The Magnificent Seven’s Market Risk, Early Retirement Planning, Roth vs. 401(k), and Portfolio Strategy
On this week’s Money Matters, Scott and Pat open the show with a look at the Magnificent Seven stocks. Is this tech dominance a warning sign or just the new market normal? They unpack what this concentration means for index investors and why historical perspective matters.
Next, they take a call from a 56-year-old tech professional navigating a surprise layoff and considering early retirement. With over $2M in assets and plans to relocate, they walk through whether he can afford to stop working—or if some part-time income is essential. It’s a timely breakdown of early retirement math, real estate moves, and RSU liquidation strategy.
The episode wraps with two strong planning discussions: a state employee navigating Roth vs. traditional 401(k)/457 contributions, and a retiree using a "bucket strategy" who wants feedback on portfolio structure. Scott and Pat debate risk tolerance, rebalancing, and why flexibility is key in retirement income planning.
If you're exploring early retirement, weighing Roth contributions, or fine-tuning your investment drawdown plan—this episode is packed with actionable insights.
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.
Man: 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: Welcome to Allworth's "Money Matters," Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah, glad you're with us. We're talking about financial matters. We're talking about kind of current events and take your calls and get your opinion on. Give you our opinion on how you should be thinking about your finances.
Pat: Yeah. It's interesting. This AI with the circular investments is kind of crazy.
Scott: I was thinking the same thing.
Pat: Crazy. It's crazy. And you wonder, is this a house built on sand?
Scott: Well, the market's sure betting that it's going to be transformational.
Pat: I think it is. The question is, how transformational?
Scott: Yeah, it's interesting. So this last week, Pat, I had...well, if you look at our own organization, we have 550 employees, somewhere in there, give or take. And where we've used AI a little more heavily is on tools for some advisors. There's some tools that help processes along. And frankly, some of the stuff you call AI, it was just a... Everything's AI now. No one has a new software program. It's a new AI tool, right? Everything.
Pat: Yeah, yeah. Well, it's software being improved by the use of AI.
Scott: That's right. And we use it for...I mean, it works great for internal answers because it knows exactly where to find stuff. It's really super quick for particularly newer employees, that sort of thing, trying to...
Pat: Yeah. It allows us to mine our own data more efficiently.
Scott: So you can kind of see. But then I also had a conversation this week with the CEO of a company, a few hundred employees, and I was asking him about AI. And he says, "Well, what's interesting," he says, "we get pitched all these really great tools." And the next thing I know, it bubbles up to me. We have this long meeting. And he says two things. One is it typically doesn't do what they say it's going to do. It's, like, still a bit of an idea.
Pat: Vaporware.
Scott: A bit of that. And he says, secondly, what they want for it, how much they want for this stuff, he's like, it's going to be hard to justify paying that even if it can do what they're promising to do. So if you think about what the big bet is right now, and the reason the stock market keeps going higher, it's driven by the Magnificent 7, or these tech stocks.
Pat: There's a little bit more broadly now in the last couple of months.
Scott: Yeah, that's right. Fair.
Pat: But the big run-up has been because of this Magnificent 7.
Scott: Well, if you take that away, I think the estimate is the economy grew by 0.1% last quarter, something along those lines. So the bet is that this is eventually going to have a massive improvement on efficiency, right?
Pat: Yes.
Scott: And productivity.
Pat: That's correct.
Scott: But right now, to your point, it seems quite insular in the fact that Microsoft's doing a deal with...
Pat: With Amazon Web Services.
Scott: They're all doing deals with one another and spending with one another.
Pat: Circular, like I invest in you and you buy this software. I was talking to a software salesman, and he said, "That's pretty common." This guy was in software sales for over 40 years and selling big enterprise systems. So he said it wasn't uncommon to go to Microsoft and say, "Okay, we're going to sell you this payroll HR software, and in return, we're going to use this." And he said, "The problem is," he said, "that you actually had to audit it that the software itself was actually being used." Because if you weren't using the software, it looked like a form of rebating. Like, I'm just going to buy this software from you, and it's going to push your sales. It's going to push our sales. But if I don't use that software and I just shelf it, then it's a form of manipulation of your earnings.
Scott: So let me get this straight. So you have to make sure we're actually using the software we bought that we didn't want. We bought it to get this deal done.
Pat: That's right.
Scott: But we have to use it.
Pat: That's right.
Scott: That was interesting.
Pat: Scott, I watched this fabulous documentary this last week on public PBS, and it was about rails to trails, right? Taking all railroad tracks and turning them into bike trails. And you're thinking, "Well, what's this got to do with this?" At the beginning of the railroad boom, there were so many railroad companies that laid railroads just to where they thought there was going to be a marketplace, and it never materialized. Just never. And the railroad just sat dormant.
Scott: So we had excess rail even when we were maximizing our rail transportation.
Pat: That's right. Because so many companies were buying these little...putting in little rail lines, right? So, how many phone calls do you get a week from someone trying to sell us AI? I probably get five or six and then at least two dozen emails. And I always think this is a little bought down company trying to sell AI. So they're building all this infrastructure for AI, and not all of it's going to make it. And even the ideas of the best AI infrastructure isn't going to improve the business processes if they're not used effectively. So it brought me back to every other cycle, where you go through these transformational periods of time where there's overcapacity.
Scott: Which clearly we're in.
Pat: Yeah, overcapacity.
Scott: There may be overcapacity.
Pat: Yes.
Scott: And there may be new technology that can process this with 10% of the power.
Pat: That's when you look at NVIDIA's stock and you think, "You know, there's companies out there..."
Scott: Five trillion dollars, they hit a week or so ago.
Pat: That's right. But there's competitors out there that will displace them in a relatively short period of time.
Scott: At least at some point in time.
Pat: I'm guessing relatively short period of time, less than two to three years.
Scott: It's interesting, Pat. You look at those Magnificent 7 stocks, and we don't always talk that much about stocks of individual companies, but it's just an interesting time. They make up something like 38% of the market cap of the S&P 500.
Pat: That's right.
Scott: So you put $1,000 into an S&P 500 index fund, let's say. Three hundred and eighty of that $1,000 is invested in just those 7 companies.
Pat: That's right. And clients call them, "Do we own any NVIDIA?" Yes, we own quite a bit of NVIDIA.
Scott: Even if you just own index stocks. Yes, your number one holding.
Pat: That's right. Just because of the weighted cap.
Scott: Yeah, it's amazing. And there will be... Everyone has an iPhone. Matter of fact, if you still live today without an iPhone, I don't know how you get by.
Pat: How do you order in a restaurant? How do you take pictures of yourself?
Scott: Well, you have phones, but the other phones, you can't do the group text. Matter of fact, the other day, I went to send a text to a guy who's got an Android phone, and it failed to send. I had to go push to send it as a regular text. Like, iPhone's making it...
Pat: Did you drop him as a friend?
Scott: I didn't like him anyway. I was just... But what if the future of AI changes things such that this phone doesn't...we don't need the phone the way we need a phone today?
Pat: Yes.
Scott: The Magnificent 7, 50 years from now...
Pat: They won't be the Magnificent 7 forever.
Scott: There'll be seven other companies that'll be market leaders 50 years from now. If you go back, you look at the last 50 years, which I think is a reminder for people... Do we own any NVIDIA?
Pat: Yes.
Scott: Right, the question, do we own an NVIDIA? And why are they asking that question? Because NVIDIA has done so well. And they want to sell it?
Pat: Oh, they wanted to make sure we had... They actually wanted to buy some if we didn't own it.
Scott: Right? Right.
Pat: We own a lot of them.
Scott: Right. But they didn't want to sell it.
Pat: No, they absolutely not. That's right. Your point being?
Scott: My point is the financial markets are fascinating. The fact that when something goes up in value, that's when people want to buy more of it, whether it's gold, NVIDIA.
Pat: Bitcoin or the thousands of other digital currencies out there. Yeah.
Scott: It's a really fascinating time. And the benefit of being in the industry for a few decades is you've seen some of these cycles. They all are different.
Pat: They're never identical, but you don't get too excited about any of it.
Scott: That's fair.
Pat: He's just like, "This is it. That's fair." It's part of the game.
Scott: It's funny. I was reading this just a few days ago. I forget the name. A famous investor. I didn't know that. The article said he was a well-known investor. I never heard of the guy. Anyway, it was back in the '90s and how he shorted the market in 1999 because he knew it was too high, lost his shirt, covered his positions, went long. It just turned out he shorted the market on the exact... I'm sorry. He went long on the market on the exact day the NASDAQ hit a peak in March of 2000.
Pat: And then he went long. He bought in.
Scott: He bought in. Lost billions. And he capitulated. Like, I guess I'm wrong. I guess the story is going to continue to play out.
Pat: I can't...yeah.
Scott: And he was wrong both times.
Pat: Like, both times.
Scott: Yeah, wrong both times. And supposedly, he was a famous investor.
Pat: Famous investor.
Scott: He's infamous now.
Pat: That's right.
Scott: Anyway, let's take some calls. To join our program to be part of Allworth's "Money Matters," the best way is just send us an email, questions@moneymatters.com. Again, questions@moneymatters.com. And we'll get you on. By the way, obviously, we have someone who vets the questions and makes sure it's a real question and some of those sort of things pertinent to most of our users. But it's not like we have a three-month wait to get your question answered. So, like...
Pat: Yeah, it's a couple of weeks.
Scott: Yeah, relatively quickly. So, if you want to be part of the program, we'd love to take your question. Just send us an email, questions@moneymatters.com. All right. We're talking with Devin. Devin, you're with Allworth's "Money Matters."
Devin: Hey, guys.
Pat: Hi Devin.
Devin: Big fan. I've been listening to you guys for about 10 years on your wonderful podcast.
Scott: Oh, cool. Thank you.
Devin: So keep up the good work.
Scott: Appreciate that.
Pat: What can we do to help?
Devin: Yeah, yeah. So I had a bit of a life change about two and a half months ago. I was working at a tech company for 34 years and got the old morning phone call and was laid off, to my surprise. And I've kind of been contemplating what to do since then, early retirement, do I go back to work, and all that, so.
Scott: Yeah.
Pat: How old are you, Devin?
Devin: I am 56 and a half.
Pat: Married?
Devin: Yes.
Pat: Are you supporting any children?
Devin: No. My son has been off the books for a couple of years now.
Pat: Okay. And you were 34 years with the same company?
Devin: Yeah, more or less. There was an acquisition at the beginning of my career, but they included all that service time. So it's actually been 27 years with the current company.
Pat: But 34 years with that same entity.
Devin: Thirty-four years total, my career, yeah.
Scott: Are you hoping to get another job of similar pay? Is that what the plan is? Are you looking at this as an opportunity to do something different?
Devin: Well, if I can float it and survive in early retirement, that would be my preference. Thirty-four years is a long time.
Scott: Are you viewing this as a blessing or a curse?
Devin: Well, it's a little bit...
Scott: Or you don't know?
Devin: Well, yeah, we can get into some of the financials. There's also a stock component to this that's gotten really interesting.
Pat: Okay. Well, let's just see if we can get you to retire now. Let's work with that. And by the way, it is a very... You know this, but for the rest of us, it is a very, very challenging job market, and especially in the tech industry. Especially in the tech industry. You just see these...
Devin: Yeah. I had three colleagues that were in the same release, and they're much younger than me. And I feel for them, for sure.
Pat: Yeah, it is.
Devin: I might have some options here.
Pat: Yeah. Okay. So, what's your financial situation look like?
Scott: What's your home worth?
Devin: Sure. I've got a condo here worth about a million. I owe about $400,000 on that.
Pat: And that's your primary residence?
Devin: Correct.
Pat: Okay.
Scott: And is your preference to stay where you are?
Devin: We're actually considering moving up to the... We're in San Jose, so we're considering moving up to the greater Sacramento area, maybe in the foothills. We like Auburn, that area.
Pat: Okay.
Devin: So that's another...
Scott: By the way, I've lived in the foothills 30 years, and I swear, every year, I think, "This is the best place to live." I really love the foothills.
Devin: Yeah, yeah. We've visited up there quite a bit. I've got some family in that area, in Folsom. So, yeah, we like it up there.
Pat: Okay. And what's the rest of the financial...?
Devin: Much cheaper than Bay Area.
Pat: Oh, yeah, exactly.
Scott: And would you have another condo, or could you buy a house for that amount?
Devin: I would hope to get sort of a standard suburban house kind of thing.
Pat: Okay.
Scott: Okay.
Devin: Yeah. So the main assets is the 401(k). So, obviously, I've been looking a long time. So I've got about 1.35 million in my current 401(k) from my company that I was let go. I also have an IRA, about 500,000 in there.
Scott: How did you get that IRA so large?
Devin: That was from my previous...so the first seven years I was working at a different company, yeah. I have a small Roth IRA of 38,000.
Pat: Okay.
Devin: Mainly, because my income's been too high to really put much in there. Yeah. So that's the main retirement pre-tax.
Scott: And how about your spouse?
Devin: She's not working. She does some volunteering, but not really any income there. And she has a very small IRA, like, about $2,000.
Pat: Okay. And then, how about after tax, non-qualified money?
Scott: Money in the bank.
Pat: Brokerage, stocks, whatever.
Devin: Yes. I've got about 63,000 in a brokerage that's invested in an index fund. And then I've got a bunch of... So I had a severance of about nine months' equivalent salary, plus PTO and all that cash out. So I've got a lot of money in high-yield savings right now. So I've got about 150,000 between a brokerage money market and an outside, like, Synchrony.
Pat: And then you mentioned stock. Tell us about that.
Devin: Yeah. So since I was laid off, the stock, my company has gone up 80%. We somehow have gotten pulled into the AI ecosystem. It's a memory hardware company, but Wall Street seems to think it's an AI company now.
Pat: Okay, everyone is.
Devin: So it's been kind of crazy. Yeah, I left with a good chunk of vested RSUs. And I've been resisting selling any because I'm going to be at such a high tax bracket this particular year, with working about nine months and then, like, a nine-month severance on top of that.
Pat: Got it. So, how much is the value of the...how much in the money are you with these RSUs?
Devin: To the minute, it's about 420,000.
Scott: And are you precluded from using any options to protect you on this? Can you put something here, or is that...? Some companies allow it, and some don't. Some of these are restricted stock. My guess is you can't.
Devin: As far as I know, they're just stock. I mean, they're vested, and I have a cost basis and all that. Anything that was not vested was released when I was severed, so.
Pat: Okay. Got it, got it, got it. So he might be able to put some options on these. Okay. And what else?
Scott: To bridge you until 2026, that's my thought.
Pat: Yes, yes, yes. Get the downside.
Scott: If we can protect that 420 until 2026, and then I would recommend reducing quite a bit of this, I think.
Pat: Yes.
Devin: Yeah, yeah. I'm keeping my fingers crossed for Gen 1.
Scott: Well, you can keep your fingers crossed. You can also use some financial instruments to secure that.
Devin: Right. Okay.
Scott: Pretty easy. Think of it like an insurance premium.
Pat: Yeah, pretty, pretty easily. And what other assets are...? Is that everything?
Devin: I do have an HSA that's pretty well-funded. It's, like, 53,000 that's invested and then another 10,000 that's just in cash.
Pat: Okay. What was your salary?
Devin: I may be using that for COBRA payments if I sign up for COBRA.
Scott: What was your salary?
Devin: It was about 250 salary plus some bonus a year, but I definitely was not living off of all of that. So I've kind of come up with a budget of what I think I'm going to need.
Pat: What is that?
Devin: So I'm thinking about 133k pre-tax a year. I don't know if you want monthly or annual.
Scott: And have you calculated what that would be as a percentage of your portfolio? I mean, it's kind of, for us, just kind of a quick and dirty way to do it. So you've got 2.2 million.
Pat: Did you include health insurance premiums in that dollar amount?
Devin: I did, yeah. I currently put in the COBRA rate that they're quoting me now. And I was just looking at COBRA California today, and I don't think...
Scott: Actually, I've got a friend that has a...
Devin: ...that was going to be cheaper for now.
Scott: I have a friend who has pretty substantial net worth, and he pays almost nothing. Just the way he's structured his...
Pat: Yeah, we could do this. You know what, it's going to be tight for you. Most certainly, living in that condo down there, it would make it almost impossible.
Scott: You're looking at about a 6% distribution rate.
Pat: At 56.
Scott: At 56. It's a little high.
Pat: It's high.
Devin: Well, I'm 56 and a half, so I'll be 57 in, you know...
Scott: Okay, at 57.
Devin: I've got plenty of cash I can live off of for six months.
Scott: Understand.
Devin: So I have a lot of leeway of what my income can be next year.
Pat: Yes.
Scott: You're fine. You've got a great period of time to figure out what you want to do the rest of your life.
Pat: Leaving the workforce completely is probably not doable, unless you want to change your lifestyle. Yeah. Leaving the Bay Area and moving to a foothill community and getting a job at $80,000 or $100,000 a year, absolutely doable.
Devin: Okay.
Scott: And then take less out of your portfolio today.
Pat: And take less out of the portfolio. You'd like to see this distribution at your age.
Scott: Three to four.
Pat: I was going to say three there. And so the way I would structure this is I'd put some downside protections on the RSU as quickly as possible. And then I'd sell the house in the Bay Area, and I'd move to, you know... You can afford a $800,000, $900,000 home by using the RSUs and then take a 3% distribution, make the difference up with earned income.
Scott: And if you maybe want to take a year before you do anything, which is fine.
Pat: Which would be okay. But a job that actually provides health insurance would be important.
Scott: Big deal.
Pat: Big deal to you.
Scott: That's a big deal for you.
Devin: Yeah, yeah, yeah. So health insurance.
Scott: And it's getting worse. It feels like a ticking time bomb, the whole health insurance.
Pat: But you can do it. You can do it. And then I would leave the 401(k), at least a percentage of it, where it's at, because you're over age 55. And as long as you don't roll it into an IRA, it becomes liquid between the ages of 55 and 59 with separation of service. So you don't have to leave it all there, but you could leave a portion of it there.
Devin: Oh, yeah, yeah. I would definitely plan to use the rule of 55 for sure.
Pat: Yes.
Scott: Because you might take some...yeah.
Pat: Some income there.
Scott: So rather than looking at this as, "I'm going to retire, I don't have to worry," I would look at this as you've got a season now. You could have a nice long sabbatical. You're not in a rush. But figure out, where's the intersection between Devin's skills, Devin's passions, and what the market will pay for? And you don't need to earn as much as you did before.
Pat: Without question. That's spending $800,000 or $900,000 on a house. If you want to spend less on a house, it just drives down the income needs, what you're going to need.
Scott: That's right.
Devin: Yeah, yeah. I was targeting about 750k on a house, give or take. So, yeah, I think we're aligned on that.
Pat: Yeah. I mean, it depends on... Since we live in the foothills that you're talking about moving to...
Scott: I haven't looked at house prices, and I have no idea.
Pat: I don't know. But the further you go up, you get Nevada City or Grass Valley.
Scott: Oh, there's some little towns that you can... You might not want to live there.
Pat: That's right.
Scott: You might have a meth lab next door, but...
Devin: Oh, yeah. Yeah, I know the range.
Scott: Yeah, you don't have to go too much further up the hill. It can be quite interesting.
Pat: Yes, interesting. So you can make it work.
Devin: Okay.
Pat: Okay. All right. Appreciate the call, Devin.
Scott: Pat, have you read that book, "From Strength to Strength?"
Pat: No.
Scott: The first chapter, you'll be very depressed. It basically looks at your creativity in your career. And I don't care what career path it is, whether you're a musician or an architect or an engineer or a financial advisor, whatever it is, your creativity wanes and drops off at a pretty early age. And it looks at all these different industries. And the point of the book is, as you get older, instead of trying to double down on what you did in your previous years, you're not as creative as you were in those times. How do you build upon the strengths that you've got today versus trying to continue to rely upon the strengths that helped you when you were a young person?
Pat: And what's the thesis that you're less creative? Is it risk-taking?
Scott: It just looks at all these different industries.
Pat: Oh, and says, "By the time you're 50..." That's awful. It sounds terrible.
Scott: Well, that's why the first chapter is depressing, and then you continue to read. But part of it is, as you get older, you're more of a mentor and more of a coach. And you've got tons of wisdom, but you might not have the same creativity as a 22-year-old does, nor the drive, for that matter.
Pat: Well, the drive is the big issue. I had a young man ask me if I would be his mentor last week.
Scott: And?
Pat: I said no.
Scott: Really?
Pat: Yeah.
Scott: Why?
Pat: I said I'm really kind of out of it, not really looking for that.
Scott: Someone in our industry?
Pat: No. No, no, no. The guy was detailing my cars, and he said, "What do you do?" And then I said, "Well, I did this and this." And he said, "Have you ever thought of taking on a mentee?" And I said...
Scott: My guess, okay.
Pat: What? Oh, had he been in my industry? What's your guess?
Scott: Well, if he owned a chain of detailing places, you might have more interest in...
Pat: I don't know. I'm just really not looking for that right now.
Scott: All right, whatever. Anyway.
Pat: All right.
Scott: That's funny.
Pat: Have you been asked to be a mentor?
Scott: I was a mentor for a while.
Pat: Internally, here at Allworth?
Scott: Yeah, yeah.
Pat: Did you like it? What are you going to say? You have to say you like it.
Scott: Yeah, one of my kids.
Pat: You have to say you like it.
Scott: Oh, it was such a rewarding experience. Yeah.
Pat: Did you?
Scott: I always enjoy time with young people, too. I'm sure it happens to you a couple of times a year. You have breakfast or a cup of coffee with...
Pat: Oh, yes, yes, yes. That happens.
Scott: ...someone young, and I always enjoy that.
Pat: But I'm not looking for another long-term relationship. I've been married 40 years. I mean, isn't that enough?
Scott: All right. Anyway, let's continue on here. We're talking to Ryan. Ryan, you're with Allworth's "Money Matters."
Ryan: Hey, Scott and Pat. Thank you for taking my call.
Scott: Yeah, glad you're joining us.
Ryan: So I'm a California state employee, and I've been maxing out my 401(k) for a number of years. And because I also have access to a 457, I started contributing to that.
Pat: In addition, Ryan, in addition to the 401(k), you started doing the 457?
Ryan: Correct.
Pat: Okay.
Ryan: Yeah.
Scott: And are you maximizing that too?
Ryan: No.
Scott: Okay.
Ryan: No. Just whatever extra I could kind of put into it. So I recently turned 50, and so I started redirecting what I was contributing to the 457 to the 401(k) for my catch-up. And now, with the new Roth rule that's coming into effect in 2026, my question is, should I redirect kind of that catch-up portion back to the 457, or should I kind of fall in line and start contributing the catch-up contribution portion to a Roth?
Scott: Are you planning on staying in California indefinitely? Well, you're 50, you probably don't really know. But do you think you'll stay in California indefinitely?
Ryan: Most likely, yes.
Pat: And what's your family income?
Ryan: Probably right around 360 annually.
Pat: And there's two of you. How many people on the tax return?
Ryan: So it's my wife, and then I've got two children.
Scott: When you retire, how much of that 360 is going to be made up in a pension?
Ryan: Probably a fairly significant amount. When I go out, it'll be about 70%. So it'll be pretty close to equal to what I'll be making at the time when I retire.
Pat: And what is your salary yourself? Your family's income is 360. What is yours?
Ryan: Right at about 175.
Pat: And does your spouse have a pension as well?
Ryan: Yes. Also with the state of California.
Scott: And is she contributing the max to her 401(k)?
Ryan: She's got a 457, and she is just about contributing the max, yes.
Pat: She works for a municipality?
Ryan: No. For the state of California.
Pat: So you both have 401(k)s and 457s?
Ryan: Correct.
Scott: So, is your basic question, should I continue to do everything on a tax-deferred basis or add some Roth?
Ryan: Correct.
Pat: That's what the question is.
Ryan: Right. Yes, right.
Scott: I would add some Roth.
Ryan: Okay.
Pat: And why, Scott?
Scott: When you get to retirement, first of all, assuming you stay the rest of your career with your job, you're going to have phenomenal retirement income, right? Guaranteed retirement income.
Pat: Cost of living adjustment on it.
Scott: So your additional savings is going to really be for ancillary stuff. I don't know if your home's paid off yet, but my guess, it's going to be paid by the time... Your needs are probably going to be less at retirement time than they are today at age 50.
Pat: Yes.
Scott: Right?
Ryan: Right. Yes.
Scott: So you're going to be in great shape retirement. And if all of your savings are in tax-deferred vehicles, it makes it a little more challenging. Pat's looking at me like I'm stupid.
Pat: Yeah, no, I just want to hear your answer, because I disagree. I disagree, but I want to hear your answer. That's White House.
Scott: You say, "I need to buy a new car." You're going to be like, "Well, crud, if I take it out of my IRA, it's going to put me in a higher tax bracket, so I've got to spread this out over a couple of years." Like, get to retirement time and having a diversified tax strategy, I think, can serve you well. Further, if we're going to have an argument...
Pat: We're going to have an argument about this.
Scott: ...debate about this.
Pat: I don't think it's an argument, but a debate.
Scott: You're currently at a 24% tax bracket. That bracket goes up to 37%. Now, granted, you'd need to have...that bracket starts today at 750,000. So that's too far. But the bracket moves from 24% to 32%. And given your income today, you're still in a 24% bracket, whether you defer or not. But the way things are going, your pension is going to make up 70% of your salary. You've got Social Security that's going to kick in as well. And then you add in distributions from your retirement account, there's a good chance you'll be in a higher tax bracket. Now, we have no idea what the tax brackets are going to be 10, 20 years from now when you retire. My bet is they're not going down.
Pat: Okay.
Scott: And you plan on staying in California. But if you don't...
Pat: So, how much money...? Do you have any money saved outside of retirement plans?
Ryan: Well, so I have a taxable brokerage of about 90,000, savings 60,000, 70,000. So that's most of what's outside. I do have a small Roth IRA, 35,000, and a small traditional IRA of 15,000.
Scott: And your kids still at home, college? What are your kids up to?
Ryan: Kids are at home, one in college, one still in high school.
Scott: And the colleges, are you helping fund that just out of current wage?
Ryan: Yes. Yeah, we've got 529s for both.
Scott: Okay.
Pat: You could touch a little bit in the Roth. I wouldn't go too heavy into the Roth.
Ryan: Okay.
Pat: Right? In fact, I would actually say...
Scott: If you had no pension, I would say do it all tax-deferred.
Pat: That's right. But he has a pension.
Scott: I know.
Pat: He's never going to spend this money. He's never going to spend this money.
Scott: You were just looking at the people we've seen.
Pat: He's not going to spend it. And what happens if he moves to another state that actually has a lower tax?
Scott: Well, then you clearly want the pre-tax contributions.
Pat: So I'd say, why wouldn't I...? I would take the benefit I could take now.
Scott: Yeah, okay. There's no right answer. We don't know what the answer is going to be until we know the tax code in the future.
Pat: But if you said, "Okay, I'm going to fund $20,000 a year into a Roth and the rest of it continue in the 401(k) and 457," I'd say, yeah, we're probably right. We might be wrong. I mean, it'll probably be okay. But so much of it depends on how long you live. Are you charitably inclined? Do you want to use these dollars?
Scott: How much do you have in your retirement accounts?
Ryan: About 470 in the 401(k) and 105 in the 457.
Scott: Okay. And your wife, where is she in those?
Ryan: Yeah. So she's probably...I think hers is a little bit less, probably about 230.
Scott: So you don't have a ton in there for a 50-year-old.
Pat: That's right.
Scott: But you have the pension, so you haven't needed it.
Ryan: Yes, right.
Pat: I wouldn't do any Roth.
Scott: Yeah. Given the fact that, you know, if your balance was...
Pat: Three million? Two million?
Scott: Three million could be a problem at age 50 by the time you calculate it out to age 75...
Pat: That's right.
Scott: ...your required minimum distributions.
Ryan: Right.
Pat: But it could be that much if they had started day one and they had been there for a long time. Yeah, I would revisit. I would continue with pre-tax and revisit it in a couple of years.
Ryan: Okay.
Pat: Right. And the only difference between the 401(k) and the 457, by the way, is how the money actually comes out and how it's taxed prior to age 55.
Ryan: Right.
Pat: That's the only difference between the two. And there's some, you know, intricacies about whether it's an asset of the state or not an asset of the state on the 457.
Ryan: Right.
Pat: I don't think that's super mature. Scott?
Scott: I think, either way, it's not going to...
Pat: Yeah.
Scott: We don't know. We won't know until the future tax rates.
Pat: Well, if you're a good financial advisor, you would not say that. You would say it with great confidence.
Scott: Like a weatherman.
Pat: No, we don't know. You're correct. We do not know.
Scott: Yeah. I think, if I were in your shoes... So here's an interesting thing, Pat. If you were Ryan, you would continue to do 100% pre-tax in the 401(k) and 457.
Pat: Yeah, if they...
Scott: I think, if I were Ryan, probably, I would do 50-50, just to hedge my bet. For tax diversification.
Pat: So that when you come in the distribution... And the reality is, if you're replacing 70% of your income, right, and I assume that's gross income at 70%, your standard of living will actually go up in retirement.
Scott: That's right.
Pat: So Scott's thinking about the tax implications in 20 years.
Scott: I'm thinking about tax implications in 20 years.
Pat: I would go either way. The benefit of actually doing it, quite frankly, I'm not wrong.
Scott: I mean, we can run numbers, but the thing with any financial model, it's all based on inputs and assumptions. So we can...
Pat: The reality is, by putting money into a Roth, you're actually saving more money on an after-tax basis because of how it's... You actually have more disposable income in retirement. I'll go with you, Scott, 50-50.
Ryan: Okay.
Scott: That way you're right.
Pat: That way you're right.
Ryan: Good point.
Pat: How's that for building confidence? That way you're right.
Scott: Well, we don't know what the tax rates are going to be by the time you're 75.
Pat: The only thing is...
Scott: If you had it 20 years ago, people would have been...people were emphatic that tax rates would be higher in 2025, right?
Pat: That was...
Scott: We've been doing this long enough.
Pat: "Oh, do you remember that?"
Scott: For sure.
Pat: There's no way they're going to be lower. No way. How many times have you heard that?
Scott: Of course, my whole career.
Pat: Yes.
Scott: And they're actually quite low today.
Pat: And what happens if they change the tax completely to a value add? Or they're discussing right now, a wealth tax.
Scott: Well, we know, though, our current structure is not sustainable.
Pat: That's correct.
Scott: Our tax has been not sustainable.
Pat: Yeah. By the way, anyway.
Scott: We only borrow so much money. All right. Appreciate the call. All right. Good luck.
Ryan: Thank you, both. Appreciate it.
Pat: Every time it comes around, every time.
Scott: What?
Pat: With taxes, it's like, we have to raise the taxes. There's never...very rarely is there...we have to cut costs. In local, even the county you and I live in, there's never...okay, we should probably just get rid of some of these services, but...
Scott: That's because that's the problem with the government. There's no private market to actually bring efficiencies to it and to kill off things that aren't productive.
Pat: That's correct.
Scott: I mean, the beauty of the private markets, the beauty of capitalism, which I don't think we teach our children anymore, is the market is going to decide if you are providing a valuable good and service or not.
Pat: That's correct.
Scott: And they reward companies that impact their lives in a positive way, and they punish companies that don't. And the capital flows to the companies that are adding the most value.
Pat: But not in government and, oftentimes, not in nonprofits.
Scott: Well, California now is trying to do a 5%...someone's floating a proposition to do a 5% wealth tax on billionaires.
Pat: How quickly those billionaires will absolutely leave the state.
Scott: I don't know. I don't begrudge anybody if they've earned money by doing something that's...
Pat: That the market wants to pay for.
Scott: Yeah. And most of these billionaires have had a positive impact on our lives. I guess one could argue that life is actually better today than it was 50 years ago, given all our mental health issues and everything else. But that's clearly our standard of living today.
Pat: Oh, it's incredible. It's incredible. I was flying somewhere, and someone's like, "Oh, the plane's been delayed four hours." I said to him, "You know, 100 years ago, we wouldn't even have considered going to that place because of all the time and energy, actually, we would have had to expend to actually go there."
Scott: Oh, days to travel by train or if you're going by ship to...
Pat: Yes. We were delayed four hours. That's awful.
Scott: My daughter was all freaking out. She was flightless. Just a couple of weeks ago, her flight. And I've traveled enough to, like, if that happens...
Pat: Just live with it.
Scott: ...it doesn't really bother me anymore. Like, at least 5% of the time, it's not going to go as my itinerary is. I've got this certain itinerary. I don't know. One out of 20 times, it's not going to work out that way. One of the flights is going to be delayed dramatically, canceled, something.
Pat: You might have to spend the night at a Holiday Inn in Omaha, Nebraska. So what?
Scott: Fortunately, it's been a while since I've had to do something like that. But I've been there a number of times. Anyway, let's continue.
Pat: Well, did she get home okay, or where was she going?
Scott: I don't even remember. I just remember thinking...
Pat: Expectations have been set, and they're high.
Scott: And I was probably more like that at age 30 than I am today, just because after you lived through a few of these things, well, I try not to sweat things you don't have control over.
Pat: I find, if you don't set the expectations, you won't be disappointed.
Scott: That's a good way to look at life, with super low expectations. I have no expectations for my children, for my marriage.
Pat: For myself, my own happiness, no expectations. No expectations of productivity. That way, I'm always happy.
Scott: We're talking with Tim. Tim, you're with Allworth's "Money Matters."
Tim: Hey, thanks for taking my call.
Scott: Yeah.
Tim: So I'm retired, and I use the bucket strategy. So I have two years in cash, five years in an intermediate core bond fund, and the remaining stuff is inequities. And I try to replenish my cash and bond bucket every four months, depending on how the market is doing. And my plan is, during a down market, only spend the cash until a recovery. So if I run out of cash, then I'll start spending out of the bonds, and hopefully, everything comes back. Like in 2022, the stocks took a couple of years, and the bonds took three and a half. So my question is, is this approach valid, and what do you think of the bucket sizes?
Pat: How much do you have inequities in terms of...?
Scott: Yeah, the percentage.
Pat: Well, you're using years, which is a form of percentages.
Scott: But I don't know how much he was spending relative to his...
Pat: Which is what would drive the decision-making. So, how many years do you actually have inequities in what you call that bucket?
Tim: So it's about 67%.
Pat: Okay.
Scott: And what percent, on an annual basis, are you withdrawing from your overall portfolio?
Tim: It's transitioning because I'm moving into starting to use my pensions and my Social Security. Right now, it's a little bit above four, but it'll go...after I start taking everything, it'll go below four.
Scott: Okay. So you're very comfortable.
Pat: And do you try to keep the 67% equities pretty constant?
Tim: Actually, I try to keep the cash and the bond constant.
Scott: So the fact that you're planning on taking a lower distribution going forward, is that then equating that you'll have a higher allocation to equities in the future?
Tim: Actually, yes. It would, in the future...
Scott: That's right. Mathematically right.
Pat: That's right. That's right. You know what, so we don't use the bucket concept. We look at percentage.
Scott: Sort of. But we sort of do.
Pat: Well, kind of. But we're not worrying so much about how many years we have in cash or intermediate bond. We worry about the overall allocation between fixed income and equity.
Scott: Yes, but we...
Pat: But it does essentially the same thing.
Scott: Correct. I mean, if we never worried about distributions, you have everything in equities.
Pat: Yes.
Scott: So if no one ever wanted to spend their money, you'd have everything in equities. Long term, it's going to outperform everything.
Pat: Which we do for some.
Scott: Which we do for some. And for some, we have no equities.
Pat: That's correct.
Scott: It depends on...
Pat: So your question is, again, what?
Tim: Is the approach valid? Is my bucket sizes about right? And I had another question after that.
Pat: Okay. It can be. It can be, depending upon...
Scott: How old are you, Tim?
Tim: I am 62.
Scott: Okay.
Pat: Yeah, okay. It depends on your risk tolerance. Because let's say you get down to a 2% distribution, right? Then, all of a sudden, your equity position is going to move up to 75% or 80% and your fixed...
Scott: Or more.
Pat: Yeah, or more.
Scott: And are you calculating your interest in dividends on replenishing? So when you calculate your bucket strategy, are you just saying, "Here's how much money I'm going to withdraw over the next seven years?" Or are you saying, "Here's how much income my portfolio is going to produce?"
Tim: No, how much I'm going to withdraw.
Scott: Yeah. So, to Pat's point, if you move down to 2%...
Pat: Yeah, you could be...
Scott: Because your equities are going to spin off almost 2%.
Pat: Yeah, and dividends. And therefore, you're going to actually see your portfolio get super aggressive. It's going to be, heck, we could do the math, but my guess is it's going to be 80%-plus, which is fine, which is fine.
Scott: If you can...
Pat: If you could stomach the volatility.
Scott: And the volatility could be multiple years, right?
Tim: And my approach on stomaching the volatility was, okay, if I know I have a two-year cash bucket and the five-year bonds, then, when I was tracking the various dips, it seems like things kind of recover in seven-ish years or so.
Scott: Sometimes. I mean, if you go back to other historical times, there's been times that have been much longer than that. But, yeah, 95% of the time, that would be correct.
Pat: Look, I'm okay. I don't think that you should let this portfolio just run like this, though, on the buckets.
Scott: Because what you just told us is that you're going to take out less income going forward because you're going to start having pension, and I don't know about Social Security, but having some other income coming in. So that would, by its nature, cause you to increase your equity allocation. And so the question I think we would have, does it make sense at this stage for a 62-year-old to increase the equity allocation beyond? And maybe it does.
Pat: Well, yeah. So let's live with this bucket strategy but put a cap on your equity exposure as a percentage of the portfolio.
Scott: Yeah, I think that's probably not a bad idea. Right? Here's what I like. By the way, here's what I like about this. You have a strategy. You have a workable strategy. And if you live by this strategy, I think it'll serve you well. We are our biggest enemies when it comes to investment returns, not the markets. It's ourselves. So the challenge is, if we've got this strategy, the market tanks, we get nervous, we start tweaking with our strategy, we forget our investment approach, we start doing new things. That's where problems happen. If you actually say, "I'm going to live by this strategy," I think it'll serve you fine.
Pat: But I don't... Did you read Ray Lucia's book? Is this where you got the buckets of money strategy from?
Tim: I got this strategy from my mother.
Pat: Okay. Because there's a book that this guy wrote.
Scott: I mean, actually, that strategy has been around a long time.
Pat: Yeah, it's been around a long time, but this is all buckets of money, although he uses annuities in there because it's probably best for him. I think I would...I'm okay if you do that, but I would cap my equity exposure probably at 75%.
Scott: Yeah, I would, too.
Tim: Okay.
Pat: Right? So you could call it whatever you want.
Scott: And I might want to match my maturities in my fixed income portfolio to when the needs are going to be.
Pat: With individual bonds?
Scott: Or different types of funds.
Pat: Yes.
Tim: Nope, I understand what you're... I did have a slightly related question, is that, like, in a down market, like 2022, it's easy to say, "Okay, I'm not touching, you know. I'm letting my cash just draw down." And at some point, when the stock started to come back, do you wait for it to reach its previous all-time high? Do you say, "Okay, well, it's within 5% or 4% of its all-time high, I can go ahead and sell it again?" Do you have any thoughts on that?
Scott: So our approach, and here's why we don't use the buckets of money approach, so our approach is determining how much we want, let's just call it risk assets, equities, maybe some other private investments, depending on portfolio size. Let's call it growth assets, risk assets, growth assets, right? So part of it is determining how much we want in those assets, and that's predicated upon, one, what someone's needs are, income needs are, cash flow needs, or when they need the capital. And then the second is how much risk tolerance, how much someone can stomach before they make stupid mistakes, right? So then, when we come up, and let's say it's 67%, like you've got, the way we tend to look at things is when the markets have great years, that 67% starts creeping up to 68%, 69%, 70%, 71%. So we rebalance, we sell. By just that nature, it forces us to sell when things are high to replenish the fixed income portion. Conversely, when the markets fall from 67% to 65% to 60%, we rebalance, meaning we buy back more equities when things are down just by the nature of keeping that asset allocation. And if you look at volatile years, particularly the year, say, 2000, when we had that really quick downturn because of the lockdowns, we rebalanced I think three or four times. And the rebalancing in and of itself produced, I forget what the excess return was, but...
Pat: Oh, it was incredible.
Scott: Yeah.
Pat: It was fast. And the reason is because it forces you, the strategy, percentage strategy forces you to actually sell when the markets are up and buy when the markets are low, which the bucket strategy doesn't. So I would, if you were my client, I would implore you to abandon the bucket strategy.
Scott: Well, the bucket strategy, how often do you...?
Pat: He said every four months.
Scott: Okay. So it's every four months you look at it.
Pat: But then he asked the question that actually said, "Well, if the markets are down, when do I wait to actually start selling to move money back out of the buckets?" And we're saying it's a constant. You should be moving... You never showed us a direction where you move from the buckets to the equities. You only showed us a direction where you move from equities to the fixed income.
Scott: Yeah, that's right.
Tim: That is correct.
Pat: And what we're saying is, look, there are times where you actually want to move from that fixed income into equities. So you're not taking advantage of the downturns in the markets in order to amplify your returns over time.
Scott: Although we've had...the last two, almost three years have been straight up, so it's...
Pat: Yeah, it hasn't mattered, but it does matter...
Scott: It does matter. Oh, absolutely.
Pat: ...when your example is the beginning of...
Scott: '22, same thing.
Pat: Yes. Yes. Because these things happen. And by the fact that you're doing it every four months, you have the ability to do it on a weekly basis. Is the money inside IRAs or outside IRAs?
Scott: Both.
Tim: Both.
Pat: Okay. Well, then, you might want to...in a perfect world, you'd have all your growth assets outside of the IRAs and all your bond inside the IRAs because capital gains rates are actually lower than ordinary income. And so you put...
Scott: And focus on the after-tax return, not only in 2025 but after-tax return for the next decade or two.
Pat: So the idea that you have right now doesn't allow you to go from buckets to equities, right, from the fixed income to the equities. And quite frankly, you're missing out on return and you're missing out on after-tax return because of the portfolios, if they're not designed correctly, which is the equities outside, the fixed income inside the IRAs to whatever extent necessary. You're just going to get an excess return after tax by doing that. So you're asking us to make a comment on a strategy that we would not employ because of the restrictions.
Tim: Okay.
Scott: Yeah, that's fair.
Pat: The restrictions that you have placed on yourself, which, by the way, your mother may have been a wonderful lady, right? She might have been the greatest person in the world. But she may not have been the best investor. My mother was a wonderful lady.
Tim: I hear you.
Pat: She's absolutely wonderful, the nicest lady, most caring lady. But I would never take investment advice from my mom.
Tim: I understand. Okay.
Scott: All right, Tim.
Tim: Hey, thanks for taking the call.
Scott: All right. Wish you well. It's interesting. And I almost said there's different ways you can approach things. Obviously, we think our way is the superior way. I mean, we have a fiduciary responsibility to our clients where this is...
Pat: Well, he's putting artificial restrictions on his portfolio that don't need to exist with that strategy.
Scott: Yeah. And sometimes I think a lot of people like doing things themselves, right? I think a lot of people take pride in the fact that they can do everything themselves. They don't need help. I do my own yard. I do whatever, right? Cut my own firewood. I split the wood. I paint the house. I fix the plumbing. Even people that can afford.
Pat: Which was like your stepdad.
Scott: I did it with him last night. He was telling about how he just cut some firewood.
Pat: The one that lived down in the Bay Area, the guy that had all the property with all the old stuff laying around the property in case he needed it.
Scott: Oh, my previous father-in-law.
Pat: Oh, that was it. Yes, yes, yes. Would do everything himself.
Scott: Everything. Made his own bolts. Literally, made his own bolts. We had some bolt machine in his basement.
Pat: Wow. Okay, keep going. Keep going.
Scott: And he mocked me, because I remember, I had my shoes polished somewhere, and he mocked me for spending my money to have my shoes polished.
Pat: Pretty sure it was your money, though.
Scott: Fair, and I was always of the mindset, I'm going to focus on what I'm pretty good at and I'm going to contract. So my point here is I think it's the same thing happens with our financial management, our financial planning, our money management. I think, look, I can just do this myself. I'm just going to figure it out. And there's a small percentage of the population, I think, can do just fine alone. The longer I'm in this industry, the more I think people benefit from a good advisor with the right kind of tax planning along with it.
Pat: But again...
Scott: It's going to pay for itself.
Pat: It's hard finding a good advisor.
Scott: Yeah. So I think, Pat, I think it's a combination of, one, there's particularly certain people that take pride in doing things themselves. That's how they were raised. That's how they've gone their whole life. And in addition to that, it's, how do you find a really good advisor, and how do you really know if it's a good advisor? It's difficult. Until you've spent some time working with that advisor.
Hey, as we're wrapping up here, just a quick note. This is really for our high-net-worth investors who are listening to our podcast in these particular markets in Houston, Denver, Phoenix, San Jose, and Indianapolis. Allworth will be in your city with some live events. You're not going to want to miss this. Because on the week of November 9th, we're holding exclusive strategy sessions for investors with portfolio of over 2 million bucks. Okay. So if you've got over $2 million, you're in those cities, these are special events with expert wealth advisors covering sophisticated planning tactics specifically designed to help you preserve and grow your wealth.
And if you're not in one of these markets, that's fine because we're hosting a year-end webinar created for you as well. And we'll get to the same high-level strategies just from the comfort of wherever you plan to be. So both the live events and the webinar are going to be essential to planning for 2026 and beyond. Sometimes timing can be everything, so you don't want to miss out on this. Visit allworthfinancial.com/workshops to learn more.
And that is all the time we have this week. It's been great being with you. This has been Scott Hanson and Pat McClain, Allworth's "Money Matters." We'll see you next week.
Man: 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 joining us.
Scott: Yeah, glad you're with us. We're talking about financial matters. We're talking about kind of current events and take your calls and get your opinion on. Give you our opinion on how you should be thinking about your finances.
Pat: Yeah. It's interesting. This AI with the circular investments is kind of crazy.
Scott: I was thinking the same thing.
Pat: Crazy. It's crazy. And you wonder, is this a house built on sand?
Scott: Well, the market's sure betting that it's going to be transformational.
Pat: I think it is. The question is, how transformational?
Scott: Yeah, it's interesting. So this last week, Pat, I had...well, if you look at our own organization, we have 550 employees, somewhere in there, give or take. And where we've used AI a little more heavily is on tools for some advisors. There's some tools that help processes along. And frankly, some of the stuff you call AI, it was just a... Everything's AI now. No one has a new software program. It's a new AI tool, right? Everything.
Pat: Yeah, yeah. Well, it's software being improved by the use of AI.
Scott: That's right. And we use it for...I mean, it works great for internal answers because it knows exactly where to find stuff. It's really super quick for particularly newer employees, that sort of thing, trying to...
Pat: Yeah. It allows us to mine our own data more efficiently.
Scott: So you can kind of see. But then I also had a conversation this week with the CEO of a company, a few hundred employees, and I was asking him about AI. And he says, "Well, what's interesting," he says, "we get pitched all these really great tools." And the next thing I know, it bubbles up to me. We have this long meeting. And he says two things. One is it typically doesn't do what they say it's going to do. It's, like, still a bit of an idea.
Pat: Vaporware.
Scott: A bit of that. And he says, secondly, what they want for it, how much they want for this stuff, he's like, it's going to be hard to justify paying that even if it can do what they're promising to do. So if you think about what the big bet is right now, and the reason the stock market keeps going higher, it's driven by the Magnificent 7, or these tech stocks.
Pat: There's a little bit more broadly now in the last couple of months.
Scott: Yeah, that's right. Fair.
Pat: But the big run-up has been because of this Magnificent 7.
Scott: Well, if you take that away, I think the estimate is the economy grew by 0.1% last quarter, something along those lines. So the bet is that this is eventually going to have a massive improvement on efficiency, right?
Pat: Yes.
Scott: And productivity.
Pat: That's correct.
Scott: But right now, to your point, it seems quite insular in the fact that Microsoft's doing a deal with...
Pat: With Amazon Web Services.
Scott: They're all doing deals with one another and spending with one another.
Pat: Circular, like I invest in you and you buy this software. I was talking to a software salesman, and he said, "That's pretty common." This guy was in software sales for over 40 years and selling big enterprise systems. So he said it wasn't uncommon to go to Microsoft and say, "Okay, we're going to sell you this payroll HR software, and in return, we're going to use this." And he said, "The problem is," he said, "that you actually had to audit it that the software itself was actually being used." Because if you weren't using the software, it looked like a form of rebating. Like, I'm just going to buy this software from you, and it's going to push your sales. It's going to push our sales. But if I don't use that software and I just shelf it, then it's a form of manipulation of your earnings.
Scott: So let me get this straight. So you have to make sure we're actually using the software we bought that we didn't want. We bought it to get this deal done.
Pat: That's right.
Scott: But we have to use it.
Pat: That's right.
Scott: That was interesting.
Pat: Scott, I watched this fabulous documentary this last week on public PBS, and it was about rails to trails, right? Taking all railroad tracks and turning them into bike trails. And you're thinking, "Well, what's this got to do with this?" At the beginning of the railroad boom, there were so many railroad companies that laid railroads just to where they thought there was going to be a marketplace, and it never materialized. Just never. And the railroad just sat dormant.
Scott: So we had excess rail even when we were maximizing our rail transportation.
Pat: That's right. Because so many companies were buying these little...putting in little rail lines, right? So, how many phone calls do you get a week from someone trying to sell us AI? I probably get five or six and then at least two dozen emails. And I always think this is a little bought down company trying to sell AI. So they're building all this infrastructure for AI, and not all of it's going to make it. And even the ideas of the best AI infrastructure isn't going to improve the business processes if they're not used effectively. So it brought me back to every other cycle, where you go through these transformational periods of time where there's overcapacity.
Scott: Which clearly we're in.
Pat: Yeah, overcapacity.
Scott: There may be overcapacity.
Pat: Yes.
Scott: And there may be new technology that can process this with 10% of the power.
Pat: That's when you look at NVIDIA's stock and you think, "You know, there's companies out there..."
Scott: Five trillion dollars, they hit a week or so ago.
Pat: That's right. But there's competitors out there that will displace them in a relatively short period of time.
Scott: At least at some point in time.
Pat: I'm guessing relatively short period of time, less than two to three years.
Scott: It's interesting, Pat. You look at those Magnificent 7 stocks, and we don't always talk that much about stocks of individual companies, but it's just an interesting time. They make up something like 38% of the market cap of the S&P 500.
Pat: That's right.
Scott: So you put $1,000 into an S&P 500 index fund, let's say. Three hundred and eighty of that $1,000 is invested in just those 7 companies.
Pat: That's right. And clients call them, "Do we own any NVIDIA?" Yes, we own quite a bit of NVIDIA.
Scott: Even if you just own index stocks. Yes, your number one holding.
Pat: That's right. Just because of the weighted cap.
Scott: Yeah, it's amazing. And there will be... Everyone has an iPhone. Matter of fact, if you still live today without an iPhone, I don't know how you get by.
Pat: How do you order in a restaurant? How do you take pictures of yourself?
Scott: Well, you have phones, but the other phones, you can't do the group text. Matter of fact, the other day, I went to send a text to a guy who's got an Android phone, and it failed to send. I had to go push to send it as a regular text. Like, iPhone's making it...
Pat: Did you drop him as a friend?
Scott: I didn't like him anyway. I was just... But what if the future of AI changes things such that this phone doesn't...we don't need the phone the way we need a phone today?
Pat: Yes.
Scott: The Magnificent 7, 50 years from now...
Pat: They won't be the Magnificent 7 forever.
Scott: There'll be seven other companies that'll be market leaders 50 years from now. If you go back, you look at the last 50 years, which I think is a reminder for people... Do we own any NVIDIA?
Pat: Yes.
Scott: Right, the question, do we own an NVIDIA? And why are they asking that question? Because NVIDIA has done so well. And they want to sell it?
Pat: Oh, they wanted to make sure we had... They actually wanted to buy some if we didn't own it.
Scott: Right? Right.
Pat: We own a lot of them.
Scott: Right. But they didn't want to sell it.
Pat: No, they absolutely not. That's right. Your point being?
Scott: My point is the financial markets are fascinating. The fact that when something goes up in value, that's when people want to buy more of it, whether it's gold, NVIDIA.
Pat: Bitcoin or the thousands of other digital currencies out there. Yeah.
Scott: It's a really fascinating time. And the benefit of being in the industry for a few decades is you've seen some of these cycles. They all are different.
Pat: They're never identical, but you don't get too excited about any of it.
Scott: That's fair.
Pat: He's just like, "This is it. That's fair." It's part of the game.
Scott: It's funny. I was reading this just a few days ago. I forget the name. A famous investor. I didn't know that. The article said he was a well-known investor. I never heard of the guy. Anyway, it was back in the '90s and how he shorted the market in 1999 because he knew it was too high, lost his shirt, covered his positions, went long. It just turned out he shorted the market on the exact... I'm sorry. He went long on the market on the exact day the NASDAQ hit a peak in March of 2000.
Pat: And then he went long. He bought in.
Scott: He bought in. Lost billions. And he capitulated. Like, I guess I'm wrong. I guess the story is going to continue to play out.
Pat: I can't...yeah.
Scott: And he was wrong both times.
Pat: Like, both times.
Scott: Yeah, wrong both times. And supposedly, he was a famous investor.
Pat: Famous investor.
Scott: He's infamous now.
Pat: That's right.
Scott: Anyway, let's take some calls. To join our program to be part of Allworth's "Money Matters," the best way is just send us an email, questions@moneymatters.com. Again, questions@moneymatters.com. And we'll get you on. By the way, obviously, we have someone who vets the questions and makes sure it's a real question and some of those sort of things pertinent to most of our users. But it's not like we have a three-month wait to get your question answered. So, like...
Pat: Yeah, it's a couple of weeks.
Scott: Yeah, relatively quickly. So, if you want to be part of the program, we'd love to take your question. Just send us an email, questions@moneymatters.com. All right. We're talking with Devin. Devin, you're with Allworth's "Money Matters."
Devin: Hey, guys.
Pat: Hi Devin.
Devin: Big fan. I've been listening to you guys for about 10 years on your wonderful podcast.
Scott: Oh, cool. Thank you.
Devin: So keep up the good work.
Scott: Appreciate that.
Pat: What can we do to help?
Devin: Yeah, yeah. So I had a bit of a life change about two and a half months ago. I was working at a tech company for 34 years and got the old morning phone call and was laid off, to my surprise. And I've kind of been contemplating what to do since then, early retirement, do I go back to work, and all that, so.
Scott: Yeah.
Pat: How old are you, Devin?
Devin: I am 56 and a half.
Pat: Married?
Devin: Yes.
Pat: Are you supporting any children?
Devin: No. My son has been off the books for a couple of years now.
Pat: Okay. And you were 34 years with the same company?
Devin: Yeah, more or less. There was an acquisition at the beginning of my career, but they included all that service time. So it's actually been 27 years with the current company.
Pat: But 34 years with that same entity.
Devin: Thirty-four years total, my career, yeah.
Scott: Are you hoping to get another job of similar pay? Is that what the plan is? Are you looking at this as an opportunity to do something different?
Devin: Well, if I can float it and survive in early retirement, that would be my preference. Thirty-four years is a long time.
Scott: Are you viewing this as a blessing or a curse?
Devin: Well, it's a little bit...
Scott: Or you don't know?
Devin: Well, yeah, we can get into some of the financials. There's also a stock component to this that's gotten really interesting.
Pat: Okay. Well, let's just see if we can get you to retire now. Let's work with that. And by the way, it is a very... You know this, but for the rest of us, it is a very, very challenging job market, and especially in the tech industry. Especially in the tech industry. You just see these...
Devin: Yeah. I had three colleagues that were in the same release, and they're much younger than me. And I feel for them, for sure.
Pat: Yeah, it is.
Devin: I might have some options here.
Pat: Yeah. Okay. So, what's your financial situation look like?
Scott: What's your home worth?
Devin: Sure. I've got a condo here worth about a million. I owe about $400,000 on that.
Pat: And that's your primary residence?
Devin: Correct.
Pat: Okay.
Scott: And is your preference to stay where you are?
Devin: We're actually considering moving up to the... We're in San Jose, so we're considering moving up to the greater Sacramento area, maybe in the foothills. We like Auburn, that area.
Pat: Okay.
Devin: So that's another...
Scott: By the way, I've lived in the foothills 30 years, and I swear, every year, I think, "This is the best place to live." I really love the foothills.
Devin: Yeah, yeah. We've visited up there quite a bit. I've got some family in that area, in Folsom. So, yeah, we like it up there.
Pat: Okay. And what's the rest of the financial...?
Devin: Much cheaper than Bay Area.
Pat: Oh, yeah, exactly.
Scott: And would you have another condo, or could you buy a house for that amount?
Devin: I would hope to get sort of a standard suburban house kind of thing.
Pat: Okay.
Scott: Okay.
Devin: Yeah. So the main assets is the 401(k). So, obviously, I've been looking a long time. So I've got about 1.35 million in my current 401(k) from my company that I was let go. I also have an IRA, about 500,000 in there.
Scott: How did you get that IRA so large?
Devin: That was from my previous...so the first seven years I was working at a different company, yeah. I have a small Roth IRA of 38,000.
Pat: Okay.
Devin: Mainly, because my income's been too high to really put much in there. Yeah. So that's the main retirement pre-tax.
Scott: And how about your spouse?
Devin: She's not working. She does some volunteering, but not really any income there. And she has a very small IRA, like, about $2,000.
Pat: Okay. And then, how about after tax, non-qualified money?
Scott: Money in the bank.
Pat: Brokerage, stocks, whatever.
Devin: Yes. I've got about 63,000 in a brokerage that's invested in an index fund. And then I've got a bunch of... So I had a severance of about nine months' equivalent salary, plus PTO and all that cash out. So I've got a lot of money in high-yield savings right now. So I've got about 150,000 between a brokerage money market and an outside, like, Synchrony.
Pat: And then you mentioned stock. Tell us about that.
Devin: Yeah. So since I was laid off, the stock, my company has gone up 80%. We somehow have gotten pulled into the AI ecosystem. It's a memory hardware company, but Wall Street seems to think it's an AI company now.
Pat: Okay, everyone is.
Devin: So it's been kind of crazy. Yeah, I left with a good chunk of vested RSUs. And I've been resisting selling any because I'm going to be at such a high tax bracket this particular year, with working about nine months and then, like, a nine-month severance on top of that.
Pat: Got it. So, how much is the value of the...how much in the money are you with these RSUs?
Devin: To the minute, it's about 420,000.
Scott: And are you precluded from using any options to protect you on this? Can you put something here, or is that...? Some companies allow it, and some don't. Some of these are restricted stock. My guess is you can't.
Devin: As far as I know, they're just stock. I mean, they're vested, and I have a cost basis and all that. Anything that was not vested was released when I was severed, so.
Pat: Okay. Got it, got it, got it. So he might be able to put some options on these. Okay. And what else?
Scott: To bridge you until 2026, that's my thought.
Pat: Yes, yes, yes. Get the downside.
Scott: If we can protect that 420 until 2026, and then I would recommend reducing quite a bit of this, I think.
Pat: Yes.
Devin: Yeah, yeah. I'm keeping my fingers crossed for Gen 1.
Scott: Well, you can keep your fingers crossed. You can also use some financial instruments to secure that.
Devin: Right. Okay.
Scott: Pretty easy. Think of it like an insurance premium.
Pat: Yeah, pretty, pretty easily. And what other assets are...? Is that everything?
Devin: I do have an HSA that's pretty well-funded. It's, like, 53,000 that's invested and then another 10,000 that's just in cash.
Pat: Okay. What was your salary?
Devin: I may be using that for COBRA payments if I sign up for COBRA.
Scott: What was your salary?
Devin: It was about 250 salary plus some bonus a year, but I definitely was not living off of all of that. So I've kind of come up with a budget of what I think I'm going to need.
Pat: What is that?
Devin: So I'm thinking about 133k pre-tax a year. I don't know if you want monthly or annual.
Scott: And have you calculated what that would be as a percentage of your portfolio? I mean, it's kind of, for us, just kind of a quick and dirty way to do it. So you've got 2.2 million.
Pat: Did you include health insurance premiums in that dollar amount?
Devin: I did, yeah. I currently put in the COBRA rate that they're quoting me now. And I was just looking at COBRA California today, and I don't think...
Scott: Actually, I've got a friend that has a...
Devin: ...that was going to be cheaper for now.
Scott: I have a friend who has pretty substantial net worth, and he pays almost nothing. Just the way he's structured his...
Pat: Yeah, we could do this. You know what, it's going to be tight for you. Most certainly, living in that condo down there, it would make it almost impossible.
Scott: You're looking at about a 6% distribution rate.
Pat: At 56.
Scott: At 56. It's a little high.
Pat: It's high.
Devin: Well, I'm 56 and a half, so I'll be 57 in, you know...
Scott: Okay, at 57.
Devin: I've got plenty of cash I can live off of for six months.
Scott: Understand.
Devin: So I have a lot of leeway of what my income can be next year.
Pat: Yes.
Scott: You're fine. You've got a great period of time to figure out what you want to do the rest of your life.
Pat: Leaving the workforce completely is probably not doable, unless you want to change your lifestyle. Yeah. Leaving the Bay Area and moving to a foothill community and getting a job at $80,000 or $100,000 a year, absolutely doable.
Devin: Okay.
Scott: And then take less out of your portfolio today.
Pat: And take less out of the portfolio. You'd like to see this distribution at your age.
Scott: Three to four.
Pat: I was going to say three there. And so the way I would structure this is I'd put some downside protections on the RSU as quickly as possible. And then I'd sell the house in the Bay Area, and I'd move to, you know... You can afford a $800,000, $900,000 home by using the RSUs and then take a 3% distribution, make the difference up with earned income.
Scott: And if you maybe want to take a year before you do anything, which is fine.
Pat: Which would be okay. But a job that actually provides health insurance would be important.
Scott: Big deal.
Pat: Big deal to you.
Scott: That's a big deal for you.
Devin: Yeah, yeah, yeah. So health insurance.
Scott: And it's getting worse. It feels like a ticking time bomb, the whole health insurance.
Pat: But you can do it. You can do it. And then I would leave the 401(k), at least a percentage of it, where it's at, because you're over age 55. And as long as you don't roll it into an IRA, it becomes liquid between the ages of 55 and 59 with separation of service. So you don't have to leave it all there, but you could leave a portion of it there.
Devin: Oh, yeah, yeah. I would definitely plan to use the rule of 55 for sure.
Pat: Yes.
Scott: Because you might take some...yeah.
Pat: Some income there.
Scott: So rather than looking at this as, "I'm going to retire, I don't have to worry," I would look at this as you've got a season now. You could have a nice long sabbatical. You're not in a rush. But figure out, where's the intersection between Devin's skills, Devin's passions, and what the market will pay for? And you don't need to earn as much as you did before.
Pat: Without question. That's spending $800,000 or $900,000 on a house. If you want to spend less on a house, it just drives down the income needs, what you're going to need.
Scott: That's right.
Devin: Yeah, yeah. I was targeting about 750k on a house, give or take. So, yeah, I think we're aligned on that.
Pat: Yeah. I mean, it depends on... Since we live in the foothills that you're talking about moving to...
Scott: I haven't looked at house prices, and I have no idea.
Pat: I don't know. But the further you go up, you get Nevada City or Grass Valley.
Scott: Oh, there's some little towns that you can... You might not want to live there.
Pat: That's right.
Scott: You might have a meth lab next door, but...
Devin: Oh, yeah. Yeah, I know the range.
Scott: Yeah, you don't have to go too much further up the hill. It can be quite interesting.
Pat: Yes, interesting. So you can make it work.
Devin: Okay.
Pat: Okay. All right. Appreciate the call, Devin.
Scott: Pat, have you read that book, "From Strength to Strength?"
Pat: No.
Scott: The first chapter, you'll be very depressed. It basically looks at your creativity in your career. And I don't care what career path it is, whether you're a musician or an architect or an engineer or a financial advisor, whatever it is, your creativity wanes and drops off at a pretty early age. And it looks at all these different industries. And the point of the book is, as you get older, instead of trying to double down on what you did in your previous years, you're not as creative as you were in those times. How do you build upon the strengths that you've got today versus trying to continue to rely upon the strengths that helped you when you were a young person?
Pat: And what's the thesis that you're less creative? Is it risk-taking?
Scott: It just looks at all these different industries.
Pat: Oh, and says, "By the time you're 50..." That's awful. It sounds terrible.
Scott: Well, that's why the first chapter is depressing, and then you continue to read. But part of it is, as you get older, you're more of a mentor and more of a coach. And you've got tons of wisdom, but you might not have the same creativity as a 22-year-old does, nor the drive, for that matter.
Pat: Well, the drive is the big issue. I had a young man ask me if I would be his mentor last week.
Scott: And?
Pat: I said no.
Scott: Really?
Pat: Yeah.
Scott: Why?
Pat: I said I'm really kind of out of it, not really looking for that.
Scott: Someone in our industry?
Pat: No. No, no, no. The guy was detailing my cars, and he said, "What do you do?" And then I said, "Well, I did this and this." And he said, "Have you ever thought of taking on a mentee?" And I said...
Scott: My guess, okay.
Pat: What? Oh, had he been in my industry? What's your guess?
Scott: Well, if he owned a chain of detailing places, you might have more interest in...
Pat: I don't know. I'm just really not looking for that right now.
Scott: All right, whatever. Anyway.
Pat: All right.
Scott: That's funny.
Pat: Have you been asked to be a mentor?
Scott: I was a mentor for a while.
Pat: Internally, here at Allworth?
Scott: Yeah, yeah.
Pat: Did you like it? What are you going to say? You have to say you like it.
Scott: Yeah, one of my kids.
Pat: You have to say you like it.
Scott: Oh, it was such a rewarding experience. Yeah.
Pat: Did you?
Scott: I always enjoy time with young people, too. I'm sure it happens to you a couple of times a year. You have breakfast or a cup of coffee with...
Pat: Oh, yes, yes, yes. That happens.
Scott: ...someone young, and I always enjoy that.
Pat: But I'm not looking for another long-term relationship. I've been married 40 years. I mean, isn't that enough?
Scott: All right. Anyway, let's continue on here. We're talking to Ryan. Ryan, you're with Allworth's "Money Matters."
Ryan: Hey, Scott and Pat. Thank you for taking my call.
Scott: Yeah, glad you're joining us.
Ryan: So I'm a California state employee, and I've been maxing out my 401(k) for a number of years. And because I also have access to a 457, I started contributing to that.
Pat: In addition, Ryan, in addition to the 401(k), you started doing the 457?
Ryan: Correct.
Pat: Okay.
Ryan: Yeah.
Scott: And are you maximizing that too?
Ryan: No.
Scott: Okay.
Ryan: No. Just whatever extra I could kind of put into it. So I recently turned 50, and so I started redirecting what I was contributing to the 457 to the 401(k) for my catch-up. And now, with the new Roth rule that's coming into effect in 2026, my question is, should I redirect kind of that catch-up portion back to the 457, or should I kind of fall in line and start contributing the catch-up contribution portion to a Roth?
Scott: Are you planning on staying in California indefinitely? Well, you're 50, you probably don't really know. But do you think you'll stay in California indefinitely?
Ryan: Most likely, yes.
Pat: And what's your family income?
Ryan: Probably right around 360 annually.
Pat: And there's two of you. How many people on the tax return?
Ryan: So it's my wife, and then I've got two children.
Scott: When you retire, how much of that 360 is going to be made up in a pension?
Ryan: Probably a fairly significant amount. When I go out, it'll be about 70%. So it'll be pretty close to equal to what I'll be making at the time when I retire.
Pat: And what is your salary yourself? Your family's income is 360. What is yours?
Ryan: Right at about 175.
Pat: And does your spouse have a pension as well?
Ryan: Yes. Also with the state of California.
Scott: And is she contributing the max to her 401(k)?
Ryan: She's got a 457, and she is just about contributing the max, yes.
Pat: She works for a municipality?
Ryan: No. For the state of California.
Pat: So you both have 401(k)s and 457s?
Ryan: Correct.
Scott: So, is your basic question, should I continue to do everything on a tax-deferred basis or add some Roth?
Ryan: Correct.
Pat: That's what the question is.
Ryan: Right. Yes, right.
Scott: I would add some Roth.
Ryan: Okay.
Pat: And why, Scott?
Scott: When you get to retirement, first of all, assuming you stay the rest of your career with your job, you're going to have phenomenal retirement income, right? Guaranteed retirement income.
Pat: Cost of living adjustment on it.
Scott: So your additional savings is going to really be for ancillary stuff. I don't know if your home's paid off yet, but my guess, it's going to be paid by the time... Your needs are probably going to be less at retirement time than they are today at age 50.
Pat: Yes.
Scott: Right?
Ryan: Right. Yes.
Scott: So you're going to be in great shape retirement. And if all of your savings are in tax-deferred vehicles, it makes it a little more challenging. Pat's looking at me like I'm stupid.
Pat: Yeah, no, I just want to hear your answer, because I disagree. I disagree, but I want to hear your answer. That's White House.
Scott: You say, "I need to buy a new car." You're going to be like, "Well, crud, if I take it out of my IRA, it's going to put me in a higher tax bracket, so I've got to spread this out over a couple of years." Like, get to retirement time and having a diversified tax strategy, I think, can serve you well. Further, if we're going to have an argument...
Pat: We're going to have an argument about this.
Scott: ...debate about this.
Pat: I don't think it's an argument, but a debate.
Scott: You're currently at a 24% tax bracket. That bracket goes up to 37%. Now, granted, you'd need to have...that bracket starts today at 750,000. So that's too far. But the bracket moves from 24% to 32%. And given your income today, you're still in a 24% bracket, whether you defer or not. But the way things are going, your pension is going to make up 70% of your salary. You've got Social Security that's going to kick in as well. And then you add in distributions from your retirement account, there's a good chance you'll be in a higher tax bracket. Now, we have no idea what the tax brackets are going to be 10, 20 years from now when you retire. My bet is they're not going down.
Pat: Okay.
Scott: And you plan on staying in California. But if you don't...
Pat: So, how much money...? Do you have any money saved outside of retirement plans?
Ryan: Well, so I have a taxable brokerage of about 90,000, savings 60,000, 70,000. So that's most of what's outside. I do have a small Roth IRA, 35,000, and a small traditional IRA of 15,000.
Scott: And your kids still at home, college? What are your kids up to?
Ryan: Kids are at home, one in college, one still in high school.
Scott: And the colleges, are you helping fund that just out of current wage?
Ryan: Yes. Yeah, we've got 529s for both.
Scott: Okay.
Pat: You could touch a little bit in the Roth. I wouldn't go too heavy into the Roth.
Ryan: Okay.
Pat: Right? In fact, I would actually say...
Scott: If you had no pension, I would say do it all tax-deferred.
Pat: That's right. But he has a pension.
Scott: I know.
Pat: He's never going to spend this money. He's never going to spend this money.
Scott: You were just looking at the people we've seen.
Pat: He's not going to spend it. And what happens if he moves to another state that actually has a lower tax?
Scott: Well, then you clearly want the pre-tax contributions.
Pat: So I'd say, why wouldn't I...? I would take the benefit I could take now.
Scott: Yeah, okay. There's no right answer. We don't know what the answer is going to be until we know the tax code in the future.
Pat: But if you said, "Okay, I'm going to fund $20,000 a year into a Roth and the rest of it continue in the 401(k) and 457," I'd say, yeah, we're probably right. We might be wrong. I mean, it'll probably be okay. But so much of it depends on how long you live. Are you charitably inclined? Do you want to use these dollars?
Scott: How much do you have in your retirement accounts?
Ryan: About 470 in the 401(k) and 105 in the 457.
Scott: Okay. And your wife, where is she in those?
Ryan: Yeah. So she's probably...I think hers is a little bit less, probably about 230.
Scott: So you don't have a ton in there for a 50-year-old.
Pat: That's right.
Scott: But you have the pension, so you haven't needed it.
Ryan: Yes, right.
Pat: I wouldn't do any Roth.
Scott: Yeah. Given the fact that, you know, if your balance was...
Pat: Three million? Two million?
Scott: Three million could be a problem at age 50 by the time you calculate it out to age 75...
Pat: That's right.
Scott: ...your required minimum distributions.
Ryan: Right.
Pat: But it could be that much if they had started day one and they had been there for a long time. Yeah, I would revisit. I would continue with pre-tax and revisit it in a couple of years.
Ryan: Okay.
Pat: Right. And the only difference between the 401(k) and the 457, by the way, is how the money actually comes out and how it's taxed prior to age 55.
Ryan: Right.
Pat: That's the only difference between the two. And there's some, you know, intricacies about whether it's an asset of the state or not an asset of the state on the 457.
Ryan: Right.
Pat: I don't think that's super mature. Scott?
Scott: I think, either way, it's not going to...
Pat: Yeah.
Scott: We don't know. We won't know until the future tax rates.
Pat: Well, if you're a good financial advisor, you would not say that. You would say it with great confidence.
Scott: Like a weatherman.
Pat: No, we don't know. You're correct. We do not know.
Scott: Yeah. I think, if I were in your shoes... So here's an interesting thing, Pat. If you were Ryan, you would continue to do 100% pre-tax in the 401(k) and 457.
Pat: Yeah, if they...
Scott: I think, if I were Ryan, probably, I would do 50-50, just to hedge my bet. For tax diversification.
Pat: So that when you come in the distribution... And the reality is, if you're replacing 70% of your income, right, and I assume that's gross income at 70%, your standard of living will actually go up in retirement.
Scott: That's right.
Pat: So Scott's thinking about the tax implications in 20 years.
Scott: I'm thinking about tax implications in 20 years.
Pat: I would go either way. The benefit of actually doing it, quite frankly, I'm not wrong.
Scott: I mean, we can run numbers, but the thing with any financial model, it's all based on inputs and assumptions. So we can...
Pat: The reality is, by putting money into a Roth, you're actually saving more money on an after-tax basis because of how it's... You actually have more disposable income in retirement. I'll go with you, Scott, 50-50.
Ryan: Okay.
Scott: That way you're right.
Pat: That way you're right.
Ryan: Good point.
Pat: How's that for building confidence? That way you're right.
Scott: Well, we don't know what the tax rates are going to be by the time you're 75.
Pat: The only thing is...
Scott: If you had it 20 years ago, people would have been...people were emphatic that tax rates would be higher in 2025, right?
Pat: That was...
Scott: We've been doing this long enough.
Pat: "Oh, do you remember that?"
Scott: For sure.
Pat: There's no way they're going to be lower. No way. How many times have you heard that?
Scott: Of course, my whole career.
Pat: Yes.
Scott: And they're actually quite low today.
Pat: And what happens if they change the tax completely to a value add? Or they're discussing right now, a wealth tax.
Scott: Well, we know, though, our current structure is not sustainable.
Pat: That's correct.
Scott: Our tax has been not sustainable.
Pat: Yeah. By the way, anyway.
Scott: We only borrow so much money. All right. Appreciate the call. All right. Good luck.
Ryan: Thank you, both. Appreciate it.
Pat: Every time it comes around, every time.
Scott: What?
Pat: With taxes, it's like, we have to raise the taxes. There's never...very rarely is there...we have to cut costs. In local, even the county you and I live in, there's never...okay, we should probably just get rid of some of these services, but...
Scott: That's because that's the problem with the government. There's no private market to actually bring efficiencies to it and to kill off things that aren't productive.
Pat: That's correct.
Scott: I mean, the beauty of the private markets, the beauty of capitalism, which I don't think we teach our children anymore, is the market is going to decide if you are providing a valuable good and service or not.
Pat: That's correct.
Scott: And they reward companies that impact their lives in a positive way, and they punish companies that don't. And the capital flows to the companies that are adding the most value.
Pat: But not in government and, oftentimes, not in nonprofits.
Scott: Well, California now is trying to do a 5%...someone's floating a proposition to do a 5% wealth tax on billionaires.
Pat: How quickly those billionaires will absolutely leave the state.
Scott: I don't know. I don't begrudge anybody if they've earned money by doing something that's...
Pat: That the market wants to pay for.
Scott: Yeah. And most of these billionaires have had a positive impact on our lives. I guess one could argue that life is actually better today than it was 50 years ago, given all our mental health issues and everything else. But that's clearly our standard of living today.
Pat: Oh, it's incredible. It's incredible. I was flying somewhere, and someone's like, "Oh, the plane's been delayed four hours." I said to him, "You know, 100 years ago, we wouldn't even have considered going to that place because of all the time and energy, actually, we would have had to expend to actually go there."
Scott: Oh, days to travel by train or if you're going by ship to...
Pat: Yes. We were delayed four hours. That's awful.
Scott: My daughter was all freaking out. She was flightless. Just a couple of weeks ago, her flight. And I've traveled enough to, like, if that happens...
Pat: Just live with it.
Scott: ...it doesn't really bother me anymore. Like, at least 5% of the time, it's not going to go as my itinerary is. I've got this certain itinerary. I don't know. One out of 20 times, it's not going to work out that way. One of the flights is going to be delayed dramatically, canceled, something.
Pat: You might have to spend the night at a Holiday Inn in Omaha, Nebraska. So what?
Scott: Fortunately, it's been a while since I've had to do something like that. But I've been there a number of times. Anyway, let's continue.
Pat: Well, did she get home okay, or where was she going?
Scott: I don't even remember. I just remember thinking...
Pat: Expectations have been set, and they're high.
Scott: And I was probably more like that at age 30 than I am today, just because after you lived through a few of these things, well, I try not to sweat things you don't have control over.
Pat: I find, if you don't set the expectations, you won't be disappointed.
Scott: That's a good way to look at life, with super low expectations. I have no expectations for my children, for my marriage.
Pat: For myself, my own happiness, no expectations. No expectations of productivity. That way, I'm always happy.
Scott: We're talking with Tim. Tim, you're with Allworth's "Money Matters."
Tim: Hey, thanks for taking my call.
Scott: Yeah.
Tim: So I'm retired, and I use the bucket strategy. So I have two years in cash, five years in an intermediate core bond fund, and the remaining stuff is inequities. And I try to replenish my cash and bond bucket every four months, depending on how the market is doing. And my plan is, during a down market, only spend the cash until a recovery. So if I run out of cash, then I'll start spending out of the bonds, and hopefully, everything comes back. Like in 2022, the stocks took a couple of years, and the bonds took three and a half. So my question is, is this approach valid, and what do you think of the bucket sizes?
Pat: How much do you have inequities in terms of...?
Scott: Yeah, the percentage.
Pat: Well, you're using years, which is a form of percentages.
Scott: But I don't know how much he was spending relative to his...
Pat: Which is what would drive the decision-making. So, how many years do you actually have inequities in what you call that bucket?
Tim: So it's about 67%.
Pat: Okay.
Scott: And what percent, on an annual basis, are you withdrawing from your overall portfolio?
Tim: It's transitioning because I'm moving into starting to use my pensions and my Social Security. Right now, it's a little bit above four, but it'll go...after I start taking everything, it'll go below four.
Scott: Okay. So you're very comfortable.
Pat: And do you try to keep the 67% equities pretty constant?
Tim: Actually, I try to keep the cash and the bond constant.
Scott: So the fact that you're planning on taking a lower distribution going forward, is that then equating that you'll have a higher allocation to equities in the future?
Tim: Actually, yes. It would, in the future...
Scott: That's right. Mathematically right.
Pat: That's right. That's right. You know what, so we don't use the bucket concept. We look at percentage.
Scott: Sort of. But we sort of do.
Pat: Well, kind of. But we're not worrying so much about how many years we have in cash or intermediate bond. We worry about the overall allocation between fixed income and equity.
Scott: Yes, but we...
Pat: But it does essentially the same thing.
Scott: Correct. I mean, if we never worried about distributions, you have everything in equities.
Pat: Yes.
Scott: So if no one ever wanted to spend their money, you'd have everything in equities. Long term, it's going to outperform everything.
Pat: Which we do for some.
Scott: Which we do for some. And for some, we have no equities.
Pat: That's correct.
Scott: It depends on...
Pat: So your question is, again, what?
Tim: Is the approach valid? Is my bucket sizes about right? And I had another question after that.
Pat: Okay. It can be. It can be, depending upon...
Scott: How old are you, Tim?
Tim: I am 62.
Scott: Okay.
Pat: Yeah, okay. It depends on your risk tolerance. Because let's say you get down to a 2% distribution, right? Then, all of a sudden, your equity position is going to move up to 75% or 80% and your fixed...
Scott: Or more.
Pat: Yeah, or more.
Scott: And are you calculating your interest in dividends on replenishing? So when you calculate your bucket strategy, are you just saying, "Here's how much money I'm going to withdraw over the next seven years?" Or are you saying, "Here's how much income my portfolio is going to produce?"
Tim: No, how much I'm going to withdraw.
Scott: Yeah. So, to Pat's point, if you move down to 2%...
Pat: Yeah, you could be...
Scott: Because your equities are going to spin off almost 2%.
Pat: Yeah, and dividends. And therefore, you're going to actually see your portfolio get super aggressive. It's going to be, heck, we could do the math, but my guess is it's going to be 80%-plus, which is fine, which is fine.
Scott: If you can...
Pat: If you could stomach the volatility.
Scott: And the volatility could be multiple years, right?
Tim: And my approach on stomaching the volatility was, okay, if I know I have a two-year cash bucket and the five-year bonds, then, when I was tracking the various dips, it seems like things kind of recover in seven-ish years or so.
Scott: Sometimes. I mean, if you go back to other historical times, there's been times that have been much longer than that. But, yeah, 95% of the time, that would be correct.
Pat: Look, I'm okay. I don't think that you should let this portfolio just run like this, though, on the buckets.
Scott: Because what you just told us is that you're going to take out less income going forward because you're going to start having pension, and I don't know about Social Security, but having some other income coming in. So that would, by its nature, cause you to increase your equity allocation. And so the question I think we would have, does it make sense at this stage for a 62-year-old to increase the equity allocation beyond? And maybe it does.
Pat: Well, yeah. So let's live with this bucket strategy but put a cap on your equity exposure as a percentage of the portfolio.
Scott: Yeah, I think that's probably not a bad idea. Right? Here's what I like. By the way, here's what I like about this. You have a strategy. You have a workable strategy. And if you live by this strategy, I think it'll serve you well. We are our biggest enemies when it comes to investment returns, not the markets. It's ourselves. So the challenge is, if we've got this strategy, the market tanks, we get nervous, we start tweaking with our strategy, we forget our investment approach, we start doing new things. That's where problems happen. If you actually say, "I'm going to live by this strategy," I think it'll serve you fine.
Pat: But I don't... Did you read Ray Lucia's book? Is this where you got the buckets of money strategy from?
Tim: I got this strategy from my mother.
Pat: Okay. Because there's a book that this guy wrote.
Scott: I mean, actually, that strategy has been around a long time.
Pat: Yeah, it's been around a long time, but this is all buckets of money, although he uses annuities in there because it's probably best for him. I think I would...I'm okay if you do that, but I would cap my equity exposure probably at 75%.
Scott: Yeah, I would, too.
Tim: Okay.
Pat: Right? So you could call it whatever you want.
Scott: And I might want to match my maturities in my fixed income portfolio to when the needs are going to be.
Pat: With individual bonds?
Scott: Or different types of funds.
Pat: Yes.
Tim: Nope, I understand what you're... I did have a slightly related question, is that, like, in a down market, like 2022, it's easy to say, "Okay, I'm not touching, you know. I'm letting my cash just draw down." And at some point, when the stock started to come back, do you wait for it to reach its previous all-time high? Do you say, "Okay, well, it's within 5% or 4% of its all-time high, I can go ahead and sell it again?" Do you have any thoughts on that?
Scott: So our approach, and here's why we don't use the buckets of money approach, so our approach is determining how much we want, let's just call it risk assets, equities, maybe some other private investments, depending on portfolio size. Let's call it growth assets, risk assets, growth assets, right? So part of it is determining how much we want in those assets, and that's predicated upon, one, what someone's needs are, income needs are, cash flow needs, or when they need the capital. And then the second is how much risk tolerance, how much someone can stomach before they make stupid mistakes, right? So then, when we come up, and let's say it's 67%, like you've got, the way we tend to look at things is when the markets have great years, that 67% starts creeping up to 68%, 69%, 70%, 71%. So we rebalance, we sell. By just that nature, it forces us to sell when things are high to replenish the fixed income portion. Conversely, when the markets fall from 67% to 65% to 60%, we rebalance, meaning we buy back more equities when things are down just by the nature of keeping that asset allocation. And if you look at volatile years, particularly the year, say, 2000, when we had that really quick downturn because of the lockdowns, we rebalanced I think three or four times. And the rebalancing in and of itself produced, I forget what the excess return was, but...
Pat: Oh, it was incredible.
Scott: Yeah.
Pat: It was fast. And the reason is because it forces you, the strategy, percentage strategy forces you to actually sell when the markets are up and buy when the markets are low, which the bucket strategy doesn't. So I would, if you were my client, I would implore you to abandon the bucket strategy.
Scott: Well, the bucket strategy, how often do you...?
Pat: He said every four months.
Scott: Okay. So it's every four months you look at it.
Pat: But then he asked the question that actually said, "Well, if the markets are down, when do I wait to actually start selling to move money back out of the buckets?" And we're saying it's a constant. You should be moving... You never showed us a direction where you move from the buckets to the equities. You only showed us a direction where you move from equities to the fixed income.
Scott: Yeah, that's right.
Tim: That is correct.
Pat: And what we're saying is, look, there are times where you actually want to move from that fixed income into equities. So you're not taking advantage of the downturns in the markets in order to amplify your returns over time.
Scott: Although we've had...the last two, almost three years have been straight up, so it's...
Pat: Yeah, it hasn't mattered, but it does matter...
Scott: It does matter. Oh, absolutely.
Pat: ...when your example is the beginning of...
Scott: '22, same thing.
Pat: Yes. Yes. Because these things happen. And by the fact that you're doing it every four months, you have the ability to do it on a weekly basis. Is the money inside IRAs or outside IRAs?
Scott: Both.
Tim: Both.
Pat: Okay. Well, then, you might want to...in a perfect world, you'd have all your growth assets outside of the IRAs and all your bond inside the IRAs because capital gains rates are actually lower than ordinary income. And so you put...
Scott: And focus on the after-tax return, not only in 2025 but after-tax return for the next decade or two.
Pat: So the idea that you have right now doesn't allow you to go from buckets to equities, right, from the fixed income to the equities. And quite frankly, you're missing out on return and you're missing out on after-tax return because of the portfolios, if they're not designed correctly, which is the equities outside, the fixed income inside the IRAs to whatever extent necessary. You're just going to get an excess return after tax by doing that. So you're asking us to make a comment on a strategy that we would not employ because of the restrictions.
Tim: Okay.
Scott: Yeah, that's fair.
Pat: The restrictions that you have placed on yourself, which, by the way, your mother may have been a wonderful lady, right? She might have been the greatest person in the world. But she may not have been the best investor. My mother was a wonderful lady.
Tim: I hear you.
Pat: She's absolutely wonderful, the nicest lady, most caring lady. But I would never take investment advice from my mom.
Tim: I understand. Okay.
Scott: All right, Tim.
Tim: Hey, thanks for taking the call.
Scott: All right. Wish you well. It's interesting. And I almost said there's different ways you can approach things. Obviously, we think our way is the superior way. I mean, we have a fiduciary responsibility to our clients where this is...
Pat: Well, he's putting artificial restrictions on his portfolio that don't need to exist with that strategy.
Scott: Yeah. And sometimes I think a lot of people like doing things themselves, right? I think a lot of people take pride in the fact that they can do everything themselves. They don't need help. I do my own yard. I do whatever, right? Cut my own firewood. I split the wood. I paint the house. I fix the plumbing. Even people that can afford.
Pat: Which was like your stepdad.
Scott: I did it with him last night. He was telling about how he just cut some firewood.
Pat: The one that lived down in the Bay Area, the guy that had all the property with all the old stuff laying around the property in case he needed it.
Scott: Oh, my previous father-in-law.
Pat: Oh, that was it. Yes, yes, yes. Would do everything himself.
Scott: Everything. Made his own bolts. Literally, made his own bolts. We had some bolt machine in his basement.
Pat: Wow. Okay, keep going. Keep going.
Scott: And he mocked me, because I remember, I had my shoes polished somewhere, and he mocked me for spending my money to have my shoes polished.
Pat: Pretty sure it was your money, though.
Scott: Fair, and I was always of the mindset, I'm going to focus on what I'm pretty good at and I'm going to contract. So my point here is I think it's the same thing happens with our financial management, our financial planning, our money management. I think, look, I can just do this myself. I'm just going to figure it out. And there's a small percentage of the population, I think, can do just fine alone. The longer I'm in this industry, the more I think people benefit from a good advisor with the right kind of tax planning along with it.
Pat: But again...
Scott: It's going to pay for itself.
Pat: It's hard finding a good advisor.
Scott: Yeah. So I think, Pat, I think it's a combination of, one, there's particularly certain people that take pride in doing things themselves. That's how they were raised. That's how they've gone their whole life. And in addition to that, it's, how do you find a really good advisor, and how do you really know if it's a good advisor? It's difficult. Until you've spent some time working with that advisor.
Hey, as we're wrapping up here, just a quick note. This is really for our high-net-worth investors who are listening to our podcast in these particular markets in Houston, Denver, Phoenix, San Jose, and Indianapolis. Allworth will be in your city with some live events. You're not going to want to miss this. Because on the week of November 9th, we're holding exclusive strategy sessions for investors with portfolio of over 2 million bucks. Okay. So if you've got over $2 million, you're in those cities, these are special events with expert wealth advisors covering sophisticated planning tactics specifically designed to help you preserve and grow your wealth.
And if you're not in one of these markets, that's fine because we're hosting a year-end webinar created for you as well. And we'll get to the same high-level strategies just from the comfort of wherever you plan to be. So both the live events and the webinar are going to be essential to planning for 2026 and beyond. Sometimes timing can be everything, so you don't want to miss out on this. Visit allworthfinancial.com/workshops to learn more.
And that is all the time we have this week. It's been great being with you. This has been Scott Hanson and Pat McClain, Allworth's "Money Matters." We'll see you next week.
Man: 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.