
My question is, should I start taking... Well, I was told by someone about Social Security optimization. And they suggested that I start taking Social Security at age 62 and then turn it off at 67 and take money out of my TSP, if necessary. Then they said I should restart Social Security at age 70 to "maximize Social Security." And I really don't understand how that's going to work because it seems like if I take Social Security for those years and start it early, it's still going to reduce the dollar amount.
Scott: It will.
Alicia: And the benefit that I receive at age 70.
Scott: It will.
Alicia: But if I did take Social Security, and also, I wouldn't take it until 63 at this point. If I did take Social Security at this point, what I'd do is use that money to pay off the mortgage on my investment property early, which is at a 7% interest.
Pat: Okay. Well, yeah, let's step back for a second here. What is the value of your primary residence?
Alicia: I'd say at this point, it's a million.
Pat: And what do you owe on it?
Alicia: I owe 360, 370 maybe. I haven't looked at it in a while.
Pat: And what's the interest rate?
Alicia: It's 2.875.
Pat: Okay. And you have one investment property or multiple investment properties?
Alicia: Well, I rent out...my house is set up as a duplex. So I rent out my basement. And so I bring in, let's see, that brings in 27k per year.
Pat: Okay. And then your investment property.
Alicia: Okay. The mortgage is 1,736 per month, including property taxes and insurance. And it brings in. 27,960, I think.
Pat: That's okay. That's close enough. That's okay.
Alicia: Okay.
Pat: And what's the value of the property?
Alicia: It's worth, I'd say, between 500 and 550.
Pat: And what did you pay for it?
Alicia: I paid 79,000.
Pat: Okay. And what do you owe on it now?
Alicia: I owe $157,125, but I've been paying extra principal since I, well, even when I had the HELOC because it had gone to 10% and it was interest-only.
Pat: Okay. And it's not a HELOC now. It's a fixed rate.
Alicia: No, no. Now it is a 30-year.
Pat: A 30-year fixed. Okay.
Alicia: But I brought that down by paying extra. I'm about 10 years ahead.
Pat: Okay. And what money do you have in the bank?
Alicia: I have 43,000 in emergency fund.
Scott: And are you 100% confident you're not going to work after you retire?
Alicia: Except for things that I lose money on. I'm kind of dealing in antiques and I've made money one year.
Scott: Okay. Is that where you want to spend your time though?
Alicia: No, actually, I want to spend my time traveling and volunteering.
Pat: And how much will your monthly pension be?
Alicia: It's going to be, it's weird because I've had estimates. It seems to be, it's going to be between 40,000 and 45,000.
Pat: How much do you earn at your job now?
Alicia: Right now I just got a bump in pay. So I earn 145,000, but I started at around 30,000.
Scott: What was your pay last year before the bump? I'm trying to understand what you've been living off of.
Alicia: One hundred and forty-one.
Pat: Ah, so this is interesting. I could, I'm running this thing through my head. So the first thing I would look at is...
Scott: And how many kids do you have?
Alicia: None.
Pat: Oh, no children? And you're not married?
Alicia: No, I'm not married, no kids. Basically my money will go to my nephew. But a lot of it, most of it is going to go to charity. I'll see that he's taken care of, you know, as far as paid-off mortgage.
Pat: Obviously when you do that, you name the beneficiary, the IRAs, or the Thrift Savings Fund.
Scott: What about a charitable remainder trust with that rental house?
Alicia: I'm sorry?
Scott: I'm talking to Pat here. I'm thinking about... I mean, because you've got one concept is you take that rental house and you structure it in a charitable vehicle where it transfers to the charity, the charity sells it, avoids the capital gain. You receive an income.
Alicia: Everything is in the trust.
Pat: I understand that. Now we're talking about something completely different. It's a charitable remainder trust and it's a tax.
Scott: And there's different flavors of that.
Pat: Yeah, and you sound charitable. The problem is, Scott, it's 400 grand, would be this. And what did you say you paid for it?
Scott: Nothing.
Alicia: Seventy-nine thousand.
Pat: Yeah, I wouldn't. The cost of administrating a charitable remainder trust over the next few years relative to the tax savings?
Scott: I don't know. And depending on how deep she is with some non-profit she is, they could structure it all and take care of all the costs. There's no cost at all and she suddenly gets a check every month and doesn't have to think about it.
Alicia: Now, why would I get a check every month?
Pat: Because of how these charitable remainder trusts are actually structured.
Alicia: Okay, I'm not familiar with those.
Scott: I mean, you have $400,000 of equity there. You could receive an income stream for the rest of your life. It's going to be greater than what you have now and you don't have to think about it.
Pat: That's right. Because you're only making $1,000...
Scott: I mean, to your point, it's $400,000, not $4 million. And oftentimes these are strategies used with larger estates. But given your situation, got a nice pension, you're going to have Social Security, you got a million and a half bucks in your 401(k), TSP. So you're asking, I wouldn't take Social Security right away. You've got some other kind of planning, I think. You've got some other strategies to consider. I don't like the 7% mortgage on the rental.
Pat: I hate it. I absolutely hate it. I would look at actually taking money out of the Thrift Savings Plan and using that money in the bank immediately to pay that down. And you say, "Well, I want the money in the bank for emergencies." You could get at the Thrift Savings Plan as fast as you'd get the money at a bank. It's just a taxable event.
Scott: It's a taxable event. You've got to be careful of that.
Pat: So the 7% is what bothers me. And I would look at, I would actually, Scott, I would say, why wouldn't you start Social Security? Why wouldn't you drain out some of that Thrift Savings Plan in one tax year and start Social Security in the next in order to get rid of this mortgage? It's the 7% that crushes me.
Scott: Is it an easy property?
Alicia: I would say I would pay about $60,000 at the beginning of next year and using a significant amount of that to also, I was thinking of paying down the mortgage since I won't need all that money.
Pat: I kind of, I would explore the charitable remainder trust that Scott mentioned. It never even crossed my mind, but it never even, because of the size of it...
Scott: You could take that rental.
Pat: So explain what a charitable remainder trust is and how they actually work.
Scott: And there's different flavors of them.
Pat: Lots of different flavors.
Scott: Yeah. You take, typically it's a property that is, or an asset that has a lot of gain in it that someone would like to dispose of. They don't want to pay the gain. Number one. Number two, they are highly charitably motivated. It doesn't work if you're not highly charitably motivated.
Pat: And it probably is, right? Because your yield on this for the amount of equity that you're actually in this house is, it's what?
Scott: By the time you have a repair or two, there's not a lot left.
Pat: Two percent.
Scott: There's not a lot left. And so it's transferred to a charity. You receive a tax deduction, not of the full value because it's calculated. The charity actually doesn't get the proceeds until either at your death or at a period of time. You could structure it for eight years and defer your Social Security. Just throwing things out, different planning ideas out. But with that, the charity then sells the property. They pay no capital gains because they're a nonprofit. And in exchange, they give you an income stream, a monthly income stream, either for the remainder of your life, charitable remainder trust, or for a period of time. There's different ways to structure things. And so there's a lot of planning techniques. Your Social Security is one of them. And every once in a while you hear us talk about like the benefit of doing a really a true financial plan with a true financial advisor running through all these different scenarios. I think it's something for you to consider.
Pat: And, by the way, many times a financial advisor will recommend life insurance to actually replace...
Scott: You don't need that.
Pat: You don't need that. That's why it actually makes the most sense is because you're going to leave this to charity anyway. And what you're worried about is cash flow and tax implications. I think the charitable remainder trust...
Scott: You're a single woman, relatively young at retirement, got a great pension. You're going to have Social Security as well. You got money saved in your retirement. The only thing we don't like in your portfolio is this rental with this high interest. You got a lot of equity that you're not getting any income. And now is the time in your life for income.
Alicia: So do you have to have a char...? If to set up a charitable remainder trust, do you have to pick the specific charity?
Pat: Yes. Yes.
Scott: There's pros and cons to them.
Alicia: What about a donor-advised fund?
Pat: Oh, a donor-advised fund? Well, the donor-advised fund, you're not going to get any income and you need income.
Scott: You give it all away.
Pat: You give it all away. So a donor-advised fund would make sense here if...
Scott: If you keep on transferring property, donor-advised funds, they can work great.
Pat: You need income.
Scott: Yeah.
Alicia: Okay.
Scott: We're not stating give away this property today.
Pat: That's right. We were saying, is there a way...
Scott: There's a way to get rid of the mortgage and have more income off the 400 grand of equity you have in this house.
Pat: And if you didn't do that, it may make sense to sell the property.
Scott: There's a lot of different planning things to look at.
Pat: It may make sense to take money out of the Thrift Savings Plan and pay it down. But even then, the yield...
Scott: Even if you did an exchange to a lesser property, the boots taxable, you'd have some taxable implications there, but not on the entire thing. There's some ways. There's a lot of different planning techniques that I think Social Security is the last, at least, of your planning opportunities.
Pat: Yes, correct. I would explore the CRT. Thank you, Scott.
Scott: Yeah. And they're not used that common.
Pat: They're not that common.
Scott: Given what you've, I don't know you that well. We don't know you that well. But given what you've said thus far, it could be a pretty interesting solution for you. So anyway, really glad you called and hope you enjoy retirement. Yeah, and engage with a good financial advisor to run through some of these scenarios with you. Yeah, and we want to have a, we just thought with the elections and whatnot, we would have a guest on our program, Victoria Bogner. And Victoria is our...
Pat: Director of Client Experience.
Scott: Director of Client Experience. And she's also, she's our Financial Analyst.
Pat: She's much more than our Director of Client. She interacts with the advisors and the clients in order to make the interface as enjoyable and as efficient as possible.
Scott: Yeah, and frankly, and before we have her on, she joined us through a merger with one of her firms where she was the CEO and their Chief Investment Officer.
Pat: And a practicing advisor.
Scott: And her first assignment at Allworth is connecting, making sure we got awesome client service, awesome advisor experience, and the whole kind of connectivity between them. That's kind of her focus. And because she's highly analytical, smart, good communicator, she's been perfect for the job at that. And so, Victoria, thank you for taking some time to join us.
Victoria: Yeah, it's great to be back.
Scott: And we're going to talk. We're on because...
Pat: Well, I said before we dug into this, Scott, I said this, we're going to talk a little bit about what's going on in the Trump, what to expect. And I said, this is just, look, I go and read the reviews from our show where people rate them. Have you ever, you know, read the reviews? If we mention Democrat or Republican, all kinds of negative stuff comes out in these reviews. Like, "Oh, I can see through you. We know whose side you're on," this kind of garbage. Go ahead, write the review. I don't, I shouldn't say I don't care because I do care.
Scott: Also, I know with Allworth, as we've led the company over the years, it was always, we are apolitical. Money's not red. Money's not blue. Money's green.
Pat: That's right.
Scott: And that's what our political focus has been. Anytime we're dealing with clients, it's not... And the reality is, like, I've got, we've got clients. We all have our own values.
Pat: That's right.
Scott: And I have clients that their values don't quite line up with mine and that's fine.
Pat: I have children.
Scott: But I also highly value servicing, serving them very well. And I have a fiduciary obligation to do what's in their best interest.
Pat: That's right. Their best interest. Look, tax law drives a lot of investment decisions. And most certainly, financial planning because you have to view financial planning through a prism of tax.
Scott: Of course.
Pat: You have to. You don't have any choice. So, we asked...
Scott: That's why we talked about HSAs at the beginning.
Pat: That's right.
Scott: I would not use it if it wasn't for the tax benefits.
Pat: That's right. Right? The investment is the investment. It's the vehicle.
Scott: Yeah, it's the same investment I could own anywhere.
Pat: That's right. So, we asked Victoria to come on today to talk a little bit about what we can kind of anticipate from this new administration.
Victoria: I can tell you exactly what the next four years are going to look like.
Scott: Perfect.
Victoria: Just kidding. Okay. Well, first of all, I think before this election was finalized, a lot of questions were around and tax cuts and Jobs Act of 2017, commonly known as the Trump tax cuts, because they were pretty significant. And a lot of those are set to expire at the end of 2025. But now that Trump is back in office, the GOP controls or will likely control both legislative branches, it's very possible that we'll see efforts to either extend those cuts or even make them permanent. But of course, Washington permanent doesn't mean forever. It just means until the next administration takes charge of it. But even if these tax cuts are extended, as you say, there's so little we can control. Right? We can't control inflation. We can't control the stock market. But we can control to a certain extent the taxes we pay. It is a lever that we can pull. And this is something that you should start thinking about in your 40s and 50s. Don't wait till you're 65 and say, "I want to retire. Now, how do I manipulate my assets so I'm not paying so much in tax?" You're setting yourself up for much greater success later if you're thinking about this in your 40s and 50s with a good financial planner so that you can adjust as laws and situations change. But especially if you're a high-income earner, tax planning should be your top priority.
Pat: Right? You should have a diversified tax strategy very similar to a diversified portfolio. Right?
Victoria: Exactly.
Pat: Which means some of the money is in pre-tax. Some is in post-tax. Some of it is in Roth. Some of it is a depreciable asset maybe. So what do we expect? Do we think that they'll be, you know, they will continue with this? Do you think there's going to be more tax cuts?
Victoria: There could potentially be even more tax cuts, tax advantages. But also the flip side of this is tariffs, trade disputes, right? Because we have the taxes that if they get extended, in large part, that will be good economically. That increases consumer spending. It will increase GDP. But on the flip side of that, if we have tariffs, trade disputes, then that is going to put a dampener on GDP. That's going to raise prices. It's going to raise inflation. So there are two sides to the coin here of how you manage your assets and your tax liability. It's not just about what is happening in the tax picture situation, but it's also what's happening in other policies and legislations, which we have an amazing investment committee that pays attention to all of that. But you need to look at the whole picture.
Scott: Yeah, and even with these trade... I've always been a free market guy from when I was in high school. Even my paper route essentially was free market. I believe that we need some sort of rules that we agree to abide by the rules and then let's let the market decide.
Pat: Well, kind of. I'm kind of that way, but I don't think that strategic assets in the U.S. should be owned by foreign corporations.
Scott: Okay, that's an easy one. Yeah. Okay. Strategic assets. But even the whole trade imbalance, the trade deficits and the tariffs, I mean, I'm curious about your perspective because there's different perspectives here and some say this is just going to cause inflation, it's going to raise prices for everybody, it's going to slow the economy down. Kind of what's your take?
Victoria: Well, here's my opinion, and I have read many different economists' takes on this. But at the end of the day, tariffs can be used as a tool to be able to negotiate trade agreements. Similar to what happened in 2018, 2019. And what's so interesting about this is back then, this was what everybody was talking about. And I bet if I asked you what happened with trade tariffs in 2018, very few people could tell me, but that's all anybody cared about. But what Trump did is he threatened tariffs of about 25% on billions of dollars' worth of Chinese goods. And many of those tariffs did go through. And then if you remember, China retaliated by putting tariffs on our agriculture and our soybeans, and then we had to subsidize farmers because they were impacted. And overall, it was a drag on GDP. It was negative. It did lead to phase one of our trade agreement with China, which by the way, just objectively speaking, COVID happened. And so that trade agreement pretty much went to the wayside because everybody was just dealing with their own COVID mess. Long story short, tariffs usually are not a good idea. You want as much free trade as possible because tariffs, there's a misconception. It is actually the buyer of the goods who's paying the tariff, right? So if we're charging 60% tariffs on Chinese imports, China isn't paying that.
Scott: That's right, the consumer. Yes.
Victoria: The American company is paying that. Or it's pushing that on to the consumer.
Pat: Or it's pushing the price of a particular product, whether it comes from China or not.
Victoria: Yes, exactly. So the issue is then that that does increase prices. It decreases competition. That passes on to the consumer. It increases inflation. And then that increases interest rates because the Fed needs to get that under control. And so it's usually a negative spiral. You want as much free trade as possible.
Pat: But I don't think he's going to... I think it's going to be the same story as last time. He's going to threaten, threaten, threaten, and then come to the table and negotiate.
Victoria: There's no way we can have 100% tariffs or 60% tariffs on anything. That's a no-go. That would be weird.
Scott: Are you saying Trump might have exaggerated a statement about something?
Victoria: You know, I know he's not known for that, but...
Scott: Let's talk about interest rates for a bit because the bond market, particularly the day following the election, the stock market skyrocketed high and bond market had a pretty significant sell-off on the longer-term bonds. So what's transpired with interest rates and what can we expect maybe over the next several months?
Victoria: That was interesting because right after Trump won the election, interest rates dropped. So as interest rates go down, that means bond prices go up. They're inversely related. But that's starting to level out now because investors are processing what these potential policy changes could mean. The biggest concern being inflation. So if Trump extends the 2017 tax cuts, that's good. It'll increase spending. It'll boost GDP in the short term. Of course, that will rack up more of our debt. But if this is met with higher tariffs, companies could see higher production costs. They're going to pass that on to consumers. It's going to lead to more inflation. And something that investors need to realize is that, as of now, the Federal Reserve is an independent part of this equation. So Trump doesn't control interest rates. It's the Federal Reserve that does. And one of their mandates is to keep inflation under control. So if inflation starts to get out of control, one of the levers that the Fed will likely pull is to start to increase rates again. So it's important for investors to then keep those factors in mind because shorter-duration bonds could help with that interest rate risk. But bonds still play an important role in keeping things stable. So important that if you have a financial planner, and I hope you do, that this is something that they're keeping a pulse on and paying attention to in your portfolio.
Pat: And so basically not reach for the long bonds, stay a little bit shorter on the bond, and you're not giving up much yield, if any at all.
Victoria: Right now, the yield curve is pretty flat. I mean, when you go far out on the long end, you're not making enough of a heightened return to lock your money up in those longer durations. So yeah, makes sense to stick to more intermediate and short term for now.
Scott: And with respect to Social Security and Medicare, you're not clairvoyant, but we all know that eventually, and it's getting closer to the point where Congress is going to have to do something, right? Are you expecting anything to come of the Trump White House in this area?
Victoria: Well, Trump has said he wants to protect these programs. But as you say, with increasing budget pressures, we might start to see some talk about raising eligibility ages or adjusting benefits. They might raise the retirement age, they might tweak the cost of living adjustments. That's the kind of change that we would see.
Pat: And, Vicki, we've seen it in parts of Europe, have we not?
Victoria: That's right. And those are easy levers to pull, but any major reform is going to take time. So the best thing to do is to plan based on what we know, but be ready to adapt if things do change. And for younger workers, personally, when I run plans for clients under 50, I just assume a 25% reduction in Social Security benefits just to see how their plan holds up. Because I think that is a realistic worst-case scenario. When we look at Social Security, if it was cut by 25%, it would actually be fully funded as of right now. So I think that's a realistic worst-case scenario.
Scott: That's what statutory will occur in 10 years if nothing is done, right?
Victoria: That's right. Yeah. And Medicare is a whole other story. I mean, that is going to be the bigger issue and the bigger problem because it is much more underfunded than Social Security. It's a big problem.
Scott: Well, it will be interesting to see with RFK, Jr. and what he actually does in that area. But when we've got roughly 20% of our economy is in health care, right?
Victoria: That's right.
Pat: It's a big number.
Scott: It is a massive piece of our economy.
Pat: It's a big number. It's a big number.
Scott: Well, thanks for taking a little time to join us, Vicki.
Victoria: Absolutely. Thank you.
Pat: As always, thanks for being part of the team and your wisdom is always appreciated.
Scott: Yeah, we like Vicki.
Pat: Yes. She's smart.
Scott: I like Vicki or Victoria, both.
Pat: Yes, super smart. She's smart. This RFK thing, quite frankly, Scott, this food pyramid, they need to get rid of that. They need to quit subsidizing corn.
Scott: Yeah, all those. Okay. Yeah, just flat out. There's lots of things that need to happen, but the government is doing them. Good point. We're not going to... I don't want to talk about policy stuff, government policy anymore. It's like... Anyway, I think we're...
Pat: We're done.
Scott: I think we're about done. Anyway, it's been great being here with you. I believe next week, Thanksgiving's coming up. Hope everyone has a great Thanksgiving. We'll be taking the week off and have a best of for you next week. If you've liked this program, please go ahead and rate it. Write us a review and send it to a friend as well. 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.
Scott: Welcome to Allworth's Money Matters, Scott Hanson.
Pat: Pat McClain, thanks for being here.
Scott: That's right. Both myself and my co-host, we're both financial advisors and we spend our weekdays with people like yourself. Some weekdays. And we broadcast on the weekends to be your financial advisors on the air. We cover all things financial. We got a good program today as typical. There's some callers that we're looking forward to chatting with.
Pat: Talk about some year-end planning. Let's talk a little bit about HSAs, Health Savings Accounts.
Scott: Did I tell you about, I thought mine was, that I'm talking about that I thought that was drained out?
Pat: No.
Scott: I'm going to start there.
Pat: Oh yeah, you didn't. No, you didn't.
Scott: So I get up, all right.
Pat: Let's explain what a Health Savings Account is. Let's start there.
Scott: Health Savings Account, I look at it like it's another IRA. So a Health Savings Account, if you have a high deductible plan, health insurance plan through your employer, which most employers, it's now an option. And depending on your health situation, it may or may not make sense for you. For a lot of people, it makes sense because the concept with the high deductibles is...
Pat: You have more control. You can manage it.
Scott: And even sometimes with the high deductible plans, they might cover an annual physical or something like that. But you can put in several thousand dollars a year into contributions.
Pat: It's the exact opposite of a HMO, Health Maintenance Organization.
Scott: And so I participated in an HSA since they first came out, whatever, how many years ago?
Pat: Twenty years ago.
Scott: Maybe it wasn't quite that long, but whatever, a long time, a long time. And it used to be just a couple thousand you could put in. And now it's like, I don't know, eight or nine thousand bucks. It's a combination between what your employer contributes and what you contribute. And you get a tax deduction for what you contribute. It grows tax-deferred. If it's used for medical expenses, withdrawals are tax-free.
Pat: So it acts very similar to a Roth IRA.
Scott: Correct. Right? And no, an IRA, it's better because you get the deduction. You get a tax deduction for it.
Pat: And you don't have to, you're not required to spend it.
Scott: That's correct.
Pat: You can pay for your deductibles out of your pocket and allow that to grow.
Scott: So how I've done it over the years, I've paid all of my medical expenses out of pocket. And you can, you can just simply hold on to all your receipts that you've paid over the years and sometime later in life, take a one-time lump sum. And this is all to reimburse me for all these bills I've had. So you can, you can enable these dollars to continue to grow.
Pat: And you can invest them like you would a regular IRA or any other investment.
Scott: That's exactly right. So and the way it typically works is you'll have like a bank account. You can get a debit card with it if you want. And I always think you're best just to let it grow. So I've always let mine grow.
Pat: And I have for the last six, seven years. My wife was not on board when I originally proposed the idea. She's like, "Why would I do that?" But it took a couple of years and then...
Scott: She saw the way it makes some sense.
Pat: Yeah. So we invest it.
Scott: So I've had my account for many years and, the way it's set up, there's like a savings account and an investment account. They're two separate accounts, but it's all under one thing. Right? And I get up in the morning and I see an email that they attempted to process my electronic funds transfer into my account. But something went wrong, or something along those lines.
Pat: From the employer.
Scott: No, from the account. The HSA company said we tried to, we struggled with your request to transfer money out of your account to this...
Pat: Oh, so like you're afraid someone hacked you?
Scott: Someone did.
Pat: Okay.
Scott: Attempted. So I go online and it says... I'm trying to talk to somebody, but at first I'm listening and I'm like, "How much is in my account?" Like $3,000.
Pat: So you thought, "Oh, smokes."
Scott: Exactly. It's many times more than 3000 in there. Right? And like, oh my goodness. And then I could hear about withdrawals, all these, they had a withdrawal. Anyway, so I finally talked to somebody and, sure enough, someone tried and attempted to do a withdrawal on it. Fortunately, the company had stopped it. But you know, like most people, you can get lazy with your passwords. I certainly am on a lot of stuff. Like there's a combination of sorts that I use for lots of things.
Pat: Yeah, like Netflix.
Scott: That got hacked too. It was a mess. But like my financial accounts now, I have very complicated passwords. I know they have two-factor authenticity. They'll send you the text or whatever.
Pat: Which is great.
Scott: Yeah. But you know, this is my own personal experience.
Pat: Is that the first time someone tried to hack one of your accounts?
Scott: Yeah, like that. They had submitted a withdrawal request and the company was about ready to process it and then they said...
Pat: Something fishy.
Scott: Something's fishy. And fortunately, when I called, they had already caught it. It already went to some fraud detection department or whatever.
Pat: It's amazing.
Scott: And I don't know if they got my password somewhere.
Pat: I don't know. Where do you keep your, you keep it on your phone, don't you?
Scott: Like in the notes section? I would never do something like that.
Pat: You don't. Really?
Scott: I've got a couple there. Not too many.
Pat: Hopefully not important ones.
Scott: Not my money. Yeah. Not my money one. I do have like my credit card, but I don't, that's my credit card passwords. Actually, you could probably find those. Well, what are you going to do? If you're fraudulent, then I'm on the hook for 50 bucks with the credit cards company.
Pat: Okay.
Scott: Have you ever had, you know, someone hacks, use your credit card?
Pat: Yeah, it happens all the time. They'll call and say, "Hey, are you in Sheboygan at Home Depot trying to buy a power tool?"
Scott: Yeah, because I typically go to buy power tools in Sheboygan.
Pat: Yes, yes, yes. Want to take some calls?
Scott: Yeah, we'll take some calls and then we're going to talk with Vicki Bogner as well. But let's take some calls. We're talking with George in Colorado. George, you're with Allworth's Money Matters.
George: Hi, how are you doing?
Scott: Hi, George.
George: Thanks for taking my call.
Scott: Yes, sir.
George: So my question is, I have a younger wife who's about 22 years younger than me. And I just want to see if my plan for her after I'm gone kind of makes sense.
Scott: Good.
George: I always learn something from you guys.
Scott: How old are you, George?
George: Sixty-three.
Scott: Okay.
George: And she's 40. Well, I'm turning 63 this month. Anyways, so I'll give you some information. I get about $124,000 a year in pensions. Sixty percent of that is taxed. I could start taking Social Security now, which is about a little over $2,000 or wait till 70 and it's $3,600. My wife, she can, after I'm gone, she can collect up to $72,000, it looks like, in guaranteed pensions. And then when she turns 60 to 67, looks like $18,000 to $34,000 a year from what I can see online.
Scott: Okay. From where?
Pat: From the pension.
George: Well, it's part of the survivor benefits plan.
Scott: Got it.
Pat: It's commingled with Social Security benefit.
Scott: Got it.
Pat: Until full retirement age. Okay.
George: Well, the $72,000 is survivor benefit plan and then another program through the VA. So there's that. And then that, in addition, when she gets to 60, she can start collecting Social Security, depending if she wants to wait or need it or not.
Pat: Is this a state pension?
Scott: Safety worker.
George: Federal, military, retirement.
Pat: All of it?
George: Well, the SBP part. And then the VA, if you die from something you acquired during the military, or you have a high enough rating, then your spouse gets an additional $2,000 a year, it looks like. I mean a month.
Pat: Were you married when you took the pension?
George: I was married, no, yes. Yes, I was. Sorry. I was married a long time, like 18 years.
Pat: Okay. To your wife.
George: Yeah.
Pat: Who's 41. You were married when you took the pension.
George: Right.
Pat: Okay, okay, perfect, thanks. I was just wondering if we should ask for a reset and we can't. Okay, keep going.
George: Okay. And so, you know, I have about $150,000 in life insurance. Can't get any more. They won't sell me anything else. We have about $200,000 in IRAs, $60,000 for my wife, $140,000 for me, which kind of planned on just leaving for her 20 years down the road, because we don't really need money now. We haven't had investments and thought about converting that to Roth slowly. We have 80 acres of mixed agricultural recreation land, and the value of that is hard to predict, but you know, it could be a lot, or it could be not. And we have a home in a foreign country. So, and that's kind of where we're at.
Pat: And where are you living now?
George: Colorado.
Pat: And do you own a home there?
George: Yeah. It's not paid for.
Pat: Say that again?
George: That's not paid for. The land's someplace else.
Pat: Okay. Tell us about the primary residence.
George: It's a home in Colorado. It's worth about, well, I don't know, they say it's worth about $700,000 and we owe about $440,000 on it.
Pat: If you were to pass away, would your wife keep that?
George: I think so, yeah. I mean, she would get that yearly money and then she would, I mean, we got a great interest rate when we got it. But also, I'm thinking she could, you know, use the life insurance until she sold, you know, the land if she needed to, to pay it off.
Pat: How much is the land worth?
Scott: He doesn't know.
George: Well, I think it's worth $400,000 to $700,000 based on, you know, how you split it up and how you sell it. Land, you know, is variable.
Scott: You get hit by a bus today, or like Pat likes to say, you get hit by an Amazon van because they're much more prevalent.
Pat: The chances of you getting hit by a bus are...
Scott: That might be unfair to Amazon. The delivery van, because they're everywhere now.
Pat: That's right. And you can't even tell.
Scott: For whatever reason, we had four different Amazon packages delivered yesterday.
Pat: At four different times.
Scott: I don't know if there are four different times, but I'm like, who's ordering what?
Pat: None of them were even for you.
Scott: No, of course not. I'm like, this is getting out of control.
Pat: But you didn't say anything, did you?
Scott: No, but it's dangerous walking on the streets because all the delivery van. Anyway, that's a stupid side of the story. Something happens to you today, your wife's going to be fine because of the survivor pension she's got. It's a good-sized pension. In addition to what you had stated, between the IRAs, the life insurance, you get that, I mean, the mortgage could be paid off if that was the choice at some point in time, or there's quite a bit of equity in the house and there's equity in that land.
Pat: And that ignores, you said you own property overseas as well, correct?
George: Yeah, that's probably only worth $50,000. She could go live there.
Scott: Two things. One is, like, if something happened to you today, yes, she would be fine financially. If she went and talked to a financial advisor, they would say, "Look, you're going to be fine financially." The second thing is, from a realistic standpoint, there's not a lot of other planning we can do unless you said, "I want to have a lesser lifestyle today to ensure that my wife is better off when I'm gone." Other than that, she's fine.
George: Yeah.
Pat: Perfectly fine. Yeah, more than fine.
Scott: I think you're good. I wouldn't worry.
Pat: Do you have children from this marriage?
George: Oh, yeah. We got two teenagers. One's getting set to go to college pretty quick, and the other one will probably go to college too. One's a senior in high school, the other's a sophomore.
Pat: And are you working now?
George: No, I haven't worked since 2023.
Pat: All right. How is that, I mean, being home with those two teenagers?
Scott: Not a normal retirement.
George: Well, they're gone. They're teenagers. And then we moved to Colorado to get around.
Scott: How old are they? You haven't collected Social Security yet, right?
George: No, I'm debating.
Pat: Oh, you want to. You want to start it right now.
Scott: Your kids could be collecting it.
George: Why?
Pat: Because your kids, you get it for the benefit of the kids.
George: They don't get anything.
Pat: Oh, they certainly do.
Scott: If you're over age 60, collecting, 62 collecting benefits, if you are collecting Social Security benefits and you have dependent children, they get benefits.
George: What?
Pat: Yes. Yes. Aren't you glad you called?
Scott: That's what we came at the very end of the call.
George: I always learn something from you guys.
Pat: You want to start it tomorrow.
George: Well, the youngest one...
Pat: Can you still back? I don't think they'll back pay it, but you start it tomorrow. It doesn't matter as long as they're under age 18.
Scott: How old are they?
George: One's 15. She turned 15 in February. The other one is 17.
Pat: Go, go!
Scott: Isn't there some additional benefit if they go to college too?
Pat: I don't know the answer to that. I don't know the answer to that. Hang up this phone, get in your car, drive down to the Social Security Administration, apply for today.
George: Well, last time they almost wanted to put me in jail. Well, they didn't say that.
Pat: Well, that's a different story altogether.
Scott: I don't know if we want to go there.
Pat: You're going to have to call another radio show to discuss that.
George: Let me ask you something. I thought you only get Social Security for your kids if like you die like this.
Scott: No. If you're on retirement benefits and you have minor children, minor dependents...
Pat: Like we've had, we've encouraged people to adopt grandkids.
Scott: Yes, because it's kind of rare being in your 60s with teenagers. But there are people that are taking care of their grandkids and we show them the numbers. Like, if you adopt them and now they're your children, not just someone, a grandkid, then you can start receiving Social Security benefits as long as they're on receiving Social Security.
Pat: That's right. You want Social Security right now. Right now.
Scott: Yeah. Now.
George: That's something I didn't know.
Pat: Well, that's why you call.
Scott: Appreciate the call, George. And by the way, if you're listening and thinking, why are these, from a taxpayer standpoint, I certainly don't like the concept, but the reality is we all navigate whatever Congress, the game they play, they set up for us. We go to play Monopoly with my kids, these are the rules. Whether we like the rules, not the rules, we all, these are the rules. Can we swap houses to get a hotel? All that kind of garbage. Congress sets up the rules. It's our opportunity to navigate the rules.
Pat: Let me ask you a question. When you're swapping a hotel or a house for a hotel...
Scott: I have not played in a decade.
Pat: With Monopoly, do you explain to your kids how the 1031 exchange works?
Scott: Actually, I take the house when they're not looking.
Pat: I tell you what, Scott, I grew up in a family of five kids, four boys. There was never a Monopoly game that didn't end up in a fistfight. Never. And we played it.
Scott: A fistfight.
Pat: A fistfight. I mean, not a fight, not an argument.
Scott: Beat the crap out of my brother. Why? Because he landed in Park Place again?
Pat: You're starting to win. You're kind of rubbing it in their face a little bit. You're pushing it. Next thing you know, the board's in the air. Fists are flying.
Scott: Where are you in the relation to the other boys?
Pat: I was third.
Scott: Oh, right in the middle then.
Pat: Yeah, yeah. And then Doug Malo, the kid down the street, holy smokes.
Scott: All right.
Pat: What do you mean all right?
Scott: We're going to move on.
Pat: Okay. A little therapy here for me.
Scott: I think it'll take a little more than that. Let's talk now with Alicia in Colorado. Hi, Alicia. You're with Allworth's Money Matters.
Alicia: Hi. Thank you and good morning.
Scott: Good morning.
Alicia: So, just to give you a background. I'm a 62-year-old federal employee. I'll be retiring in four months. I have, I think, a lot of things in order. I have a trust set up. I have lifetime long-term care. And I have lifetime medical through the federal government. I have 1.4 million in my TSP. My question is, and I get rental income, that basically covers my mortgages. And my investment property brings in enough money to cover expenses and mortgages. I refinance to take out money out of my investment property for cost runs for remodel of my primary home. My money, I'm planning to leave to family members and a significant amount to charity.
My question is, should I start taking... Well, I was told by someone about Social Security optimization. And they suggested that I start taking Social Security at age 62 and then turn it off at 67 and take money out of my TSP, if necessary. Then they said I should restart Social Security at age 70 to "maximize Social Security." And I really don't understand how that's going to work because it seems like if I take Social Security for those years and start it early, it's still going to reduce the dollar amount.
Scott: It will.
Alicia: And the benefit that I receive at age 70.
Scott: It will.
Alicia: But if I did take Social Security, and also, I wouldn't take it until 63 at this point. If I did take Social Security at this point, what I'd do is use that money to pay off the mortgage on my investment property early, which is at a 7% interest.
Pat: Okay. Well, yeah, let's step back for a second here. What is the value of your primary residence?
Alicia: I'd say at this point, it's a million.
Pat: And what do you owe on it?
Alicia: I owe 360, 370 maybe. I haven't looked at it in a while.
Pat: And what's the interest rate?
Alicia: It's 2.875.
Pat: Okay. And you have one investment property or multiple investment properties?
Alicia: Well, I rent out...my house is set up as a duplex. So I rent out my basement. And so I bring in, let's see, that brings in 27k per year.
Pat: Okay. And then your investment property.
Alicia: Okay. The mortgage is 1,736 per month, including property taxes and insurance. And it brings in. 27,960, I think.
Pat: That's okay. That's close enough. That's okay.
Alicia: Okay.
Pat: And what's the value of the property?
Alicia: It's worth, I'd say, between 500 and 550.
Pat: And what did you pay for it?
Alicia: I paid 79,000.
Pat: Okay. And what do you owe on it now?
Alicia: I owe $157,125, but I've been paying extra principal since I, well, even when I had the HELOC because it had gone to 10% and it was interest-only.
Pat: Okay. And it's not a HELOC now. It's a fixed rate.
Alicia: No, no. Now it is a 30-year.
Pat: A 30-year fixed. Okay.
Alicia: But I brought that down by paying extra. I'm about 10 years ahead.
Pat: Okay. And what money do you have in the bank?
Alicia: I have 43,000 in emergency fund.
Scott: And are you 100% confident you're not going to work after you retire?
Alicia: Except for things that I lose money on. I'm kind of dealing in antiques and I've made money one year.
Scott: Okay. Is that where you want to spend your time though?
Alicia: No, actually, I want to spend my time traveling and volunteering.
Pat: And how much will your monthly pension be?
Alicia: It's going to be, it's weird because I've had estimates. It seems to be, it's going to be between 40,000 and 45,000.
Pat: How much do you earn at your job now?
Alicia: Right now I just got a bump in pay. So I earn 145,000, but I started at around 30,000.
Scott: What was your pay last year before the bump? I'm trying to understand what you've been living off of.
Alicia: One hundred and forty-one.
Pat: Ah, so this is interesting. I could, I'm running this thing through my head. So the first thing I would look at is...
Scott: And how many kids do you have?
Alicia: None.
Pat: Oh, no children? And you're not married?
Alicia: No, I'm not married, no kids. Basically my money will go to my nephew. But a lot of it, most of it is going to go to charity. I'll see that he's taken care of, you know, as far as paid-off mortgage.
Pat: Obviously when you do that, you name the beneficiary, the IRAs, or the Thrift Savings Fund.
Scott: What about a charitable remainder trust with that rental house?
Alicia: I'm sorry?
Scott: I'm talking to Pat here. I'm thinking about... I mean, because you've got one concept is you take that rental house and you structure it in a charitable vehicle where it transfers to the charity, the charity sells it, avoids the capital gain. You receive an income.
Alicia: Everything is in the trust.
Pat: I understand that. Now we're talking about something completely different. It's a charitable remainder trust and it's a tax.
Scott: And there's different flavors of that.
Pat: Yeah, and you sound charitable. The problem is, Scott, it's 400 grand, would be this. And what did you say you paid for it?
Scott: Nothing.
Alicia: Seventy-nine thousand.
Pat: Yeah, I wouldn't. The cost of administrating a charitable remainder trust over the next few years relative to the tax savings?
Scott: I don't know. And depending on how deep she is with some non-profit she is, they could structure it all and take care of all the costs. There's no cost at all and she suddenly gets a check every month and doesn't have to think about it.
Alicia: Now, why would I get a check every month?
Pat: Because of how these charitable remainder trusts are actually structured.
Alicia: Okay, I'm not familiar with those.
Scott: I mean, you have $400,000 of equity there. You could receive an income stream for the rest of your life. It's going to be greater than what you have now and you don't have to think about it.
Pat: That's right. Because you're only making $1,000...
Scott: I mean, to your point, it's $400,000, not $4 million. And oftentimes these are strategies used with larger estates. But given your situation, got a nice pension, you're going to have Social Security, you got a million and a half bucks in your 401(k), TSP. So you're asking, I wouldn't take Social Security right away. You've got some other kind of planning, I think. You've got some other strategies to consider. I don't like the 7% mortgage on the rental.
Pat: I hate it. I absolutely hate it. I would look at actually taking money out of the Thrift Savings Plan and using that money in the bank immediately to pay that down. And you say, "Well, I want the money in the bank for emergencies." You could get at the Thrift Savings Plan as fast as you'd get the money at a bank. It's just a taxable event.
Scott: It's a taxable event. You've got to be careful of that.
Pat: So the 7% is what bothers me. And I would look at, I would actually, Scott, I would say, why wouldn't you start Social Security? Why wouldn't you drain out some of that Thrift Savings Plan in one tax year and start Social Security in the next in order to get rid of this mortgage? It's the 7% that crushes me.
Scott: Is it an easy property?
Alicia: I would say I would pay about $60,000 at the beginning of next year and using a significant amount of that to also, I was thinking of paying down the mortgage since I won't need all that money.
Pat: I kind of, I would explore the charitable remainder trust that Scott mentioned. It never even crossed my mind, but it never even, because of the size of it...
Scott: You could take that rental.
Pat: So explain what a charitable remainder trust is and how they actually work.
Scott: And there's different flavors of them.
Pat: Lots of different flavors.
Scott: Yeah. You take, typically it's a property that is, or an asset that has a lot of gain in it that someone would like to dispose of. They don't want to pay the gain. Number one. Number two, they are highly charitably motivated. It doesn't work if you're not highly charitably motivated.
Pat: And it probably is, right? Because your yield on this for the amount of equity that you're actually in this house is, it's what?
Scott: By the time you have a repair or two, there's not a lot left.
Pat: Two percent.
Scott: There's not a lot left. And so it's transferred to a charity. You receive a tax deduction, not of the full value because it's calculated. The charity actually doesn't get the proceeds until either at your death or at a period of time. You could structure it for eight years and defer your Social Security. Just throwing things out, different planning ideas out. But with that, the charity then sells the property. They pay no capital gains because they're a nonprofit. And in exchange, they give you an income stream, a monthly income stream, either for the remainder of your life, charitable remainder trust, or for a period of time. There's different ways to structure things. And so there's a lot of planning techniques. Your Social Security is one of them. And every once in a while you hear us talk about like the benefit of doing a really a true financial plan with a true financial advisor running through all these different scenarios. I think it's something for you to consider.
Pat: And, by the way, many times a financial advisor will recommend life insurance to actually replace...
Scott: You don't need that.
Pat: You don't need that. That's why it actually makes the most sense is because you're going to leave this to charity anyway. And what you're worried about is cash flow and tax implications. I think the charitable remainder trust...
Scott: You're a single woman, relatively young at retirement, got a great pension. You're going to have Social Security as well. You got money saved in your retirement. The only thing we don't like in your portfolio is this rental with this high interest. You got a lot of equity that you're not getting any income. And now is the time in your life for income.
Alicia: So do you have to have a char...? If to set up a charitable remainder trust, do you have to pick the specific charity?
Pat: Yes. Yes.
Scott: There's pros and cons to them.
Alicia: What about a donor-advised fund?
Pat: Oh, a donor-advised fund? Well, the donor-advised fund, you're not going to get any income and you need income.
Scott: You give it all away.
Pat: You give it all away. So a donor-advised fund would make sense here if...
Scott: If you keep on transferring property, donor-advised funds, they can work great.
Pat: You need income.
Scott: Yeah.
Alicia: Okay.
Scott: We're not stating give away this property today.
Pat: That's right. We were saying, is there a way...
Scott: There's a way to get rid of the mortgage and have more income off the 400 grand of equity you have in this house.
Pat: And if you didn't do that, it may make sense to sell the property.
Scott: There's a lot of different planning things to look at.
Pat: It may make sense to take money out of the Thrift Savings Plan and pay it down. But even then, the yield...
Scott: Even if you did an exchange to a lesser property, the boots taxable, you'd have some taxable implications there, but not on the entire thing. There's some ways. There's a lot of different planning techniques that I think Social Security is the last, at least, of your planning opportunities.
Pat: Yes, correct. I would explore the CRT. Thank you, Scott.
Scott: Yeah. And they're not used that common.
Pat: They're not that common.
Scott: Given what you've, I don't know you that well. We don't know you that well. But given what you've said thus far, it could be a pretty interesting solution for you. So anyway, really glad you called and hope you enjoy retirement. Yeah, and engage with a good financial advisor to run through some of these scenarios with you. Yeah, and we want to have a, we just thought with the elections and whatnot, we would have a guest on our program, Victoria Bogner. And Victoria is our...
Pat: Director of Client Experience.
Scott: Director of Client Experience. And she's also, she's our Financial Analyst.
Pat: She's much more than our Director of Client. She interacts with the advisors and the clients in order to make the interface as enjoyable and as efficient as possible.
Scott: Yeah, and frankly, and before we have her on, she joined us through a merger with one of her firms where she was the CEO and their Chief Investment Officer.
Pat: And a practicing advisor.
Scott: And her first assignment at Allworth is connecting, making sure we got awesome client service, awesome advisor experience, and the whole kind of connectivity between them. That's kind of her focus. And because she's highly analytical, smart, good communicator, she's been perfect for the job at that. And so, Victoria, thank you for taking some time to join us.
Victoria: Yeah, it's great to be back.
Scott: And we're going to talk. We're on because...
Pat: Well, I said before we dug into this, Scott, I said this, we're going to talk a little bit about what's going on in the Trump, what to expect. And I said, this is just, look, I go and read the reviews from our show where people rate them. Have you ever, you know, read the reviews? If we mention Democrat or Republican, all kinds of negative stuff comes out in these reviews. Like, "Oh, I can see through you. We know whose side you're on," this kind of garbage. Go ahead, write the review. I don't, I shouldn't say I don't care because I do care.
Scott: Also, I know with Allworth, as we've led the company over the years, it was always, we are apolitical. Money's not red. Money's not blue. Money's green.
Pat: That's right.
Scott: And that's what our political focus has been. Anytime we're dealing with clients, it's not... And the reality is, like, I've got, we've got clients. We all have our own values.
Pat: That's right.
Scott: And I have clients that their values don't quite line up with mine and that's fine.
Pat: I have children.
Scott: But I also highly value servicing, serving them very well. And I have a fiduciary obligation to do what's in their best interest.
Pat: That's right. Their best interest. Look, tax law drives a lot of investment decisions. And most certainly, financial planning because you have to view financial planning through a prism of tax.
Scott: Of course.
Pat: You have to. You don't have any choice. So, we asked...
Scott: That's why we talked about HSAs at the beginning.
Pat: That's right.
Scott: I would not use it if it wasn't for the tax benefits.
Pat: That's right. Right? The investment is the investment. It's the vehicle.
Scott: Yeah, it's the same investment I could own anywhere.
Pat: That's right. So, we asked Victoria to come on today to talk a little bit about what we can kind of anticipate from this new administration.
Victoria: I can tell you exactly what the next four years are going to look like.
Scott: Perfect.
Victoria: Just kidding. Okay. Well, first of all, I think before this election was finalized, a lot of questions were around and tax cuts and Jobs Act of 2017, commonly known as the Trump tax cuts, because they were pretty significant. And a lot of those are set to expire at the end of 2025. But now that Trump is back in office, the GOP controls or will likely control both legislative branches, it's very possible that we'll see efforts to either extend those cuts or even make them permanent. But of course, Washington permanent doesn't mean forever. It just means until the next administration takes charge of it. But even if these tax cuts are extended, as you say, there's so little we can control. Right? We can't control inflation. We can't control the stock market. But we can control to a certain extent the taxes we pay. It is a lever that we can pull. And this is something that you should start thinking about in your 40s and 50s. Don't wait till you're 65 and say, "I want to retire. Now, how do I manipulate my assets so I'm not paying so much in tax?" You're setting yourself up for much greater success later if you're thinking about this in your 40s and 50s with a good financial planner so that you can adjust as laws and situations change. But especially if you're a high-income earner, tax planning should be your top priority.
Pat: Right? You should have a diversified tax strategy very similar to a diversified portfolio. Right?
Victoria: Exactly.
Pat: Which means some of the money is in pre-tax. Some is in post-tax. Some of it is in Roth. Some of it is a depreciable asset maybe. So what do we expect? Do we think that they'll be, you know, they will continue with this? Do you think there's going to be more tax cuts?
Victoria: There could potentially be even more tax cuts, tax advantages. But also the flip side of this is tariffs, trade disputes, right? Because we have the taxes that if they get extended, in large part, that will be good economically. That increases consumer spending. It will increase GDP. But on the flip side of that, if we have tariffs, trade disputes, then that is going to put a dampener on GDP. That's going to raise prices. It's going to raise inflation. So there are two sides to the coin here of how you manage your assets and your tax liability. It's not just about what is happening in the tax picture situation, but it's also what's happening in other policies and legislations, which we have an amazing investment committee that pays attention to all of that. But you need to look at the whole picture.
Scott: Yeah, and even with these trade... I've always been a free market guy from when I was in high school. Even my paper route essentially was free market. I believe that we need some sort of rules that we agree to abide by the rules and then let's let the market decide.
Pat: Well, kind of. I'm kind of that way, but I don't think that strategic assets in the U.S. should be owned by foreign corporations.
Scott: Okay, that's an easy one. Yeah. Okay. Strategic assets. But even the whole trade imbalance, the trade deficits and the tariffs, I mean, I'm curious about your perspective because there's different perspectives here and some say this is just going to cause inflation, it's going to raise prices for everybody, it's going to slow the economy down. Kind of what's your take?
Victoria: Well, here's my opinion, and I have read many different economists' takes on this. But at the end of the day, tariffs can be used as a tool to be able to negotiate trade agreements. Similar to what happened in 2018, 2019. And what's so interesting about this is back then, this was what everybody was talking about. And I bet if I asked you what happened with trade tariffs in 2018, very few people could tell me, but that's all anybody cared about. But what Trump did is he threatened tariffs of about 25% on billions of dollars' worth of Chinese goods. And many of those tariffs did go through. And then if you remember, China retaliated by putting tariffs on our agriculture and our soybeans, and then we had to subsidize farmers because they were impacted. And overall, it was a drag on GDP. It was negative. It did lead to phase one of our trade agreement with China, which by the way, just objectively speaking, COVID happened. And so that trade agreement pretty much went to the wayside because everybody was just dealing with their own COVID mess. Long story short, tariffs usually are not a good idea. You want as much free trade as possible because tariffs, there's a misconception. It is actually the buyer of the goods who's paying the tariff, right? So if we're charging 60% tariffs on Chinese imports, China isn't paying that.
Scott: That's right, the consumer. Yes.
Victoria: The American company is paying that. Or it's pushing that on to the consumer.
Pat: Or it's pushing the price of a particular product, whether it comes from China or not.
Victoria: Yes, exactly. So the issue is then that that does increase prices. It decreases competition. That passes on to the consumer. It increases inflation. And then that increases interest rates because the Fed needs to get that under control. And so it's usually a negative spiral. You want as much free trade as possible.
Pat: But I don't think he's going to... I think it's going to be the same story as last time. He's going to threaten, threaten, threaten, and then come to the table and negotiate.
Victoria: There's no way we can have 100% tariffs or 60% tariffs on anything. That's a no-go. That would be weird.
Scott: Are you saying Trump might have exaggerated a statement about something?
Victoria: You know, I know he's not known for that, but...
Scott: Let's talk about interest rates for a bit because the bond market, particularly the day following the election, the stock market skyrocketed high and bond market had a pretty significant sell-off on the longer-term bonds. So what's transpired with interest rates and what can we expect maybe over the next several months?
Victoria: That was interesting because right after Trump won the election, interest rates dropped. So as interest rates go down, that means bond prices go up. They're inversely related. But that's starting to level out now because investors are processing what these potential policy changes could mean. The biggest concern being inflation. So if Trump extends the 2017 tax cuts, that's good. It'll increase spending. It'll boost GDP in the short term. Of course, that will rack up more of our debt. But if this is met with higher tariffs, companies could see higher production costs. They're going to pass that on to consumers. It's going to lead to more inflation. And something that investors need to realize is that, as of now, the Federal Reserve is an independent part of this equation. So Trump doesn't control interest rates. It's the Federal Reserve that does. And one of their mandates is to keep inflation under control. So if inflation starts to get out of control, one of the levers that the Fed will likely pull is to start to increase rates again. So it's important for investors to then keep those factors in mind because shorter-duration bonds could help with that interest rate risk. But bonds still play an important role in keeping things stable. So important that if you have a financial planner, and I hope you do, that this is something that they're keeping a pulse on and paying attention to in your portfolio.
Pat: And so basically not reach for the long bonds, stay a little bit shorter on the bond, and you're not giving up much yield, if any at all.
Victoria: Right now, the yield curve is pretty flat. I mean, when you go far out on the long end, you're not making enough of a heightened return to lock your money up in those longer durations. So yeah, makes sense to stick to more intermediate and short term for now.
Scott: And with respect to Social Security and Medicare, you're not clairvoyant, but we all know that eventually, and it's getting closer to the point where Congress is going to have to do something, right? Are you expecting anything to come of the Trump White House in this area?
Victoria: Well, Trump has said he wants to protect these programs. But as you say, with increasing budget pressures, we might start to see some talk about raising eligibility ages or adjusting benefits. They might raise the retirement age, they might tweak the cost of living adjustments. That's the kind of change that we would see.
Pat: And, Vicki, we've seen it in parts of Europe, have we not?
Victoria: That's right. And those are easy levers to pull, but any major reform is going to take time. So the best thing to do is to plan based on what we know, but be ready to adapt if things do change. And for younger workers, personally, when I run plans for clients under 50, I just assume a 25% reduction in Social Security benefits just to see how their plan holds up. Because I think that is a realistic worst-case scenario. When we look at Social Security, if it was cut by 25%, it would actually be fully funded as of right now. So I think that's a realistic worst-case scenario.
Scott: That's what statutory will occur in 10 years if nothing is done, right?
Victoria: That's right. Yeah. And Medicare is a whole other story. I mean, that is going to be the bigger issue and the bigger problem because it is much more underfunded than Social Security. It's a big problem.
Scott: Well, it will be interesting to see with RFK, Jr. and what he actually does in that area. But when we've got roughly 20% of our economy is in health care, right?
Victoria: That's right.
Pat: It's a big number.
Scott: It is a massive piece of our economy.
Pat: It's a big number. It's a big number.
Scott: Well, thanks for taking a little time to join us, Vicki.
Victoria: Absolutely. Thank you.
Pat: As always, thanks for being part of the team and your wisdom is always appreciated.
Scott: Yeah, we like Vicki.
Pat: Yes. She's smart.
Scott: I like Vicki or Victoria, both.
Pat: Yes, super smart. She's smart. This RFK thing, quite frankly, Scott, this food pyramid, they need to get rid of that. They need to quit subsidizing corn.
Scott: Yeah, all those. Okay. Yeah, just flat out. There's lots of things that need to happen, but the government is doing them. Good point. We're not going to... I don't want to talk about policy stuff, government policy anymore. It's like... Anyway, I think we're...
Pat: We're done.
Scott: I think we're about done. Anyway, it's been great being here with you. I believe next week, Thanksgiving's coming up. Hope everyone has a great Thanksgiving. We'll be taking the week off and have a best of for you next week. If you've liked this program, please go ahead and rate it. Write us a review and send it to a friend as well. 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.
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