Is Your Financial Plan Built to Last? Stress Testing Portfolios, Roth Conversions, and Real-Life Retirement Decisions
Markets look strong—but are they too perfect? On this week’s Money Matters, Scott and Pat explore how to stress test your financial plan so it can hold up in the real world. They take a call from a 63-year-old retiree with a $6 million portfolio who’s rethinking his Roth conversions and Social Security timing, then talk with a 47-year-old state employee balancing burnout, real estate, and early retirement goals. Finally, Allworth’s Head of Wealth Planning, Victoria Bogner, joins to explain how taxes, Medicare, and market strategy all connect inside a resilient financial plan. If you’ve ever wondered whether your financial plan could weather a true market test, this episode delivers clarity, humor, and timeless perspective.
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Scott H.: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott H.: Yeah, talking about finances, investments, markets, all that good stuff.
Pat: The good stuff, yeah.
Scott H.: It feels, Pat, like the market has priced in a bit of perfection.
Pat: Ask me. Ask me, your host. Ask me how I feel about it three days from now because I'm all over the place as to whether...
Scott H.: Yes. And by the way, we might have feelings or gut, it doesn't necessarily mean we're going to change our investment strategies because we, believe that we will have recessions in the future. We will believe we will have corrections in the stock market. We will believe we'll have bear markets in the future.
Pat: And we believe we don't know when those will happen.
Scott H.: That's correct.
Pat: Right? So, I just read an article last week. It's called, "Now's the Time to Stress Test". And the stress test on a portfolio is when you put it through what happens, an algorithm, AI, if you will. An algorithm that actually tells you what the probable outcome is if certain things happen. I'm trying to make comparisons between this and the dot-com. And I don't believe this is anything like the dot-com because of the... Like Walmart came out and announced that they don't expect that they will...
Scott H.: They're not going to be hiring.
Pat: They don't expect that they're going to move their head count. They expect their use to attrition.
Scott H.: And in fact, they expect their revenues to double before they hire more people or something like that.
Pat: It was amazing. And then you see companies like Royal Dutch Petroleum comes out...
Scott H.: Shell oil.
Pat: ...Shell oil. And then you see Rolls Royce, they build engines. And you just think, where does this stop?
Scott H.: Because they all believe technologies can exist to replace human labor.
Pat: And we run a business and we see it.
Scott H.: Correct.
Pat: Right? We see it.
Scott H.: I think...
Pat: I see it in the medical care, especially.
Scott H.: The question is, how long will things...? Okay, but it's priced such that all these data centers, the billions of dollars that have been...
Pat: Well, first of all, I don't believe that all the data centers that have been announced will actually be built. Let's go with that. I think that that's an appeasement to the current political environment.
Scott H.: All right, fair, that might be.
Pat: Or clearly some of that. Let's just see, "Okay, Trump. Yeah, sure it will. $600 billion." Just making up a number at the top of his head. I get it.
Scott H.: But if you look at... I mean, one of the things, during the dot-com, there was all this fiber optic that was laid over capacity.
Pat: Way over capacity, right?
Scott H.: Which then those companies collapsed. It was pretty much... I mean, it was a nasty bear market, but it was still somewhat... It didn't have the widespread contagion like the dot-com...I'm sorry, the financial crisis caused by the housing bubble.
Pat: This did not. The dot-com did.
Scott H.: The dot-com, yeah.
Pat: That's correct. That's correct.
Scott H.: It was a different... But I just think right now, it just feels like things are priced to perfection. And so, even if I think that, does it mean I'm going to make any changes in my portfolio? Probably not. And I was having a bike ride with a buddy the other day and we're talking about the markets, and after we talked about politics for a while and religion, and then we went to the markets. Sounds great. But he said, "Oh, I just watched that movie, 'The Big Short'." I watched it for the second time the other day. And "The Big Short", I don't know if you remember the movie, Pat, the book as well.
Pat: I certainly do remember. I read the book. By Michael Lewis.
Scott H.: Yes. And it was about this guy who saw... He looked at what was going on in the credit markets and the loans on these houses and he says, "This is completely unsustainable. I'm going to bet against this, because clearly, it's not sustainable. It's going to blow up." And so, he started...
Pat: Well, he found someone that would sell him those options, which I thought should have been the main point, which is because someone took the other side of the trade.
Scott H.: Right. If you think how many years it took before he was proved right. And by the time he was proved right, there was no one else with him.
Pat: That's right. No, his investors had all bailed.
Scott H.: All bailed on him.
Pat: All bailed.
Scott H.: And it just reminded me that a bull market can run much longer than you can stay liquid. And in the early 2000s, probably mid-2000, I don't remember the exact, I personally bought puts on Countrywide and IndyMac Bank.
Pat: I bought them on Countrywide.
Scott H.: Both went bankrupt. My puts, both expired out of the money, which means, I took some money to bet that these companies were going to decline in value, and that they were like two-year options, as long as I could get at the time. And you were right, but the bull market lasted a lot longer than my options.
Pat: Which was hard to believe. But the point being is if you didn't ride it the whole way, if you didn't get the upside at the end of the bull market, you wouldn't know when to get in on the down side.
Scott H.: That's exactly right. Which is why we're come back to asset allocation. And that was a good time to look. And the whole concept, Pat of stress test in your portfolio like, "What does my personal account look like? If the stock market fell 30%, what would my account look like?" And of my fixed income, how much of this is in not the highest credit rated?
Pat: And people have a tendency to let their portfolios run. Which by the way, when you're working and you're putting money in your 401(k) and you're 90% equities, it doesn't make that big of a deal. But when you're 71, 72, you're taking income and your portfolios crept from 60% to 80%, which 100% conceivable over the last few years.
Scott H.: The last few years, yes.
Pat: That if you don't bring that back down, then you've got risk in the portfolio that you didn't have just a few years ago.
Scott H.: That's exactly right.
Pat: And the thing is, and we've talked about this on the show before, it's hard to do because you're actually selling off the things that's done really well.
Scott H.: Yeah. And when you reallocate, you're buying...
Pat: You end up selling the best performers of your portfolio.
Scott H.: Which is hard to do, but it's imperative.
Pat: Particularly, not so imperative when you're 30, in that room. To your point, when you're either nearing retirement, at retirement, no longer working, particularly, if you're no longer working, now, you need to be much more concerned about preserving what you have. You know, we've been doing this a long time, Scott. You've known me for a long time. I turn 63 next month.
Scott H.: Happy birthday.
Pat: Thank you.
Scott H.: I'll get you the same thing I got you last year.
Pat: Thank you very, very much.
Scott H.: And the same phone greeting of singing you happy birthday, which I don't think I ever have, so...
Pat: So, I spend a lot more time on my asset allocation than I did when I was 40.
Scott H.: Yeah, of course.
Pat: I have a much more defined investment thesis.
Scott H.: And more diversification than you had before.
Pat: And a lot more diversification, because it didn't...
Scott H.: Of course, it was all stocks, 100%.
Pat: Yeah, yeah. And it didn't really matter because I wasn't going to take income any time soon.
Scott H.: Yeah, you know you're 20 years before you needed some income.
Pat: And you had lots of times to trip up. Not so much now.
Scott H.: Yeah. Well, you're still employed today. Who knows tomorrow?
Pat: Do you know something?
Scott H.: I don't.
Pat: Should we be talking off air?
Scott H.: I guess. This was a year and a half ago. So, we have an advisors conference once a year. All the advisors across the country all come together and there's education and award stuff. And we got some sort of a lifetime achievement award or something like that. I forget what they called it. They honored Hanson and McLean for the company that we. And after, are we getting fired? So, my son, I told my son about this, and he said, "Well, did they play "Closing Time' the song when you were stepping off the stage?" That was really funny. Anyway. All right. Let's...
Pat: We didn't get fired, right?
Scott H.: No, we didn't. We're still here. Still standing.
Pat: I've seen the movie "Office Space" where the guy continued to show up to work.
Scott H.: Yeah, that's one of those stupid movies that the more you see, the better it gets. In one of those movies, my wife's like, "You're not watching 'Dumb and Dumber' again, are you?"
Pat: Oh, yeah, I am flipping the channels. What are you going to do?
Scott H.: Like, how old are you? All right, let's go. All right. If you want to be part of our program, you want to join us with your questions regarding your finances, the best way is send us an email, questions@moneymatters.com, again, questions@moneymatters.com. We're starting off with Scott. Scott, you're with Allworth's "Money Matters".
Scott: Hey, guys.
Scott H.: Hi, Scott.
Scott: Yep. Thanks for having me on the show. I started listening about three months ago.
Scott H.: Oh, all right.
Scott: And kind of catching up on your old podcasts. You're kind of making me a little bit nervous about my allocation as I listen to you. But my questions are primarily about Roth conversions and how much variability there seems to be in the different software packages out there.
Scott H.: Okay. Well, a lot of them, I mean, some of them, it's just a narrow view. It's difficult to get a complete holistic view of Scott's financial life, risk tolerance, income needs.
Scott: Yeah, these are ones that have you entering in quite a bit of data and subscribe to them, so these are not free calculators. And you probably know which ones are out there. And my background is, I'm 63, retired in the last year, have a net worth of about $6.1. And in terms of, most of it's in an IRA, a SEP IRA, and about $154,000 in a brokerage account. And then I did a Roth conversion this year, about $321,000. That was prior to the tax bill changing.
Scott H.: Are you married?
Scott: I'm married, mm-hmm, yeah.
Scott H.: Are your kids grown and out of the house, self-supported?
Scott: They are in their 20s, and some of them are in the house, some of them are out of the house. None of them are dependent on my tax return.
Pat: It doesn't mean they're not dependents, but okay, keep going.
Scott: Well, I was very specific about my statement.
Scott H.: Thank you. They could be okay if they had to be.
Scott: Yeah. The youngest is still in college, so I assume...
Pat: And what do you...? Have you started taking Social Security?
Scott: No, I'm not going to do that until age 70.
Pat: All right, well, we'll discuss that. And what are you living on?
Scott: You know, we're in the ballpark of $180 to $200 a year in terms of what we are spending, including taxes.
Pat: Where's it coming from?
Scott: Probably about... Well, three quarters of it, at least, are from IRA distributions. And then the other... And I kind of give that as a baseline paycheck. And then I will do some brokerage withdrawals depending upon what I need to fill the gaps. But that's kind of how I've done it so far. And I've tried to make sure that I have enough to pay the taxes on the Roth conversion from the brokerage account, as I understand that's a better source.
Scott H.: Yeah, but...
Pat: Yeah, but you're not going to be able to do it very long. So, what's your question for us?
Scott: Well, when you use these different calculators, there can be as much of a difference of 40% to 50% in terms of... And the sequence of Roth conversions can vary a fair amount, and even when I tell you all the things I just told you. And I was surprised, I thought it would be a little bit more precise about... You know, and obviously, it can vary based on a lot of things.
Scott H.: Well, a lot of it, it's what the future tax rates are going to be that nobody knows.
Scott: Right. So, I'm kind of banking on...
Scott H.: I mean, so we can run all the numbers we want, but the outcome is going to be based more on our assumptions. And the assumptions that we're putting in is based upon what we believe Congress and the future administration is going to do with tax law. So, if we believe tax law is going to be much higher in the future, this is a really easy decision to make. Actually, if we believe they're going to be the same, then that it's relatively easy math. If we believe that there's going to be more complicated, then we don't know.
Scott: Right. I mean, I'm convinced I should do...
Scott H.: So, the software programs are only going to do so much for us because it's going to be based upon assumptions.
Scott: Right, right.
Scott H.: So, what's your question for us?
Scott: So, my assumption is that the tax rates are likely to go higher. And that because I have such a large percentage of my retirement in a SEP IRA, with some big RMDs coming at age 75.
Scott H.: That's right. And you believe that tax rates will go higher, predominantly on higher income people or across the board?
Scott: Probably in higher income more so, but I'm not really sure. But I think it'll affect me, put it that way.
Scott H.: So, if I were planning, I would agree with you on that. So, I think most people that have some decent savings at retirement should plan a higher tax in the future. And if they don't have them, great.
Pat: But why? So, give me the reason that you think you should wait till you're age 70 to start taking Social Security benefits.
Scott: Well, I mean, when I use the different calculators, it suggests that as long as I can live on other funds, then I should wait to get the 8% increase every year until I get to...
Scott H.: That's based upon an assumption.
Pat: Yeah. But if we believe tax rates are going to be higher, and I started taking Social Security, could I not use some of that Social Security to pay for the Roth convergence?
Scott: Okay. I just haven't thought about that before.
Scott H.: No.
Pat: So, when you look at the situation, this is what... If you and I were just sitting and going for a bike ride, like Scott does with his buddies, and they talk about politics and money.
Scott: I go for bike rides with my buddies, too.
Scott H.: Okay, but then I could...
Pat: But do you talk about politics and money, right? And how fast?
Scott: Yeah, sometimes. We try to avoid the politics.
Pat: And how fast do you...
Scott H.: If you ride with someone who's very similar politically, then it's a lot of fun.
Pat: That's right. And how fast you used to be. You used to be really fast. That's right.
Scott: Well, they're all faster than me.
Pat: It's actually, so it's my bicycle's problem. So, here's what I would think about. I would think about your net worth and the scheme of taxation in the United States. So, if we think about this, and we think about relative wealth... Because you look at yourself and you don't think you're that wealthy. The guy with $15 million is wealthy, right? You're middle class.
Scott: Oh, yeah, it's all relative.
Scott H.: Correct.
Pat: That's right, everything's relative. So, I would worry about Social Security taxation or lack of Social Security at age 70.
Scott H.: Where do you think he is as far as percentile for 63 year olds?
Pat: You're in the top zero...
Scott H.: Less than 1%.
Pat: Yeah, you're most certainly in the top one half of 1% of net worth in the United States at age 63. And then you look at these distributions and the Roth conversions, and you're taking out about a 4% distribution a year. And so, let's just assume that you're going to grow at 8%. We're going to get to $9 million, $10 million by the time you're 70. And at that point in time, the Social Security taxation... The Social Security is a really weird thing because of the fact that statutory wise, when we hit 0, which is either 2023 or 2024, by the way, looks like your normal retirement age is 2032, so you're going to be right up against it, it's an automatic 22%, 23% cut across the board.
Scott H.: And then I make another argument. And because you're relatively...
Pat: So, while it might grow 8%, you are betting that Congress is going to step up and say that, Scott, who's in the top 1% of wealthy retirees, needs his Social Security preserved.
Scott H.: So, in this...
Pat: I'm of the assumption that people like Scott...
Scott: So, in 2032, so you're thinking in 2022 they're going to increase the percentage of Social Security?
Scott H.: Oh, no, I think it might happen before then.
Pat: I think it will be needs based.
Scott H.:: That's my assumption. Maybe I'm wrong.
Pat: But this has happened before. If you look at the history of taxation of Social Security, back in the 80s, Social Security benefits were tax free. And then they started taxing 50% of the benefits of incomes with couples over $32,000. And they created a whole new provision in the tax law called provisional income, which included tax free municipal bond income. For the first time ever, they were figuring out how they could actually tax municipal bond income. About four or five years later, in the early '90s, they said, "This is working out pretty well. Let's start taxing incomes of $44,000 and above. We will tax 85% of their Social Security."
Scott H.: Maybe we would include 85% of their Social Security in their income tax rate.
Pat: And never adjusted any of this for inflation, by the way.
Scott: Exactly. So, in my calculations, I should vary the amount of taxation that's going to occur on my Social Security to kind of get a better understanding.
Pat: No, I would... If I were you...
Scott H.: I'd take it now.
Pat: ...I would assume I'm not going to get Social Security come 2033, 2034. I'm of the assumption...
Scott: Really?
Scott H.: Yes.
Scott: Oh, okay.
Pat: No, who are they going to tax? People that can't get by?
Scott H.: By the way, there's been talk from senators on both sides of the aisle about having Social Security means tested. If your income's over $200,000, you don't need Social Security, so you shouldn't get it.
Scott: Got it. okay. So, if I don't take it now, then I might lose it.
Scott H.: Yeah, or a portion of it. But not only that, just based upon your required minimum distributions.
Pat: Not only that, I would make the argument, because you're starting to take Social Security, you can do more Roth conversion because you have...
Scott: Okay, so I can leverage it to recover my loss.
Scott H.: Yes, exactly.
Pat: Exactly. So, it serves two purposes.
Scott H.: Because your brokerage account is relatively small relative to your net worth.
Scott: I know. I know.
Scott H.: And if I were in your situation, I wouldn't want to see that get much smaller.
Pat: But don't beat yourself up about your $6million IRA.
Scott: No, I'm not. I'm not. It's a first world problem.
Scott H.: For sure, it's a good problem.
Pat: That is a 100%. So, you can look at software programs all day long, but they're static. And the assumptions are...
Scott H.: Assumptions are the assumptions are. You change the assumptions, it's going to give you different recommendations.
Pat: Sometimes, you could put in the assumptions, sometimes the software. But I would encourage you to step back and look at it philosophically in terms of how you fit into the world in the United States. And we have created this economy that if it says anything when they're talking about minimum incomes because of AI. Imagine having that discussion with your grandfather, "So, here's what happens, grandfather..."
Scott H.: We're going to confiscate.
Pat: "...you don't have to go to the steel mill anymore, my grandfather. You don't have to go to the steel mill. You just stay home and people send you checks."
Scott H.: And by the way, the Roth IRA, we are of the assumption that it's always going to be tax free in the future. I wouldn't put that at 100%.
Scott: Right. Correct. I mean, not in general, for sure.
Scott H.: I don't know. But look, in my lifetime, I remember as an advisor when there wasn't a 15% excise tax on retirement accounts greater than $750,000. So, if you withdraw more than $750,000, I think that was the number, it was a 15% excise tax.
Scott: So, let me ask a second question unrelated. So, if I started thinking about donor-advised funds, does that change any of the equation?
Pat: Not till 70. But you don't have enough. The donor-advised funds can't come from your IRA.
Scott H.: Well, they can. You have to withdraw them first, and then put money in the donor-advised fund.
Pat: That's right. That's right. That's right. They can't go directly. Yeah, that's right.
Scott: It just lowers my R&D in the future at some point.
Pat: That's right. But that's a big change in behavior.
Scott: So, my take home is the Social Security. I ought to look at that a little more carefully and think about how to leverage that.
Scott H.: Assuming you're not going to work. If you think you may work between now and normal retirement age, then it doesn't make sense to take the Social Security.
Scott: Yeah, I don't know. I don't I don't think I will, but, you know.
Pat: If gifting hasn't been part of your life in a serious manner, you're not going to do it now, regardless of what the tax return says to you.
Scott: Yeah, I do it about 10 or 15 a year right now.
Pat: Okay, yeah, you're there. You're there.
Scott H.: Unfortunately, your situation is not such that you've got a lot of great tax strategies when it comes to gifting. If you had some rental property that you'd owned for 30 years or something that had a high appreciation, but you don't. I mean, you do have... I would gift appreciated assets from your brokerage account to a donor-adviced fund. So, if it's 10 or 15 grand...
Scott: Right. But right now, there's not enough time.
Scott H.: All right. Well, okay.
Pat: Yeah, unfortunately. Unfortunately, you don't have a lot of those great strategies.
Scott H.: All right. Did this help, Scott?
Scott: Yeah, it's helpful. It's got me thinking about something differently.
Pat: Good, yeah, yeah.
Scott H.: Was a little bit there.
Pat: Yeah, I would just... Look, my wife, for the minute she turned 62, we started Social Security for her because she does a job.
Scott: Oh, really? Okay.
Pat: The minute. I mean, not... Like, weeks in advance, we applied for it.
Scott H.: You don't want to wait and get a higher payout at age 70?
Scott: So, do you think the Social Security taking early will make me bike faster?
Pat: It will 100%. It's guaranteed. It's guaranteed.
Scott: I'm glad to hear that. That's probably going to be very motivated.
Pat: That, and two energy bars.
Scott H.: Part of my thought I'm planning, though, really, particularly those with higher net worths, and the higher net worth, the more I think about this. I believe that the tax code will be more punitive to wealthy people in the future than it is today. It's primarily because our system is not sustainable. At some point in time, we're going to run out of people to borrow money from as a country, right? It's just...
Scott: I completely agree with that, so, yeah.
Pat: Yes. And you go where the money is.
Scott: Well, I appreciate the conversation.
Scott H.: All right, Scott. Yeah, us too.
Pat: Appreciate it.
Scott H.: Yeah. Wish you well.
Pat: All right. Thanks. Stay safe on that bicycle.
Scott H.: Yeah. All right. Let's continue on here. And we're talking with Jill. Jill, you're with Allworth's "Money Matters".
Jill: Good morning. Thank you for taking my call.
Scott H.: Hi, Jill.
Jill: Very excited to be here. And it's a hard show to go after him. So, I'm not in that category.
Pat: I'm sure you'll be fine.
Jill: So, I'll just kind of jump into my question here.
Scott H.: Yeah, perfect.
Jill: I'm a government worker. I am 47 years old. I'm single, and I don't have any children. And so, I'm looking for advice on just... Yeah, and I'm not married, so I mentioned that.
Pat: State or federal?
Jill: State.
Pat: In which state?
Scott H.: Which state?
Jill: California.
Pat: Okay, thanks.
Jill: And those are all of your key questions. I noticed you ask almost all of your callers.
Pat: We do.
Jill: So, giving you that background. And I know that's relevant. And so, my decisions at 47, I know are important. And I'm not planning to get married, so I'm on my own here. So, that's partially why I'm looking for some support and input. Obviously, as a government worker, my net worth is not high, but I'm planning on a pension. And I'm looking to retire as soon as I can. I'm definitely burning out. If I could leave the government, I think I would.
Pat: Are you a safety worker?
Jill: No.
Pat: Okay, thanks.
Jill: Nope. I work in conservation.
Pat: And how many years of service?
Jill: Twenty-one.
Pat: Thank you.
Jill: Twenty-one years this year. So, when I'm 55, I'm looking at about 30 years of work. So, I'm like gauging to 55 to get my pension.
Scott H.: And at 55, what percentage of your current salary will that pension make up?
Jill: Well, I'm in a calculation category that's so old. The calculation, it's so I'm looking at about 60% of my current salary at 55. And every year more, it starts to add additionally. So, every year more gets better, right?
Pat: Yeah, yeah.
Scott H.: Yeah. That's why it's hard.
Jill: I'm burning out. So, 55 is kind of like I think I might look for another job at that point, part time or something. But I'm kind of like, you know, just working until it makes most sense and I know, you know, any sooner won't make sense.
Scott H.: And tell us about the your financial assets you have. Do you have money in the 401(k) or 457?
Jill: Yeah. So, let me tell you, so I have a primary residence that I purchased in 2021. It's worth about $500,000 and I owe $440,000. So, not great equity in there, but it's at a low 2.75%. And then I have a rental property that I refinanced in 2023. I've had it for about 10 years. And it's worth about $450,000 and I owe $305,000. And that's at a higher rate, 7%. So, yeah, I know, I'm kind of waiting to see what goes on with rates, because I'd love to get that down. Otherwise...
Scott H.: Why did you refinance that?
Jill: I had debt. So, it got me completely... So, now, I have no debt and now I have an emergency savings. So, I kind of have to get out...
Scott H.: And has your spending patterns changed such that you won't find yourself in the same position five years from now?
Jill: Correct. And my income has gone up.
Scott H.: Okay.
Jill: So, I was able to like use it for my best benefit.
Pat: And 401(k) and 457 plant, what do you have?
Jill: I have a 457 I'm contributing a small amount to each month. It's in a Roth right now. So, that's only like 1% of my income a month. That's the most that I can do right now with the high cost of my mortgages. So, I've been real stretched just over my adulthood. Like over the last 15 years, I've been furloughed a lot. It's just been really hard. And the housing market and everything has hit me. I feel like this is the first couple of years of my life where I'm actually, like, in the green and able to start to accumulate and build on my assets. And so, I guess, one of my...
Pat: Are you asking us if you're able to retire at 55? Because I think that's where this conversation is going.
Jill: I mean, that's one of my questions. I have a couple other ones.
Pat: What are the other ones?
Jill: Regarding life insurance and long-term care insurance, I've noticed you talk about that, especially when people have kids. But I don't have long-term care insurance. I don't have life insurance. And so, I'm wondering if I need to be considering that and building more into my budget.
Pat: Well, you don't need life insurance. Long-term care insurance, you're not there, you can't afford it. And you're still a little young, but you can't afford it.
Scott H.: And you're just saying that flat. But the reality is that industry has changed so dramatically over the last 20 years. There's 10% of the number of policies written today in long-term care that there was 20-some years ago. The market has shrunk. It's because the insurance companies didn't know how to handle that.
Pat: Yeah. If I got you a quote for a policy, you would just say, "Okay, great, Pat." Because it's going to be probably $700, $800 a month. So, all right, and what are the other questions?
Jill: And so, then it's better to save cash for...like, get more equity into my property, or save more cash flow so that when I need care, I have it saved up. Is that kind of what you...
Scott H.: Well, in a perfect situation, yes, you have the cash flow and assets to cover whatever expenses with it. That's a perfect situation.
Pat: The reality is most long-term care is actually provided by the state in which people live. Yeah. That's just the way it is.
Jill: Okay, thank you.
Pat: And I hear that people are like, well, there's so much worse than the private pay. My father was in both. They were both bad. So, yeah. And what were your other questions?
Jill: So, then tax strategies. So, I hear you talking about that with higher, you know, wealth-level people. I noticed that without kids, this rental property has been really good for me. I'm starting to wonder more about, as my income is increasing, so I'm probably going to get one more promotion, and I'm going to have more monthly income on a W-2 really tough tax situation for me. My rental property has been good.
Pat: Put more money in your 457. It does exactly the same thing for you. The problem is, you're at the highest risk level you should be with these two properties.
Scott H.: And is your rental, is it cash flow positive after you pay taxes, insurance, and repairs?
Jill: Yeah, just barely, though.
Scott H.: Very little.
Jill: Yeah. I'm kind of breaking even. I'm almost like, is it worth it?
Pat: You said you worked in conservation. Do you, like, walk around in the woods? Like, what do you do?
Scott H.: Can we finish her financial...?
Pat: No, this is relevant. This is relevant. And here's why it's relevant. If you were my little sister, I'd say, "Look, Jill, you walk around the woods. Where do you think you're going to retire?" Do you live in the woods now or close to the woods?
Jill: I want to I want to retire on the coast, if that's my dream.
Pat: The coast of what? Spain, Portugal, California? Because you can retire on a coast. No, truly.
Jill: Coast in California, Pacific Northwest, I prefer.
Pat: Yeah, you could probably retire... Where do you live now? In what state? California?
Jill: California.
Pat: Oh, that's right. You answered that. So, yeah, you could in a small town and in Oregon or... So, if you were sitting down with me for financial planning... And Scott's smiling at me, just kind of shaking his head a little bit. These are pertinent questions because it gives us a direction to go to. So, you've got eight years to kind of push this thing together. And you're like, "Well, what happens if the house appreciates this in here and this is the property on a coast?" And by the way, I would not discount living overseas if I were you, if you really wanted a lifestyle.
Jill: Like Spain.
Pat: Like Spain or Portugal or Ecuador or Costa Rica. I have some friends that just bought a house in Spain because they're huge golfers, and they moved into this place. Unbelievable, there's five golf courses that they could basically drive to in their golf cart. And the cost...
Scott H.: And the cost of living is a fraction of what it would be here.
Pat: Yeah. And they kept a small house here in in California, but they were able... They're like, "This is a golfers..." And he's Scottish, too. So, it's not that far back to the mother country.
Jill: My dream is Switzerland or Sweden.
Pat: Oh, well, okay.
Scott H.: Okay. They have this... They're still on the Franc. They didn't even go to the euro. That is out of question.
Pat: That is one of the most expensive places you could go.
Jill: I know. I have this taste in this low. I know, it's not great.
Scott H.: The neighborings, neighboring country.
Jill: So, my tax question for you is, at what point do I need a strategist? Like, right now, I have an accountant that helps me each year. They don't help me very much. I don't have any...
Pat: There's not much you can do.
Scott H.: There's not much you can do. The best thing you can do is save in your 457. Increase that from 1% to 2% to 3% to 5%.
Jill: So, you don't see I'm wasting my effort if I try to get a strategist with me and...
Scott H.: There's nothing you can do.
Pat: Yeah, you're done. And it's not that complicated. Your situation is... By the way, by the way, don't discount the value of that lifetime pension from the state of California. That is worth millions of dollars if I had an investable asset. Because I've had clients, lots of clients from the state of California that come and see us and go, "Well, I heard you need $2 million." And I said, "Well."
Scott H.: You actually have $1.2 million in this pension, and then, yeah.
Pat: Because if you look at how much money you'd have to set aside to provide that same amount of income, also known as net present value of a stream of income based on your life expectancy, that's lots of money. So, you are saving for retirement, it's just not transparent to you.
Scott H.: And I would really focus on saving that and getting that 457 up.
Pat: You need to get it up to 6%, 7%, 10%, 15%.
Scott H.: Fifteen percent.
Jill: Okay. Got it.
Pat: And the rental house, why do you have this rental?
Jill: Well, because I lived in it originally. It was a primary residence, purchased, and then...
Pat: What did you pay for it?
Jill: And then my parents, you know, they've done really well with rental property, so I tried to hold on to it. I paid $245 for it. So, now, it's worth, like, $450.
Pat: I'd hold it.
Jill: You know, it's in a Bay Area. Like, I couldn't ever buy it again.
Pat: I'd hold it. I'd hold it. I'd hold it. I'd look to see whether I need to liquidate that house for your primary residence in that rental, even when you go to retire to see where you settle.
Jill: That's what I was thinking. Will sell them both, and then take whatever I have and purchase where I really want to stay the rest of my life. I was really thinking at it.
Pat: Yes. Yes, go visit those places you really want to stay the rest of your life before you go buy something.
Scott H.: Buy something.
Jill: And that all is taking like, where's the hospital? You know, like access to medical. I didn't use to think about that, but as I'm getting older, I'm like, "Oh, I could have gone for [inaudible 00:37:52.278]."
Pat: But you're doing great. I mean, or you could just marry money. Those two choices. But you want to get your savings up to 10%, at least, 10% on the 457.
Scott H.: Yeah, because marrying money always works out well.
Pat: Oh, I knew it would be the...
Jill: I love it.
Scott H.: Oh, yeah, yeah. The most happily married couples are the ones that made for money. Statistics show it.
Jill: Oh, my God.
Scott H.: Oh, yeah. There's no divorce there. No infidelity.
Jill: I mean, you guys need a whole nother show for that because I'm fascinated.
Pat: No.
Scott H.: We're obviously joking.
Pat: We're obviously joking. It will be the hardest money you've ever earned.
Jill: Exactly my point. I'm doing fine.
Pat: All right. Appreciate the call. Keep up the great work. Thanks, Jill.
Jill: Thank you for your help. Have a good day.
Scott H.: It's funny.
Pat: I have a relative and married money. And he said, "Oh, it was hard." He's no longer married to her.
Scott H.: Well, obviously, those marriages, most of the time they don't work out.
Pat: Yeah. So, I looked for it growing up.
Scott H.: I could point to some political people, but I'm not going to. Might be in that category. But I'm not going to point anybody out.
Pat: No, don't, don't.
Scott H.: No, no, no. Victoria Bogner who is our head of wealth planning is joining us. One of the common questions we deal with right now is people are like, "Should I spend my down my IRA? Should I do Roth conversions? How's it going to impact my Social Security? And also, what happens with my Medicare Part B?"
Pat: Which is a big deal.
Scott H.: Which goes up as your income goes up. So, we've got Victoria joining us now. Vicky, thanks for taken some time out of your schedule.
Victoria: Yeah. Good to be on the show. Always a pleasure. I thought we could tackle this very common question that we get, especially when folks are getting ready to retire. They're in their earlier mid-60s and they ask, "Should I take IRA withdrawals now and delay Social Security? Or should I start Social Security now and let the IRA grow?" So, if you're listening and you've wrestled with this, you are not alone. And it might seem like a really benign, straightforward question, but it really has a lot of layers and nuance that are important to realize. Really, I've drilled this down to hopefully make this as easy as possible to understand of the implications of that decision. So, there are five key pieces of information that you need to write down in order to help answer this question. And then there are three different moving parts to consider. So, it's not as complicated as it sounds, but I do want to dive in to, how do you answer this question of which path to take A or B?
Pat: And by the way, Vicky, you actually asked that question, very coherent question, because clients typically don't know how to ask the question. They normally ask the question, when do I start Social Security? That's...
Victoria: There's so many implications to that question and depends on so many different things. And most people just think, I'll just take it at my normal retirement age. And that's a fine choice, but if you're a little bit more intentional about when you take it and what you can do in lieu of taking it, then you might find that you're able to save a lot more in taxes later down the line, or you're able to have more powerful, charitable gifting or legacy planning. So, there are a lot of implications to, not only when you take Social Security, but how you handle your accounts in the meantime before your RMD age.
Pat: Okay, and so, the five facts you gather are.
Victoria: Yes. So, the five facts are, how much income do you need? So, that's question number one. How much do you need to live on? Especially, you know, you've retired and now you have your accounts and you need to figure out, "How am I still going to get myself a paycheck month after month when I don't have this job to rely on. I need to rely on either Social Security or my investment accounts or a combination of both." So, that's the number one question. Then your age. How old are you right now? So, if you're willing to wait until your full retirement age to take Social Security, or age 70 for Social Security, just know that past your full retirement age, your Social Security benefit grows roughly 8% per year until you're 70. So, it's something to keep in mind. The third piece of information you need is your Social Security amount at your full retirement age, and you can find that on your Social Security statement. If you've never logged into ssa.gov, I recommend you do that. You can see all of your statements there.
Scott H.: Do they still make paper statement? Because I haven't received one in years.
Pat: I got one last...
Victoria: No, I don't think they do paper anymore. You have to go online.
Scott H.: You think you got one, Pat?
Victoria: And it's a good idea to look at them and make sure it's accurate. Make sure your earnings history is accurate. Because I've known of cases in which it's not, and they've had to contest that and get it fixed. So, that's important. So, the fourth piece of information is, how big is your IRA, or all of your pre-tax accounts combined? So, your IRAs, your 401(k)s, 403(b), anything that's pre-taxed, how much of that do you have? And then the fifth piece of information is, what other assets or income do you have? Do you have taxable brokerages, annuities, pensions, rental income, all of that factors in? So, those are the five key pieces of information. And, yes, we could get into the weeds about longevity and your health and that kind of thing, but we're going to keep it simple for now. So, yeah, those...
Pat: Well, thank you, because I was just going to actually ask that question. I was. I circled age on the notes I was taking. But so, I'm going to get in the weeds, when we say longevity, we're talking about you, a person specifically.
Victoria: Yes. Yes, how long do you think you're going to live? I probably knew...
Pat: Yes, what kind of vices do you now possess that will shorten your life significantly?
Victoria: Yes. What is your medical history in your family? And also a factor is if you're married, if your spouse is significantly younger or older than you are, that plays into this as well. But just so that, you know, you don't have to listen to me talk for the next 90 minutes, we'll keep it pretty simple here. So, let's go into the two paths, and then I'm going to go into the three moving parts. So, we have these two paths. They're both perfectly reasonable.
Scott H.: So, you've got five facts, two paths, three moving parts.
Victoria: Yes.
Scott H.: For a combination of 10. You weren't a STEM major.
Pat: Of course, she was.
Victoria: Yeah. Can you tell I'm a math major? Yes, very algorithmic in my thinking. So, you've got path A, which is you bridge with the IRA and delay your Social Security. So, you spend from your IRA and maybe a combination of your taxable accounts for now. And you delay that Social Security, ideally to 70. And the reason you might do that is you buy yourself a bigger guaranteed paycheck because that Social Security is accruing. And if you're married, you have a bigger survivor benefit for the longer lived spouse. So, that's something to put in mind.
Scott H.: And this, primarily, is really important for those that don't have massive assets. Like, Social Security is going to be really important for them for the retirement income.
Victoria: Yes. And when you think about it, when you pass away, your spouse, now, not only are they widowed and they don't have your Social Security check, they have to start filing singly on their taxes. So, it's a bit of a double whammy. The bigger that Social Security payment can be to them, the better. The second reason you might do it is you have a tax planning runway between retirement and your first required minimum distribution, which varies depending on how old you are. But it's probably 73, if you're listening to this and you haven't yet started taking Social Security. And in that window, you can do Roth conversions. And by doing Roth conversions, you can lock in certain tax brackets. Whereas if you wait and you have these required minimum distributions, you might be in higher tax brackets then. So, it's a way that you can reduce a chance of high taxes and maybe even being pushed into another Medicare premium bracket later in life in your 70s and 80s.
So, those are the big reasons why to do path A, bridge with the IRA, delay Social Security. Now, you've got path B, claim Social Security now and let the IRA grow. And the reason you might do that is if you're very nervous about near term portfolio stress and you're very risk adverse and you just you've... I have clients like this. They've been paying into Social Security their whole lives and they just want that money back as soon as possible. Then I get it. You know, you don't want to wait until 70 to take Social Security. You want to start seeing some of that money back that you've paid into the system for so long, it's a valid reason.
Also, if you have pre-tax balances that are pretty modest, let's say, you've been a great saver, but it's mainly in Roth assets or taxable brokerage or something like that, then you don't really have a compelling reason to try to do a bunch of Roth conversions. That could be a reason to go ahead and claim Social Security now. But just know that if you do claim it now and you have the larger IRA balances, you could run into those larger RMDs later, and that can push you into higher tax brackets. That can trigger more taxation of your Social Security. It can increase your Medicare premiums. So, these are all things to consider when you're making this decision.
Scott H.: Going forward. Correct.
Victoria: So, those are the two paths. And then we get into the three moving parts. So, here are the three moving parts. This is where the rubber meets the spreadsheet, right? You've got your Roth conversions. These are the runway years. So, your conversions, what you're doing is you're taking dollars out of your IRA, you're paying taxes now, and you're moving them to Roth, where all that future growth and your withdrawals, it's all tax free, right? And the goal isn't to convert everything. The goal is to fill up those favorable tax brackets each year without tripping a Medicare premium tier that you don't want. So, if you can, for example, convert some IRA money in a 12% tax bracket now, that would then prevent you from having to have RMDs in a 24% tax bracket later. That makes a lot of sense, right?
Scott H.: For sure.
Victoria: So, that's the first moving part. The second is Medicare's income tiers or IRMA. So, Medicare looks at your modified adjusted gross income, and it uses a two year look back. So, the income that you had at age 63 affects premiums you're going to pay at 65, right? So, when we're doing conversions or large withdrawals from pre-tax accounts, we want to make sure we're modeling those tax brackets and that next IRMA tier at the same time. Because if we can stay under certain IRMA tiers, that can mean you can save some pretty meaningful premiums with Medicare.
Pat: Significant amounts, significant.
Victoria: Yes. Yes, pretty meaningful there. So, that's the second moving part. And the third is taxation of your Social Security. Because a big component to that mass of how much you're going to pay on your Social Security is AGI. It's actually provisional income. If you want to get into the weeds, it's AGI plus your tax exempt interest plus half your Social Security. Up to 85% of your Social Security can be taxed or is taxable, right? And it depends largely on how much adjusted gross income you have. Roth conversions count toward adjusted gross income in the year that you convert. So, that's why sometimes the better move is delay Social Security, convert what you can at a reasonable tax rate, and then you can enjoy those lower AGI years later when you're taking Social Security. And then your AGI is lower because you've moved some IRA money to Roth. And then hopefully, if the math works out, even less of your Social Security is taxable at the same time.
Pat: This is so dang complicated.
Victoria: Yes. And it seems like such a simple question. But the implications of how and when you take Social Security and what you do with your accounts until you're taking it have really big impact and look scary.
Pat: Yeah, so you...
Scott H.: And I'd say, particularly those that, they've saved well, they're not super rich, these are maybe middle class retirees. These are really important questions.
Pat: I mean, these are tens of thousand-dollar questions, because if you go out and you look at...
Scott H.: Yeah, yeah, they're huge.
Pat: ...their net worth in the latter years and you run these different scenarios, you'll see it in their net worth calculation 15, 20 years out.
Victoria: Yeah. Yeah. And it's knowing that you have more control over your tax planning than you realize. You have these levers that you can pull. But you need to know how and when to pull them and how you factor in all of these different Social Security tables as far as you've got your AGI and your income tax and your IRMA brackets and your taxable brokerage...
Pat: I know. But if I hear one more time... Well, I heard, the best thing to do is to take it at age 70.
Scott H.: It's all different.
Pat: What I heard...
Scott H.: Every situation is different.
Pat: And I think if I hear that one more time, I'm just going to lose my...
Scott H.: There we go. Carry on.
Pat: Because that's what you hear. It's like, well, I was talking to my friend and my friend said...
Scott H.: Every situation is different.
Victoria: Yes. It depends.
Scott H.: Every situation.
Victoria: It very much depends on the situation. And I hear people say a lot, too, that, you know, "Social Security is going broke, so I'm going to take it right away so I can get my money while there's still anything left."
Pat: And maybe.
Victoria: You know, that's the headline we often hear, right?
Pat: Yeah, and maybe.
Scott H.: Yeah. And I might I might preach.
Pat: Yes. And because of the fact... But it doesn't matter to you, maybe if your IRA was a million, too. But it most certainly probably matters to you if your IRA was $5 million in your 63 years of age. So...
Victoria: Yes, yes. And the sooner you can start to plan this out, even like in your early 50s.
Pat: Yeah, for sure.
Victoria: You don't want to wait until you're 67 and then start asking these questions. And the sooner you can get your ducks in a row, the better off you're going to be.
Pat: Well, Vicky, as always, we appreciate you on the show.
Scott H.: Before you go, we've got a webinar that you are doing this week, a webinar...
Victoria: That's right. Very excited about it.
Scott H.: This webinar is... And Victoria Bogner is our head of wealth planning. So, she actually does things, not only as far as webinars and stuff, but also some classes with our advisors on keeping up to date with things. But what are some of the things we're going to be learning during this webinar?
Victoria: Yeah. Well, so this webinar, it's called Wealth Building Beyond Wall Street. It's specifically targeted for affluent investors. So, this is by design, really tailored for investors that have $5 million or more in investable assets. We're going to talk about why today's 60/40 portfolio falls short for those multimillion dollar portfolios. We're going to talk about non-public strategies that can help generate some tax alpha and some additional yield, and how sophisticated allocations in non-traditional assets can really help support those multi-generational wealth goals, and much more.
Scott H.: Good, good.
Victoria: I think it was so much fun to talk about. I'm very passionate about these things. So, if you attend, I hope you walk away learning something new.
Scott H.: Yeah. And the webinars are going to be coming up this week, Wednesday, October 15th at 10 a.m. Pacific, Thursday, October 16th at noon Pacific, Saturday, October 18th at 9 a.m. Pacific. And for more information and to register, you got to register, obviously, to get the link and all that stuff, allworthfinancial.com/workshops. Vicky, thanks for taking some time to join us.
Victoria: Always a pleasure.
Scott H.: And by the way, thank you for our listeners that make this show possible, because without our listeners, I'm pretty confident that this would all come to an end.
Pat: I think you might be right there. Thanks, Vicky.
Scott H.: Yeah, this is the thing Allworth Financials...
Victoria: Absolutely.
Scott H.: ..."Money Matters" with Scott Hanson and Pat McClain. We'll see you next week.
Automated Voice: 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 a state-planning attorney to conduct your own due diligence.
Scott H.: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott H.: Yeah, talking about finances, investments, markets, all that good stuff.
Pat: The good stuff, yeah.
Scott H.: It feels, Pat, like the market has priced in a bit of perfection.
Pat: Ask me. Ask me, your host. Ask me how I feel about it three days from now because I'm all over the place as to whether...
Scott H.: Yes. And by the way, we might have feelings or gut, it doesn't necessarily mean we're going to change our investment strategies because we, believe that we will have recessions in the future. We will believe we will have corrections in the stock market. We will believe we'll have bear markets in the future.
Pat: And we believe we don't know when those will happen.
Scott H.: That's correct.
Pat: Right? So, I just read an article last week. It's called, "Now's the Time to Stress Test". And the stress test on a portfolio is when you put it through what happens, an algorithm, AI, if you will. An algorithm that actually tells you what the probable outcome is if certain things happen. I'm trying to make comparisons between this and the dot-com. And I don't believe this is anything like the dot-com because of the... Like Walmart came out and announced that they don't expect that they will...
Scott H.: They're not going to be hiring.
Pat: They don't expect that they're going to move their head count. They expect their use to attrition.
Scott H.: And in fact, they expect their revenues to double before they hire more people or something like that.
Pat: It was amazing. And then you see companies like Royal Dutch Petroleum comes out...
Scott H.: Shell oil.
Pat: ...Shell oil. And then you see Rolls Royce, they build engines. And you just think, where does this stop?
Scott H.: Because they all believe technologies can exist to replace human labor.
Pat: And we run a business and we see it.
Scott H.: Correct.
Pat: Right? We see it.
Scott H.: I think...
Pat: I see it in the medical care, especially.
Scott H.: The question is, how long will things...? Okay, but it's priced such that all these data centers, the billions of dollars that have been...
Pat: Well, first of all, I don't believe that all the data centers that have been announced will actually be built. Let's go with that. I think that that's an appeasement to the current political environment.
Scott H.: All right, fair, that might be.
Pat: Or clearly some of that. Let's just see, "Okay, Trump. Yeah, sure it will. $600 billion." Just making up a number at the top of his head. I get it.
Scott H.: But if you look at... I mean, one of the things, during the dot-com, there was all this fiber optic that was laid over capacity.
Pat: Way over capacity, right?
Scott H.: Which then those companies collapsed. It was pretty much... I mean, it was a nasty bear market, but it was still somewhat... It didn't have the widespread contagion like the dot-com...I'm sorry, the financial crisis caused by the housing bubble.
Pat: This did not. The dot-com did.
Scott H.: The dot-com, yeah.
Pat: That's correct. That's correct.
Scott H.: It was a different... But I just think right now, it just feels like things are priced to perfection. And so, even if I think that, does it mean I'm going to make any changes in my portfolio? Probably not. And I was having a bike ride with a buddy the other day and we're talking about the markets, and after we talked about politics for a while and religion, and then we went to the markets. Sounds great. But he said, "Oh, I just watched that movie, 'The Big Short'." I watched it for the second time the other day. And "The Big Short", I don't know if you remember the movie, Pat, the book as well.
Pat: I certainly do remember. I read the book. By Michael Lewis.
Scott H.: Yes. And it was about this guy who saw... He looked at what was going on in the credit markets and the loans on these houses and he says, "This is completely unsustainable. I'm going to bet against this, because clearly, it's not sustainable. It's going to blow up." And so, he started...
Pat: Well, he found someone that would sell him those options, which I thought should have been the main point, which is because someone took the other side of the trade.
Scott H.: Right. If you think how many years it took before he was proved right. And by the time he was proved right, there was no one else with him.
Pat: That's right. No, his investors had all bailed.
Scott H.: All bailed on him.
Pat: All bailed.
Scott H.: And it just reminded me that a bull market can run much longer than you can stay liquid. And in the early 2000s, probably mid-2000, I don't remember the exact, I personally bought puts on Countrywide and IndyMac Bank.
Pat: I bought them on Countrywide.
Scott H.: Both went bankrupt. My puts, both expired out of the money, which means, I took some money to bet that these companies were going to decline in value, and that they were like two-year options, as long as I could get at the time. And you were right, but the bull market lasted a lot longer than my options.
Pat: Which was hard to believe. But the point being is if you didn't ride it the whole way, if you didn't get the upside at the end of the bull market, you wouldn't know when to get in on the down side.
Scott H.: That's exactly right. Which is why we're come back to asset allocation. And that was a good time to look. And the whole concept, Pat of stress test in your portfolio like, "What does my personal account look like? If the stock market fell 30%, what would my account look like?" And of my fixed income, how much of this is in not the highest credit rated?
Pat: And people have a tendency to let their portfolios run. Which by the way, when you're working and you're putting money in your 401(k) and you're 90% equities, it doesn't make that big of a deal. But when you're 71, 72, you're taking income and your portfolios crept from 60% to 80%, which 100% conceivable over the last few years.
Scott H.: The last few years, yes.
Pat: That if you don't bring that back down, then you've got risk in the portfolio that you didn't have just a few years ago.
Scott H.: That's exactly right.
Pat: And the thing is, and we've talked about this on the show before, it's hard to do because you're actually selling off the things that's done really well.
Scott H.: Yeah. And when you reallocate, you're buying...
Pat: You end up selling the best performers of your portfolio.
Scott H.: Which is hard to do, but it's imperative.
Pat: Particularly, not so imperative when you're 30, in that room. To your point, when you're either nearing retirement, at retirement, no longer working, particularly, if you're no longer working, now, you need to be much more concerned about preserving what you have. You know, we've been doing this a long time, Scott. You've known me for a long time. I turn 63 next month.
Scott H.: Happy birthday.
Pat: Thank you.
Scott H.: I'll get you the same thing I got you last year.
Pat: Thank you very, very much.
Scott H.: And the same phone greeting of singing you happy birthday, which I don't think I ever have, so...
Pat: So, I spend a lot more time on my asset allocation than I did when I was 40.
Scott H.: Yeah, of course.
Pat: I have a much more defined investment thesis.
Scott H.: And more diversification than you had before.
Pat: And a lot more diversification, because it didn't...
Scott H.: Of course, it was all stocks, 100%.
Pat: Yeah, yeah. And it didn't really matter because I wasn't going to take income any time soon.
Scott H.: Yeah, you know you're 20 years before you needed some income.
Pat: And you had lots of times to trip up. Not so much now.
Scott H.: Yeah. Well, you're still employed today. Who knows tomorrow?
Pat: Do you know something?
Scott H.: I don't.
Pat: Should we be talking off air?
Scott H.: I guess. This was a year and a half ago. So, we have an advisors conference once a year. All the advisors across the country all come together and there's education and award stuff. And we got some sort of a lifetime achievement award or something like that. I forget what they called it. They honored Hanson and McLean for the company that we. And after, are we getting fired? So, my son, I told my son about this, and he said, "Well, did they play "Closing Time' the song when you were stepping off the stage?" That was really funny. Anyway. All right. Let's...
Pat: We didn't get fired, right?
Scott H.: No, we didn't. We're still here. Still standing.
Pat: I've seen the movie "Office Space" where the guy continued to show up to work.
Scott H.: Yeah, that's one of those stupid movies that the more you see, the better it gets. In one of those movies, my wife's like, "You're not watching 'Dumb and Dumber' again, are you?"
Pat: Oh, yeah, I am flipping the channels. What are you going to do?
Scott H.: Like, how old are you? All right, let's go. All right. If you want to be part of our program, you want to join us with your questions regarding your finances, the best way is send us an email, questions@moneymatters.com, again, questions@moneymatters.com. We're starting off with Scott. Scott, you're with Allworth's "Money Matters".
Scott: Hey, guys.
Scott H.: Hi, Scott.
Scott: Yep. Thanks for having me on the show. I started listening about three months ago.
Scott H.: Oh, all right.
Scott: And kind of catching up on your old podcasts. You're kind of making me a little bit nervous about my allocation as I listen to you. But my questions are primarily about Roth conversions and how much variability there seems to be in the different software packages out there.
Scott H.: Okay. Well, a lot of them, I mean, some of them, it's just a narrow view. It's difficult to get a complete holistic view of Scott's financial life, risk tolerance, income needs.
Scott: Yeah, these are ones that have you entering in quite a bit of data and subscribe to them, so these are not free calculators. And you probably know which ones are out there. And my background is, I'm 63, retired in the last year, have a net worth of about $6.1. And in terms of, most of it's in an IRA, a SEP IRA, and about $154,000 in a brokerage account. And then I did a Roth conversion this year, about $321,000. That was prior to the tax bill changing.
Scott H.: Are you married?
Scott: I'm married, mm-hmm, yeah.
Scott H.: Are your kids grown and out of the house, self-supported?
Scott: They are in their 20s, and some of them are in the house, some of them are out of the house. None of them are dependent on my tax return.
Pat: It doesn't mean they're not dependents, but okay, keep going.
Scott: Well, I was very specific about my statement.
Scott H.: Thank you. They could be okay if they had to be.
Scott: Yeah. The youngest is still in college, so I assume...
Pat: And what do you...? Have you started taking Social Security?
Scott: No, I'm not going to do that until age 70.
Pat: All right, well, we'll discuss that. And what are you living on?
Scott: You know, we're in the ballpark of $180 to $200 a year in terms of what we are spending, including taxes.
Pat: Where's it coming from?
Scott: Probably about... Well, three quarters of it, at least, are from IRA distributions. And then the other... And I kind of give that as a baseline paycheck. And then I will do some brokerage withdrawals depending upon what I need to fill the gaps. But that's kind of how I've done it so far. And I've tried to make sure that I have enough to pay the taxes on the Roth conversion from the brokerage account, as I understand that's a better source.
Scott H.: Yeah, but...
Pat: Yeah, but you're not going to be able to do it very long. So, what's your question for us?
Scott: Well, when you use these different calculators, there can be as much of a difference of 40% to 50% in terms of... And the sequence of Roth conversions can vary a fair amount, and even when I tell you all the things I just told you. And I was surprised, I thought it would be a little bit more precise about... You know, and obviously, it can vary based on a lot of things.
Scott H.: Well, a lot of it, it's what the future tax rates are going to be that nobody knows.
Scott: Right. So, I'm kind of banking on...
Scott H.: I mean, so we can run all the numbers we want, but the outcome is going to be based more on our assumptions. And the assumptions that we're putting in is based upon what we believe Congress and the future administration is going to do with tax law. So, if we believe tax law is going to be much higher in the future, this is a really easy decision to make. Actually, if we believe they're going to be the same, then that it's relatively easy math. If we believe that there's going to be more complicated, then we don't know.
Scott: Right. I mean, I'm convinced I should do...
Scott H.: So, the software programs are only going to do so much for us because it's going to be based upon assumptions.
Scott: Right, right.
Scott H.: So, what's your question for us?
Scott: So, my assumption is that the tax rates are likely to go higher. And that because I have such a large percentage of my retirement in a SEP IRA, with some big RMDs coming at age 75.
Scott H.: That's right. And you believe that tax rates will go higher, predominantly on higher income people or across the board?
Scott: Probably in higher income more so, but I'm not really sure. But I think it'll affect me, put it that way.
Scott H.: So, if I were planning, I would agree with you on that. So, I think most people that have some decent savings at retirement should plan a higher tax in the future. And if they don't have them, great.
Pat: But why? So, give me the reason that you think you should wait till you're age 70 to start taking Social Security benefits.
Scott: Well, I mean, when I use the different calculators, it suggests that as long as I can live on other funds, then I should wait to get the 8% increase every year until I get to...
Scott H.: That's based upon an assumption.
Pat: Yeah. But if we believe tax rates are going to be higher, and I started taking Social Security, could I not use some of that Social Security to pay for the Roth convergence?
Scott: Okay. I just haven't thought about that before.
Scott H.: No.
Pat: So, when you look at the situation, this is what... If you and I were just sitting and going for a bike ride, like Scott does with his buddies, and they talk about politics and money.
Scott: I go for bike rides with my buddies, too.
Scott H.: Okay, but then I could...
Pat: But do you talk about politics and money, right? And how fast?
Scott: Yeah, sometimes. We try to avoid the politics.
Pat: And how fast do you...
Scott H.: If you ride with someone who's very similar politically, then it's a lot of fun.
Pat: That's right. And how fast you used to be. You used to be really fast. That's right.
Scott: Well, they're all faster than me.
Pat: It's actually, so it's my bicycle's problem. So, here's what I would think about. I would think about your net worth and the scheme of taxation in the United States. So, if we think about this, and we think about relative wealth... Because you look at yourself and you don't think you're that wealthy. The guy with $15 million is wealthy, right? You're middle class.
Scott: Oh, yeah, it's all relative.
Scott H.: Correct.
Pat: That's right, everything's relative. So, I would worry about Social Security taxation or lack of Social Security at age 70.
Scott H.: Where do you think he is as far as percentile for 63 year olds?
Pat: You're in the top zero...
Scott H.: Less than 1%.
Pat: Yeah, you're most certainly in the top one half of 1% of net worth in the United States at age 63. And then you look at these distributions and the Roth conversions, and you're taking out about a 4% distribution a year. And so, let's just assume that you're going to grow at 8%. We're going to get to $9 million, $10 million by the time you're 70. And at that point in time, the Social Security taxation... The Social Security is a really weird thing because of the fact that statutory wise, when we hit 0, which is either 2023 or 2024, by the way, looks like your normal retirement age is 2032, so you're going to be right up against it, it's an automatic 22%, 23% cut across the board.
Scott H.: And then I make another argument. And because you're relatively...
Pat: So, while it might grow 8%, you are betting that Congress is going to step up and say that, Scott, who's in the top 1% of wealthy retirees, needs his Social Security preserved.
Scott H.: So, in this...
Pat: I'm of the assumption that people like Scott...
Scott: So, in 2032, so you're thinking in 2022 they're going to increase the percentage of Social Security?
Scott H.: Oh, no, I think it might happen before then.
Pat: I think it will be needs based.
Scott H.:: That's my assumption. Maybe I'm wrong.
Pat: But this has happened before. If you look at the history of taxation of Social Security, back in the 80s, Social Security benefits were tax free. And then they started taxing 50% of the benefits of incomes with couples over $32,000. And they created a whole new provision in the tax law called provisional income, which included tax free municipal bond income. For the first time ever, they were figuring out how they could actually tax municipal bond income. About four or five years later, in the early '90s, they said, "This is working out pretty well. Let's start taxing incomes of $44,000 and above. We will tax 85% of their Social Security."
Scott H.: Maybe we would include 85% of their Social Security in their income tax rate.
Pat: And never adjusted any of this for inflation, by the way.
Scott: Exactly. So, in my calculations, I should vary the amount of taxation that's going to occur on my Social Security to kind of get a better understanding.
Pat: No, I would... If I were you...
Scott H.: I'd take it now.
Pat: ...I would assume I'm not going to get Social Security come 2033, 2034. I'm of the assumption...
Scott: Really?
Scott H.: Yes.
Scott: Oh, okay.
Pat: No, who are they going to tax? People that can't get by?
Scott H.: By the way, there's been talk from senators on both sides of the aisle about having Social Security means tested. If your income's over $200,000, you don't need Social Security, so you shouldn't get it.
Scott: Got it. okay. So, if I don't take it now, then I might lose it.
Scott H.: Yeah, or a portion of it. But not only that, just based upon your required minimum distributions.
Pat: Not only that, I would make the argument, because you're starting to take Social Security, you can do more Roth conversion because you have...
Scott: Okay, so I can leverage it to recover my loss.
Scott H.: Yes, exactly.
Pat: Exactly. So, it serves two purposes.
Scott H.: Because your brokerage account is relatively small relative to your net worth.
Scott: I know. I know.
Scott H.: And if I were in your situation, I wouldn't want to see that get much smaller.
Pat: But don't beat yourself up about your $6million IRA.
Scott: No, I'm not. I'm not. It's a first world problem.
Scott H.: For sure, it's a good problem.
Pat: That is a 100%. So, you can look at software programs all day long, but they're static. And the assumptions are...
Scott H.: Assumptions are the assumptions are. You change the assumptions, it's going to give you different recommendations.
Pat: Sometimes, you could put in the assumptions, sometimes the software. But I would encourage you to step back and look at it philosophically in terms of how you fit into the world in the United States. And we have created this economy that if it says anything when they're talking about minimum incomes because of AI. Imagine having that discussion with your grandfather, "So, here's what happens, grandfather..."
Scott H.: We're going to confiscate.
Pat: "...you don't have to go to the steel mill anymore, my grandfather. You don't have to go to the steel mill. You just stay home and people send you checks."
Scott H.: And by the way, the Roth IRA, we are of the assumption that it's always going to be tax free in the future. I wouldn't put that at 100%.
Scott: Right. Correct. I mean, not in general, for sure.
Scott H.: I don't know. But look, in my lifetime, I remember as an advisor when there wasn't a 15% excise tax on retirement accounts greater than $750,000. So, if you withdraw more than $750,000, I think that was the number, it was a 15% excise tax.
Scott: So, let me ask a second question unrelated. So, if I started thinking about donor-advised funds, does that change any of the equation?
Pat: Not till 70. But you don't have enough. The donor-advised funds can't come from your IRA.
Scott H.: Well, they can. You have to withdraw them first, and then put money in the donor-advised fund.
Pat: That's right. That's right. That's right. They can't go directly. Yeah, that's right.
Scott: It just lowers my R&D in the future at some point.
Pat: That's right. But that's a big change in behavior.
Scott: So, my take home is the Social Security. I ought to look at that a little more carefully and think about how to leverage that.
Scott H.: Assuming you're not going to work. If you think you may work between now and normal retirement age, then it doesn't make sense to take the Social Security.
Scott: Yeah, I don't know. I don't I don't think I will, but, you know.
Pat: If gifting hasn't been part of your life in a serious manner, you're not going to do it now, regardless of what the tax return says to you.
Scott: Yeah, I do it about 10 or 15 a year right now.
Pat: Okay, yeah, you're there. You're there.
Scott H.: Unfortunately, your situation is not such that you've got a lot of great tax strategies when it comes to gifting. If you had some rental property that you'd owned for 30 years or something that had a high appreciation, but you don't. I mean, you do have... I would gift appreciated assets from your brokerage account to a donor-adviced fund. So, if it's 10 or 15 grand...
Scott: Right. But right now, there's not enough time.
Scott H.: All right. Well, okay.
Pat: Yeah, unfortunately. Unfortunately, you don't have a lot of those great strategies.
Scott H.: All right. Did this help, Scott?
Scott: Yeah, it's helpful. It's got me thinking about something differently.
Pat: Good, yeah, yeah.
Scott H.: Was a little bit there.
Pat: Yeah, I would just... Look, my wife, for the minute she turned 62, we started Social Security for her because she does a job.
Scott: Oh, really? Okay.
Pat: The minute. I mean, not... Like, weeks in advance, we applied for it.
Scott H.: You don't want to wait and get a higher payout at age 70?
Scott: So, do you think the Social Security taking early will make me bike faster?
Pat: It will 100%. It's guaranteed. It's guaranteed.
Scott: I'm glad to hear that. That's probably going to be very motivated.
Pat: That, and two energy bars.
Scott H.: Part of my thought I'm planning, though, really, particularly those with higher net worths, and the higher net worth, the more I think about this. I believe that the tax code will be more punitive to wealthy people in the future than it is today. It's primarily because our system is not sustainable. At some point in time, we're going to run out of people to borrow money from as a country, right? It's just...
Scott: I completely agree with that, so, yeah.
Pat: Yes. And you go where the money is.
Scott: Well, I appreciate the conversation.
Scott H.: All right, Scott. Yeah, us too.
Pat: Appreciate it.
Scott H.: Yeah. Wish you well.
Pat: All right. Thanks. Stay safe on that bicycle.
Scott H.: Yeah. All right. Let's continue on here. And we're talking with Jill. Jill, you're with Allworth's "Money Matters".
Jill: Good morning. Thank you for taking my call.
Scott H.: Hi, Jill.
Jill: Very excited to be here. And it's a hard show to go after him. So, I'm not in that category.
Pat: I'm sure you'll be fine.
Jill: So, I'll just kind of jump into my question here.
Scott H.: Yeah, perfect.
Jill: I'm a government worker. I am 47 years old. I'm single, and I don't have any children. And so, I'm looking for advice on just... Yeah, and I'm not married, so I mentioned that.
Pat: State or federal?
Jill: State.
Pat: In which state?
Scott H.: Which state?
Jill: California.
Pat: Okay, thanks.
Jill: And those are all of your key questions. I noticed you ask almost all of your callers.
Pat: We do.
Jill: So, giving you that background. And I know that's relevant. And so, my decisions at 47, I know are important. And I'm not planning to get married, so I'm on my own here. So, that's partially why I'm looking for some support and input. Obviously, as a government worker, my net worth is not high, but I'm planning on a pension. And I'm looking to retire as soon as I can. I'm definitely burning out. If I could leave the government, I think I would.
Pat: Are you a safety worker?
Jill: No.
Pat: Okay, thanks.
Jill: Nope. I work in conservation.
Pat: And how many years of service?
Jill: Twenty-one.
Pat: Thank you.
Jill: Twenty-one years this year. So, when I'm 55, I'm looking at about 30 years of work. So, I'm like gauging to 55 to get my pension.
Scott H.: And at 55, what percentage of your current salary will that pension make up?
Jill: Well, I'm in a calculation category that's so old. The calculation, it's so I'm looking at about 60% of my current salary at 55. And every year more, it starts to add additionally. So, every year more gets better, right?
Pat: Yeah, yeah.
Scott H.: Yeah. That's why it's hard.
Jill: I'm burning out. So, 55 is kind of like I think I might look for another job at that point, part time or something. But I'm kind of like, you know, just working until it makes most sense and I know, you know, any sooner won't make sense.
Scott H.: And tell us about the your financial assets you have. Do you have money in the 401(k) or 457?
Jill: Yeah. So, let me tell you, so I have a primary residence that I purchased in 2021. It's worth about $500,000 and I owe $440,000. So, not great equity in there, but it's at a low 2.75%. And then I have a rental property that I refinanced in 2023. I've had it for about 10 years. And it's worth about $450,000 and I owe $305,000. And that's at a higher rate, 7%. So, yeah, I know, I'm kind of waiting to see what goes on with rates, because I'd love to get that down. Otherwise...
Scott H.: Why did you refinance that?
Jill: I had debt. So, it got me completely... So, now, I have no debt and now I have an emergency savings. So, I kind of have to get out...
Scott H.: And has your spending patterns changed such that you won't find yourself in the same position five years from now?
Jill: Correct. And my income has gone up.
Scott H.: Okay.
Jill: So, I was able to like use it for my best benefit.
Pat: And 401(k) and 457 plant, what do you have?
Jill: I have a 457 I'm contributing a small amount to each month. It's in a Roth right now. So, that's only like 1% of my income a month. That's the most that I can do right now with the high cost of my mortgages. So, I've been real stretched just over my adulthood. Like over the last 15 years, I've been furloughed a lot. It's just been really hard. And the housing market and everything has hit me. I feel like this is the first couple of years of my life where I'm actually, like, in the green and able to start to accumulate and build on my assets. And so, I guess, one of my...
Pat: Are you asking us if you're able to retire at 55? Because I think that's where this conversation is going.
Jill: I mean, that's one of my questions. I have a couple other ones.
Pat: What are the other ones?
Jill: Regarding life insurance and long-term care insurance, I've noticed you talk about that, especially when people have kids. But I don't have long-term care insurance. I don't have life insurance. And so, I'm wondering if I need to be considering that and building more into my budget.
Pat: Well, you don't need life insurance. Long-term care insurance, you're not there, you can't afford it. And you're still a little young, but you can't afford it.
Scott H.: And you're just saying that flat. But the reality is that industry has changed so dramatically over the last 20 years. There's 10% of the number of policies written today in long-term care that there was 20-some years ago. The market has shrunk. It's because the insurance companies didn't know how to handle that.
Pat: Yeah. If I got you a quote for a policy, you would just say, "Okay, great, Pat." Because it's going to be probably $700, $800 a month. So, all right, and what are the other questions?
Jill: And so, then it's better to save cash for...like, get more equity into my property, or save more cash flow so that when I need care, I have it saved up. Is that kind of what you...
Scott H.: Well, in a perfect situation, yes, you have the cash flow and assets to cover whatever expenses with it. That's a perfect situation.
Pat: The reality is most long-term care is actually provided by the state in which people live. Yeah. That's just the way it is.
Jill: Okay, thank you.
Pat: And I hear that people are like, well, there's so much worse than the private pay. My father was in both. They were both bad. So, yeah. And what were your other questions?
Jill: So, then tax strategies. So, I hear you talking about that with higher, you know, wealth-level people. I noticed that without kids, this rental property has been really good for me. I'm starting to wonder more about, as my income is increasing, so I'm probably going to get one more promotion, and I'm going to have more monthly income on a W-2 really tough tax situation for me. My rental property has been good.
Pat: Put more money in your 457. It does exactly the same thing for you. The problem is, you're at the highest risk level you should be with these two properties.
Scott H.: And is your rental, is it cash flow positive after you pay taxes, insurance, and repairs?
Jill: Yeah, just barely, though.
Scott H.: Very little.
Jill: Yeah. I'm kind of breaking even. I'm almost like, is it worth it?
Pat: You said you worked in conservation. Do you, like, walk around in the woods? Like, what do you do?
Scott H.: Can we finish her financial...?
Pat: No, this is relevant. This is relevant. And here's why it's relevant. If you were my little sister, I'd say, "Look, Jill, you walk around the woods. Where do you think you're going to retire?" Do you live in the woods now or close to the woods?
Jill: I want to I want to retire on the coast, if that's my dream.
Pat: The coast of what? Spain, Portugal, California? Because you can retire on a coast. No, truly.
Jill: Coast in California, Pacific Northwest, I prefer.
Pat: Yeah, you could probably retire... Where do you live now? In what state? California?
Jill: California.
Pat: Oh, that's right. You answered that. So, yeah, you could in a small town and in Oregon or... So, if you were sitting down with me for financial planning... And Scott's smiling at me, just kind of shaking his head a little bit. These are pertinent questions because it gives us a direction to go to. So, you've got eight years to kind of push this thing together. And you're like, "Well, what happens if the house appreciates this in here and this is the property on a coast?" And by the way, I would not discount living overseas if I were you, if you really wanted a lifestyle.
Jill: Like Spain.
Pat: Like Spain or Portugal or Ecuador or Costa Rica. I have some friends that just bought a house in Spain because they're huge golfers, and they moved into this place. Unbelievable, there's five golf courses that they could basically drive to in their golf cart. And the cost...
Scott H.: And the cost of living is a fraction of what it would be here.
Pat: Yeah. And they kept a small house here in in California, but they were able... They're like, "This is a golfers..." And he's Scottish, too. So, it's not that far back to the mother country.
Jill: My dream is Switzerland or Sweden.
Pat: Oh, well, okay.
Scott H.: Okay. They have this... They're still on the Franc. They didn't even go to the euro. That is out of question.
Pat: That is one of the most expensive places you could go.
Jill: I know. I have this taste in this low. I know, it's not great.
Scott H.: The neighborings, neighboring country.
Jill: So, my tax question for you is, at what point do I need a strategist? Like, right now, I have an accountant that helps me each year. They don't help me very much. I don't have any...
Pat: There's not much you can do.
Scott H.: There's not much you can do. The best thing you can do is save in your 457. Increase that from 1% to 2% to 3% to 5%.
Jill: So, you don't see I'm wasting my effort if I try to get a strategist with me and...
Scott H.: There's nothing you can do.
Pat: Yeah, you're done. And it's not that complicated. Your situation is... By the way, by the way, don't discount the value of that lifetime pension from the state of California. That is worth millions of dollars if I had an investable asset. Because I've had clients, lots of clients from the state of California that come and see us and go, "Well, I heard you need $2 million." And I said, "Well."
Scott H.: You actually have $1.2 million in this pension, and then, yeah.
Pat: Because if you look at how much money you'd have to set aside to provide that same amount of income, also known as net present value of a stream of income based on your life expectancy, that's lots of money. So, you are saving for retirement, it's just not transparent to you.
Scott H.: And I would really focus on saving that and getting that 457 up.
Pat: You need to get it up to 6%, 7%, 10%, 15%.
Scott H.: Fifteen percent.
Jill: Okay. Got it.
Pat: And the rental house, why do you have this rental?
Jill: Well, because I lived in it originally. It was a primary residence, purchased, and then...
Pat: What did you pay for it?
Jill: And then my parents, you know, they've done really well with rental property, so I tried to hold on to it. I paid $245 for it. So, now, it's worth, like, $450.
Pat: I'd hold it.
Jill: You know, it's in a Bay Area. Like, I couldn't ever buy it again.
Pat: I'd hold it. I'd hold it. I'd hold it. I'd look to see whether I need to liquidate that house for your primary residence in that rental, even when you go to retire to see where you settle.
Jill: That's what I was thinking. Will sell them both, and then take whatever I have and purchase where I really want to stay the rest of my life. I was really thinking at it.
Pat: Yes. Yes, go visit those places you really want to stay the rest of your life before you go buy something.
Scott H.: Buy something.
Jill: And that all is taking like, where's the hospital? You know, like access to medical. I didn't use to think about that, but as I'm getting older, I'm like, "Oh, I could have gone for [inaudible 00:37:52.278]."
Pat: But you're doing great. I mean, or you could just marry money. Those two choices. But you want to get your savings up to 10%, at least, 10% on the 457.
Scott H.: Yeah, because marrying money always works out well.
Pat: Oh, I knew it would be the...
Jill: I love it.
Scott H.: Oh, yeah, yeah. The most happily married couples are the ones that made for money. Statistics show it.
Jill: Oh, my God.
Scott H.: Oh, yeah. There's no divorce there. No infidelity.
Jill: I mean, you guys need a whole nother show for that because I'm fascinated.
Pat: No.
Scott H.: We're obviously joking.
Pat: We're obviously joking. It will be the hardest money you've ever earned.
Jill: Exactly my point. I'm doing fine.
Pat: All right. Appreciate the call. Keep up the great work. Thanks, Jill.
Jill: Thank you for your help. Have a good day.
Scott H.: It's funny.
Pat: I have a relative and married money. And he said, "Oh, it was hard." He's no longer married to her.
Scott H.: Well, obviously, those marriages, most of the time they don't work out.
Pat: Yeah. So, I looked for it growing up.
Scott H.: I could point to some political people, but I'm not going to. Might be in that category. But I'm not going to point anybody out.
Pat: No, don't, don't.
Scott H.: No, no, no. Victoria Bogner who is our head of wealth planning is joining us. One of the common questions we deal with right now is people are like, "Should I spend my down my IRA? Should I do Roth conversions? How's it going to impact my Social Security? And also, what happens with my Medicare Part B?"
Pat: Which is a big deal.
Scott H.: Which goes up as your income goes up. So, we've got Victoria joining us now. Vicky, thanks for taken some time out of your schedule.
Victoria: Yeah. Good to be on the show. Always a pleasure. I thought we could tackle this very common question that we get, especially when folks are getting ready to retire. They're in their earlier mid-60s and they ask, "Should I take IRA withdrawals now and delay Social Security? Or should I start Social Security now and let the IRA grow?" So, if you're listening and you've wrestled with this, you are not alone. And it might seem like a really benign, straightforward question, but it really has a lot of layers and nuance that are important to realize. Really, I've drilled this down to hopefully make this as easy as possible to understand of the implications of that decision. So, there are five key pieces of information that you need to write down in order to help answer this question. And then there are three different moving parts to consider. So, it's not as complicated as it sounds, but I do want to dive in to, how do you answer this question of which path to take A or B?
Pat: And by the way, Vicky, you actually asked that question, very coherent question, because clients typically don't know how to ask the question. They normally ask the question, when do I start Social Security? That's...
Victoria: There's so many implications to that question and depends on so many different things. And most people just think, I'll just take it at my normal retirement age. And that's a fine choice, but if you're a little bit more intentional about when you take it and what you can do in lieu of taking it, then you might find that you're able to save a lot more in taxes later down the line, or you're able to have more powerful, charitable gifting or legacy planning. So, there are a lot of implications to, not only when you take Social Security, but how you handle your accounts in the meantime before your RMD age.
Pat: Okay, and so, the five facts you gather are.
Victoria: Yes. So, the five facts are, how much income do you need? So, that's question number one. How much do you need to live on? Especially, you know, you've retired and now you have your accounts and you need to figure out, "How am I still going to get myself a paycheck month after month when I don't have this job to rely on. I need to rely on either Social Security or my investment accounts or a combination of both." So, that's the number one question. Then your age. How old are you right now? So, if you're willing to wait until your full retirement age to take Social Security, or age 70 for Social Security, just know that past your full retirement age, your Social Security benefit grows roughly 8% per year until you're 70. So, it's something to keep in mind. The third piece of information you need is your Social Security amount at your full retirement age, and you can find that on your Social Security statement. If you've never logged into ssa.gov, I recommend you do that. You can see all of your statements there.
Scott H.: Do they still make paper statement? Because I haven't received one in years.
Pat: I got one last...
Victoria: No, I don't think they do paper anymore. You have to go online.
Scott H.: You think you got one, Pat?
Victoria: And it's a good idea to look at them and make sure it's accurate. Make sure your earnings history is accurate. Because I've known of cases in which it's not, and they've had to contest that and get it fixed. So, that's important. So, the fourth piece of information is, how big is your IRA, or all of your pre-tax accounts combined? So, your IRAs, your 401(k)s, 403(b), anything that's pre-taxed, how much of that do you have? And then the fifth piece of information is, what other assets or income do you have? Do you have taxable brokerages, annuities, pensions, rental income, all of that factors in? So, those are the five key pieces of information. And, yes, we could get into the weeds about longevity and your health and that kind of thing, but we're going to keep it simple for now. So, yeah, those...
Pat: Well, thank you, because I was just going to actually ask that question. I was. I circled age on the notes I was taking. But so, I'm going to get in the weeds, when we say longevity, we're talking about you, a person specifically.
Victoria: Yes. Yes, how long do you think you're going to live? I probably knew...
Pat: Yes, what kind of vices do you now possess that will shorten your life significantly?
Victoria: Yes. What is your medical history in your family? And also a factor is if you're married, if your spouse is significantly younger or older than you are, that plays into this as well. But just so that, you know, you don't have to listen to me talk for the next 90 minutes, we'll keep it pretty simple here. So, let's go into the two paths, and then I'm going to go into the three moving parts. So, we have these two paths. They're both perfectly reasonable.
Scott H.: So, you've got five facts, two paths, three moving parts.
Victoria: Yes.
Scott H.: For a combination of 10. You weren't a STEM major.
Pat: Of course, she was.
Victoria: Yeah. Can you tell I'm a math major? Yes, very algorithmic in my thinking. So, you've got path A, which is you bridge with the IRA and delay your Social Security. So, you spend from your IRA and maybe a combination of your taxable accounts for now. And you delay that Social Security, ideally to 70. And the reason you might do that is you buy yourself a bigger guaranteed paycheck because that Social Security is accruing. And if you're married, you have a bigger survivor benefit for the longer lived spouse. So, that's something to put in mind.
Scott H.: And this, primarily, is really important for those that don't have massive assets. Like, Social Security is going to be really important for them for the retirement income.
Victoria: Yes. And when you think about it, when you pass away, your spouse, now, not only are they widowed and they don't have your Social Security check, they have to start filing singly on their taxes. So, it's a bit of a double whammy. The bigger that Social Security payment can be to them, the better. The second reason you might do it is you have a tax planning runway between retirement and your first required minimum distribution, which varies depending on how old you are. But it's probably 73, if you're listening to this and you haven't yet started taking Social Security. And in that window, you can do Roth conversions. And by doing Roth conversions, you can lock in certain tax brackets. Whereas if you wait and you have these required minimum distributions, you might be in higher tax brackets then. So, it's a way that you can reduce a chance of high taxes and maybe even being pushed into another Medicare premium bracket later in life in your 70s and 80s.
So, those are the big reasons why to do path A, bridge with the IRA, delay Social Security. Now, you've got path B, claim Social Security now and let the IRA grow. And the reason you might do that is if you're very nervous about near term portfolio stress and you're very risk adverse and you just you've... I have clients like this. They've been paying into Social Security their whole lives and they just want that money back as soon as possible. Then I get it. You know, you don't want to wait until 70 to take Social Security. You want to start seeing some of that money back that you've paid into the system for so long, it's a valid reason.
Also, if you have pre-tax balances that are pretty modest, let's say, you've been a great saver, but it's mainly in Roth assets or taxable brokerage or something like that, then you don't really have a compelling reason to try to do a bunch of Roth conversions. That could be a reason to go ahead and claim Social Security now. But just know that if you do claim it now and you have the larger IRA balances, you could run into those larger RMDs later, and that can push you into higher tax brackets. That can trigger more taxation of your Social Security. It can increase your Medicare premiums. So, these are all things to consider when you're making this decision.
Scott H.: Going forward. Correct.
Victoria: So, those are the two paths. And then we get into the three moving parts. So, here are the three moving parts. This is where the rubber meets the spreadsheet, right? You've got your Roth conversions. These are the runway years. So, your conversions, what you're doing is you're taking dollars out of your IRA, you're paying taxes now, and you're moving them to Roth, where all that future growth and your withdrawals, it's all tax free, right? And the goal isn't to convert everything. The goal is to fill up those favorable tax brackets each year without tripping a Medicare premium tier that you don't want. So, if you can, for example, convert some IRA money in a 12% tax bracket now, that would then prevent you from having to have RMDs in a 24% tax bracket later. That makes a lot of sense, right?
Scott H.: For sure.
Victoria: So, that's the first moving part. The second is Medicare's income tiers or IRMA. So, Medicare looks at your modified adjusted gross income, and it uses a two year look back. So, the income that you had at age 63 affects premiums you're going to pay at 65, right? So, when we're doing conversions or large withdrawals from pre-tax accounts, we want to make sure we're modeling those tax brackets and that next IRMA tier at the same time. Because if we can stay under certain IRMA tiers, that can mean you can save some pretty meaningful premiums with Medicare.
Pat: Significant amounts, significant.
Victoria: Yes. Yes, pretty meaningful there. So, that's the second moving part. And the third is taxation of your Social Security. Because a big component to that mass of how much you're going to pay on your Social Security is AGI. It's actually provisional income. If you want to get into the weeds, it's AGI plus your tax exempt interest plus half your Social Security. Up to 85% of your Social Security can be taxed or is taxable, right? And it depends largely on how much adjusted gross income you have. Roth conversions count toward adjusted gross income in the year that you convert. So, that's why sometimes the better move is delay Social Security, convert what you can at a reasonable tax rate, and then you can enjoy those lower AGI years later when you're taking Social Security. And then your AGI is lower because you've moved some IRA money to Roth. And then hopefully, if the math works out, even less of your Social Security is taxable at the same time.
Pat: This is so dang complicated.
Victoria: Yes. And it seems like such a simple question. But the implications of how and when you take Social Security and what you do with your accounts until you're taking it have really big impact and look scary.
Pat: Yeah, so you...
Scott H.: And I'd say, particularly those that, they've saved well, they're not super rich, these are maybe middle class retirees. These are really important questions.
Pat: I mean, these are tens of thousand-dollar questions, because if you go out and you look at...
Scott H.: Yeah, yeah, they're huge.
Pat: ...their net worth in the latter years and you run these different scenarios, you'll see it in their net worth calculation 15, 20 years out.
Victoria: Yeah. Yeah. And it's knowing that you have more control over your tax planning than you realize. You have these levers that you can pull. But you need to know how and when to pull them and how you factor in all of these different Social Security tables as far as you've got your AGI and your income tax and your IRMA brackets and your taxable brokerage...
Pat: I know. But if I hear one more time... Well, I heard, the best thing to do is to take it at age 70.
Scott H.: It's all different.
Pat: What I heard...
Scott H.: Every situation is different.
Pat: And I think if I hear that one more time, I'm just going to lose my...
Scott H.: There we go. Carry on.
Pat: Because that's what you hear. It's like, well, I was talking to my friend and my friend said...
Scott H.: Every situation is different.
Victoria: Yes. It depends.
Scott H.: Every situation.
Victoria: It very much depends on the situation. And I hear people say a lot, too, that, you know, "Social Security is going broke, so I'm going to take it right away so I can get my money while there's still anything left."
Pat: And maybe.
Victoria: You know, that's the headline we often hear, right?
Pat: Yeah, and maybe.
Scott H.: Yeah. And I might I might preach.
Pat: Yes. And because of the fact... But it doesn't matter to you, maybe if your IRA was a million, too. But it most certainly probably matters to you if your IRA was $5 million in your 63 years of age. So...
Victoria: Yes, yes. And the sooner you can start to plan this out, even like in your early 50s.
Pat: Yeah, for sure.
Victoria: You don't want to wait until you're 67 and then start asking these questions. And the sooner you can get your ducks in a row, the better off you're going to be.
Pat: Well, Vicky, as always, we appreciate you on the show.
Scott H.: Before you go, we've got a webinar that you are doing this week, a webinar...
Victoria: That's right. Very excited about it.
Scott H.: This webinar is... And Victoria Bogner is our head of wealth planning. So, she actually does things, not only as far as webinars and stuff, but also some classes with our advisors on keeping up to date with things. But what are some of the things we're going to be learning during this webinar?
Victoria: Yeah. Well, so this webinar, it's called Wealth Building Beyond Wall Street. It's specifically targeted for affluent investors. So, this is by design, really tailored for investors that have $5 million or more in investable assets. We're going to talk about why today's 60/40 portfolio falls short for those multimillion dollar portfolios. We're going to talk about non-public strategies that can help generate some tax alpha and some additional yield, and how sophisticated allocations in non-traditional assets can really help support those multi-generational wealth goals, and much more.
Scott H.: Good, good.
Victoria: I think it was so much fun to talk about. I'm very passionate about these things. So, if you attend, I hope you walk away learning something new.
Scott H.: Yeah. And the webinars are going to be coming up this week, Wednesday, October 15th at 10 a.m. Pacific, Thursday, October 16th at noon Pacific, Saturday, October 18th at 9 a.m. Pacific. And for more information and to register, you got to register, obviously, to get the link and all that stuff, allworthfinancial.com/workshops. Vicky, thanks for taking some time to join us.
Victoria: Always a pleasure.
Scott H.: And by the way, thank you for our listeners that make this show possible, because without our listeners, I'm pretty confident that this would all come to an end.
Pat: I think you might be right there. Thanks, Vicky.
Scott H.: Yeah, this is the thing Allworth Financials...
Victoria: Absolutely.
Scott H.: ..."Money Matters" with Scott Hanson and Pat McClain. We'll see you next week.
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