Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.

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

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

Scott: Yeah, both myself and my co-host here are both financial advisors, certified financial planners, chartered financial consultants. We spend our weekdays helping people like yourself, broadcast on the weekends to be your financial advisors on...I used to say on the air, but we have more podcast listeners, so through your device.

Pat: Your iPhone, who are we kidding? I don't know.

Scott: Isn't it strange how Apple has completely dominated the mobile phone market in the U.S.?

Pat: In the U.S.

Scott: Yeah.

Pat: In the U.S. Yes.

Scott: Completely dominated.

Pat: Yes. Yes.

Scott: And you're kind of something of an outcast if you don't have an iPhone.

Pat: Yes.

Scott: And why am I talking about that? Okay. Well, anyway, we got a great program lined up. We got some good topics to discuss. And, of course, taking some calls and we're gonna be joined later with one of Allworth's advisors, Lauren Williams. She has been with us for a long time, talking about quite an interesting client story. So, should be good.

Pat: So, Scott.

Scott: Yes, sir.

Pat: SBF, Sam Bankman Fried. I know I bring this up a lot because it just absolutely fascinates me. And...

Scott: FTX, the collapse of FTX, the crypto trading firm. About a year ago he was arrested. Trial's happening now.

Pat: And Alameda Research, which was their, supposedly, hedge fund, whatever they called it. It was their investment vehicle of choice to steal money from clients is really what it was. I'm fascinated for two reasons. One is, I could see it coming. If you listened to this show for any length of time...

Scott: That's right. It's not that we can predict the future. You can just tell.

Pat: You can see that it is an unregulated industry that is...which is the strangest thing to me though. I read an op-ed the other day, and I thought this guy hit it right on the head. It was an op-ed in "The Wall Street Journal," and I forget who wrote it, but he said, "Here's a group of these misfits that wanted to move to a currency that was outside of fiat currency, which is a government-issued currency, because they didn't trust the governments, but they trusted each other." Right?

That was exactly what happened. "We're not gonna trust the government, but I'm gonna trust you, some revolutionary," right? That's exactly what happened, which is if I'm taking my currency, my fiat currency, dollar, yen, Deutsche mark, whatever it is, and putting that on an exchange and exchanging my government currency for your currency that you issue, did I not just say, "I trust someone that's not regulated...

Scott: That I don't know anything about.

Pat: ...that I don't know, that doesn't have any real experience in this, but I trust you more than the government?"

Scott: Or you trust the ledger. It's the blockchain, Pat.

Pat: Okay.

Scott: That's how it was all sold originally. It's all based...It's the blockchain.

Pat: So, exactly. Let's go through all the companies that have used funky accounting and blew themselves up through illegal...

Scott: FTX didn't even use accounting.

Pat: Well, they didn't even.

Scott: It was so sloppy. It was unbelievable.

Pat: They just used spreadsheets. So, I have not started the book. Is it called "Infinity and Beyond" or...?

Scott: Is that what it's called?

Pat: "Infinity."

Scott: Michael Lewis.

Pat: It's Michael Lewis who wrote...If you like mysteries...

Scott: "Moneyball," "Liar's Poker," "Blind Side."

Pat: Yes.

Scott: It's a great book. I'm halfway through it, just started a few days ago. And if you've followed this stuff, it's baffling how people...He's obviously brilliant, clearly on the spectrum, if not way off the spectrum, extremely bright, very socially awkward, and I think...You know, people believe what they want to believe, right? And if you're a venture fund that's been very successful, you're looking for the next hot thing, and here's this absolutely brilliant, really odd young man who started this business, you're gonna find...I guess, just give yourself excuses why you should invest. That's why they gave him hundreds of millions of dollars.

Pat: You're gonna create your own narrative.

Scott: That's exactly what they did.

Pat: And gave them money. And then...

Scott: He would play video games during interviews, television interviews.

Pat: Which is just...like, first of all, it just completely lacks respect.

Scott: He didn't think that way. You didn't read the book. There was...

Pat: Well, actually, I'm going to. I have put off buying the book. I wanted to finish two books right now that I'm in the middle of reading, and I knew if I bought Michael Lewis's book that I would not finish these.

Scott: But the trial's been going on, which is fascinating.

Pat: Yes. And he's in a lot of trouble.

Scott: We haven't had a call on crypto in a long time, have we?

Pat: No. That's strange how that is, isn't it?

Scott: Yeah.

Pat: Someone asked us the other night. So, Scott and I were at dinner with another firm that was looking at joining us. So, we've integrated 30-plus firms across the U.S. into the Allworth brand. And the question he asked at dinner I thought was pretty interesting. He said, "Tell us about the calls that you get on the radio show," because we've been doing it 26 years. And they come in batches based upon whatever's hot in the market at that point in time. And it's almost like a contraindicator that as soon as we receive six or eight calls about a particular subject that we should be really worried about that asset class. Right?

Scott: Yeah, exactly right. Oh yeah, yeah, that's exactly.

Pat: Whatever the hot, hot...

Scott: Well, if something's going down, when the pain gets great, and people have the same painful questions, you'd know it's about over. It's almost over.

Pat: Yeah, that's right.

Scott: Right? Markets aren't going to fall anymore.

Pat: All right. So, this show is a contraindicator. So, if you listen closely, if we're receiving a lot of calls about asset classes doing really well and people wanting to buy, the run-up is almost over.

Scott: All right. Let's take some calls. You can connect with us at questions@moneymatters.com or 833-99-WORTH. We are in California talking with Randy. Randy, you're with Allworth's "Money Matters."

Randy: Good morning, Scott and Pat. Thank you for taking my call. Calling today in regards to my mother's financial situation. Back in 2019, she purchased a qualified annuity for about $300,000. And I'm wondering if it's best to have her do a direct transfer rollover. And then, over the course of the next three or four years have her do Roth conversions.

Pat: Okay, so, this is inside of an IRA?

Randy: It was given to an insurance agent. And I think these are pre-tax dollars. This is a qualified annuity. This is from her deferred compensation.

Pat: Okay, so yes, yes, yes. So, it's inside of an IRA. So, it's qualified versus a non-qualified, which would be after-tax dollars in there. And the reason that's important is the tax ramifications in actually liquidating the annuity.

Scott: Yeah, for sure.

Pat: And so, for the rest of the listeners, inside of an IRA, it's viewed as any other asset and you can take it and move it to another IRA without paying any taxes on it.

Scott: Well, there was some sort of...

Pat: If it was outside of an IRA, there would be tax implications in...

Scott: Is this an equity index annuity, or a variable annuity, or a fixed annuity?

Randy: I believe it got changed to a fixed annuity back in December and it's only paying 2.1%.

Pat: When you said it got...was a new annuity issued in December or they moved money?

Randy: I believe she was investing in some other type of asset class, and then in December, they switched the asset class to a fixed annuity at 2.1%.

Pat: Is that something she asked to do?

Randy: I don't know.

Pat: Okay. So, this is the issue. So, in a variable annuity...

Scott: Which was what it sounds like...

Pat: Originally...

Scott: ...if she moved the money from one account to a guaranteed interest account.

Pat: But if she got a whole new annuity in January, did she get a whole new annuity?

Randy: No. No, it's still the same.

Pat: Okay, perfect. Easy, easy, easy, easy.

Scott: So, it's a variable annuity that's...Do you know what the surrender charges still are?

Randy: So, at this point, it's going to be about a 5% surrender charge. And this is a 10-year annuity, so it would lapse in 2029.

Scott: Ten years. Maybe it's not a variable annuity. Ten years. Usually, the variable annuities are six or seven years.

Randy: Yeah. I think there's some type of death benefit as well on this. I'm not real sure, but I do know it would be about a 5% surrender charge.

Pat: And she bought this in 2013.

Randy: No, 2019.

Pat: 2019. That's why. I had 2013. She bought it in 2019.

Scott: And so, is your thought just yanking it out of there, paying the 5%?

Pat: I would.

Randy: Exactly.

Pat: I'd take my lumps on this. I'd take the lump.

Scott: Sticking around for another five years, the extra 1% a year or 1.5% or 2% a year you're paying in fees or 3% a year, depending on the contract structure and fees, is going to be more than the 5% you're paying out.

Pat: So, your thought, Randy, is to take this out and do what with it?

Randy: So, we'd do a direct transfer rollover into a traditional IRA and then start doing Roth conversions because right now, with her pension, Social Security, and RMD, she's about $100,000 a year, which is the bottom of the 24% tax bracket federally.

Pat: And how old is she?

Randy: Seventy-four. Her house is paid off. It's $1.3 million. She has about $2,000 per month extra in income that she's just not spending.

Pat: How much money does she have in the bank?

Randy: About $120,000 with the cash in the money market.

Pat: And does she have a brokerage account, stocks, anything outside of it?

Randy: She does, about $30,000. She's also got a long-term healthcare insurance plan in place.

Pat: I like your idea. I like it a lot.

Scott: And are you the one who is going to be allocating the dollars and managing it?

Randy: Yeah, I was thinking maybe like an S&P 500 fund or maybe some type of money market or something, just a little bit of a mix so if the market goes down, you know, she doesn't take a big hit on it.

Pat: Is she giving money to charities?

Randy: No.

Pat: Okay. I like it. I like it. Scott?

Scott: Yeah.

Randy: Okay.

Pat: I think it's a great idea. I'd take that 5% hit, chalk this one up to, you know, a learning experience, and then do the...

Scott: Do you have siblings?

Randy: No.

Scott: Okay.

Pat: What was the question? What was that about? Like, how they would view it?

Scott: So, here's my view of the world. I'll be really transparent here with you. Like, I think maybe 5% of people can do well without a financial advisor. I think most people will do better with a financial advisor, right? So, like, maybe you can build the right portfolio for her, maybe you can't. I don't know. We haven't had a really in-depth conversation on that. But you have a fiduciary responsibility to make sure that this money is invested in your mother's best interest.

The reason I asked if you had a sibling, if you said, "I've got this brother I haven't talked to in 10 years," I would be adamant about hiring a financial advisor so that you're not the one...because otherwise, down the road, they can point the finger at you and say that, "Randy was an idiot. He didn't know what he was doing. He invested things poorly. I should have another $100,000 coming to me."

Pat: Fair enough. But this isn't super complicated, and based upon the questions that Randy called and asked...

Scott: It seemed like he may know.

Pat: Yes, and by the way, if she's not looking at...Will she look at the statements?

Randy: She hasn't been looking at them and the truth is she's probably never gonna spend this money.

Pat: That's right. That is exactly where I was going. And if she's not looking at the statements and she's never going to spend the money, you're investing it upon your risk tolerance, not hers, correct?

Randy: Most likely, yeah.

Pat: Yeah, how I'd do it.

Randy: It's kind of how I'm...

Pat: That's exactly how I'd do it. In fact, that's how I do it with some of my clients, which is I will have separate accounts and let the people know that these are going to be volatile because the timeline is 30, 40, 50 years.

Scott: Because they're never gonna spend it in their life.

Pat: Because they're never gonna spend it in their lifetime. And so, even if you took all of this money and put it in the S&P or total market, and all equities, I'd be comfortable with that because of what you just said.

Randy: Okay.

Pat: Yep.

Randy: All right.

Pat: All right.

Randy: Well, appreciate it.

Pat: And just do the odd calculation every year and push to the Roth, especially if you're in a higher tax bracket than her.

Randy: I think I will be in the next five or six years [crosstalk 00:14:00].

Pat: I hope you are. I hope you are in the highest tax bracket that you could possibly get for the rest of your life.

Randy: And then I'd put it all in crypto.

Pat: And then put it all in crypto, yeah. For sure.

Scott: That's right. You gotta pick the right coin though.

Pat: Yes. Yes. It's all about the coin. I go with the Dogecoin.

Scott: Doge...

Randy: [inaudible 00:14:17]

Pat: All right, Randy. I appreciate it.

Scott: Is that Dogecoin still trending or something?

Pat: I have no idea. You know something? It's interesting about crypto. I did not know this, that you can take a loss on a crypto, and then buy the same crypto back the same day and actually get to recognize the loss.

Scott: There's no tax loss?

Pat: There's no tax wash rule on it. But then I thought...

Scott: Who said that?

Pat: I was watching another financial advisor do a podcast on it, our friend, Richard Del Monte.

Scott: What if they come back later and they deem it a security?

Pat: So, they said that that's why it's not. It's not deemed a security right now. But they could deem it a security, and then I thought to myself...

Scott: So, what happens if it's deemed as a security...?

Pat: And then you did it?

Scott: ...and then the IRS comes back and says you should have treated this as a security, not...?

Pat: I'm just telling you what it is today, but it's not deemed as security. It's deemed as real property.

Scott: What about currency? What if I bought a futures contract?

Pat: I'm just telling you how it's treated. But then I thought to myself, "I wonder how many people are actually declaring taxes on their earnings at crypto anyway."

Scott: How many clients do you know that own crypto that wouldn't want to tell you now?

Pat: I don't know. I don't think any of my clients own crypto. I just found it interesting. It was an academic, "Oh, that's interesting." But then, I thought, sure, that might be, but how many people that I've...

Scott: I've known that advisor a long time. I have tremendous respect for him, but I still suspect...

Pat: And then my question is well, how many people are actually...? I've got to tell you. I have family members, I come from a large family, that trade in crypto. I'm pretty sure that unless a 1099 is sent regarding their gains, they are not paying taxes on it, just flat out. How many people making money...? People do make money in crypto, more lose money, but how many people do you think are actually recognizing the gains and losses on their tax return from their crypto investments? I'm guessing close to none.

Scott: I would, and it's not necessarily because I'm so moral and ethical that I want to make sure that I pay every dollar. I'd like to believe that's how I'm wired. But I would do it out of just, like, of all things in life, do you want the IRS to come after you for something?

Pat: Out of crypto. I was pointing that out. I don't know where we got on that. This seems to be a show partially about crypto today.

Scott: Partially.

Pat: By the way, we're still not fans of crypto. It is the Beanie Baby mania without the Beanie Babies. It is smoke and mirrors and will continue to be smoke and mirrors for years and years to come. That's where we at.

Scott: You're probably right. All right, let's continue on. In New Jersey, talking with Wendy. Wendy, you're with Allworth's "Money Matters."

Wendy: Hi.

Scott: Hi, Wendy.

Wendy: How are you? Thank you, guys, for taking my call.

Pat: Thank you, we're doing great.

Wendy: Good.

Pat: Life's good.

Wendy: Do you have my information, or do you want me to repeat my question?

Pat: We just know your name and it says you have a question.

Wendy: Oh, okay.

Pat: Well, not only that, the broad listeners that we do the recording don't know what's the question.

Scott: Yeah, so give us the rundown and we'll see if we can help.

Wendy: Okay. So, I got from a workman's comp settlement a lump sum of money, and I wanna know what best to do with it. I have a first mortgage on my house of $120,000 and change and that's at 5.75%. I have a second mortgage that's $31,000 and that's at 0%.

Scott: Why?

Wendy: Because we paid on it. It was a home equity loan that my husband funded his business on. And so, they finally...Our house at one point was upside down. So, they closed the line and changed it to 0%.

Pat: Okay.

Wendy: Then we have to pay...

Scott: Wow, I would not pay that one off.

Wendy: No...

Scott: How long can you keep that?

Wendy: I don't know. I guess as long as I keep my house. So, I have a Truist mortgage for $71,000, and that's at 4.125%. That's on an investment property in Florida that we rent for the season. So, that's an income-producing property. And the amount that I have in liquid cash is around $127,000.

Pat: What's the value of your primary residence?

Wendy: So, it's probably around $500,000, maybe more.

Pat: And what's the value of the property in Florida?

Wendy: Probably around $425,000.

Pat: All right. And you are a New Jersey resident that bought...

Wendy: Yeah.

Pat: ...a property in Florida, which is just really strange, by the way, that people in New Jersey and New York feel they have to buy a property in Florida but that's the way it is.

Scott: Yeah, right.

Pat: And how much...?

Wendy: [crosstalk 00:19:35] all the time like you.

Scott: What's the workman's comp? How much is the...?

Pat: Is that included in that $127,000?

Wendy: Yeah, it's included because I took some money out a couple of years ago to make an investment and when I got that money back, I just put it in this bank account, which is earning 4.88%.

Pat: And how old are you?

Wendy: I'm 62.

Pat: And your spouse?

Wendy: He's 67.

Pat: And are you both retired now?

Wendy: No, I retire in three years. I'm a teacher so I need three more years to get health benefits and he retires when we can afford to. So, right now, he's getting Social Security to pay a tax liability that he owes.

Pat: How much does he owe?

Wendy: I don't know. You know what? Honestly, I stopped looking.

Pat: Well, how long have you been married?

Wendy: Thirty-six years.

Pat: Okay. Okay.

Scott: There's no such thing as my asset and his asset.

Pat: Yes. Do you have any idea what that tax liability is?

Wendy: It's probably down to about $50,000 maybe.

Pat: And do you know the interest rate they're charging on that?

Wendy: Yeah, but he said he's gonna...since he's on a payment plan, he's gonna negotiate the penalties and interest down, hopefully.

Pat: Okay. Well...

Wendy: And I pay taxes, by the way.

Pat: Yeah.

Scott: In an ideal world, he's still working, and he suspends his Social Security to allow that to continue to grow because retirement...

Pat: Yeah. What's the family income right now?

Wendy: Well, so, my income, I make...well, I make...I don't know what I take home, but I probably...I don't know. I make $97,000, but I pay union dues. I pay healthcare out of that.

Pat: Okay. That's gross. And what does he make?

Wendy: He pulls in a lot, but he also has expenses. He's a sole lawyer practitioner. So, he probably makes, I don't know, maybe $100,000.

Scott: And what do you have in retirement savings, 401(k)s, IRAs, 403(b)s?

Wendy: So, I have a traditional IRA that's $42,900 approximately. I have a Roth that's $34,000. I have a 457 that's $20,000. Oh, no, wait, that's up to $40,000. I just looked today. And a 403(b) that's $72,000.

Pat: And what does he have?

Wendy: He has a $4,000 IRA that I opened for him a bunch of years ago.

Pat: And that's it?

Wendy: Yeah.

Pat: Well, I gotta tell you. I was fine with everything until you threw in that little $50,000 tax liability deal you got there. Do you plan on selling the house in New Jersey and moving to Florida?

Wendy: We'll probably sell the house. I'm not sure where we'll move. It depends where my kid is.

Pat: All right. Well, you're gonna have to sell one of these homes if you wanna retire.

Wendy: Yeah, absolutely. And this one is what I'm gonna sell. Unless I can afford a bigger one in Florida, I won't sell that.

Pat: Okay. So, that would be what I would focus on.

Scott: Will you qualify for Social Security as well?

Wendy: Will I qualify? Yeah.

Pat: So, I agree with Scott. You should suspend his Social Security now, assuming he has a normal life expectancy. Is he in decent health?

Wendy: I guess so, yeah. He's in better health [crosstalk 00:23:35].

Scott: I mean, you're going to need as large of a Social Security benefit as you can. How big is your pension gonna be when you retire?

Wendy: Oh, I don't even know. The last I checked, it was gonna be about $35,000 or $40,000.

Pat: It will be close. It will be close. You can't afford to retire with both homes, even if one is a rental for part of the year.

Wendy: Right.

Pat: This tax liability scares the daylights out of me. And I know that you brushed over it, kinda like that's his problem, but it's not his problem. It's your problem.

Wendy: Okay.

Scott: Well, is New Jersey a community property state? Do you know, Pat?

Pat: I don't know.

Scott: I don't know that.

Pat: So, minus that tax...What's that?

Wendy: It probably has my name on it too.

Pat: Oh, I would almost guarantee it.

Scott: Was it an income tax or is it payroll tax?

Wendy: Yeah, he had a few...You know, it just seemed like he doesn't pay estimates, and so by the time, we pay all his office bills and our other expenses, then at the end of the year when the tax comes around, he didn't have it for a couple of years. So, he would just start paying...you know, the next year, he would pay last year. You know, it just got away from him.

Pat: Got it. I would pay down the first mortgage on the primary residence...

Wendy: That's what I was...

Pat: ...with that lump sum, but I wouldn't do any of that until I address that tax liability.

Wendy: So, you think I should take care of his tax liability?

Pat: Well, my concern is you pay off the mortgage and the dollars that you were spending to the mortgage, it goes to increase the lifestyle even more.

Scott: That's right.

Pat: And my guess is that tax liability has interest and penalties that far exceed the 5.75% cost of money on the first mortgage. So, we could talk about what to do with that money, but my guess, if you were sitting in any of the offices in the United States with an Allworth advisor that they would focus on this tax liability before they moved another thing. I wouldn't even make a decision until I suspended this tax liability. And then, I wouldn't trust your husband to set aside the money to pay this every year. So, you created this problem. It's been going on for years and years and years. Every self-employed person knows that they have a tax liability coming up and sets aside a percentage of their income to pay that.

Scott: Yes, and oftentimes, set up a separate account.

Pat: And as money comes in, they allocate a third of their dollars to it.

Scott: Yeah, 30% or whatever. Well, you have self-employment tax in addition to [crosstalk 00:26:35].

Pat: Yes. You know, your 15-3, and then income tax on top of that. So, you need to address the fundamental problem, which is this tax liability, before you do another thing. By the way, this is real. You're getting 4.88% on your money at this $127,000 and you're paying 5.75% in...

Wendy: Right, totally.

Pat: So, the delta between that is 0.9%, which at $120,000 is $1,000 a year. So, it's minimal. It doesn't even really matter in the scheme of things. You're asking me, like, "Hey, should I paint my front door?" when there's a hole in your roof. That's what you just said. "Should I improve the look and feel of my house when there's water streaming through the roof because it fundamentally has issues?" You have a fundamental issue in your finances that you need to fix because your retirement isn't going to be three years away with this sort of behavior.

Wendy: Okay. Well, that has stopped. This was a while ago.

Pat: Okay. But fix this 50 grand. And, actually, quite frankly, if I...I'd actually...

Scott: I would not pay half the mortgage...

Pat: I wouldn't pay the mortgage, no.

Scott: ...unless your husband suspended Social Security.

Pat: That is correct.

Scott: If your husband suspends Social Security, then pay off the mortgage.

Pat: I wouldn't actually do...Scott, I would actually...Yes, I would actually pay off the mortgage.

Scott: And here's why I say that. Like, here's my concern. It's 10 years from now, right? You're each 10 years older. Your husband can no longer work. You're retired. The majority of your income is coming from your pension, which is replacing roughly a third of your pay and Social Security. So, you're gonna want that Social Security to be as large as possible.

Pat: That's right. And so, what I would do is...I agree with Scott. I'd suspend that Social Security tomorrow. I'd fix the tax liability. And then, I would pay down the mortgage and, at the same time, I would increase my contributions for you into your 403(b) by the same amount that the mortgage was paid down by.

Scott: Yeah, I like that.

Pat: So, if your payment to your mortgage was $1,000 a month and you paid off that mortgage, then I would increase my contributions to the 403(b) by $1,000 a month.

Wendy: So, should I pay off my house? See, I wouldn't be able to pay off my house mortgage. That's $120,000.

Pat: No, I understand. You can pay it down.

Wendy: Should I pay off the investment property mortgage then?

Scott: No. I would do the...you get a tax deduction for that.

Pat: Yeah, you might.

Scott: Yeah, because your income's far too high but...

Pat: I would actually fix the tax thing first. And after you fix the tax thing, suspend the Social Security.

Scott: I would wanna know exactly what's going...if I were you, I'd wanna know exactly what's going on, everything.

Pat: If I were you, I'd get...

Scott: You're in this together.

Pat: If I were you, I'd get off this call with us and be freaked out about that tax liability.

Wendy: Yeah.

Scott: I know...I mean, look, we're all married. I've been married 31 years. You've been married 36, like...

Pat: Thirty-seven years.

Scott: Yeah.

Pat: You're in it.

Scott: You're in it.

Wendy: Yeah, exactly.

Scott: The good and the bad, right? We all have good and bad. And you're gonna have to figure out exactly what's going on here.

Pat: Yeah. Suspend the Social Security tomorrow.

Scott: Which, by doing that, every month that he doesn't receive benefits, the dollar amount goes up. Every month he doesn't take benefits, the dollar amount goes up.

Pat: And you're gonna need that income. You could be spending it now.

Scott: He could pay some of that back.

Pat: He could pay it back. That actually wouldn't...Assuming you have a normal life expectancy, you could pay that back.

Wendy: Okay.

Scott: That I would do before I paid down this thing.

Pat: I would too.

Scott: Because my concern is not a year, two years. It's 10 years out.

Pat: But let's not get ahead of ourselves. Let's fix the tax thing and suspend the Social Security.

Scott: Fair enough.

Pat: And if you can get him to do that, call us back and we'll give you more advice.

Scott: There, sounds good.

Wendy: Oh, okay.

Pat: All right, Wendy.

Wendy: Thank you guys so much. Have a wonderful night. I appreciate it.

Pat: All right. Thank you.

Scott: Thank you.

Pat: Right, Scott? Right?

Scott: Yeah.

Pat: Baby steps. You fix that...

Scott: Well, we have no idea what else is really there, right?

Pat: Well, none, nor does she. That's what I said.

Scott: Like, you probably have had some clients over the years with gambling issues.

Pat: Oh.

Scott: Yep.

Pat: Watched a divorce because of it. Sad. Sad. Yeah.

Scott: Yeah. All right. It's hard. It's hard to save money. When you get later in life and you've saved up a few nickels, it's been...And you hear us tell people that. It's funny because, Pat, I know you...I'm the same. I've had clients for a long time and, "Oh, Scott, thank you so much. I couldn't have done this without you." I'm like, "You did the hard part. You saved the money."

Pat: That was the hard part.

Scott: That's the hard part.

Pat: That's the hard part.

Scott: You planning an investment's kind of the easy part.

Pat: You postponed gratification.

Scott: Yeah.

Scott: Okay. Hey, we're gonna do right now an interview with...This is an Allworth advisor named Lauren Williams, and we've got what we call our client story. Lauren's a certified financial planner professional. She's also a chartered retirement planning counselor. She's got about 20 years of retirement planning expertise and has spent her career helping people make good financial decisions. She's taught the CFP curriculum at UC Davis. So, the Certified Finance Planner Board curriculum at UC Davis and also lectures at California State University, Sacramento. Lauren, thanks for taking a little time to join us.

Lauren: Hey gentlemen. How are you doing today?

Pat: Good.

Scott: Good. I just like being called gentlemen.

Pat: That's awfully nice, Lauren. She gets all formal when she is on. In person, she's like, "Hey, you."

Scott: We've had the privilege of working with...

Lauren: What's up, guys?

Scott: ...Lauren for over a decade, which has been fun, but you've got a really heartwarming story, maybe an inspiring story to share. So, I think it really highlights the power of financial planning, along with some resilience and love. It's when life takes some turns. So, tell us about that.

Lauren: So, I thought this was an important one to share because I actually have these clients I've been working with, I think since 2014. So, maybe the year after I started with you guys, and I had been meeting with them each year up to retirement. We were always aiming for that one day. You know, it was like May 2021, we're out. They did a great job saving, always maxing out the 401(k). She was a flight attendant and he worked for one of the companies that we served. And 2020 happened. And so, during that time period, she ended up actually getting laid off from her job as a flight attendant and...

Scott: Considering that flights stopped.

Lauren: Yeah, exactly. Considering...I mean, what didn't stop at that point in time, I guess, but...? So, they came in and they're like, "Hey, we need to roll over the 401(k)s," and we're kind of going through this. And we're just chatting. I mean, like, as we typically do, catching up on life together. And they mentioned that she had some tumors growing in her brain and it's not just like one. It's like 20 of them, right? And I sat there for a minute, taken aback, and all of a sudden, I was like, "Have you guys applied for Social Security Disability?" And it hadn't really crossed their mind because she didn't leave because of disability. She left because she got laid off. And so, they went ahead and pursued that route. They got onto ssa.gov, which is where you file the application. They were able to actually get Social Security Disability approved on their own, which is pretty rare. Usually, you have to go through a disability attorney.

Pat: And did they get it paid back to day one or from the date they filed?

Lauren: From the date of filing.

Pat: Okay, thank you.

Lauren: Yeah, yeah. So, she ended up getting her full retirement age benefit at the age of 60 years old. And so, essentially, they're going to collect $144,000 in advance of her full retirement age that they would not have gotten if she didn't apply early. And the other thing that was...

Pat: Lauren, is this because as soon as she was deemed disabled...

Scott: She went on Social Security Disability.

Pat: ...for Social Security disability...

Scott: It accelerated her normal retirement age.

Pat: ...it accelerated her normal retirement age?

Lauren: Yeah. So, it's usually...like, if you look at your Social Security benefits, you can see where it lists out your full retirement age, age 62 and age 70, and then underneath, it says, like, disability or, like, family. And so, your disability benefit is typically going to be up there right around what your full retirement age benefit is going to be.

Pat: I know. But my question is did it affect her pension benefits from the company, from the airline she was working for? Did it accelerate any of that in terms of taking any age discounts or anything?

Lauren: No, because she never went on...No, no, no, no. She never went on any long-term disability or anything like that.

Pat: Okay. All right. Perfect.

Lauren: Non-issue. Yep.

Pat: Okay. Thank you.

Lauren: It did, however...You know how they start Medicare two years after you start Social Security Disability? They were able to save $700 from his pension each month because she got moved over to Medicare at the age of 61.

Pat: Got it.

Lauren: So, that was pretty cool.

Pat: And how are they now?

Lauren: I mean, right now, she's dealing with treatment. She has had some of these tumors removed and he's driving back and forth between Southern California and Northern California to be with her as both of them go through this process together. And they're dealing with it with love and humor. I mean, I know it's not easy. I hear about it. I talk to them about it when I can. And I know she's having a rough time, but I know that they're just like...They're so good to each other.

Scott: Oh, that's nice.

Lauren: Yeah, he tells me about how they still laugh together. And, you know, I think they're both looking forward to better days ahead, because it certainly isn't the way you anticipate setting up, you know, to retire. You want to travel. You want to do things. And then, life happens.

Pat: And this is actually why...and we emphasize this with our advisors constantly, which is by the time the financial plan is actually put down on paper, it's ready to be changed.

Scott: Because life changes.

Pat: Because life changes.

Scott: And you get thrown curveballs like this.

Pat: And things happen and not everything goes exactly as planned. And this is an example of that. But I gotta...I will share a quick story. I had clients that engaged us when the gentleman was in hospice, and he could not get disability from his company for whatever reason unless he qualified for Social Security. His pension wouldn't vest unless he qualified for disability, but he couldn't qualify for disability unless he qualified for Social Security.

Scott: And you needed the pension to vest for the Survivor Benefit.

Pat: For the Survivor Benefit, I needed that pension to vest. And in order to get it to vest...and he was very, very ill. He was in hospice. But there was hundreds of thousands of dollars at stake here because of the vesting in the pension if he became a deferred vested pension versus what they call vested pension. And so, I ran...This couple called me, and they said they had applied for Social Security but were turned down. And so, we called the local congressman's office and explained what what was happening. They got it. They got a touch with the Social Security Administration and this gentleman was qualified for Social Security Disability five days before he died.

Scott: No. Wow.

Lauren: Wow.

Pat: Five days before he died.

Scott: I had never heard that story from you.

Pat: Oh, I have not shared this. And because he qualified for that, then his heir, his spouse, was eligible for a full pension benefit at his death. But, I mean, it was that little thing. And they kept saying, "Well, we're not getting anywhere with the Social Security Administration." And I kept...I tried to explain to them, this is key. This is...

Scott: Yeah, because everything else is contingent.

Pat: Everything else is contingent, including the spouse's medical insurance for the rest of their life. And so...

Scott: Wow.

Pat: You know, people...I had this conversation with my brother. He's like, "Well, what a..." My own brother, he's like, "Yeah, you know, you're financial advisors. You guys just build portfolios." And I'm like, "Okay." It's a little bit...

Lauren: That's not true.

Pat: That is not true. Right?

Lauren: That is not true.

Pat: But they don't know what they don't know, right? And even financial advisors, I mean, we like our financial advisors to work in an office with three, four, five other advisors or at least have communication with other advisors on a daily basis so that they can bounce ideas off each other. And this is a perfect example, right?

Lauren: Yeah. Exactly. You need to be able to sit around and think through things or plan through them. You have to learn from each other. But I'm also amazed by how much I learned, you know, just by living life next to my clients' side. Like, you know, I am only 4 decades on this earth, but I feel like I have so much life experience just because I've gotten to hold people's hands in their financial realm for the last 20 years of my life.

Pat: And you do a...

Lauren: You get a lot of experience that way too.

Pat: And you do a great job at it, great job at it.

Scott: Yeah. Thanks for taking some time with us, Lauren.

Pat: Highly empathetic advisor.

Lauren: Yeah.

Scott: Yeah, for sure.

Lauren: Aw, thank you.

Scott: Yeah, yeah, yeah, yeah. That's why it makes her good.

Pat: Yes, yes. That's what makes you good.

Scott: That's why she has so many clients.

Pat: That's right. All right, thank you, Lauren. Thanks for being part of the Allworth team.

Scott: Yeah, I appreciate that.

Lauren: Thank you so much. Bye.

Scott: I mean, none of us get out of here alive, right? We're all gonna die one day. And there's a good chance we're all gonna have some illness along the way.

Pat: It's gonna happen.

Scott: And the financial plans change. Life changes.

Pat: Which is if you have a financial advisor and you are going through a life change, loss of job, illness, any of that, you should be talking to your advisor about how it affects you.

Scott: Yes, yes, you really should.

Pat: And of no other reason, just inform them, but see if you're missing something. And my guess is that oftentimes, as this is the case, it can help.

Scott: Yeah, and look, if you're married and you're the one who's primarily responsible for the finances, have your spouse involved in the meetings with your advisor.

Pat: Please.

Scott: I had a client years ago. He never would bring in his wife. He took care of the finances and he just always said, "She has no interest." And I said, "Would you please bring her in with you so I can get to know her because it'd be helpful?" And he finally did, and he brought her in, and he looked terrible. And he had Parkinson's, rapidly progressing Parkinson's, and died less than a year later. And when he passed away, she comes in with her sister, who I'd never met either. Her sister's there, maybe because she is the more financially astute, or the older sister, or the mature, whatever, I don't know, but she's got her sister. Her sister's there to help because she doesn't know me well enough to trust me yet. And I'm sitting there across the table from this widow. Typically, it's, "Do nothing for as long as possible, at least six months. Don't sell the house. Like, just..."

Pat: Yeah, just wait until the fog clears a bit.

Scott: And her sister's in there saying, "I think she needs to buy a rental property for the tax deduction."

Pat: Oh.

Scott: I'm like...

Pat: This is the worst thing you could do. Add more stress to stress?

Scott: She's in her 70s, got her grandkids live near.

Pat: Never owned a rental property before?

Scott: Correct. And I remember that after that meeting, I thought, I'm gonna insist...

Pat: That they bring in...

Scott: Yeah. It's not always the man who takes care of it.

Pat: Yes, oftentimes, it's the woman.

Scott: But if you got an advisor, make sure your spouse knows the advisor as well because of things like that.

Pat: They didn't buy the rental property, did they?

Scott: No. Fortunately, she trusted me and...

Pat: Oh, good. Yeah.

Scott: I did explain why I didn't think it was a very good idea. They weren't spending the money. They had saved it already. Like, can I have a rental property for saving money in taxes?

Pat: I actually believe that people exaggerate the tax benefits of real estate a little bit too much.

Scott: There's some tax benefits. There's also some costs.

Pat: I think they exaggerate the value of the tax benefits too much.

Scott: All right, let's...We're talking now with Rachel. Rachel, you're with Allworth's "Money Matters."

Rachel: Hi, gentlemen. Happy to be on the line with you.

Scott: Hello, Rachel. Happy to have you.

Rachel: Okay. Well, thank you so much.

Scott: You sound nice and chipper.

Rachel: I feel very chipper. I feel very happy to join you today.

Scott: Oh, good. How can we help?

Rachel: So, let me...

Scott: You sound like the kind of person I wanna hang out with. You sound fun. Anyway, go ahead.

Rachel: Hey, I'm close to Sacramento. I'm coming.

Scott: Okay.

Rachel: All right. So, I'm gonna break down my finances for you first. My husband and I, we have two small children, they are 8 and 10. We have a house that's paid for. No debt. We have 401(k)s totaling $340,000. Brokerage account is $60,000. Roth account is $15k. Total family income is about $330k a year, but that is also variable. And the main reason for my call today is that we are very cash-heavy. We have $360,000 sitting around in cash. So...

Pat: How old are you?

Rachel: I know.

Pat: Yeah, how old?

Rachel: I'm sorry. I am 39 and my husband is 46.

Pat: Is he in sales?

Rachel: He is not.

Pat: And what would cause the variability in his income?

Scott: Wait a minute. What makes you think it's his income? That was awfully presumptuous.

Rachel: Oh, that's okay. Presume away.

Pat: Oh. Scott is right?

Scott: I'm like, my gosh.

Pat: You are so right. Oh, just another round of sensitivity training for Pat McLain.

Scott: Oh my gosh.

Pat: I've gotta watch six more videos on implicit...

Scott: Implicit bias.

Pat: Implicit bias. That was a perfect example. I am guilty as charged. Implicit bias.

Rachel: You were also correct. So...

R: Okay. Well, it doesn't make it any better. It just flat-out doesn't make it any better. That was implicit bias. I swear, I hope HR doesn't listen to this show. I'm gonna have to watch 8 or 10 hours of videos now.

Rachel: I'll vouch for you. So, he can work many, many, many hours of overtime depending on the weather in the winter, what jobs they have lined up, things like that. So, he usually brings in, in the last couple of years, between $330,000 or last year, it was $390k. So, it really varies. And then I bring in $10,000 to $20,000.

Pat: Oh. How right could I have been?

Rachel: There you go.

Pat: Nonetheless, still wrong. Okay, so what's your question for us?

Rachel: So, I have a couple mostly Roth questions. So, I have $15,000 in a Roth that I started way before we were married and didn't qualify for Roth contributions any longer due to income. My husband would like to do Backdoor Roth conversions, but we are in a very high tax bracket, so I'm not sure if that makes sense. So, that's question one. Through my work, I can either contribute to a 401(k) or a Roth 401(k). My income is minimal.

Pat: That's right.

Rachel: And we don't really need it. So, I was wondering if I should just put in enough to get the match in my 401(k) and then contribute the rest to the Roth 401(k) option. So, there's that.

Scott: You are in California, right?

Rachel: I am not. I'm in Nevada.

Scott: Oh.

Pat: You are in Nevada.

Rachel: Across the border. Yep.

Pat: Okay. So, I assume you have a big-term life insurance policy on your husband and yourself?

Rachel: A million on him and $500k on myself.

Pat: Okay. So, I assume you're funded the children's 529 plans?

Rachel: We have not.

Pat: You want to do that?

Rachel: So, we have custodial accounts for them.

Scott: How much do you have in custodial accounts?

Rachel: $15,000 apiece. My husband isn't a big fan.

R: Okay.

M: I'm not either.

R: But, on the...

Rachel: Yeah. Well, he paid for his own college. So, I get it.

Scott: Oh, I'm not saying...I paid for my kids' college, and I'm actually paying for my son's flight school post-college. I don't have any problem paying for college. I'm not a big fan of the custodial accounts just because it becomes their money.

Pat: So, here's the breakdown. Here's the breakdown. Your husband needs to increase his term life insurance policy to at least $2 million. Yours is fine. I would fund the children's 529 plans.

Scott: Well, unless her husband's totally opposed. Odds are if your kid's gonna go to college in this day and age, you're gonna help them some.

Pat: But the reality, Scott, is that even if the kids don't go to college, the grandkids could go to college, and the money can convert to a Roth IRA into the kids' name anyway. This is a 46 and 39-year-old that are incredible savers.

Scott: That's right.

Pat: That's $360,000 in cash.

Scott: They're not going to spend it all.

Pat: They're not going to spend it all, right?

Scott: That's right. Clearly.

Pat: That's just the reality. So, if the kids don't go to college, you can actually convert it from the Roth...excuse me, from the 529 to a Roth IRA in a period of time. So, this is how I would break this down. I would actually take $2 million of term life insurance on, increase it for your husband, and if he medically qualifies, I'd probably rewrite the whole thing. I would put $50,000 each into each one of the children's 529 plans and I would plan on putting another $10,000 per year in after that, at least $50,000. I would do two Backdoor Roth IRAs for you.

Scott: One for you and one for your husband.

Pat: And do it every year. And then, I would put your match...

Scott: Do it every other year. You do it in the springtime and you could do it two years at once.

Pat: My wife and I had this argument. I shouldn't say this, Scott. We didn't have this argument. I was doing that, but I missed one year by mistake. I just missed it on the counter. But technically, you want to do it every other year, just to make it easy.

Scott: And she said, "Do it every year so you don't forget."

Pat: That's what she said. And I said...

Scott: She's got something.

Pat: I said, "How about if we put it on the counter and then you help me manage it, Cathy?" So, you want to...I like Scott's idea because it's kind of a pain in the butt. You could do it every year, every other year. So, January 1, you could do it for the year 2023 and 2024 all at the same time. And then, that way, you don't have to do it until January of 2026. And you wanna do two of those, one for each.

Scott: And then, it's in there one day and you can convert it to Roth the next.

Pat: And it's easy for you since you don't have any money in regular...Oh, she has $340 grand in an IRA. Is it in that? $340 grand...?

Scott: That's a 401(k).

Pat: Is it a 401(k)?

Scott: Her husband's 401(k).

Pat: Okay.

Rachel: Right. So, I have $50,000 in my 401(k), and then his makes up the rest.

Pat: Okay, perfect.

Rachel: And then he has an annuity also.

Scott: Don't buy any more annuities.

Pat: I don't think it's...

Rachel: Oh, it's through his work.

Scott: Oh, okay, got it, got it, got it.

Pat: Your husband works for utility?

Scott: Union.

Rachel: Correct.

Scott: He's a union utility worker, right?

Rachel: Yes.

Pat: Okay, that would have been my guess.

Rachel: Yes, in California.

Scott: Outside [crosstalk 00:51:43].

Pat: Yeah, you're in...We know who you work for. In fact, we actually have hundreds of clients that work for that utility.

Scott: Is he maximizing his 401(k)?

Rachel: Yes. So, another option is that we have the high deductible HSA account...

Pat: You beat me to it.

Rachel: ...as an option. We don't utilize it...

Pat: Yeah, you beat me to it.

Rachel: ...because we have the little kids.

Pat: You beat me to it.

Scott: Well, so you say you don't...Are you in an HSA now and you're not saving the money? You use the money to pay claims?

Rachel: We've opted for the different insurance program where we have a very low deductible, and then we're not [crosstalk 00:52:23].

Scott: You gotta run the numbers to see what's going to be the cheapest for you insurance-wise. You might be in the best plan.

Pat: Yeah, yeah, yeah. Especially [crosstalk 00:52:29].

Scott: For those that have a high deductible plan and an HSA, don't spend the HSA. You can let it grow tax for [crosstalk 00:52:37].

Pat: So, Scott, do you know...Can you overfund these, the 401(k)s, at Pacific Gas and Electric?

Scott: I don't know.

Pat: I don't know the answer to that.

Scott: I don't think you can. I'm pretty...

Rachel: So, we're in a similar company, not quite that one.

Pat: Okay. Got it.

Scott: They're in Nevada.

Pat: No, he's in...
Rachel: Works in California.

Pat: He's employed by a California company. So, I would do all those things. And then, so, the insurance, the 529s, the Backdoor Roths, and then the rest of that money that's sitting in the bank, I would take 50% of whatever was left and I would put it into a tax-efficient portfolio.

Scott: First of all, her 401(k), Roth or traditional?

Pat: Traditional.

Rachel: Mine is both.

Pat: Understand that. I would put it in traditional.

Rachel: You would, okay.

Pat: It's not that much, Scott. I would put them both in traditional.

Scott: Yeah. And then, with the cash, I mean, you need to build a portfolio that's highly tax efficient.

Pat: Highly tax-efficient.

Scott: You don't wanna have a bunch of taxable dividends and distributions hitting you while you're saving.

Pat: Yeah. And so, you might even wanna go 70% to 80% of that portfolio more aggressively invested than what it's sitting in now. But do those things in that order, in that order that I gave you.

Rachel: Okay. Well, during COVID, that's when I kind of took the initiative to start my brokerage account because I felt like the stocks were actually something that I could afford when they plummeted.

Pat: Smart.

Scott: Did you open an account at Robinhood?

Rachel: I sure did.

Scott: You did?

Rachel: Yup.

Pat: And you can afford...And, by the way, that wouldn't have been the direction I would have taken. I would have actually...You want to construct a well-balanced portfolio and then, create an investment thesis before you start investing.

Rachel: Yes. So, yes...

Scott: It sounds like she's learned a lot. You're doing a great job.

Rachel: Well, thanks.

Scott: You're probably enjoying this, my guess. That's why you're listening to this program.

Pat: And do you live in Stateline, by chance?

Rachel: I don't. Nope. We're in Reno.

Pat: Oh, beautiful. I like Reno.

Scott: I don't think I've ever heard anyone call it beautiful before. Have you been to the outskirts? Quite beautiful.

Rachel: It is right now. It's gorgeous.

Pat: Yeah, yes.

Scott: Downtown is [crosstalk 00:54:59].

Pat: Okay, but South Reno's nice.

Rachel: I'm not in downtown.

Scott: Yeah, I know.

Rachel: I'm in South Reno.

Pat: Yeah, South Reno or out in the Sparks area, not bad. South Reno. Anyway, you're doing a great job. You're on track.

Rachel: Great.

Pat: Do it in that order and put together a...Make sure it is a tax-efficient portfolio for that brokerage account.

Rachel: Yes. Okay, perfect. And then, as far as putting in money into the 529s, that's not tax-deductible, right?

Pat: That's correct.

Scott: No deduction, but it grows tax-deferred. If it's used for education, it's tax-free.

Pat: And if you don't use it at all, you convert it to the children's Roth IRAs at some point in time.

Rachel: Yeah, okay. Well, thank you very much for your time. I appreciate it.

Pat: All right, thank you.

Scott: Thanks.

Pat: Good savers. Holy smokes.

Scott: Isn't it funny?

Pat: Yeah.

Scott: The other people, they have debt.

Pat: Good.

Scott: I got them. "I owe $82,000 on my boat," or maybe that's, "I owe it $282,000 on my boat."

Pat: Actually, in this particular situation, they might be too good of savers. I might say spend a little bit of that. But whatever they're comfortable with.

Scott: Absolutely.

Pat: Anyway, we're out of time. It's been great being here with you. Hey, if you appreciate this podcast and you haven't given us a review, do us a favor and do so. We'd appreciate that. And if you think you know somebody that can benefit or if there's been a topic on today's program or another program that you've got a friend you think can benefit, forward them on to the podcast, we'd appreciate that. See you next week.

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