October 1, 2022

The consequences of poor financial planning, how to handle RMD’s when markets are down, and should I use my 401(k) to pay off my mortgage?

On this week’s Money Matters, Scott and Pat explain why failing to plan for market drops is planning to fail.  They help a caller decide how much of an RMD to take while the indexes are down.  You’ll hear from a woman who wants to know whether it’s a good move to use some of her 401(k) to pay off her mortgage. Finally, a father puts his college graduate on the phone to get a lesson on investing.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's CEOs 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.

Download and rate our podcast here.


Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call to join Allworth's "Money Matters." Call now at 833-99-Worth. That's 833-99-W-O-R-T-H.

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

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

Scott: That's right. We are just finishing out third quarter. Both myself and my partner here are both financial advisors. We spend our weeks for people like yourself.

Pat: So what does that mean, financial advisor versus investment advisor, versus asset manager, versus I don't know. No, I don't. I don't know. So what's the thesis behind us calling ourselves financial planners versus investment advisors?

Scott: Well, I think it's interesting because people can call themselves whatever they want almost in our industry, right? Our approach... We think the prudent approach is taking a look at all of the areas of your finances, and how they work with one another, including tax, which is one of the major factors to consider, any other sources of income you may or may not have during retirement, how to maximize those. How to deal with your... Kind of how much stomach you can take with ups and downs with your investment portfolios, and designing that properly to meet your objectives long term, and then as life happens, be there helping you navigate through those times.

Pat: To manage the money as well.

Scott: And to manage the money.

Pat: Yeah. In a fashion that is appropriate for the...

Scott: Pat, I don't know how you can build a portfolio without doing the other kind of planning first. Unless it's like, "Hey Pat, where should I be investing right now?" "Hey, Pat, I just..." Right?

Pat: Well that's what... I get that.

Scott: I know. It's ridiculous.

Pat: Yeah, I get that a lot.

Scott: Like, I don't know.

Pat: Right. I don't know anything about you, right?

Scott: What we do know is this last quarters was not...

Pat: Oh, it was not. And the reason I asked that question, obviously I knew the answer, I've been your partner for almost 30 years was this market, what we're going through right now, as painful as it is, as painful as it is down, you know, almost all indexes.

Scott: Almost 25. Everything's down this year.

Pat: Yeah. Bonds. It doesn't matter. It's a part of the investment life cycle. It is a normal...

Scott: You know, and it amazes me, Pat, how quickly people forget. And I was just thinking the other day, like whatever happened to Tina. Tina, there is no alternative. So remember there's... This was a year or so ago, there's no alternative to stocks, interest rates are low, so therefore you're not making any money in the bank, you're not making any in money bonds. So just put all your money in stocks because there's no other alternative. Where else are you going to put your money in this day and age, right? Well, we're seeing the ramifications of that.

Pat: Yeah. There is...

Scott: There are alternatives.

Pat: There are alternatives. There's always alternatives, right? But...

Scott: And stocks are great for the long period of time, but they go through times like this.

Pat: But the reason financial planning is important is because if you need the money in the next 3, 4, 5 years, and you had 100% of it inequity, you were probably misallocated. You probably did not have the proper allocation. If you don't need the money for a period of years, then you can afford to take the ups and downs in the marketplace.

Scott: And you'll be compensated for that.

Pat: Now, in saying that, if you're retiring, you're not going to spend all your money the first day of retirement. Many of it, much of it, you won't spend for 15, 20 years, 25 years.

Scott: The vast majority clearly not for five years.

Pat: Yes. Yes. Right. And, you know, we're practicing advisors. Many of my clients, I have stopped adding new clients, probably about 10, or just...

Scott: 20 years ago.

Pat: ... 20 years ago, you get so many of them are in their 80s. Many of my clients are in their 80s, and none of them are happy with the downturns in the market.

Scott: No, nobody is.

Pat: But no one's really surprised by it either.

Scott: I don't like in the fall when my gutters are full of leaves either, but it's a normal part of the cycle, the seasons.

Pat: Yeah. You just... Although the fall, you know when it's going to happen.

Scott: That's the difference.

Pat: That is the difference.

Scott: Yeah. That's a pretty good point, Pat, because in the natural seasons, we can prepare for those, and we could watch for storms, that sort of thing. Even you have some mitigation for fires, I suppose. We know the financial cycles come and go, we just don't know when they start or when they stop.

Pat: You know, why don't we just take our money out before it started, the downfall in the market?

Scott: Every day there's risk reasons to say, "Now's a bad time to invest." So, if that's your approach, you've been sitting on the sidelines for 30 years.

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

Scott: When I started in this industry, Pat, in July of 1990, the Dow Jones industrial average was roughly 2,600. We were at 30 some odd before, now we're backed below 30,000, still roughly 10X where it was.

Pat: Yeah. And quite frankly, I think of this story. I know a couple, one of them is 80% equities all the time, 80%, and just like, "Hey, you know, I know it's going to go up and down, but over time it's going to be fine. I've got 20% that I need to live on, which is more than enough, and so my allocation is correct." And the other person is, "It's always a bad time to invest in equities." And I've known these people for 30 years, and, "Is now a good time to invest in equities?" "I don't think it's a good time to invest in equities." "Is now a good time to invest in equities?" "I..." And so almost...

Scott: Well, now's a much better time than it was January one of this year.

Pat: I understand. But over the last 30 years, there have been multiple times that were much better times, and the reality is the risk tolerance isn't there. They'd rather not make the money than lose a dime.

Scott: And part of it is an education process, right? Because those that take the time to understand how these cycles work, and why they're temporary, why these declines are always temporary, the emotions are still there. Nobody likes looking on their accounts when they're down. I don't either. Nobody likes... Right. And then you start thinking, "Well, what if this continues? How much lower can this go?"

Pat: Or, "This is how long it took me to actually make this money. I lost 100 grand, and it took me a year to make this money." By the way, most people never say that when they're making the money when the accounts are going up, only when they go down.

Scott: Yeah. But, let's say, you retired beginning of the year, you had $2 million saved up.

Pat: That's rough.

Scott: You're highly diversified. You still may be down 15% or 20%.

Pat: Yes. It's rough.

Scott: And you're thinking, "Holy smokes."

Pat: "Do I have to go back to work?" And this too...

Scott: Or you're allocated properly, of course not. But...

Pat: This too shall pass. This too shall pass. And you might be thinking, "I've heard this story so many times. Why don't they tell us a different story?" Well, this story is as old as time itself. Asset prices go up and down.

Scott: We're starting in Northern California talking with Bob. Bob, you are with Allworth's "Money Matters".

Bob: Hi, Scott, and hi, Pat. How are you guys today?

Scott: Hi, Bob. Good.

Pat: Good, Bob. What can we do for you?

Bob: My wife and I have listened to your show for several years now. We've really learned a lot from you and I got a couple questions today.

Scott: Fire away.

Bob: So I am 65, my wife is 62, we've been retired about three years now. Enjoyed the fabulous run-up of the investment accounts during the good times, and now we're trying to just do things right while the pullback's happening, and in that regard, you know, we've watched our accounts drop about 19% this year. And so my question has both to do with when to Social Security and sort of interrelated about taking withdrawals from your accounts during a declining market. You know, my inclination is, "Boy, we should pull back. We should pull back." But I don't know that that's necessary or a good idea.

Scott: Pull back as far as reducing your stock, or pull back on your expenditures?

Bob: Pull back on expenditures.

Pat: Okay. So let's just start at the beginning. You own a home?

Bob: Yes.

Pat: It's paid for?

Bob: Paid for.

Pat: Okay. Do you own any other real estate?

Bob: No, and no other debt.

Pat: Okay. And what is your account size approximately all the investible assets, including money and bank accounts?

Bob: About 3.1.

Pat: And what are you living on?

Bob: We just analyze that, and our all-in costs seem to be about 145,000 a year.

Pat: And where's it coming from now?

Bob: I have a pension. It's no COLA. It's about 57,000 a year.

Pat: And if you... And your wife does she have a pension as well or?

Bob: She'll have just a few $100 pension at age 65. Other income I do get about 5,600 a year from the VA, and other than that we're bridging... Right now we're taking about 7,500 a month from our investments. So that's been about a 3% distribution.

Pat: Normal life expectancy, you think?

Bob: Yes.

Scott: And is the 3.1 that's what it's worth today?

Bob: Today.

Scott: Yeah. I would not recommend cutting back your expenditures at all.

Pat: I wouldn't either. Should he start Social Security? I would. 65.

Bob: You know, if we start Social Security now we'd get a little over about $5,300 a month.

Pat: So that puts you at...

Bob: And we wouldn't need nearly as much money out of our investment accounts if we start that, of course. But I think you do give up some opportunity for Roth conversions. How do you weigh those two?

Pat: Have you done Roth conversions since you retired?

Bob: We've been doing them for three years. We've got... Of our balance, we have 162 in Roth.

Scott: And is the rest in traditional IRA or 401(k), or do you have some money in brokerage accounts?

Pat: Or savings?

Bob: I've got, yeah, a little over 700 in brokerage. So there's about a little under 2.1 in tax-deferred accounts.

Pat: You know, I would actually do the Roth conversions between now and the end of the year, and then actually start Social Security next year.

Scott: Yeah. Because give away the only three.

Pat: Yeah. Three months. You got time to do.

Scott: I would start it next... If I were in your shoes, I'd start it next year.

Pat: I would actually do a boatload of tax lost harvesting too.

Scott: If there's any opportunity there.

Pat: Right. But I'd make sure... But I wouldn't change my overall allocation in terms of stock to bonds at the end of it. So I would decide how much I was going to do in Roth. I'd do my tax lost harvesting and then I would actually make sure that, you know, if you started at this downturn in the market 70/30, I would make sure it reallocated to 70/30 or 60/40, whatever it is. I would make sure that that allocation... What happens now is... Quite frankly, I was thinking about this on the drive into the day, is people aren't reallocating their portfolios to go higher into equities, right?

So I have a client who called me yesterday. I've got an appointment with him, a phone appointment with him this afternoon. He called me and said, "Hey, I got $50,000 in the bank, is their opportunity? Should I actually put that into the markets?" And I'm like, "This guy gets it. He gets it." We've been... As we manage the portfolios, as the equities fall, we've been increasing that equity, bringing that equity exposure back so that we're not missing the allocation on the portfolio. And you want to sure your doing that.

Scott: What percentage of your overall savings ballpark is in equities?

Bob: Only about 55%.

Pat: You're fine. You're fine. I would...

Scott: Look, it's a really challenging year this year for investors, not only on the stock side, but the bond side as well. It's just been... It's been a rough year. There's been nowhere to hide this year.

Pat: I would take it one step further. I would start your Social Security and I would probably defer your wives for a couple years, but I would start yours because we're cutting the difference here. And then I would actually... I wouldn't... I think you should be spending more than $145,000 a year.

Bob: You're making my wife very happy.

Pat: But think about it. I mean, think about it. This is a temporary part of the market, right? So if you start Social Security right now, you're taking a distribution of your portfolio of, so you're taking $80,000 a year on three. You're at 2.7% of your portfolio is a distribution. So even if we...

Scott: And if you start Social Security now we're talking a percent and a half or something.

Pat: Yeah. We're actually lowering it. So I would actually... I would start Social Security for you, and then I would probably do two and a half percent distribution from the overall portfolio. Do those things that I talked about. And then when your wife's Social Security, you want to kick that into 55, 56. 57. Yeah. What's that?

Scott: 65.

Pat: Yeah, 65. I wouldn't lower the distribution from the portfolio.

Bob: Yeah. I hear you. This is difficult for me. We didn't...

Scott: That's why you have these dollars...

Bob: ... we didn't spend a lot of money by spending a lot of money.

Pat: That's right. You show me someone that doesn't care about money, I'll show you someone that doesn't have any, right?

Scott: No, It's interesting. I mean, the reason you've got these dollars is because you've been... Look, if you think back when you're young, it wasn't easy. Imagine you raised kids, there were times when you were still saving, and it was really difficult, and they were sacrifices you made as a family so you can continue to save for the future, right?

Bob: Very true.

Scott: There's no question. You didn't save 3 million bucks without a lot of work there.

Pat: You wouldn't have it if you didn't.

Scott: But it is hard when you go, and suddenly now you're retired, you save for these years, like giving yourself permission to enjoy them, and the reality is no one gets out here alive, right? We're all going to die at some point in time, and if there's things that are important for you to do, we don't know what tomorrow brings, we know today is here, and as long as we're planning...

Bob: We're not really looking for any legacy money either.

Pat: Oh, you're not?

Bob: No.

Pat: Oh, absolutely. Then you should actually... So start your soul security, and then do a 2.5% distribution.

Scott: That's still really conservative for you.

Pat: It's super conservative. It's super conservative. So that's $75,000 a year. So between the two of those, your income will go up by 30, $40,000 a year.

Bob: Awesome.

Pat: And you should do it, and just spend it. I mean, just spend it. Spend it, right? In fact, if you've ever wanted to go to Europe, now's the time just. I'm just telling you. I mean, their currency has been devalued so much.

Scott: Oh, yeah. It's parody now. Pound and... I mean, well, a pound's almost a parody too. Incredibly.

Bob: Wow. Sounds good. Thank you, guys.

Pat: All right. Well, listen, I hope your wife has been listening. We'll listen to the tape of the show because maybe it's the reinforcement that you need. It's not easy. It truly it's not easy spending money. In fact, Scott and I we just got in the studio today, and we're joking-

Scott: We appreciate the call, Bob.

Pat: We're joking that, like the old days I'm wearing this dress shirt two days in a row.

Scott: And I said to, Pat, "I'm wearing the same shirt. It's my second day wearing this as well."

Pat: But when I started in the business, I would try to get as many days out of the same dress shirt as I possibly could because it was expensive...

Scott: It was expensive getting a dry cleaning.

Pat: Yeah. I don't worry about that as much anymore, but I still... Just because I could afford to dry clean it...

Scott: Now you didn't change your behavior this year because of the bear market. It's just...

Pat: That's who I am.

Scott: You're not going to waste money. You'll spend money in areas that might seem like a large amount, but you get utility for that.

Pat: Correct. And quite frankly, I think I look pretty good on this shirt that I've been wearing two days in a row. What does the people in the control booth look? How do you think? Oh, I got thumbs up. It's weird how the people that work with you always are like, "Hey, what a great guy."

Scott: Yeah. I don't like those people either. You could tell the ones that are sincere, and the ones are just trying to suck up to you.

Pat: I know. But my kids are like, "You know, dad, you're not funny. Those people that laugh work for you." I'm like, "Okay, son."

Scott: Yeah. If you realize the only reason I love you is because I have to because you're my kid. So shut your mouth...

Pat: That's how we do.

Scott: And there we go. All right. Let's continue on. We're in Washington DC talking with Helen. Hi, Helen. You're with Allworth's "Money Matters".

Helen: Hi. I have a question about whether or not we could pay off our house. If it's advisable to ever dip into our 401(k)?

Scott: Sometimes the challenge with... And the challenge with using a retirement account, 401(k), IRA, that sort of thing to pay off a mortgage is, we've got a silent partner called the tax man, right? The IRS. And whenever we pull money out of our retirement account, a chunk goes to the IRS, and the more we pull out the higher percentage has to go to the IRS. So it's not... Years ago we used to be able to spread... You could take a lump sum, and spread the taxation out over a 10-year period. Remember that, Pat.

Pat: That was a long time ago.

Scott: A long time ago, but it used to be that way, and then there was a five-year average as well. There's no average in it all now. So it's if you take a large distribution, it's like you made that much money in one particular year. So what do you owe in the house?

Helen: 300.

Pat: And what's the value of the home?

Helen: 1.1.

Pat: And how much money do you have in 401(k)s or IRAs

Scott: And what's the interest rate?

Helen: 1.1.

Scott: What's the interest rate on your mortgage?

Helen: It's four.

Scott: And is that fixed?

Helen: Fixed.

Pat: Okay. And how much do you have in IRAs and 401(k)s?

Helen: We have 1.2 in the 401(k), and then mine's at 300.

Pat: And how old are you?

Helen: I'm 59.

Scott: And are you retired or still working?

Helen: No. I'll probably be working for another, I don't know, eight, nine years.

Pat: And is your spouse retired or still working?

Helen: He is on medical disability.

Scott: Is this a newer disability? Are you trying to eliminate the mortgage payment? What's...

Helen: Well, we're just trying to figure out if it's worth moving, or if we could just sort of... I mean, it seems like we never really thought about it. I was like, "Maybe this would work." He loses his private... He always is going to have Social Security, but he loses his private disability insurance because he turned 65 this year.

Scott: Okay. So there's a change in income that's saying, "I wish I..." Are you taking any income from your accounts today?

Helen: From our 401(k)? No.

Pat: And how much his income go down? What's the private disability that wraps...

Helen: The insurance will start... It's like 55K.

Scott: And you mentioned moving. Where would you move, and why would you move?

Helen: See the whole thing is we live in a high-income area. The house will never lose its value based on what's going on right now. I mean, it'll go up and down probably a little bit in the market, but it's in a great spot, and we're near a major city. So if we move in order to just sort of just go to, you know, buy a smaller place, and then just not have to deal with a mortgage. The property tax obviously be lower. We're in a high property tax area. So we're just trying to figure out...

Scott: What's that mean for your job though?

Helen: Job. I think I could pick up something close to what I'm doing right now. So because I work for the government.

Pat: Do you want to move?

Helen: No, I don't.

Pat: Do you have children?

Helen: Yeah, they're grown.

Scott: And is your husband on Social Security currently?

Helen: Yes.

Scott: Okay. And, well... Suddenly it's $55,000 a year, what's driving this is his disability insurance is ending, and you're starting to think...

Helen: Yeah, the private part. Yeah.

Scott: What do you earn a year?

Helen: I make 60 a year.

Pat: If he started the distribution on the 1.5 to make up that 55, we'd have to take a 5% distribution net cash.

Scott: Yes, and a little tie.

Pat: At that age.

Scott: If your mortgage payment was paid for, can you still afford to stay in the house, and be fine?

Helen: Yes. That's the whole thing.

Scott: So because it's a 4% rate, you can get 4% on a... You can buy a 10-year treasury and get 4%, and match the yield so you're not taking any risk of those dollars, and then just have...

Helen: Repeat that again. I'm sorry, what was that? Repeat the what?

Scott: Okay. So watch for this. You could start...

Pat: Even CDs you can get about that grade today.

Scott: You shouldn't pay off the mortgage, and you shouldn't actually decide now what to do. I would not sell the home unless you actually found a job in a place that you really wanted to live. And if I did, I would actually pick up, and then I would pay all cash for the next house. Whatever your mortgage payment is, have that amount coming from your IRA or 401(k) each month.

Pat: For the time being.

Scott: To make the payment. And you could always,... if you want to stay in the home, you can always do a reverse mortgage.

Pat: That as well.

Scott: You could always do a reverse mortgage, but...

Pat: It wouldn't be the first option.

Scott: It wouldn't be the first options.

Helen: I thought that that would considered... All right. So first option would be reverse mortgage?

Pat: No. That'd be the last option. The move would be the first option.

Scott: Yeah. If you're my older sister, I'd say, "Hey, Helen, instead of worrying about paying off the mortgage you can..." If you took 300,000 out of your 401(k) today to pay off the mortgage, you're going to be taxed up the ying-yang. So that's not going to work. Instead, whatever your mortgage payment is, let's call it two grand a month, set up an automatic payment so that two grand comes from your retirement account and drops in your checking account each month. It's there, and then they'll make the mortgage payment. That solves what your problem is, which is that income problem.

Pat: At least for the short term.

Scott: Yeah. So, hey, I appreciate you calling. And I'd highly recommend meeting with a good financial advisor, either in-person or digitally or virtually to run through your scenarios here. Thanks. Well, we'll be right back.

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

Scott: Welcome back to Allworth's "Money Matters". Scott Hanson.

Pat: Pat McClain. Thanks for sticking with us.

Scott: You know, one of the interesting things Helen's call got me thinking that risk tolerances sometimes change based upon circumstances in life. Sometimes our investment portfolios oftentimes because of our circumstances in life, or our risk tolerance. And sometimes when there's a big change like that... I was thinking, I had a client of mine a few years ago her husband died. He was retired, she was late 50s, early 60s still working. He passes away. And when he was going through chemo stage four cancer, he was going through chemo, and she was freaked out about her world change obviously.

And so I remember talking to her and said, "Well, let's just..." I said, "Let's reduce your stock exposure right now." She says, "Why are you worried about the stock market crashing?" Like, I said, "I have no idea where the market's going to go right now, but it seems to me you've got enough going on in life." Here's your partner, odds are he's not going to be here for your retirement. You don't even... Like, you've been planning on your retirement together, you don't even know what your future's going to look like. You've got this major issue in front of you of being with your husband through this journey. So we reduced her stock exposure dramatically during that, and he passed on, and then shortly thereafter waited a little while as she started...

Pat: So you reallocated the portfolio?

Scott: Yeah. It added back to where it should have been.

Pat: But that was one less thing she needed to worry about.

Scott: One less thing she needed to worry.

Pat: She was looking for things to worry about.

Scott: I knew her well enough to because she's low-risk tolerance. I knew her well enough to know that if a bear market happened at the same time, it'd be...

Pat: It wasn't good.

Scott: It wouldn't be good for her. And frankly, I was concerned that she might say, I don't care what you say, I need to sell some stocks in the bare market to make me feel better.

Pat: You're proactive because the environment changed, not the environment that she lived, the market environment, but her environment changed.

Scott: Exactly. Her environment changed.

Pat: Her environment changed.

Scott: So you oftentimes allocation change in your investment strategy is not based upon someone thinking that now's a good time to buy this or bad time to be whatever. It's so much based upon having things structured a manner to give you the highest probability of a good outcome over a long period of time, which is based upon your financial plans. And when your financial plan and her situation was not clear, the future was very cloudy. It would made sense to make a change at that time.

Pat: So you're saying that psychology is important in investing?

Scott: Well, some studies show that working with a good advisor you can yield over two percentage points a year in additional returns through the behavioral coaching of that.

Pat: Yeah. It's hard to measure behavioral coaching though.

Scott: Anyway, let's go back to calls 833-99-Worth if you want to get yourself on the program. I'd love to take your call. We're talking to Rob. Rob, your with Allworth's "Money Matters."

Rob: Thank you, and for your service to financial planning.

Scott: Thanks.

Rob: I have both myself, I'm the dad, and then I have my daughter, Peyton, on the line with us.

Pat: Oh, wonderful.

Rob: And we're trying to guide her in the right financial direction. Our questions today are kind of on the other side of the spectrum of financial planning, retirement, more the beginning side. So this is one of these things that, you know, I wish I knew then what I know now, is was what I'm trying to help her with. So Peyton she's 22. She's a recent graduate from college and has just started her career two weeks ago.

Pat: Congratulations, Peyton. Peyton, where did you go to school?

Peyton: Thank you. I just graduated from Cal Poly San Luis Obispo.

Pat: Oh, good for you. And what did you study?

Peyton: I studied agricultural communications, and now I'm doing Ag marketing.

Pat: Oh, good for you.

Scott: Wow, you're using your degree. Agriculture communication that led us speak into the...

Pat: The dancing raisins. Good for you.

Rob: Perfect.

Pat: By the way, for the rest of the listeners across the United States, this is a college that is a few 100 miles away from where we broadcast from Sacramento, and it is a very difficult school to get into.

Scott: Yeah, very prestigious.

Pat: Very, very prestigious. In a beautiful location. So visit California.

Scott: And you work for... Peyton, so is your job with a large employer, or an association, or who you working for?

Peyton: I'm working for a large employer now.

Scott: Okay. And I imagine they offer a 401(k).

Peyton: They do, and I'm trying to navigate everything that comes with that.

Rob: Yeah. So that's kind of our question. So walking into this she has no debt. So we saved via a 529 plan for the last 18 years. So go ahead and put me down for a hard no on forgiving student debt, just a side note. And she also has approximately $30,000 now from savings over her life from various things, jobs and 4-H animals, and actually dad harvesting some birthday money over the years.

Pat: Good job, Peyton.

Rob: She's kind of on the other side where she doesn't have debt. She actually has some money hopefully to invest.

Pat: Well, the first thing Peyton wants to do is put the maximum into the 401(k).

Scott: I wouldn't say the maximum. She's not going to be putting in six...

Pat: The maximum is a percentage of pay that the plan allows.

Scott: Well, some will allow 30% of pay. I would think 10% to 15% into the 401(k).

Rob: Yeah. So this is what I'm proposing for, before the 401(k) question is, you know, so you're always trying to save, you're trying to save for houses probably down the road. You know, that seems like a long ways down the road, but in the next 5 to 10 years, that's going to be something that she's going to be interested in. And to give her a good financial base, I'm recommending that she lives at home for a year or two. Understanding that comes with some sacrifice, because you're back living with mom and dad, right? And it's, "I was in college, you know, kind of free and, you know, I'm back with mom and dad, so I realize there's some sacrifice there." But I think that would give her a great financial base going forward. And we can get to that. So as a...

Scott: So I got to tell you, Pat and I are both looking at each other like...

Pat: I wouldn't... Look...

Scott: So here's kind of my thought about this. Obviously, she knows how to save, she's got money saved, and it's always this balance between enjoying some life today, and saving for tomorrow. Someone at 22 years old, if they're saving, let's call, 15%... What was that book that was written 100 years ago? The Wealthiest Barber. Something about the... What was it?

Pat: Wealthiest Barber.

Scott: It's all about saving 10% of your income. If you save 10% of your income from day one, you don't have to worry about anything. Save 10% of your income, stay out of debt, you don't really have to worry about anything else. So from a typical new college grad, it's like, if you can be saving 10% to 15% in your 401(k), I'd use the Roth option at this income level, then if you choose to go to the weekend with some friends from a bachelorette party, or go out to dinner with some friends, you feel good about those sort of things.

Pat: And living at home is... You know, we shouldn't confuse the money thing with the social thing at a 22-year-old, right? Look, my daughter lives with... I have four children. My daughter lives with us, but it's not... It may be economics for her, but it wasn't for me. I didn't encourage it one way or the other.

Scott: Well, she graduated in COVID time, right?

Pat: She graduated towards COVID, that's right. That's right. Yes. Yeah.

Scott: Probably sent home in the middle of COVID, never went back.

Pat: No, we went to her graduation.

Scott: Okay. Whatever. I don't know what I'm talking about. But...

Pat: Anyway, so she teaches at a low-income school, and doesn't make a ton of money, but teaches in a low-income public school, and will be attending law school next year, and will probably moving out again. So for that was just easy. It had nothing to do with what I wanted to do, or not want her to do. And quite frankly, I don't mind... In fact, I like her living there. It's finally nice to have an adult in the room. So, Rob, don't confuse the living...

Scott: Like, I remember my oldest daughter, I love dearly, we have a great relationship, and she was home for a couple months during COVID. She didn't last. And our relationship's much better when she's not at home.

Pat: So, Rob, if that's what Peyton decides, then Peyton decides, right? I don't know, I think...

Rob: No, I agree. I mean, obviously 100% her choice. I'm just trying to, you know, show her, as you're building this income at least in the first year, then she's able to see things grow. You know, a compounding interest. She'll see that...

Scott: You know, it's more powerful for... I'm giving her a challenge here. If she really focused on her career, right? She obviously worked hard in high school to get into Cal Poly. I don't know how she graduated, but she graduated at Cal Poly. I don't know where she fit in the class, but it doesn't matter. She's got a job now. Once you get your first job, all that stuff kind of is irrelevant. But the better you can do in your career to become more and more valuable first to your employer, and then to wherever that leads, that's going to yield the greatest economic benefit over your lifetime. If you can get to the point where you're suddenly in the top 2% or 3% of income earners, because you're so good at what you do, that's going to yield much more financial independence. You can't really bank on that.

Pat: So, we're getting way offline. And we have lots of young people that start with us right off college, and they ask me, "What should I do?" And I always tell them to go join Toastmaster to learn public speaking, because if you can articulate your ideas, it makes you much more valuable in the marketplace. So in saying all that, Rob, yes. If she lives at home and she saves, if she's saving for a house, I would buy one-year treasuries, or put the money in a high-yield equity.

Scott: But she's probably not going to buy a house for a few years.

Pat: Yeah. But I still wouldn't invest it in equities if I thought I was going to buy a house in the next five years. Scott?

Scott: I don't know. It's a good time to be investing. I would recommend taking some of that... Maybe make a Roth IRA contribution for this year.

Pat: No. After you do the Roth, you know, 15% of pay...

Scott: Into the 401(k).

Pat: ... into the 401(k). Do it Roth. I'm assuming you're making, you know, a ton of money. And then maybe a Roth IRA because you could draw the money out of the Roth IRA for the purchase of a first-time home.

Scott: Yeah. But for the $30,000 she has to invest. I wouldn't leave it all in cash.

Pat: I forgot about the 30 grand. I could invest half of it.

Scott: Yeah. I wouldn't leave it all in cash. Yeah, I'd invest some.

Pat: Yeah. And then the money she saves on a monthly basis, that's what I was talking about, putting into a high-yield money market.

Scott: Oh, to save for a house.

Pat: To save for a house.

Scott: Yeah. I would agree with that.

Rob: Right. Yeah, I was thinking that she would contribute to the 401(k) to the amount that's going to be matching, which is going to be 4%, and then the balance, some sort of investing. You all are suggesting a Roth, where she can borrow against it, if I'm hearing that correctly.

Pat: That's right. But she can...

Scott: Even withdraw from it, and not borrow. But I would recommend contributing more to the 401(k), and for one simple reason. If you listen to the show for a period of time, where's the majority of people's assets? It's in their company retirement plan. Why is that? Because the money gets yanked out of the paycheck before someone has a chance to spend it.

Pat: And by the way...

Scott: It's the best four savings there is.

Pat: Rob, she'll have a 401(k) Roth option on her 401(k). So we're saying do both. The Roth option on the 401(k), and the Roth, and then invest half of that $30,000. I'd take 15 grand, and I'd put it in the total market. That's what I would buy with it. I'd leave the other 15,000. I'd probably buy two-year treasuries with it.

Scott: Or you'd put it in a high-yield savings account.

Pat: Slow down here buddy. A two-year treasury or I would put it in a high-yield savings account.

Scott: Or a two-year CD. It's kind of hard to buy a treasury with $15,000. It'd be a lot of work for... I don't know.

Pat: All right.

Scott: Hey, Rob and Peyton, appreciate the call. I hope that was helpful.

Pat: Yes. Appreciate that.

Scott: Yeah. And it's good she has a father that cares so deeply that helps her with her financial plans. I'm trying to think the chance of me getting my daughter on the line with me to call a program to talk about anything to have to do with behaviors. I don't care what the behavior is.

Pat: I think I mentioned this about a year ago. My daughter, I saw a book in her room that was investing for... I think it was "Investing For Dummies," or "Wall Street Journal Guide to Money & Investing."

Scott: She didn't ask you about it?

Pat: No. She just went online and bought it, and I asked her, I was like, "What's this?" And she said, "I want to understand it better. I want to understand how this whole thing works better." So I thought, "Good for you." Well, let's talk about...

Scott: There's a lot to talk about in the financial markets. So let's spend a little time.

Pat: But I want to talk about Beyond Meat.

Scott: Have you tried a Beyond Meat?

Pat: I have tried Beyond Meat a couple of times. It's all right. My daughter eats it.

Scott: She does.

Pat: Again, we're talking about my daughter. You know, she's been a vegan, I think, for three or four years.

Scott: And she's vegan.

Pat: Not vegetarian, vegan.

Scott: How strict? Like, will she have a leather purse? Will she wear leather shoes?

Pat: I've never noticed.

Scott: I mean, there's some vegans that go that far.

Pat: No honey. No honey, won't need honey because animal has something to do with it. So I don't know whether...

Scott: I got stung by a bee in my inside lip last week.

Pat: Did you?

Scott: I killed the bee.

Pat: You could die, anyway.

Scott: I'm still angry.

Pat: I don't think it was... I know you're going to die but...

Scott: And it's still all funny too.

Pat: Anyway. So Beyond Meat came out. It was a public company that came out in 2019, and the stock went crazy. It reached a high of $234 a share.

Scott: Which put a valuation on it of $14 billion.

Pat: That is a big number. I don't care where you grew up.

Scott: So let's step back for a second. Here's why you're bringing this story up, Pat, right? So here's a product, interesting product. Hey...

Pat: Lots of hype around it.

Scott: There's a lot of marketing hype around it. Meat alternative, cows have... They're creating too much methane, it's causing climate change. This is going to solve all kinds of problems.

Pat: Yes. Fake meat. How could you go wrong?

Scott: How could it go wrong? Market value of 14 billion in 2019.

Pat: And it was trading at $150 this year.

Scott: By July of 2021, so a little more than a year ago, it was still...

Pat: Well, I'm sorry. At the high, it was 234 a share. In July, it was...

Scott: July of 21 it had fallen to 150 bucks a share, still 9 billion. But a week ago, this is what is amazing, right, Pat?

Pat: Yeah.

Scott: It fell to 18 bucks a share, $1.1 billion.

Pat: In what? Less than three years.

Scott: Almost a 90% decline.

Pat: And this was a stock...

Scott: A little more than 90% decline.

Pat: So this is what we talk about hype stocks.

Scott: Here's how you destroy your wealth, seriously. No. It's... I mean...

Pat: Like, "How could you go wrong?"

Scott: Like, we talk about, "You got to invest for the long-term. Stick with these things. Don't sell in the down market." We're not talking about if you put a bunch of money in one individual company like this. This is probably never going to come back.

Pat: Well, here's why, if people had thought about it at the time, what percentage of the population in the United States is vegetarian? Not vegan, vegetarian. It's 5%.

Scott: I didn't know it was that high.

Pat: Five percent, they consider themselves vegetarians. I consider myself healthy and in shape. Out of the gate, we have a product that 95% of the population has a little use for. They'll try it. I tried it. "I mixed it with some regular ground beef. I tried it a couple times. Yeah. It's alright. It's okay. It's in our house, it's in our refrigerator."

Scott: I've got some in our freezer, and I've eaten it once. You know, the interesting thing about this though also, I mean, there's some health people that say, "If you look at an ingredients list, and it has more than four or five ingredients..." No, no, no, don't well, because it's the same issue.

Pat: Well, then go on.

Scott: Don't eat it. And there's people that say... And I'm not saying... I don't want to get sued by Beyond Meat. So, allegedly.

Pat: Okay. Is that what they say?

Scott: No, no, no. There's some that say it's not healthy for you.

Pat: Because it's not close enough to the Earth.

Scott: No. There's just full of all kinds of different ingredients to get this flavor.

Pat: Oh, I don't know.

Scott: Oh, no. That's what other people have said.

Pat: Well, it makes sense.

Scott: So you might be vegan and say, "I don't want to eat Beyond Meat. This totally processed, fake something."

Pat: Oh, because it's chemical.

Scott: "I want to eat whole real foods."

Pat: Well, the stock didn't do well. I appreciate...

Scott: That's why you're talking about it.

Pat: That's right. You know what it reminded me of?

Scott: Because there's other companies like that.

Pat: It reminded me of Krispy Kreme. Remember when Krispy Kreme went public years and years ago? I remember there was an investment person in our office that was not from our firm, that was hyping the heck out of Krispy Kreme, and I said to him, "You know, they sell doughnuts, right?" Sure, it's a great doughnut. Sure, they got a sign that flashes when it's hot. But there hasn't been a ton of innovation in doughnut making over the last couple 100. And I don't believe, because they have a machine that could spit this dough into batter a little bit faster. But the stock went crazy when it first came out, the Krispy Kreme did.

Scott: That was a long time ago.

Pat: It was a long time, but it kind of reminded me of did it... Anyway.

Scott: Well, it's been a... I mean, look, this market downturn is...

Pat: It's hard.

Scott: It's painful and nasty for most of us. But it's really hard if you have not been diversified, and you've overweighted it in one or two different things. We also talked about... We gave some warning about these SPACs, special purpose acquisition companies, blank check companies.

Pat: When did they get... Was it two years ago, three years ago that they started getting popular?

Scott: A couple years ago. There's a couple major ones now that they're shutting down because they can't find any companies worth buying. IPOs this year...

Pat: Dead.

Scott: Yeah. They're doing just awful as well. 87% of companies that went public last year are trading below their IPO price. 87%. Some of the worst performers Rent the Runway, you can rent clothes. I know that's not a rented shirt you have on because you wore it two days in a row. Although, if you could find a way to rent it, and return it dirty, factor of that cost... Rent the Runway is down more than 85% from its IPO price.

Pat: Wow.

Scott: There are a ton that are off dramatically from where they were.

Pat: It's been a lot of electric vehicle companies.

Scott: The average decline for a company that went public this year is 49%. So if last year you said, "I'm going to buy IPOs at the initial price." So you got the initial shares, not the first day they traded, but the actual initial shares, you're down 49%.

Pat: I wonder, Scott, if we compared those numbers that actually had earnings when they went public, and actually looked at the ones that actually made money versus the ones that...

Scott: Well, okay. You could probably...

Pat: No. The reason is that in an environment like weren't in today, earnings matter, the growth story matters less than the earning story. And where we were two years ago, the growth story was the story, and the earning story didn't matter.

Scott: The momentum was the story. Remember GameStop and all that stuff.

Pat: Oh, yeah.

Scott: Bitcoin.

Pat: Yes.

Scott: All kinds of stuff. It was just to buy it because it's going up. It doesn't matter the underlying fundamentals. Just buy it because it's going up. I mean, Robinhood came out, they put gamification behind it, and you got rewarded on your trades, which is the opposite of what long-term investors say, "The more trades you have, the worse you're going to do. Not the better." They would encourage trading fair down more than half. No, Robin's down more than 70%.

Pat: So the moral the story is, don't get caught up in the trends.

Scott: Look, there's some things in your portfolio, we talk about sticking with these bear markets, because they will recover. The broad markets will recover. Some individual companies may or may not recover, and if you got caught up in some of this year or so ago, you might want to cut your losses, and take advantage of a tax loss on it today.

Pat: Go back, take a look. Go back, take a look.

Scott: Because...

Pat: Yeah. It's rough. It is rough.

Scott: Yeah. Hey, before we go there, I want to make note of a new workshop that we've got, titled The Healthcare Financial Factor: Preparing for the Transition from Workplace to Retirement. And I actually did some recording on this earlier this week, but it's going to air October 11th, 12th, 13th, and 15th. And the reason we are doing this is, a typical couple who retires at age 65 is going to spend roughly $315,000 on healthcare, but secondly, there's a lot of confusion behind Medicare Advantage plans, Medigap plans, all those things.

Pat: Long-term care, what's covered, what's not covered.

Scott: If you plan on retiring before you're 65, how do you make that work? 87% of people that are on a private exchange plan under 65 are subsidized by the federal government today.

Pat: What percent?

Scott: 87%. 87%. If you're on a private plan... I mean, you might find yourself in a good position income-wise, right, and you want to retire before you're 65, you might be able to structure so that you're on one of the health state exchange plans.

Pat: So, you said that... Did I hear this right? 87% of private insurance...

Scott: On single-payer plan are through an exchange subsidized by the government.

Pat: That is amazing. 87%. Let me think about this.

Scott: If you leave your employer, you've got guaranteed insurability. There's no underwriting. There's a period of time where you can go into a private plan, an individual plan, guaranteed insurability with premiums set by the Affordable Care Act.

Pat: So you don't have to go on COBRA?

Scott: Oftentimes, it's the most expensive.

Pat: And you can go... Well...

Scott: Actually, write this down, October 11th, 12th, 13th, and 15th.

Pat: I'm actually going to... This is...

Scott: You're going to watch yourself.

Pat: I know.

Scott: Well, so I did some recording with an expert in this area, and this is what is going to be aired. But I asked... When we're done, "I said we need to make sure all of our advisors watched this, because things have changed."

Pat: Yeah. Dramatically.

Scott: Yeah. I mean, like, there's no Medicare Part C anymore for new rollies, and that sort of stuff. It's changed. So, October 11th, 12, 13th, and 15th is when we are airing this, and you'll want to join, and you can join at allworthfinancial.com/workshops. That's allworthfinancial.com/workshops. We're out of time. It's been great being with you. I'll see you next week.

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