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

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

Pat: I'm Pat McClain. Thanks for joining us.

Scott: Glad you are with us. Both myself, my co-host, we're both financial advisors. Our objective is helping people make wise choices with their dollars, so that they come to a point in their life where they have some financial independence. Work is an option, not an obligation, and help people make some sense out of what goes on in the world and how they're supposed to manage their finances.

Pat: Is it, make sense? I was thinking about this on the drive in today, because we talk about making sense of it. Is it really just reconciling with it emotionally that you have no control over it? A broadly diverse...

Scott: Well, that's my point, yeah.

Pat: That a broadly diversified portfolio is the most sure way to steer yourself through this and still have room for growth.

Scott: It's amazing, when you look at the studies... I mean, I guess there's people that go to Vegas and they play blackjack, which is a zero-sum game, then the house takes its cut. You're bound to lose you play long enough, right?

Pat: Yes.

Scott: Even if you play every hand perfectly, exactly what you're supposed to do, by the book, you're gonna lose long term, right?

Pat: Yes.

Scott: But people still go and they believe it's different for them.

Pat: Well, wait, wait. Stop, stop. Not necessarily, because if it's a single or double deck, and you can count, and you can adjust your wages, then you have a higher probability of winning.

Scott: I retract. They go up to play roulette.

Pat: Okay, roulette.

Scott: Whatever. Here's my point. We know that 70%, 80% of professional money managers cannot outperform the indexes. These are professionals.

Pat: The indexes that they are comparing themselves to.

Scott: Large company stocks, let's compare to the S&P 500, whatever it is. We know that, depending on the timeframe, roughly 70% to 80% of professional money managers can't do better than just simply buying a basket of stocks and forgetting about it. But yet some individuals think that they can.

Pat: On their stocks.

Scott: Yes.

Pat: And oftentimes, on bonds.

Scott: And studies also show that individual investors do much worse in the broad markets because of their poor timing.

Pat: Oh, correct, correct. Correct. I was reminiscing about my early days. Maybe it's because I turned 60 in November and I've started reminiscing. Is that too early to reminisce, 60? I was reminiscing about my early days.

Scott: That's a big birthday. A big decade birthday, if you like.

Pat: Yeah, we're not doing anything for it, but my choice.

Scott: Obviously. I remember being at your 30th birthday.

Pat: Oh, that's a long time ago.

Scott: Yeah. In Lexington Hills in your garage.

Pat: Yeah. Well, it was a nice garage. So, just early on, 30 years ago, with meeting with clients and them wanting to select the best performing mutual fund from the previous year. And me arguing with them that that's probably not the right thing to do. And actually not getting the business, not having them as clients, because someone else showed them short-term rate of returns as if they would continue into perpetuity. As if everything continued into perpetuity. And so, I was thinking about this and then I was talking to a friend of mine and I said, "You know, when we look at stocks, you look at the FANGs, which is now Meta, but Facebook, Amazon, Netflix and Google, how rock they have been in this marketplace.

Scott: They've been hammered this year. You look at Facebook...

Pat: Now, Meta.

Scott: All right, whatever. Meta, and it got hammered again just a week or so ago.

Pat: Yeah. It was down 22%, what, a week or so.

Scott: In, like, one day. At least earlier in the week, the stock was at about 93 bucks a share. That stock in the last years was $350.

Pat: Yes. Yeah. So, it is down significantly. But the point being is that, when we talk about weathering the storms, don't throw in the towel on your portfolio, look, if you were overloaded in Meta coming into the year, I mean, it's okay. Look, if you do not have a broadly diversified portfolio, then you're betting a lot in individual stocks or individual sectors, then it may not be the best thing for you to actually try to weather the storm. But if you have a broadly diversified portfolio, which is stocks and bonds, and you know what your allocation is, and by the way...

Scott: Maybe some real estate, maybe some cash.

Pat: Which leads me to what we're gonna talk about later on in the show, which is why right now you should really be building models of your portfolio and make sure you're balanced correctly. Most people don't rebalance their portfolios. Most people do not. And as the stock goes down, you have less risk, but therefore your portfolio's no longer in balance the appropriate allocation. We're gonna talk about that right after a couple of calls.

Scott: Not only that, even things with different types of sectors and whatnot.

Pat: Exactly, yeah.

Scott: Anyway, let's take some calls. We've got a good program lined up. We believe it anyway. To join the program, 833-99-WORTH is the number. 833-99-WORTH. Numerically, it's 833-999-6784. We're in Washington talking with Melissa. Melissa, you're with Allworth's "Money Matters."

Melissa: Hi. Thank you for taking my call.

Scott: Yeah. Glad you joined us.

Melissa: Well, the question... Sadly, I recently lost my father in April of this year, and he had left me a considerable amount of money. And so, married, I have two grown kids that are, like, 19 and 22, and they're going to college, and we're paying for that. But we did find ourselves needing a financial advisor because a couple of them, I have about $500k that are in annuities. And the annuity, the company said, "Well, we can keep you in those annuities for the next five years with a guarantee of 4.6%." Or I can withdraw them, and at this point, I'm gonna withdraw one of them before the end of this year, and then, for tax purposes, withdraw the other one with my intent of maybe obviously investing in the market and working with our financial planner.

Scott: So, let's back up just a bit. So, sorry about your father. Melissa, how old are you?

Melissa: Thank you. I am 52.

Scott: Okay. And when did you put money in these annuities?

Melissa: Well, he put money in these annuities in the early '80s.

Scott: Oh, this is your dad put the money in the annuities.

Pat: Thank you.

Melissa: Okay. Oh, yes. My dad put the money in the annuities. Well, he was a financial planner.

Scott: We were both confused.

Pat: Okay. And they were outside of an IRA. They were just cash that he put in...

Melissa: Yeah.

Pat: They weren't in there. And how much money did he deposit into these annuities?

Scott: Not much. It's been a long time.

Melissa: Oh, yeah. not very much, so it has grown quite a bit. I think that one of the annuities have about...well, one was about, if I remember correctly, $178,000... Oh, go ahead.

Pat: What are the guaranteed minimums? Because sometimes these... I've come across some really old annuities that have, like, a guaranteed interest rate of 4.5%, or 5%, much higher than market rate would be today. Do you know what the guaranteed rates are?

Melissa: Yeah. Right now they're at 4%.

Pat: Okay...

Melissa: And then... Go ahead.

Pat: All right. Four percent for both of 'em.

Melissa: Yes.

Pat: And there's $500,000 in there.

Scott: And how much did you inherit, ballpark, in total?

Melissa: Just a little. Probably with life insurance and homes, about $800,000, maybe $850,000.

Pat: Plus these annuities, or including these annuities?

Melissa: No, Including.

Pat: Okay.

Melissa: Including.

Scott: Okay. The majority of his wealth was tied up in some annuities.

Melissa: Exactly.

Scott: And unfortunately, annuities are one of the worst investment products for passing on wealth to heirs. Because if this was 500...

Pat: Annuities outside of an IRAs.

Scott: Correct.

Pat: If these dollars were invested, let's just say in a stock fund, the Vanguard Total Stock Market Index, or something like that, you'd receive that with all the capital gain forgiven. And so, the reason we ask the question, how much money did he deposit in there is, we were trying to figure out what your capital gain...

Scott: Ordinary income.

Pat: Ordinary income, that's correct. Ordinary income would be...

Scott: When received.

Pat: Yeah. So, do you have any idea how much was deposited in these annuities?

Melissa: I do, and it's at home and I don't have it right...

Scott: If it was before, I think it was '86 or '88, it used to be the old...remember the old annuities.

Pat: [crosstalk 00:10:05.830] rules?

Scott: Yeah. It was first in, first out accounting on it. So, depending on when these were issued, you might be able to take his original deposits out without any tax considerations. So, that's something you're gonna wanna look into before you pull a trigger on this. I don't remember if it was '86 or '88.

Pat: If you could find an accountant, you know, who's been in practice that long that they can remember the rules that were changed in 1986.

Scott: Talk to someone old.

Pat: 1986. Tell us about your family. Like, you and your spouse, how much money do you make on an annual basis?

Melissa: So, we make together about $140,000 together. And, you know, our objective is I'd like to be able to retire at 62, and my husband would like to retire at 62. We have a financial planner that's been talking about long-term care. Like, we should take some of that money and put it into a long-term care program with a annuity writer with the thought of, you know, passing on this, like, generational wealth kind of thing.

Pat: Yeah. Well, good for him.

Scott: How much money do you have saved for you and your spouse for retirement? Just the two of you, forget this $850,000.

Melissa: Well, my husband has, like, three pensions, and I'll have a school pension. So, we have a retirement that is...

Scott: So your retirement income is gonna be...by 62, you think you're already on track for retirement?

Melissa: Yeah.

Scott: Without these dollars.

Melissa: Yes.

Scott: So, your thoughts on the annuity then, because the challenge is the tax ramifications, which is why I brought up, if it was issued before, it was either '86 or '88. Because you get some favorable tax treatment on least the deposits. But the challenge is, when you take these dollars out, it's taxed as ordinary income dumped on top of your other income. Now, you're in Washington, are you in Washington State or Washington, DC?

Melissa: Washington State.

Pat: I know what I would do with it, Scott.

Scott: So, that's tax-free if it's from the state.

Pat: I mean, if I was a financial advisor sitting down, first of all, I wouldn't hire a single financial advisor that didn't ask the questions about the tax implications on this inherited annuities, just flat out. I wouldn't hire anyone that didn't ask about that. Here's what I would do. I would look to see what tax deferral benefits in through your employers that you're not taking an advantage of now...

Scott: Maximizing.

Pat: And maximizing those. Figuring out whether this is a pre-'86 deposit, whether we could pull them in first in, first out. And then I would look at annuitizing them over a...

Scott: Three, five, seven.

Pat: Five, seven-year period, and integrating this, now insane, all of...

Scott: Annuitizing them just means they pay it out over a period of years to spread the tax liability. But if you're able to get out the deposits, and you'd wanna shoot for doing that...it probably doesn't matter if it's this year, next year for that matter. But you might wanna take some income out this year. I would figure it out before the calendar year's over.

Pat: Before I did any of that, I would remind you that this is separate property and not marital property, which means...

Melissa: Oh, oh. Meaning that...

Pat: It's your property, not your husband's.

Melissa: This is all my property.

Pat: Your property. All right?

Melissa: Does it become his property...

Scott: Only if you co-mingle it.

Pat: If you co-mingle it.

Melissa: What if I have an account under my own name?

Pat: Then you would keep it separate. It's not marital asset.

Melissa: Right.

Pat: So, that's the first. I'm trying to think, "Well, she would be my little sister or my sister-in-law." The first thing I do, I'd sit down in a room and say, "Okay, before we get started, and this is the first thing I want you to know, is these are separate property. If you co-mingle 'em and you and your spouse have some sort of separation in the future, this could be subject to losing some of those. Making them separate property and making them marital property." So know that.

Melissa: Okay.

Scott: But then the real issue is, and I'm with you, I don't like the idea of, you're 52 having $500,000 in fixed income annuity, and you're just gonna exasperate the tax problem, right?

Pat: Yeah, yeah.

Scott: So, I certainly like the idea of trying to figure out how do we get out of these. It's that whole tax situation. It's tricky, and...

Pat: Are you maximizing your contributions to your company employer pension plans right now, you and your spouse?

Melissa: Yes. Well, my spouse is. And then now what we have, I think it's a 403(b). And I'm going to maximize my pre-taxed withholdings from my...

Pat: Perfect.

Melissa:... my set. And then, I'm going to use some of the money that I have to live off of that if I need to. Does that make sense?

Pat: Let me ask you this question. You have not put the annuities in your name, is that correct?

Melissa: Well, the annuities are in my name. I'm the beneficiary of the annuity. They're in my name.

Pat: You didn't get a new contract, right?

Melissa: Nope. Nope. The company says I can sign over my annuities to a five-year contract with a rate of 4.6% guaranteed.

Pat: Yeah, that's an annuitiza... Well, that doesn't necessarily...you're just trying to sell you a new annuity, is what they're trying to sell you.

Melissa: Yes. And I wanted to...

Pat: That's right. But you gotta make sure...

Melissa: [crosstalk 00:15:57.140] my benefits.

Pat: You need a qualified financial advisor...

Scott: To run through all the scenarios. What's retirement look like? Finishing the kids through college.

Pat: Scott and I are sitting here talking through this like, "Okay, this is what we..."

Scott: You just see a bunch of landmines.

Pat: "This is what you can do. You can do this." That's what I see. And by the way, you don't have to make it all marital property. You can make part of it. So you could say, "Okay, I'm gonna combine $400,000 into the marriage and I'm gonna leave $400,000 as separate property."

Scott: Yeah. You need a good, certified financial planner. Someone who can really do a great financial plan, that can dig into some of these issues that we brought up, figure out some right answers, and then provide a variety of alternatives. And you can make the best-informed choice.

Pat: And not someone that was trying to sell you a life insurance policy as a long-term care.

Scott: Yeah. That's probably not the right thing right now.

Pat: That's probably the wrong thing right now.

Scott: Appreciate the call, Melissa. Let's go to California, talk with Peter. Peter, you're with Allworth's "Money matters."

Peter: How you doing?

Scott: Hi, Peter.

Peter: Hi. Yeah, I just wanted to call because I'm 63, recently laid off, been about two months now. And, you know, being at this age it's not been very good. I've applied for, you know, tons of different jobs, and they all come back saying, you know, "We're considering other candidates." So kind of getting frustrated because, you know, nothing's happening. So, I was thinking about, you know, just going ahead and just throw in the towel and just retiring.

Scott: Can you afford to retire?

Peter: I think I can. My wife says no, but she's still stuck on the money thing that she doesn't know how to, you know, live...

Scott: Okay. She might be right.

Peter: Well, no. I don't think so. I know we can make it comfortably, but she's like her dad. You know, everything's about how much money you can save and...

Pat: Okay, fair enough. fair enough, fair enough. So, what question do you want us to answer for you?

Peter: Well, I have a TSP account and then I have a couple of 401s, and so, I was thinking about using my TSP and just go ahead and start drawing from my TSP and then waiting till I'm 70 to collect social security, which would give me 3,000 bucks a month.

Pat: Okay. And how much is in your TSP?

Scott: Thrift savings plans.

Peter: About $120.

Pat: And how much are in the other 401(k)s?

Peter: One of them's got $200, the other one's got $20,000. Then, I have a Roth for $15,000.

Pat: Okay. And do you own a home?

Peter: Yeah, it's paid off.

Pat: Okay. And what did you...

Scott: You got a pension?

Pat: You have a pension because you were working for the government for a while. You have a pension?

Peter: No, actually it was a government contract, so I wasn't really working for the government, but I do get a pension from one of the jobs for 400 bucks a month. And then, I get something from the VA, about 1,000 bucks a month. But my wife is retired and she's pulling...she brings home, like, 3,100.

Pat: And when did she retire?

Peter: Last December.

Pat: And how much money were you...

Scott: So, your wife retired last December. She currently brings in 3,100 bucks a month in pension?

Peter: Yeah. Uh-huh.

Pat: And how much were you earning before, between the two of you? Let's go back to...

Scott: 2021.

Pat: Thank you. What was your income for that year?

Peter: Probably for both of us, about $250.

Pat: How much money do you have in the bank?

Peter: About $250 in the bank. So, like I said, we got enough money in savings, I think. And then, what we're bringing in we should be okay. Right now, we're paying 1,700 bucks a month for COBRA but, you know, that'll go down after December.

Pat: And is your wife receiving Social security now?

Peter: No, she's not. She says she's gonna wait till 66 and then she'll get $3,000 a month. So, I mean, in about five years, you know, we're gonna get...just alone on social security be about $6,000 a month.

Scott: I think, that you're not gonna be able to have the same lifestyle in retirement as what you'd had before. Assuming that $250 has been kind of a common income.

Pat: Unless, you know, you were accelerating your mortgage payments to get the home paid off...

Peter: It's been paid off.

Pat:... or you are putting kids through college.

Peter: Yeah. We don't owe anything. Everything's paid off.

Scott: So, from your retirement accounts, I mean, you've got $ 250s... So that's what? $650 in savings? $600?

Pat: Seven hundred?

Scott: Yeah, $600.

Peter: Well, my wife, she's got almost $500 in her 401. Then, she has another one that's got about $180.

Scott: Have you set...?, You know, look, here's what. If you're my brother, I'm like, "Peter, come on. You and your wife go sit down with a financial advisor...

Pat: Pay for a financial plan.

Scott: Have him do a financial plan. You can do all kinds of different, what-if scenarios. Like, what's a realistic income for the family right now with you never going back to work? I think, I mean you need that for both yourself and for your wife. Your wife particularly.

Pat: My first bless is, yes, you have enough money to retire.

Peter: That's what I say.

Pat: No. I know, but your wife, there's two of you in the relationship, I'm assuming. And if your wife doesn't get comfortable with the concept, then you can't get comfortable with the concept. Right?

Scott: Yeah. Happy wife, happy life.

Peter: She's more freaked out about health insurance than anything else.

Pat: Well, then she's got a valid point.

Scott: But you could probably go on the Affordable Care, or the California Plan, next...

Pat: He's in?

Scott: California. Which would be really cheap.

Pat: Which actually may make a ton of sense for you.

Scott: And by the way, we just did a webinar on paying for healthcare options. One of the things we dealt with, and we interviewed an expert on people who retire before 65, how to get health insurance. So, allworthfinancial.com.

Peter: Yeah. I watched that.

Scott: You watched it?

Peter: Yes, I did.

Scott: Okay.

Pat: So, Peter, I'm looking at this and you're asking, "Should I take money from my TSP?" And you asked that specific question.

Scott: We're finding all these other assets around.

Pat: And there's $750,000 in qualified money in your accounts, which are either Roth or IRA money in some TSP or 401K, or whatever. You know, what I'm guessing, if you sat down for a financial plan, we'd actually spend down some of that $250,000 in the bank and take some money out of the IRAs in order to qualify for...

Scott: Lower cost medical for the next...

Pat: Lower cost medical until you actually qualify...

Scott: 65. Yeah.

Pat: Qualify for Medicare. And then at that point in time, make the decision whether you need to go on social security or not. So, you asked a very specific question, which was...

Scott: With a lot of moving parts.

Pat:... "Should I take money from my TSP?"

Scott: No.

Pat: And I'm gonna answer this very specifically, I have no idea. I have no idea. It is a option, but I don't believe it is the best option. If you were my brother... I have a brother named, not Peter but it might as well be. He's 63, and what we would do is we'd do a financial plan. I'd end up putting all these dollars in an IRA figuring out when to do social security, and my bet is at the end of the day you're gonna live on some of the IRA money and some of the money from the bank. And you've got what? You've got $4,500 a month in taxable income coming out anyway, so you're probably not gonna take much out of the IRAs in order to qualify for the low-cost, government-subsidized health insurance. Which would put your wife at ease, which would be worth every dollar of the cost of a financial plan. Every dollar, and then some.

Scott: Totally.

Peter: Yeah.

Scott: Go see a financial advisor, Peter. Really, you're doing yourself and your wife a huge favor. There's a lot of moving parts here. A good advisor that understands these issues as people go from the workplace to retirement, it's just gonna make tremendous difference. And you know what's interesting, Pat? I've often said the importance for people to be retirement ready because one out of two of us are going to retire earlier than we'd planned. Either because of change in job like just Peter experienced, or maybe we have a new company buys our company, or new manager comes in, or whatever.

It's like, "I'm outta here." Like, "It's no longer the place it used to be." Or a health issue between either your own personal health issue, or a health issue of a loved one. Maybe it's a spouse, maybe it's a parent, maybe it's a child. One out of two, so it's important. Look, even if you think, "I don't know if I ever wanna really retire," I get that. Like, I'm 56, right now at this stage I think, "Oh, I never wanna retire." That might change at some point in time when I...

Pat: It's funny though, when the call was, "Should I take money out of this account?" If I'm in poor health, I don't go to my doctor and say, "Should I diet or exercise?" I think it would be both diet and exercise. So, the phone call was specific, "Should I take money out of this account so that I have enough to retire?"

Scott: You do realize most of the medical system is based just upon that, "What's the sickness we can deal with? We'll give you a prescription and I got a code I can check off to someone and the insurance company pays me." That is how most health...

Pat: I said, in an ideal world. Okay. Thank you, Scott.

Scott: A doctor looking at your whole picture, maybe a full bloodwork done.

Pat: Yes, yes. Maybe all the bad habits I have in addition to the lack of diet and exercise. We're taking a quick break. We'll be right back.

Male Speaker: 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 back to Allworth's "Money Matters," Scott Hanson.

Pat: Pat McClain. So, for the terrestrial radio listeners, I'm gonna do a little follow-up on the conversation we just had before the break with Peter. No, no, no. I'm sorry. The one before that, I was thinking about it over the break with Melissa, and how really complicated her situation is. Really, really complicated. And how she brought up the fact that she met with a financial planner and they recommended...

Scott: A product.

Pat: A product, where we never even got close to a product. We were trying to figure out the tax ramifications of the solutions around. And part of it...

Scott: And annuities are some of the worst investments you could own when you pass on. They're horrible for state planning unless you plan on giving it to charity, or you know you've got a child that doesn't have a lot of income, and you wanna provide some sort of lifetime income for them.

Pat: Or special needs.

Scott: Every once in a while there might be a case, but by and large, you're much better off owning an asset that has capital gains forgiven.

Pat: Yeah, but this was a fixed-income product, so if they had a choice between this and let's say bonds...

Scott: Well, they didn't. They have the whole world of investment alternatives.

Pat: Well, they did invest in the '80s, so they had 40...

Scott: It would've been worth several million if it was invested elsewhere by now.

Pat: Yeah, it was 40-plus years. All right, fair enough. Fair enough.

Scott: Your point was though?

Pat: Sometimes you just really need to go get professional help and I'm not talking about someone that holds themselves out as a financial planner. You know, sometimes it makes sense to go and pay a fee to someone and have them just analyze the situation and tell you exactly what you should do without actually trying to institute any sort of product.

Scott: Yeah. "Well, here are the alternatives for you. You go down path A, here's what it means. Here's the cost. Path B, here's what it means. Here's the cost." Cost as far as taxes and opportunities, and some of those sort of things.

Pat: Yes. And then align that. And what was really interesting about the call was when we mentioned it was separate property. When you inherit an asset and it is just your name inheriting and not your spouse's or anyone else's, it is considered separate property. And to mix those with marital property is kind of a big deal, because I have seen it where people have tried to pull money out of the marital property.

Scott: Well, you've seen what's happened when people end up getting... Look, in a perfect world, we get married, we live happily ever after. It's marital bliss the whole way through. Our finances are secure, our kids are wonderful. Right?

Pat: Okay. We're okay.

Scott: That's not reality. The vast majority of people do not go into a marriage thinking, "Oh, this might not work out. We could just get a divorce later." That's not the reality. But whether it's good or bad, the fact is a lot of marriages ended in divorce. And gray divorce has risen dramatically, older people. Kids go off to college, move out, whatnot. We've seen it a lot over the years, right?

Pat: Yes, yes. One of the fastest growing segments of divorce are actually...

Scott: But just as a financial advisor, Pat.

Pat: Oh, yes, individually.

Scott: You've helped clients split their assets countless times.

Pat: Yesterday. Yesterday I did it.

Scott: Literally.

Pat: Yes, literally.

Scott: And how long had they been married?

Pat: 30 plus years.

Scott: Okay. So that is...

Pat: So, yesterday I counseled one party of the couple. And ideally, they're on talking terms. You could sit down with both of 'em and talk about the difference between why a million dollars house is not worth the same as a million-dollar IRA or vice versa. Why we need to value those differently based upon different factors, etc.

Scott: But the reality is the couple you're dealing with, one of 'em is choosing to file...or both, whatever, right?

Pat: Yep. None of my business.

Scott: Had one of them inherited some money 15 years ago and just threw it in the pot with the rest, now it's all in the pot and now it's 50-50 as opposed to, "Hey, wait a minute. Those dollars came from my dad, those are mine, then everything else is 50-50."

Pat: That's right. And even keeping it separate property could cause conflict in the marriage. First of all, because...

Scott: That's right.

Pat: You kept it separate. Second of all, if it's a not a tax-efficient portfolio and it's in separate property, who pays the taxes that are generated by that portfolio? The individual or the marital asset?

Scott: And then, I mean, married filing separately never works well. I mean...

Pat: That's right. That's right. That's right. But then I've sat down with people and they were inheriting $200,000, and I explained the separate property and the gentleman said, "Well, that makes sense I should keep it separate." And I said, "No, no. It doesn't." I said, "Your net worth is so high, this as a percentage isn't even worth talking to your wife about. Just mix it in and call it a day." And he said, "Why'd you tell me?" I said, "Well, really, because I have an obligation to warn you." I'm thinking...

Scott: Yeah, I would not recommend bringing this thing up if that's a...

Pat: That's right. But if it was, you know, 200,000 and their overall net worth was a million dollars, I most certainly would say, "You should consider keeping it separate property." But a good estate plan actually...

Scott: Not only that, Pat. Let's talk about a sizable... Like, we've seen someone passes away, the surviving spouse, obviously it's traumatic. They think they'll never remarry. What do you know, a couple of years later, they remarry. They list one another as beneficiaries. That person passes away, suddenly this new individual's brought into the scene who now has the asset that may or may not choose to provide some to the down generation as a benefit.

Pat: So, people inadvertently disinherit their own children, normally, their children because of poor estate planning at the second marriage.

Scott: Yeah. Yes, yep.

Pat: Look, I've worked with clients who say, "I want as little as possible to go to those two, and as much as possible as going to my two." And as much as I think my job's not to really pass judgment, I go, "Well, yeah. Here's how that works." But it's like... So, estate planning... Melissa called us...

Scott: This is getting depressing.

Pat: Well, dad could have made it a lot easier on Melissa. No, I'm just thinking. I don't even like thinking about it. Well, let's go back to the...

Scott: By the way, my wife's mother died 13 years ago.

Pat: Has it been that long?

Scott: Yeah. 65, heart attack. It's one of those things that... It's, like, heart disease number one killer for women. And you think of it always as men and they missed the signs, and, like, we missed some of the signs, truly. But my wife had inherited a small amount. She just said, "Let's throw it in the pot. My father passed away a few years ago. We just... A modest amount, threw it in the pot. Although there are some IRAs still that we take the requirement of distributions on, Roth and normal IRAs.

Pat: Is that kind of a hassle?

Scott: No. Because my Allworth advisor set it up. It's all automatic.

Pat: Automated?

Scott: Yes. It just comes out at December and gets transferred to my brokerage account that my Allworth financial advisor takes care of for me.

Pat: That's right.

Scott: That's a little shameless plug for...

Pat: For us.

Scott: Allworth Financial.

Pat: For us.

Scott: Anyway, let's...

Pat: For us and our 300 and whatever, 50, teammates.

Scott: Let's go back in calls.

Pat: Are we allowed to call 'em teammates? Associates.

Scott: We call 'em associates because no one wants to... I don't know why. They're not employees, they're associates. But then some senior people think, "Why am I an associate?" It's like, "Associates not meant like that. Associates just meant we associate under the Allworth umbrella."

Pat: That's very nicely said. There you go. There's some boardroom bingo, corporate bingo talk-speak going on there.

Scott: We do have a great team of people though, I must say.

Pat: That's correct.

Scott: Yeah. If you wanna join us, 833-99-WORTH is our number here. 833-99-WORTH. And we are in California talking with Opal. Opal, You're with Allworth's "Money Matters."

Opal: Hello there. Thank you for taking my call.

Scott: Thank you.

Opal: Oh, wow. I'm calling you guys. Oh, wow. This is cool.

Pat: Oh, good.

Scott: Oh, thank you for joining us.

Pat: We think so too. We thank you for calling us. We do appreciate you.

Opal: You're welcome. I have a request for a clarification and a question.

Pat: Okay.

Scott: All right.

Opal: The clarification, a couple of weeks ago you were talking to a gentleman and you said, "You lose money when you reinvest dividends," and you didn't explain why.

Pat: Oh, I don't know if we said that.

Opal: Yeah, you did. Yeah, I listened to it twice.

Scott: Okay. Well, it was in some context, so how about we explain why reinvesting in your dividends oftentimes doesn't make sense?

Pat: And why oftentimes companies paying out dividends don't make sense. So, dividend...

Scott: Money invested inside of a retirement plan, IRA, 401(k), it doesn't matter. There's no taxes until you pull the money out, and in this day and age there's really no transaction costs when you buy or sell a security. So, whether it's reinvested or not reinvest makes no difference whatsoever. But money that is invested outside of a retirement account, when we choose to have dividend reinvestment, we are stating, "I'm choosing to put some cash that I've got today and buying that individual company, or that individual security. Buying more shares of that." And oftentimes, most money that is invested outside of retirement account is not allocated perfectly.

Because over time, one thing does better than something else, and people don't rebalance because the tax implications of rebalance is, "I know I should probably sell a little bit of this because it's up in val..." Actually, most people don't think this way, but the proper way to manage money is when something is outperformed, you pair off a bit of that and invest in a different area. When you reinvest in the dividends, you're prolonging that problem. You're making it worse when you could be instead saying, "I'm gonna take those dividends and use this fresh cash as an opportunity to perfect my portfolio, or move it closer to the ultimate..."

Pat: And rebalance the portfolio.

Opal: Oh, I see.

Pat: So, it doesn't necessarily cost you more money, it's just an inefficient way of managing your money. Because let's just say a company had a stock, I had $100,000 dollars in a company stock, and it paid, this is fictitious, a 25% dividend.

Scott: That'd be pretty good.

Pat: Now I get this $25,000 and I turn around, and I actually put it back in that company stock. But maybe I've got too much of that company stock already.

Opal: Oh, I get it.

Pat: Or maybe it's paying such a high dividend...

Scott: Something's wrong.

Pat: Something's wrong. It's not earning that much money. In fact, it's borrowing money in order to pay such a high dividend, which isn't unusual by the way. So...

Opal: Got it.

Pat: I'm just compounding my problem. And then now one day I wake up and I say, "Oh, I should really diversify that portfolio. I have to go back in and sell shares, which may or may not be the right thing to do in order to diversify the portfolio."

Scott: Yeah. Having said all this, years ago, companies would often have a dividend reinvestment plan. I think just about every company did.

Pat: They're called DRIP plans.

Scott: Yeah. I don't know if they're still really out there because...

Opal: Got it.

Scott:... times have changed a lot. But that was back in the day and that was also when you had to buy a even lot, 100 shares or more as a chance for investors to be able to reinvest their dividends in the same company without any transaction costs and without having to meet 100 share minimum threshold. But that was...

Pat: Well, that was when I started.

Scott: Yeah, I know. Yeah, we've been in the business a long time.

Pat: And that's a good point. And so, that was a way of doing it.

Scott: It's not the preferred way today.

Pat: Not, not, not...

Opal: Got it.

Pat: Not. In fact, if you had listened to this show 25 years ago, which you could have...

Scott: But don't listen to it now.

Pat: Which you could have... You could have listened to it 25 years ago.

Scott: Actually, the vast majority of our planning is no different today than it was 25 years ago.

Pat: That's right.

Scott: It's some of the investment techniques and how to... ETFs weren't even around back then. I mean, a lot of things have changed.

Pat: Yeah. But it wasn't a bad way to accumulate shares. It's just not efficient at all.

Opal: Got it.

Pat: Okay. Yeah, so.

Opal: Okay. I understand what you're saying.

Pat: And by the way, people get hung up on these dividend-paying stocks. I don't understand it.

Scott: Well, you do.

Pat: I understand why people do it.

Scott: In your viewpoint, it's not a well-educated viewpoint.

Pat: Thank you. Thank you. Thanks, Scott. Thank you for telling me what I think. I'm saying, you actually did a better job of explaining it than I did.

Scott: I know you pretty well. We've worked together a long time. You got a question for us, too.

Opal: Yeah. Okay, this is a tax question. This is a pretty watered-down scenario so I can get the point. Let's say you buy your favorite mutual fund. You buy one share at $21, and you buy one share at $25 and, you know, the market does whatever it does. After x amount of time, the custodian gives you dividends and they buy 1 share of that favorite mutual fund for $20, so now you have 3 shares. In two years, let's say you wanna buy, I'm sorry, you wanna sell at $30. Which one are you selling? Because in order to file your taxes...

Pat: The $25 one.

Scott: Most likely. Unless you find yourself in a situation we've got zero capital gains based upon your income that year, then you might sell the one at $20.

Pat: Oh, depending upon what the total income for the family is.

Scott: Yeah.

Opal: Oh, I see.

Pat: So, Scott.

Scott. Some capital gains at zero, some's at 5%.

Pat: So, what's your income? And then, this will kind of land us closer to the right answer.

Opal: Oh, I'm retired, but I mean, this is just a scenario. I mean, just an idea. Yeah, I get what you're saying.

Pat: So, you're most likely to sell the $25 one if you are in...

Scott: Eighty percent of the time, 90-plus percent of the time.

Pat: Yeah, most likely. You can state exactly which [inaudible 00:42:23] you wanna sell.

Opal: You can pick and choose whatever which one...but you have to keep good records to make sure of it.

Pat: Yeah, that's correct. That is correct, too. Yes, both those things.

Opal: And that's in the brokerage account. This doesn't matter if it's in a rollover IRA or the Roth.

Pat: The IRA doesn't matter. The only thing that's taxed in an IRA and Roth...

Scott: Distribution.

Pat:... is the money that's distributed.

Opal: Got it. Got it. Okay.

Scott: All right.

Pat: And here's the reasoning behind why you would normally sell the highest ones is you've lowest capital gains. Under the current tax law, you'll receive a step up in basis at death or depending upon how the property is titled if you've got a spouse on either of your death so that all that capital gain is wiped away. And you can gift things to people...well, not to people.

Scott: And to people.

Pat: Yeah, you can gift shares to people and you could gift this to non-profits. If you are gifting, you might wanna gift the $25 one to a non-profit.

Scott: They still give the one with the lowest cost basis, the most [inaudible 00:43:26] can gain.

Pat: Oh, that's a good point. That's a good point.

Scott: So, most of the time, you're gonna choose the one that's gonna have the lowest tax implication. There are times if you're... And the majority of Americans don't pay any capital gain tax just because they're lower tax rates. And if you're only buying three shares.

Pat: Yeah, but the majority of our listeners aren't in the lowest tax rate.

Scott: That is correct. That is correct. Again, it takes planning, just with... That's a good question, though. I appreciate you calling so much. Well, we are getting to the end of our time here with you guys. Just want to remind of our website, this program...we've been doing this program for 27 years. Highly education, at least I hope you think that. That's our approach. Let's help educate people they can make better choices with their finances is the more educated there. We have the same approach with our website. We've got lots of different tools. Obviously, you can get this podcast there, but there's lot of different educational tools and techniques and stuff that you can get from our website, whether it's articles, or blogs, or video productions, or webinars, or seminars, and all kind of things. Allworthfinancial.com is our website, allworthfinancial.com.

Pat: And they're not run-of-the-mill, we do them in-house.

Scott: Yeah, yeah. We do them in-house. We manufacture...we make our own content. So, visit allworthfinancial.com, and a great topic right there right now is where retirees are moving, and also, a great article on required minimum distributions. We're out of time, we'll see you next week. This has been Allworth's "Money Matters."

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