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-WORTH.

Scott: Hey, everyone, this is Scott Hanson with Allworth's Money Matters. You're hearing one of our best of shows on this Thanksgiving weekend. I hope everyone's having a fantastic Thanksgiving weekend. But Pat and I did want to offer our best wishes to you and your family. And if you think this podcast is good, share it with someone who you think could also benefit from the advice here. And when you're finished listening, please give us a review. We always appreciate it. Enjoy the rest of your weekend.

Welcome to Allworth's Money Matters, Scott Hanson,

Pat: Pat McClain.

Scott: Glad you're taking part in the program today. Myself, my co-host, both financial advisors, certified financial planner, charter financial consultant, and we work with people.

Pat: Long-time advisors. We work with people just like yourself.

Scott: We've seen almost everything. Every once in a while, someone calls with a situation that we've yet to encounter. But it's pretty rare.

Pat: Yeah, I've seen a lot.

Scott: Yeah, we've seen a lot on all sides.

Pat: Both good and bad. Both good and bad.

Scott: You know, money's a funny thing, Pat. Sometimes people with...they get additional dollars, it's highly beneficial to them for a lot of reasons.

Pat: Yes.

Scott: Others, it's completely detrimental.

Pat: Well, I think money makes people more of what they already are...can make more people more of what they already are.

Scott: If you're a generous person, you have more money, you'll probably be more generous with your finances. If you're greedy, you'll probably even be more greedy.

Pat: If you're a jerk, you're just a jerk at nicer places. But probably a bigger jerk because you think you're something special...

Scott: Well, maybe.

Pat: ... because you have a couple bucks now. Yeah, well. It's funny.

Scott: And then when people inherit money, they do weird things too.

Pat: They do. They do. They do. I talked to a young man this last week. He's 19, college, father passed away. He inherited some money. I appreciated what he said. He said, "You know, there's not a lot of income in the family, so I've been trying to qualify for federal aid, but because of this inheritance, I can't qualify." So that's the way it works.

Scott: Was inheritance enough to like set him up for life?

Pat: No, no, no, no. It wasn't even that much. Yeah, it's just enough to actually pay for his college. Like that's how it works. So it works.

Scott: So he's gonna have to use his inheritance to go to college.

Pat: So what? It's good for them.

Scott: Well, it's better than blowing it on something else, right?

Pat: That's right.

Scott: Yeah, I remember a client. They inherited some money and their kid was like 16. I forget though, his allowance was like 1500 bucks a month or something like that, in high school. This was many years ago. And I'm like, what? That's not good. No, I said he must be one of the most popular kids. Oh yeah. He's the one who's got all the money and he got some special motor for his Mustang and all this stuff. And I'm thinking, "This isn't good. This is not good."

Pat: Not good for the kids.

Scott: Anyway, I don't know why I started there, but I did. Well, but instead let's take calls, questions@moneymatters.com. If you've got something you'd like us to discuss on the program, questions@moneymatters.com, or you can call us 833-99-WORTH is our number. We're gonna start off here with Pat. Pat, you're with All Worth's Money Matters.

Pat (Caller): Hey, good afternoon, Pat and Scott. How are you today?

Scott: Actually, really good day.

Pat: I'm well, thank you.

Scott: Can we help?

Scott: Okay

Pat (Caller): Yeah, yeah, yeah. But first, thanks for the show. I've been listening for seven, eight years now and really enjoy it. I find it very educational and also entertaining.

Scott and Pat: Well, thank you.

Pat: I appreciate that.

Scott: It's one of our favorite hours of the week, I gotta say, work-wise.

Pat (Caller): So I'm currently faced with a pension buyout decision that I hope you guys can help me with.

Pat: Okay?

Pat (Caller): So here's all the relevant information surrounding that decision. I'm currently 58, single, no kids. I'm in relatively good health, but I was adopted, so my biological family longevity is unknown to me. I do have a couple chronic conditions that are well managed and my doctors assure me that I should expect a normal life expectancy. So, I separated service in 2012 from this former employer. And ever since then, my plan has been to wait until age 65 to begin receiving the monthly payout or monthly pension payments of $3,541 per month. That's single life only payout. And they've just recently given me an offer to buy out that pension of $341,000.

Pat: And that was at age 65 was $3,541. Right. And you're 58 now. And then the lump sum was how much?

Scott: 341.

Pat: And did they give you a number of you were to take the pension today?

Pat (Caller): Yep.

Pat: And what was that?

Pat (Caller): And that's $1741.

Pat: Okay.

Pat (Caller): So I'm beyond, I'm currently beyond the earliest benefit commencement date. And that number is no different than if I take this offer off the table. If I had called them up today and said, I want to start my pension, it would have been $1,741.

Pat: Got it.

Scott: So basically they come out and stated, "We're gonna give you an option to take a lump sum." They wanna get you off the books.

Pat (Caller): That's right.

Scott: Yeah, because they take the investment risk and if it doesn't work out, they eat it and you haven't even been around 11 years.

Pat: And tell us about the rest of your situation.

Pat (Caller): Yeah. So currently my investments total just about $1.4 million. And that's 1.1 in a traditional 401(k) or just under 1.1. I'm just giving around numbers. And then I have a Roth 401(k) and a Roth IRA and the Roth money totals $260,000.

Pat: Okay.

Pat (Caller): And I have $60,000 in a brokerage account. And that's the $1.4 million that's invested, and I have about $80,000 cash.

Pat: And by the way, excellent job by giving us all the relevant information without us asking a single question. I suspect that you've heard people call this show before and ask this question.

Pat (Caller): Yes, yes, I have. In fact, just last weekend's show had the same question come up by a 70-year-old man. So

Pat: The home, is it paid for?

Pat (Caller): It is not. I currently owe $162,000 and its value is somewhere between $1.4 and $1.5 million.

Pat: And what's the interest rate?

Pat (Caller): 4%.

Pat: I almost didn't ask the question because I assumed it was low.

Pat (Caller): Yeah, right, right. I didn't take advantage of the low interest rates we had a couple years ago. I didn't get on that train.

Scott: Yeah, it's better than having a 6.5% current one.

Pat (Caller): Yeah, that's right. That's what it is today.

Pat: How is your 401(k) managed now? What percentage is in equities and what percentage is in bonds?

Pat (Caller): Yep, yep. So if you take all my investable assets, I'm currently invested 65% equity, 30% bonds and 5% cash. And over the course of the last six, seven years, I've been parrying back that equity exposure as I'm approaching retirement. And my plan has been that I would retire at 62 and live off my 401(k) assets for three years and then at 65, start drawing social security and the pension.

Pat: What's your income today?

Pat (Caller): It varies between 170 and 180 depending on the annual bonus.

Pat: Okay, and just speculate if you will for a minute. With your portfolio at 60% stock and 40% bonds and cash, what do you think the long-term rate of return will be over that of the rate of inflation? 5%, 6%, 7%?

Scott: Over inflation? 3%, 2%?

Pat (Caller): Yeah, over inflation, maybe 3%.

Scott: Yeah.

Pat: Okay. I'm just trying to get a feel on expectations.

Pat (Caller): Right, right, right. And I think, you know, over the course of the last 10 years, we've experienced outsized gains in the market.

Pat: And you have no kids, right?

Pat (Caller): No kids.

Pat: And so if you were to die today, where would these assets go?

Pat (Caller): Right. So it would go to my mother and my sister. And, you know, the 1.4 that I currently have should be plenty. It's not like they would be going, "Oh, if only he took that $341,000."

Scott: So there's two ways to calculate this. First of all, is to figure out what kind of interest rate would you need to earn to have a net present value of $1,741 a month for the rest of your normal life expectancy.

Pat: So like if I took this $341,000 and I put it in the bank and I looked at your normal life expectancy and said, "Okay, I'm gonna dole out $1,741 a month. What kind of rate of return do I need so that on your dying day, based on a normal life expectancy, the account is zero at that dying day?"

Pat (Caller): 5%.

Pat: Thank you. It's right around there. What kind of rate of return...

Scott: And then the second thing you look at is the hurdle rate. The hurdle rate. If you had the lump sum, what kind of rate would you need to earn in order to maintain that principle and have that same distribution?

Pat: And what was the number you came up with, Pat?

Pat (Caller): Between five and six.

Pat: Yeah, 6.12%.

Pat (Caller): Yeah, it seems like a very fair offer. You know, I used several online calculators. I did an Excel spreadsheet.

Scott: Have you looked to see what a commercial annuity would provide? In other words, if you went to an insurance company and said, "Here's $341,000, what would you give me in a single life annuity?" Because I have a feeling that the lump sum's a good deal right now with where the interest rate environment is.

Pat: Yeah, I. Yes. All right, I would take this. And I didn't think about a commercial annuity, Scott. Why do you... You're making comparison to comparison.

Scott: Well, because if he... You'd be a fool, like if you... If you can take $341,000 lump sum and buy a commercial annuity and get $1,900 a month instead of $1,741, you'd be a fool to take the monthly pension.

Pat: That's right.

Scott: So there are times when you are a fool to take a monthly pension if you can get something greater with no additional risk.

Pat: In the open market. So you would go online and there'll be a bunch of calculators there and you can go to a no-fee life annuity.

Scott: I remember there was a time when we had clients that we could take a lump sum and buy U.S. government bonds and have a higher rate. Anyone who took a monthly pension at that period of time, they were ignorant or foolish. One of the two.

Pat: Okay, so that is an alternative. My guess is that a commercial annuity would actually provide a higher income.

Scott: I think so, which would lead me to believe then if that's the case then taking the monthly pension you'd have to have...if you like it so much, why don't you take more of your lifetime savings and buy more of that.

Pat: I don't think that's the answer. What would you do in this situation?

Scott: I would take the lump sum and I'd roll it into an IRA.

Pat: I would too.

Scott: And I'd manage it just like the rest of the portfolio.

Pat: I would too.

Pat (Caller): Okay, that's interesting. I hadn't thought about checking out a commercial annuity.

Scott: I'm not saying that. I'm not recommending that you should, because I think our recommendation should be, in your situation, given your savings, given your sophistication with your knowledge of financial markets, the way you've structured your portfolio, you know exactly what's going on, I have a high degree of confidence that you will manage these dollars well, and I think you've got a greater chance of a better outcome by taking the lump sum. Had this call gone differently, and you're like, "Well, I'm not sure how my 401(k) is invested, it's in something called growth, something growth?"

Pat: We would probably have a tendency to steer you more in the...

Scott: Yes, because we've seen people who don't know what they're doing, take a lump sum and do foolish things with it and destroy their capital.

Pat: So the answer to your question is based upon those numbers, take the lump sum, roll it into the IRA and just play it like you were normally if you were going to retire in three years, retire in three years. It's just another form of income.

Pat (Caller): Okay. Two thoughts come to mind. One, you know, the commercial annuity avenue. Obviously, I wouldn't do that. But, you know, in my mind, it's not an apples-to-apples on the risk comparison because, you know, if I would be subject to the claims-paying ability of the commercial life insurance...

Pat: That's right. That's right.

Pat (Caller): ...company as opposed to the PBGC taking over for my company.

Pat: That's right, that's right. That's right.

Scott: But there are limits on your PBGC based upon your age at retirement and the pension.

Pat (Caller): Yep. And I've looked at that and the 2023 values, you know, this pension is under that. It's under that. So I don't think there would be any reduction.

Scott: Yeah, but we're not saying that. There's insurance pools that protect insurance annuitants that came out after Executive Life blew up 40 years ago.

Pat: So you would take that. What was the other question for us?

Scott: But I'm not recommending that you take money and go buy the commercial annuity.

Pat (Caller): Right, understand, understand. So, as I mentioned, I've been parrying back my equity exposure over the years. And up until last year, I was heading towards a goal of 50-50. And again, currently, I'm at 65, 30, and 5. I paused that partly based on things I've learned from listening to your show is that you need to consider your Social Security and your pension as a fixed income portion of your portfolio.

Pat: That's correct.

Pat (Caller): And that resonated with me. And I'm going, huh, well maybe 50-50 is too conservative given the pension and the social security. Maybe I should rethink that and target a 70-30 for the rest of my life.

Pat: Well, but the pension's off the table now.

Pat (Caller): But if I take that... And that's right and that's where I was going with this question is, if I take that pension, what would you guys...

Pat: 60-40

Pat (Caller): 60-40?

Pat: 60-40. Look, look, you're sophisticated enough. You've lived around a long time. You've been through these markets up and down.

Scott: The key really is to make sure you've got enough money outside of the equities markets to provide whatever retirement income you're going to need for five-plus years. That's the key. Right. And whatever that number is, is that number. So 60-40 is going to get you there and then some. Okay.

Pat: I think so too.

Scott: It will get you there and then some. I think that you actually have a great understanding of this. Thank you for actually crediting our show for some of that understanding, but I doubt that's 100% true.

Pat: You would have gotten it somewhere else.

Scott: You would have gotten it somewhere else, probably from nicer people.

Pat (Caller): But not as funny.

Scott: Yeah, you're fine. You're absolutely fine. You've done a great job. Take the lump sum, roll it into an IRA and let her rip.

Pat (Caller): Okay, well thanks for your advice guys. All right, appreciate it. Thanks. Okay, bye-bye.

Scott: All right, appreciate it, Pat.

Pat: Bye, Pat. Thanks.

Pat (Caller): Bye-bye.

Pat: That's refreshing. And very good understanding of his finances.

Scott: The people who need this the most are not listening.

Pat: They're not.

Scott: Listening to our show, no way. And they said, "Man, I wish I could be like that guy."

Pat: You're like, okay. Well, then start acting like that guy.

Scott: Let's continue on here. We're in Missouri talking with Keith. Keith, you're with Allworth's Money Matters

Keith: Yes, good afternoon. How are you?

Scott: Fantastic.

Keith: I have one question that may be unanswerable, but it is, can I afford to self-fund my long-term care?

Pat: Well, let's figure it out.

Scott: And the second question, can you afford to buy long-term care insurance?

Keith: I possibly could. I would prefer not to if I felt safe.

Scott: I mean, that market is just a...long-term care insurance market is a disaster. It's there's roughly 10% of the premiums being paid today...policies being, excuse me, policies issued today than 20-some years ago. Like, it used to be...

Pat: Well, there's no one underwriting them, or very few.

Scott: Not many insurance carriers want to be in the business anymore, and they've jacked up the premiums to the point where people look at it like, "Whoa!"

Pat: So tell us about your situation.

Keith: Well, I have approximately $2 million total assets. About half of that is in IRA. The rest is in taxable investments and also my home equity. The house is paid off.

Pat: So of the million dollars that's in taxable, you're including the home equity in that as well?

Keith: Yes.

Pat: And how much is in a brokerage account, the taxable, and how much is actually in the home equity? What are the dollar amounts?

Keith: The taxable brokerage accounts have about $312,000. I have about $431,000 in a money market.

Pat: And then the remainder is the home. So $250,000 in the house.

Keith: $41,000 in U.S. [inaudible 00:20:06.508] bonds.

Scott: And Keith, how old are you?

Keith: 68.

Pat: Are you married?

Keith: Yes, I am. She's 67.

Pat: And what kind of income do you have coming into the household?

Keith: About $90,000 a year.

Scott: And where's that coming from?

Keith: Solely from a railroad retirement pension.

Scott: And so you're not taking any income from your IRA or your other savings?

Keith: No.

Scott: Yeah, you can self-insure.

Pat: Yeah, but Scott, he can...

Scott: I mean, but you clearly could because you've got $90,000 a year coming in. Let's assume you require long-term care. That's $80,000 a year.

Pat: Let's assume that when you received that pension that you took a joint and full life for your wife. Is that correct?

Keith: I'm not quite sure how to describe it. I think it's a survivorship life.

Pat: That's okay. Survivorship life. All right. So it pays the same amount to her as it would to you whether you're there or not. Correct?

Keith: No, actually, no.

Pat: 50%.

Keith: A railroad retirement annuity, I guess, it's more like...it's an annuity, not a pension. And she draws a spousal benefit. And when I pass, she would receive my primary benefit and would lose the spousal portion.

Pat: Okay. Thank you. Okay. So what would you consider like an asset base?

Scott: Yeah, so if you were going to look at it, so here's how I look at it. Right now you're not spending any of your savings.

Keith: No, in fact, we are still saving money. Our average expenses last 12 months were about $4,400 a month.

Pat: Well, you better tighten up. I don't know why you're only saving this.

Scott: You've got roughly 1.7 million, 1.75 in savings. That's right. So let's assume you earn just 4% on those dollars. That's $70,000 a year of income without even touching your principal, of which you, frankly, don't really need because you're not using it to support your lifestyle today.

Keith: Not currently. My plan when I retired six years ago was to try to live on my income or less than until such time as inflation or my medical expenses caught up with me and I had to start growing from my savings.

Pat: Well, you've done that.

Scott: I was at a memorial service this week. This week, 84-year-old gentleman, Alzheimer's, 13 years. He wasn't institutionalized the whole time, but very long. Those are the kind of things. If you're going to have insurance, you'd want insurance for the really long issues. But most long-term care insurance is only they only pay for...

Pat: A couple of years.

Scott: ...30 months or 36 months.

Pat: So, Scott, I have this question. So he can self-insure or use an asset-based like a life insurance, a single-pay life insurance contract that has a long-term care benefit associated with it. And what you're giving up when you purchase those is the earnings on the deposit. And let's say you bought something that covers both you and your wife. Let's say you put in 200 grand into this policy, the assets still yours. If you don't need the care, it's still yours. And when you pass away, those dollars are going to go to your heirs. And if you have long-term care, you need long-term care, it's going to draw down that balance until it hits zero, at which point an insurance rider kicks in to continue the payments.

Scott: So essentially what you're doing is you're self-insuring yourself for the $200,000.

Pat: In my example there, yeah.

Scott: And so that is an alternative. In fact, you might find that that will provide the most comfort for you since you're not actually living on any portion of your brokerage account now. And it would actually provide you coverage. The difference is that you're going to be giving up any upside, but you're giving away all the backside too. So if you were sitting down, if you were my uncle or my older brother, I would say, yes, you can self-insure, but.

Scott: Take a look at an asset. You can self-insure, but to Pat's point, if it gives you some peace of mind by having a policy in place that'll help fund some of your care, some or all of your care, then take a look at that. But I would do it in the asset-based.

Pat: The asset-based life insurance. And they're called... Look, we're not huge fans and we're not life insurance salesmen. It is an alternative. You're fine either way. Just take a look at them. They're called asset-based long-term care or asset-based life insurance policies with long-term care writers inside of them.

Scott: But even if you had a 13-year-long Alzheimer's, you can still self-insure with this portfolio based upon what you just told us.

Keith: Oh, okay. Well, that's the risk that really scares me is most people don't live that long once they go to skilled nursing.

Scott: That's right. Right. Yeah, no big deal, right?

Keith: What if I do?

Scott: That's right. Well, you don't want at age 69, suddenly you're in a skilled nursing facility for the next decade and you're worried about your spouse.

Keith: Right. And I suppose, you know, my health is good, but anything can happen.

Pat: That's right. So that's why, in your situation, I'd look for that kind of asset base.

Scott: And if I were your advisor, I'd tell you to spend a little bit more money. And long-term care insurance is really challenging. It's important that we all plan for, how are we gonna cover the care if we need it. And they say almost everyone's gonna need some sort of care, which is why the insurance is so expensive. This is Allworth's Money Matters, we'll be right back.

Announcer: Can't get enough of Allworth's Money Matters? Visit allworthfinancial.com/radio to listen to the Money Matters podcast.

Scott: Welcome back to Allworth's Money Matter. So Pat, I told you why I don't tell anyone they should spend more money. So this was...

Pat: You don't suggest it.

Scott: Well, I'll tell you the story and then what changed about me. This was in probably mid-90s. I had this couple, retired. He took a pension lump sum and had the money in his IRA and growing. He had a 401(k) rollover just growing and they lived off their social security. That's all they spent, was their social security. House was paid for, very modest lifestyle. And so I'm watching this 401(k), I mean, this IRA just continue to grow. And so, I'd suggest, you know, "Why don't you take some money out this retirement account here?" And anyway, so one time the gentleman comes in without his spouse and I said, "Where's Susie?" And he says, "Well, that's what I want to talk to you about." So he says, "Well, Susie feels that every time she's in here, you call her cheapskate."

Pat: Because you wanted them to spend more money.

Scott: Yes.

Pat: And psychologically, that was going to make them happier. Having the money in the account would make her happier.

Scott: Correct. For whatever reason.

Pat: Yep.

Scott: So as a young advisor, I realized...

Pat: It's none of your business.

Scott: Look, if somebody is spending too much and it's going to cause damage to their lives, then I'll let them know. Having too much money is a good problem. It's not a bad problem. It's not a problem.

Pat: Yeah. I get it. But I do recommend to clients. Or gifting. And I had a client. I actually thought it was what he said. He was gifting his sons the minimum.

Scott: The minimum?

Pat: 17 grand a year or whatever. So that. And I explained how it, they're going to receive the money at his death or you could pass it on while you're living. He called me up a year later and said, "I'm going to give them each a bunch of money." And I said, "What changed?" And he said, "I want it to be from a warm heart and not a cold hand." Like, wow. And I'm like, "So what happens if they spend it in a manner that you don't like?" And he said, "Well, I'm comfortable enough now after giving the money year over year to watch what they've done, that it's not a concern." But if you go to gift a lot of money to someone or give it to them, remember, you don't have any control over what they do with that money.

Scott: Zero.

Pat: Yes.

Scott: And if you have control, it's not a completed gift.

Pat: That's right.

Scott: All right. We're continuing. We're going to talk with Steve Ruby. Steve is one of our certified financial planners in our Cincinnati office. But Steve, what's interesting about him is he hosts our...we have a daily radio program in Cincinnati that airs on...

Pat: The radio.

Scott: What station? But he's out in our Cincinnati office. But before Steve joined Allworth, he had some other jobs at financial services firms where his job there was to sell. And so we thought we'd have Steve just to kind of share. And I've got a list here of questions I wanted to ask. It lists the actual names of the firms, I'm going to leave the names of the firms out just because...

So, Steve, you started your career... Are you with us, Steve, by the way?

Steve: Yeah, I am.

Scott: Okay, great. Thank you. Thanks for taking a little time. So you started at one of these very large firms that has branches that people go into, and oftentimes people do self-directed stuff there.

Steve: Yes, correct.

Scott: You say the goal there was to sell something to just about everyone. What do you mean by that?

Steve: Oh, yeah. So it's a well-tuned machine that they've built. So as you mentioned, I'm in Cincinnati and there is a big brokerage firm that has a presence here where a lot of the advisors in the industry, they come up through this brokerage firm. And I spent time there myself, as little as I could, in fact, about five years because they have a wonderful vesting schedule, but that's neither here nor there. This role, if you've ever called...let's say you've separated from an employer and you have an old 401(k), you call that custodian. If you call to move money out, oftentimes the service person that you talk to is going to transfer you to some kind of a retirement specialist or a rollover specialist. In reality, what that is, is a group that is trying to retain the business. That's what that is. And the role that I had at this brokerage firm was kind of a hybrid opportunity where we not only retain the business, but we also welcome to people to their 401(k). So it was kind of the reciprocal of that where we were trained to be sales machines. And the goal was to have a consultative conversation where we would ask open-ended questions and uncover the hidden need to sell whatever retail solution that we could. And that was to every person that we talked to.

Scott: And did you...was your compensation...did it vary based upon the kind of products or services you sold?

Steve: Yeah, what do you think the answer to that one is?

Scott: Yes.

Steve: The salary was meager. The goals were paid based on how many accounts we opened, how much flows we brought in. So it was an interesting model because we also got we got transfers from other people in the organization, most notably the 401(k) service team. And I'm talking things like if somebody called to increase contributions to their 401(k), that's great. But they get transferred to our...the expectation is to have a conversation about whether or not this decision makes the most sense for you. Can I ask you some questions? We'll explore that and maybe share some ideas. Sure, people tend to appreciate that type of, you know, offering. And the goal there at that point was to, you know, that's great. Congratulations on saving more money. But rather than putting that into your 401(k), how about we open a Roth IRA and start putting in $200 a month?

Scott: Yes. Because you get compensated. Yeah.

Pat: Yeah. And so what kind of would just...were there annuity sales involved in this or what other products were involved?

Steve: Yes, so when we could identify an opportunity that crossed a certain dollar threshold, you had mentioned, Scott, that this organization has branches across the country. The goal at that point would be to get these prospects into one of the branches where, you know, those people, they're paid handsomely to sell new annuities, to sell the managed solutions. In the role that I was in, it was to create that crossover retail relationship for active 401(k) plan participants any way we could. Maybe it was a 529 because we know that they have a grandchild or a child. Maybe it was the Roth IRA. Maybe it was a cash management account or self-directed account. But if there was a certain dollar threshold, yes, the expectation was that we got them somewhere else and that somewhere else would then make the annuity sale.

Scott: And so you started in this firm right out of college, right?

Steve: Close enough. It was a career switch for me.

Scott: All right. That's how you got your launch in financial services. I imagine early on you thought this is how things just work. And then my guess is you became a little scrummy after a period of time realizing, we're not always serving our clients' best interests.

Steve: Yeah, they'll train the heck out of you. I got five securities licenses while I was there. I became a certified financial planner while I was there. The last straw was when leadership, at one point...I did well at the work that I did and I thought I was helping people, and I would like to think that I really did help a lot of people, but it was all about suitability. It was finding a reason to be able to sell something and backing it up with that. I became a certified financial planner when I was there. Leadership at one point pulled me aside and said, "Hey, maybe pump the brakes on opening with the fact that you're a certified financial planner." And I asked, "Are you serious? Why would I do that? I just work so hard to become one." And the answer was pretty much, "If you're going to serve as a fiduciary, then you shouldn't be trying to sell this stuff to every person that you talk to, and that's what the job is." Needless to say, I found another job pretty quickly.

Scott: And so you found a job after that you went to one of the large Wall Street firms

Steve: Yeah, I went to one owned by a big bank. We'll put it that way. So again, we're leaving the names off. And, you know, kind of the thought process there was to join one of these financial advisor teams that has full-service offerings, build my own book of business, you know, maybe I get experience and I go back to a different role at the firm that I ran away from for more money because that was what was front and center. When you're working in these big banks settings, the advisors there are paid 100% commission, 100%. So the motivating factor in that situation is finding ways to sell all the time. And this is a systematic thing too, because the goals that these advisors have, obviously, are set by leadership in these organizations and it rains down. So you're forced to pigeonhole your clients into solutions that may or may not be in their best interest. It's like going into a shoe store and you wear a size eight and they say, "Oh, great, we have just what you need. Here's a size six, we're gonna make it work."

Pat: Got it. And so you weren't acting as a fiduciary there either.

Steve: Oh, no, no. At the end of the day, no. You think that you have the ability to do so when you have a full-service brokerage firm behind you, but when your goals are tied to forcing people to take on home loans from the bank, only using that bank for car loans, opening bank accounts and credit cards, and using their self-directed platform if they had some outside assets that they wanted to trade on. So yes, you could help somebody with all of it at the same time. And I thought that was a cool feature. But at the end of the day, it doesn't sit right when you're forced to use only the solutions offered by that bank.

Pat: My grandfather used to say is all you have is a hammer, everything looks like a nail. So at some point you decided that this wasn't Scott. Can I? So did they give you cross-sell quotas? This is interesting because I've never talked to anyone that actually worked in this. I've heard about it. So the idea, you know,

Scott: So at some point you decided that this wasn't... Go ahead.

Pat: Wait, Scott. So did they give you cross-sell quotas? This is interesting because I've never talked to anybody who worked in this type of...I've heard about it.

Scott: they don't tell you they're full skinny when they're working there. Okay, right. You know people work for the big banks. Yeah, they're not gonna give you a candid answer knowing that you're a fiduciary, a leader of an RIA.

Pat: I have asked someone before, like, is the size of your office and its location in the building dependent upon how much you do something?

Scott: You sell.

Pat: Cross-selling would be, they expect you to do so many mortgages a year or so many referrals for auto or so many credit card or so many other things. Because obviously, it's a big bank. Were you given a quota or were you just rewarded for that behavior or were you punished for...?

Steve: I should have highlighted that a little bit because when I say it's systematic, yes, those goals are tied to your compensation entirely to the point where you can make it the sliding scale maybe 35% to 45% of the commissions that you actually generate go to you as your bottom line paycheck. If you don't cross-sell to a certain percentage of your entire book each year, different products and solutions, then the percentage that you get paid out goes down for that year. And it can go down the next year. If you do meet those goals, then instead of getting paid out 40%, you could be up to 41%. So you are motivated heavily to continuously find ways to cross-sell these solutions that, again, may not be the best option.

Scott: Yeah, you know what, you just think about that. Here you are trying to do what's in the client's best interest. You're thinking about...you're trying to put yourself in their shoes, right, offering some solutions. And then in the back of your head, you're thinking, "Well, if I can get them to do a home equity loan, I'm going to get an extra comp, not just on this client, but all my clients, because I have to do six of these a year," or whatever the number is.

Pat: So were you ever operating Steve as a fiduciary while you were doing this?

Steve: To the best of my ability, to the point where leadership would sometimes get a little bit upset when I was too honest about somebody not needing something. And that's fine because I want to be able to sleep at night.

Pat: But did they hold themselves out as a fiduciary, this firm?

Steve: Not always. Some of them do, some of them don't. I had a unique opportunity where I actually worked with 170 financial advisors as kind of extension of team. And some of them...I will say that there are plenty of good advisors out there that do their best to do the right thing for their clients at some of these places, but at the same time, they're still forced to operate under the realm of the expectations of their employer. And that in and of itself is a conflict in my opinion.

Pat: Got it.

Scott: And when was the time did you make the decision to leave that life?

Steve: I mean, while I was at this big bank, I was looking for opportunities. I was looking for the right opportunity to land at a place where I would spend the rest of my career. And that was networking and looking for everybody I could to land at a registered investment advisor where I'm expected to behave as a fiduciary. It was frustrating. At places where I've had my own book of business prior to this, we could not help, for example, our clients with an active 401(k) investment allocation or help with their health savings accounts or their 529 investments. As a fiduciary financial planner, we have a responsibility to ensure that our clients have uniform investment strategies across their entire portfolio. So a registered investment advisor firm that allows you to do that is just one example and something that I was, obviously, looking for because I wanted to be a fiduciary and treat clients the way that I think they deserve and should be treated.

Scott: So based on your last experience, what are some warning signs or keywords that people should need to be aware of when they're interacting with some so-called financial expert? I guess these sort of models or any other kind of model for that matter.

Steve: Yeah, I mean, just a moment ago, you asked me, were you a fiduciary at those places? And I almost feel like I danced around the answer a little bit. Anybody that does that when they're talking about their place of employment, steer clear. Because if they're not acting as a fiduciary, then why do you need to work with them when there's people out there that offer holistic financial planning? On that note, do they offer financial planning? I come with the opinion that there are firms out there that just ask you a series of questions, a basic questionnaire to determine your risk tolerance, and that that determines your entire portfolio strategy. That's how it was for me at these other places. When you're actually building a financial plan that looks at the ins and outs of your entire financial situation, it gives the advisor the opportunity to understand the level of risk that you need to take to meet your financial goals and that you can afford to take based on your financial situation. So make sure that who you're working with is going to offer financial planning. To take that a step further, how are they going to help you implement any strategies that they recommend? Do they have the capabilities to help you file your taxes, help you with tax planning? Do they have the capabilities to offer estate planning? Things like that.

Scott: You know, and, and just to make clear, Steve is an employee of Allworth, but there are many, many firms like Allworth across the United States.

Pat: For sure. They're independent advisory firms.

Scott: Independent advisory firms that are every bit as good as the services that we offer. So to not make this look like a commercial, we're biased to this model.

Steve: Fair enough. I agree.

Pat: So Steve, thank you very much for taking the time to join us.

Scott: We appreciate your insight. Thanks so much. And Pat, a lot of people in the independent space started at these large national firms, right?

Pat: We did.

Scott: We did, right? But no one migrates the other direction.

Steve: Fair enough, I agree. We appreciate your insight.

Scott: I mean, that tells you something right there. People don't migrate the other way. You don't hear about somebody leaving an independent firm and going to work for...whatever.

Pat: I'm trying to think.

Scott: Do you know anybody? I know plenty of people who've left the other direction.

Pat: I don't know of anyone, anywhere.

Scott: Okay. All right. We've beaten that one. Let's go. Yeah, appreciate it. Let's let's talk now with Pat. Pat, you're with Allworth's Money Matters.

Pat (Caller 2): Hey, guys, thanks for taking my call.

Scott: Yeah, thank you.

Pat (Caller 2): Yeah, I had a couple of questions. Thanks for the chance to send them in and to chat with you on the phone. So the first question is, I'm nearing age 70. So I'm 68 and I got 15 more months till I hit age 70. I'm planning on...I dropped down in my work to half time in July and I'm planning on...my contract ends in on my birthday, actually pretty close to my birthday in April next year, whatever is, '25. And so I'm planning on stopping work and I had been planning on taking social security starting at age 70. However, some things have come up. So one is my wife has been a stay-at-home mom and a stay-at-home grandma for 46 years and doesn't have 40 quarters. She doesn't have her own social security. So her social security is based on my income. And you know the drill there. But one of the things is she's four years younger than I am. And so we're also right in that period where the full social security age shifts from 66 to 67, right? So I'm at 66 years 2 months. She's at 66 years 10 months. So when I hit age 70, she's not quite at full social security age yet. So there's this big question is when do I start taking social security? Should I wait till age 70 and max out mine, wait till starting hers to max out hers? Or should I take them both same time? Or should I... Actually, another thing that came up is since I went down to half-time, I actually don't make quite enough to manage our cash flow. And I would have to, in January, start withdrawing from my retirement accounts to supplement my income in order to keep our lavish lifestyle going at the current level.

Pat: What is your account balances in your IRAs and 401(k)s?

Pat (Caller 2): Yeah, so I have a traditional IRA that I've been carrying for a while, adding, shifting 401(k)s and things too, and that balance is about...let's see. It's 2.1 and then I also have a SEP IRA. In 2015, I shifted from being an employee to my own sole proprietorship. I do software project management consulting with the state of California. And so in that consulting business, I've got about 250 in the SEP IRA. So the total is about 2.4 million.

Pat: All right, and are you still self-employed?

Pat (Caller 2): Yeah, yeah, I have a contract with the state and I make about 250.

Pat: How many quarters does your wife need? How many quarters does she need?

Pat (Caller 2): Oh, she would need she would need 20. She worked like three years out of our entire married life and she gets half of mine.

Pat: The reason I ask that question is, in some situations, the spouse may be performing some duties for the business and, at that point in time, should be paid and paid in for social security in order to qualify them, but that's not the case.

Pat (Caller 2): I did that math on that and you know paying self-employment tax on, you know...

Pat: I understand. I get it.

Scott: Yeah, I get it. You notice we didn't continue on.

Pat: No, no, we just asked the question.

Pat (Caller 2): My social security is going to be...you know, my [inaduible 00:47:17.156], whatever that number is, your average, your AIME, all those acronyms I've been learning about social security is like 9,000, almost 10,000.

Scott: And Pat, the best way to go about making a decision is to really run the numbers in conjunction with your other finances because if you started it early... So you said your plan was to start Social Security and have that supplement for a couple years. If you instead chose to defer that, then you have to start drawing down on your assets today. So it has an impact on the amount of assets you have.

Pat (Caller 2): There's an opportunity cost.

Scott: That's right. That's 100% there. And then you plug in, how's your health?

Pat (Caller 2): Yeah, yeah. So my health is better a little better than my wife. She's on some, you know, blood pressure medication, that kind of thing. I'm pretty good. So, yeah, we just kind of did the 20-year, you know, I turned 70. So let's say if we go...if I go 90, and she goes 86, you know, what are the numbers? And it also looked like...I did run the math and it said like it was about 12 years to break even.

Pat: Yeah, but there's a net present value calculation that needs to be run on that.

Pat (Caller 2): Okay.

Scott: But it's still about that, Pat.

Pat: Yeah. Yeah. So the answer is you need to actually run the numbers.

Pat (Caller 2): You've got to do the math to determine. There's no magic...

Pat: No, no, no, it's on a scale. You could actually... It looks like a bell curve on all the different opportunities. So our social security planning software actually integrates with our income planning software that integrates with the asset management. And then it says, if I assume this rate of return, if I start social security, this is my crossover, right?

Scott: What's my net worth look like today, next year, three years, based upon these income needs with this assumed inflation, etc.?

Pat: And you need to you need to pay a couple thousand dollars to someone for that advice, that's just the reality of it, because there's no right answer. I could ballpark it for you and say, well...and has your wife considered taking Social Security today?

Scott: She didn't qualify. She didn't have the 40 quarters.

Pat (Caller 2): She can't take it until I file. She can only get it. Now the other thing is, I thought I'd throw this out, that my actual original question, I've kind of answered, but it might be interesting to others on the phone, is that there is this thing called a family maximum I learned about. And I thought that that was...because I thought that was gonna come into play here. But as I've been reading, it seems like that only comes into play for retirement benefits, if there's more than two...if there's at least three people drawing on the same core income. I don't know if you...

Scott: Yeah, what typically happens is the maximum benefit, it's already calculated when they calculate your monthly amount. It's already in there.

Pat (Caller 2): Yeah, when I did mine and my wife's originally the total came up over the family maximum amount, but then it said... I kept searching on that and it said the family maximum only applies if there's three or more people drawing on the same earner's income, not just a person and the spouse. So maybe that doesn't apply.

Pat: We could get into that. I mean, how many times do you have to be married in order to get there?

Scott: Well, or have kids.

Pat (Caller 2): I think it usually applies when you have kids or you have disability.

Pat: Oh, yeah, I understand. I mean, all those permeations. Yeah, the only way you're going to get there is actually just to do the...

Scott: Yeah, you got to run the numbers. Otherwise, we're just making stuff up. But, I mean, if they were to probably take it, based on your assets [crosstalk 00:51:14.904].

Pat: Remember the good old days of the file on suspense, Scott?

Scott: Oh, they were confusing days. There was a lot of moving parts then. There's still a lot of moving parts, that's why we use software. That's all the time we have. It's been great being with you. This has been Allworth's Money Matters.

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