Tax Strategy, Life Insurance Mistakes, and Smart Investment Placement
On this week’s Money Matters, Scott and Pat break down just how complex the tax system has become—and why staying ahead of the changes matters more than ever. You’ll hear from one caller trying to track down the value of old savings certificates from the 1980s, another wrestling with how to allocate investments for better tax efficiency, and a listener who made major changes after Scott and Pat helped him realize the true cost of a Variable Universal Life (VUL) insurance plan. If you’ve ever wondered whether your tax strategy is working for you—or against you—this one’s for you.
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Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain.
Scott: Glad you are with us. Myself and my co-host here, we're both financial advisors, and been doing this for a long time. And like to talk about... Our whole goal is to help people make wise choices with their money.
Pat: And it's okay.
Scott: And this program's not about, oh, here's the latest best investment.
Pat: And sometimes it's a forum for me to talk about things that are bothering me that I just don't understand. So, this is how we're going to start the show today of that's okay.
Scott: Perhaps. Is it somewhat related to the world of finance and investments?
Pat: Oh, no, it has everything to do with my cell phone. Yes, it's related to the finance and investments.
Scott: Just making sure.
Pat: Well, it just reminded me that I saw this article in the last couple of weeks, "High earners age 50 and older are about to lose a major 401(k) tax break."
Scott: I saw that headline.
Pat: And then I read it, and then I thought, you know, where's the simplification of the tax code? When exactly will this happen?
Scott: Pat, I'm in this business. I'm over 50. I read this article twice. I was still confused.
Pat: I was still. Yes.
Scott: Beginning next year.
Pat: Starting next year.
Scott: The article didn't explain it.
Pat: Well, yeah.
Scott: I'm waiting for our internal. Our internal CPAs will.
Pat: Yeah, but it was a catch up provision. But it brought back to me, Scott, that the tax code, it doesn't get any easier and it changes constantly. It has become a political hammer.
Scott: Completely. But it has been for decades.
Pat: Yes. Well, that's true.
Scott: But the whole financial planning, particularly if you've done well and have some assets, that tax side of things, that is more important than which company you're going to put in your portfolio.
Pat: It's as important as the asset class. Is an asset class. It's very difficult to pick the right company.
Scott: That's why you use that example as opposed to asset class.
Pat: Yes, because you're correct.
Scott: But, yeah, it's as important as the asset allocation.
Pat: And it doesn't get any easier. It does not get any easier.
Scott: Well, in some ways it does, because now there's technology.
Pat: Okay. I'm going to go with that.
Scott: Because it used to be... I mean, we've had financial planning tools forever, but there'd be a tax law change. You have to wait for an update and...
Pat: I'll take that.
Scott: Because there's so many phase outs. Yeah, phase in and phase out.
Pat: Oh, my gosh.
Scott: Even like the SALT, it actually goes up to $40,000 beginning next year instead of $10,000 the SALT deduction. But...
Pat: Unless your income is here and you're over taxable tips, tax free, and your overtime. I mean, well, I was working with my daughter this year. And she's in law school, so she doesn't have a lot of income. So, we did a bunch of Roth conversions from when she was a school teacher. But we did make a mistake. I thought she had some income last year, so I told her to make a Roth contribution at the beginning of the year. So, we had to back it out, which was kind of a pain in the butt. So...
Scott: Yeah, I didn't think you can recharacterize. Was that just on it?
Pat: This was a Roth counter change on that or something.
Scott: No, we were able to.
Pat: There was no penalty. Did we pay penalty? I don't think we paid a penalty. But my point is...
Scott: The point was how complicated it can be.
Pat: Yeah. And fortunately, the tools are there. Maybe that's why it's become so complicated. It's because the government realized that no one really complains about it anymore because the tools are there. Your accountant, it gives them a list of things that they should be aware of when they're looking at that your tax return.
Scott: Yeah, but it's also it's so complicated that... Tax attorneys are employed because it's like, "All right, the code says we can't go from A to F. We can't go a straight line from A to F." So, the tax change says, "That's fine. We're going to go instead from A to B to C to E to F. And if we do it in those steps, then we satisfy the requirement and we're able to do it."
Pat: Yes, yes. That's correct. But the 401(k) was created.
Scott: Like the backdoor Roth conversion is a prime example for the average person. Okay, anyway.
Pat: Well, thanks for listening. I got that off my chest. Yeah. All right. Well, why don't we take calls here, right?
Scott: Yeah. Why don't we take some calls? And we're in Arizona. And if you want to join us, we love taking calls, answering questions. The best way is to send us an email, questions@moneymatters.com, questions@moneymatters.com. We're in Arizona talking with Josh. Josh, you're with Allworth's "Money Matters".
Josh: Hello.
Scott: Hi, Josh.
Josh: I have a question on some certificates that I have. And they were my grandfather's and he passed away. And they're from the 80s. And I just kind of found them. We were going through some paperwork and we don't know quite what to do with them. We've contacted my financial advisor and connected me with the company he thought that they were issued from. But turns out that it was a little bit different, difference in the name. And they said they never went under that name. So, we're back to step 1.
Pat: So, their stock certificates.
Josh: No, I don't think so. I don't believe so. The top of it says Fidelity Federal Savings and Loan Association Federal Security Certificates. And they're not from...
Scott: He was in his 80s, or they're from the 1980s?
Josh: They're from the 1980s and he was in his 80s when he passed, actually. But they're from the 80s, yeah. And on the front of the certificates, there are six of them, and the first one, certificate amount is $5,465, 20%. The interest rate is 14%. It has his name and has a certificate number. The date of the issue was October 7th, 1981. The maturity date, January 4th, 1982. Then it has his Social from the taxpayer ID, ID number...
Scott: Okay. And the maturity date was a year later?
Josh: Yes, it has terms. And each one of them have terms that are like... On the backside of it, they're like these little...
Scott: I wonders if this had anything to do with Charles Keating savings and loans.
Pat: Where are you located? Arizona?
Josh: Yeah, in Arizona.
Pat: Whereabouts?
Josh: Tucson. They were they were purchased and I believe issued from the federal state, the credit institution in Douglas, Arizona, which is no longer in existence.
Pat: How much is the total face value
Scott: Of all the certificates? You're trying to see if there's any money here or if it's all gone.
Josh: Yes, exactly. It's about... Let's see, there's one for $5,000, $5,4000, $6,600, $3,800, $45,000, and $5,500, I'm sorry. And they all have different times of issue and they all have different interest rates.
Pat: Well, we remember in the 80s, the high interest rate.
Scott: I mean, if you think of the savings and loans debacle, well, you might not... I was...
Pat: You might be pretty young.
Scott: Yeah. So, I mean, the savings alone crisis occurred in the 80s. Arizona was like the epicenter, at least, from a from an excess standpoint. Because the Phoenician was built from money from...
Pat: Which is beautiful.
Scott: People thought they were buying a certificate, a deposit at the bank, and they were instead money was going to...
Pat: My guess, but then I'm going to tell you what I would do if I were you. But my guess is...
Scott: These are all worthless.
Pat: ...these are all worthless because they were issued from a bank that is probably no longer in existence.
Scott: And they passed the maturity date.
Pat: And they were probably never FDIC insured, but...
Josh: It says on the list, it was something about the federal charted, it says, "For value fully received. Fidelity Federal Savings and Loan Association of Douglas, a federally chartered association. Fidelity Federal promises to pay to the investors certificate amount together with the interest at the annual interest rate and on the maturity date."
Scott: Okay. So, what makes you think that your grandpa didn't take this the money at maturity and go do something else with it?
Josh: Because my grandfather had a... I mean, he was quite... I mean, he did a lot. We found, like, $20,000, like, in a box that he had in storage. I mean, he had a lot of investments that we're still finding insurance of.
Pat: I'd use the lost asset firm. That's what I would use, a lost...
Scott: This is a good idea.
Pat: Thank you. You're going to go the other direction.
Scott: Because I'm thinking, you go to a forensic account. I mean, it's so many years ago.
Pat: No, you go to a lost asset.
Scott: A lot of people, unless they've been around that long, then I don't even remember.
Pat: So, here's what happens. There's lost asset firms out there that they make their living out of actually... Typically, they find an asset that they call it a sheeted, which means it's been turned over to a state or, normally state. And by the way, you should actually go to your state website and see if there's any lost assets in your grandfather or grandmother's or parents name. But you want to find one of these lost asset firms, and you're going to contact them and say, "Look, we found these assets. They're in my grandfather's name. We don't know whether they're worth anything or not." And they're going to say to you, "All right, we'll find out for you, but you've got to sign this contract that you're going to give us 25% or 30% of the value of whatever assets we find."
Josh: Okay. Actually, originally I called, I traced the successor when it closed, it was a Chase Bank, actually. And then I thought it was Chase. I called Chase and they said it wasn't it, that since the Fidelity was federal, was still open. The main offices were open in San Francisco. So, I contacted them, and then over the phone they said that it was fine that the accounts were open there, they were legit accounts. But then when I went into an office here, after keeping them for a couple days, they said that, you know, it wasn't them, in fact.
Pat: Yes, that's exactly what I would expect.
Josh: Okay, I did...
Pat: They said exactly what I would expect. Someone showed up with a certificate at a bank, the easiest thing for the person working in the bank is, "I don't know."
Scott: "I don't know." I mean, you're thinking that. It's not going to be the basic person working at a branch.
Pat: Yes. So, what you want is a firm that actually specializes in finding lost assets. And like I said, being...
Scott: Because it's matured, so the question is, did it get reinvested into something else?
Pat: It's probably been sold two or three times. It may be off the books. It may be on the books. It may have been written down.
Scott: May have been spent.
Pat: It may have been a sheeted to a government.
Josh: There is a couple that were along with these, two more, actually, and they were stamped like they had already been redeemed, but these had not.
Pat: Okay, I would still... The way I'd handle it is I'd find a... So, go and Google.
Scott: But these could have been redeemed.
Pat: That's quite.
Scott: And your grandpa, maybe he didn't find the certificate, and so, he signed some statements saying that the certificate is lost or destroyed.
Pat: Yeah, just think about it. In the 80s, I mean, you had a passbook where they write your deposits in there. So, you want to find a lost asset firm, contact them, sign a contract with them. And I would take everything and turn it over to them. And I give them all the information about your grandparents and say, "Tell us what's out there." And you'll end up paying 20%, or 25%, maybe even 30% to them. By the way, that number is completely negotiable. And I have friends that run these businesses in California, these lost asset businesses. What they specialize is overseas inherited assets. Or someone in Ireland dies and leaves an estate and they find the lost estate.
Scott: I keep waiting for one of those.
Pat: Oh, Scott, I have a long history of wealth in our family. We haven't discovered it, yet.
Scott: Yeah, sure you do.
Pat: Anyway, good luck to you, Josh. Yeah, that should take care of it.
Josh: Thank you very much. Do you have any recommendations on who I can contact in Arizona.
Pat: I would...
Scott: Just Google.
Pat: Yeah, just Google.
Scott: Yeah, you will always find.
Pat: So, just Google lost asset firms. Thanks.
Josh: Thank you very much. I appreciate the advice.
Pat: Yeah. And I've done it for all my kids. I've Googled in the state of California and state of Colorado assets. I found some money for one of my son.
Scott: You did?
Pat: Like, 400 bucks or so. Yeah.
Scott: From where? What do you mean, you found money, 400 bucks?
Pat: Was in his name.
Scott: From where?
Pat: I don't actually remember.
Scott: Now, I'm getting a little curious. I'm going to look myself up.
Pat: I guess we could own a...
Scott: I could find 400 bucks. Take my wife to dinner or something.
Pat: There you go. You can just spend $400 on dinner.
Scott: No, two dinners, four dinners, eight dinners at Chili's. I've picked on Chili's a couple of times. I meet at Chili's.
Pat: I like Chili's.
Scott: I like Chili's. I think the only time I eat it at Chili's is when I'm in a restaurant. I mean...
Pat: Airport?
Scott: ...I'm in a airport and it's one of the few options.
Pat: We ate at Chili's all the time when kids were young. They're nachos. Mm-hmm.
Scott: My mother's 86, and she gets her, like, treat twice a month is to get salmon. And it's not Chili's, but it's a national chain. You wouldn't expect that as where's... But, "Oh, that's the best salmon, honey."
Pat: It's like, "I hope."
Scott: It might be something like that. I'm sure it's frozen salmon from far. And we could go to other nice restaurants. "Mom, I know you like salmon." "Well, no, I like to get it from..."
Pat: That's so funny.
Scott: Anyway, all right, let's continue on here. We're in Oregon.
Pat: The guy back there said 17-year-old flip and there's salmon.
Scott: The frozen salmon. It's mostly salmon.
Pat: All right, let's go to the next call.
Scott: All right, we're talking with Andy. Andy, you're with Allworth's "Money Matters".
Andy: Hi, Scott and Pat.
Scott: Hi, Andy.
Andy: I've been listening to you guys forever, and I'm real happy to have a chance to get some little advise.
Pat: Oh, cool.
Scott: Well, thank you. I'm glad to call.
Andy: Yeah. So, my questions are around tax efficiency. You know, I have all these investments. I have a little bit of Roth, not much, you know, traditional and deferred and brokerage accounts. And then there's all these different asset types, and I don't know which ones belong in which accounts. And whenever you do research, you see things like, "Oh, this particular investment works best in a Roth." Well, doesn't every investment kind of work better in a Roth? So...
Pat: Excellent point.
Andy: ...you have what you have and you got to work within the confines of where your money is. And I'm trying to figure out, okay, what goes where?
Pat: Okay, so let's just... We'll start with the basic outline that this is driven by your asset allocation. And the reason it's driven by your asset allocation. So, if you said to me, "Okay, McClain, what do you want your equity exposure to be?" And I said, "Oh, 100% stocks, 100% stocks." And you're like, "Why?" I'm like, "Well, because the market goes up more than it goes down. And over time, it'll be okay and I can live through the volatility." Then it wouldn't matter whether it went into an IRA or a brokerage or a Roth IRA.
Andy: Yeah. I get it. And it's only recently that... You know, there used to be no alternative, right? And so, everything I had was equity and it didn't matter. But now that I'm branching out and looking at other things, it kind of matters.
Pat: So, Scott, take it from here.
Scott: Yeah. You want... So, the focus is not necessarily on what your tax return is for 2025. The focus needs to be on what's going to yield the highest net worth down the road.
Pat: Lifetime return.
Scott: Lifetime return. And as we were talking off break, Pat had mentioned that he had got an email from a client recently that said, "My CPA said we need more munis in my portfolio." Pat had a kick out of it, like, the CPA has never even looked at the guy's portfolio. There's no idea what's in the portfolio.
Pat: I've got nothing but equities in his brokerage account, and I've got all his bonds in his IRAs. So, putting munis in the portfolio would ruin the whole strategy.
Scott: Right, so...
Andy: Yes. And I am really interested in the munis. Say, you know, I'm in a high-tax state and a high-tax bracket, and it looks fairly compelling.
Pat: I understand. But if you think about it, give us a breakdown of what's in what. How much money do you have in Roth? How much do you have in brokerage? How much you haven't qualified?
Andy: Okay. So, in deferred and traditional, it's $3.9 million. In brokerage, it's about $700,000. And in Roth, it's about $270,000.
Pat: All right. And what's your stock to bond ratio?
Andy: It's 75% stock, 15% bond, and 10% in cash.
Scott: Where's the cash?
Andy: It's in cash.
Scott: No, I mean, is it in the brokerage account, or is it in IRA?
Andy: Okay, yeah. The cash it's in the traditional. Yeah, it's spread fairly evenly in all the accounts.
Pat: And how old are you?
Andy: 52.
Pat: And when do you expect you're going to start taking distributions?
Andy: That is the question. I like working. I don't have any desire to stop working. Like, probably 10 years still.
Scott: Yeah, you got a lot in your deferred accounts for 52. Is that all your contributions or your spouse as well?
Andy: That's us together.
Pat: So, if you think about it, people get excited about munis, and there's nothing wrong with munis. But if I'm taking a discount on what the muni pays because the federal government is subsidizing the taxation...
Scott: Right, exactly.
Pat: ...why would I hold them at all? Why wouldn't I just have bonds inside of an IRA or a Roth IRA and get that higher return? And that's how you should think about munis, right, which is...
Scott: If you flip these numbers, if you had $3.9 million in a brokerage account and $700,000 in your IRAs, we would say, munis might be a great thing for you. But almost everything you have is in tax-deferred accounts.
Pat: And what's your approximate family income?
Andy: Yeah, our HDI this year is probably around $830,000.
Pat: Is that a pretty consistent?
Andy: No, it's not.
Pat: This is a high year for you, or low year?
Andy: Yeah, it's a higher. And that's actually, that's post deferral, so I'm, like, deferring as much as I can.
Pat: That's right. So, when you look at this, you should have no munis in the portfolio...
Scott: Today.
Pat: ...today.
Scott: But based on your income, in another decade, my guess is you're going to start accumulating more and more in your brokerage.
Andy: Mm-hmm.
Pat: Yeah. And then at that point in time, you could look at mixing munis in. But remember, these municipal bonds are subsidized by the federal government, which is actually for years and years, the federal government subsidized high-tax rate states by allowing the state and local tax deduction. And you think about it, I hated it when Trump passed that thing, because it hurt me directly. But I realized that...
Scott: I remember talking to my congressman. I said, "Well, personally, I don't like it at all. But philosophically, I think it makes a lot of sense to get rid of that."
Pat: That's right. That's right. So, you should have all your highly appreciated assets in your brokerage account and mix the rest of the portfolio everywhere else.
Scott: You want to have that as highly efficient tax as possible. And again, because the vast majority of your wealth is in tax-deferred accounts, which would mean you're going to have some fixed income.
Pat: You're going to...
Scott: Until the point you have no fixed income in your brokerage accounts, you're not going to benefit from munis.
Pat: Yeah, keep the fixed income.
Scott: I misspoke. The day you have no fixed income in your tax-deferred accounts is the day it's going to make some sense to have some municipal bonds.
Pat: So, Scott, one of my favorite parts of the show is that sections segment we call House Calls, where we check in with a caller from the past and see if our advice was sound or ridiculous.
Scott: Or crazy, yeah. And there are times we might be out there. Anyway, in June, we spoke with Amit from Texas. He's not an Allworth client, but wanted to know how to invest the family's money for retirement in a tax-efficient manner. And as we talked to him, we also discovered he had been sold quite a bit of insurance. So, let's hear that clip right now.
Amit: My wife and I are 40 and 37, respectively. Combined gross income of $310,000 annually from our corporate jobs. We currently have $125,000 in Roth retirement accounts that we converted that is managed by an advisor that charges 75 basis points, and invested very aggressively in genomics and innovation tech companies showing healthy returns. However, we self-manage the rest of our investments. About another $200,000 IRAs, $15,000 in a separate Roth, all primarily invested in low-cost index funds. We have about $4,000 in a 529 plans for our two kids, and then about $20,000 in HSA that are also invested in index funds.
Pat: You mean you...
Amit: I maxed out my... Sorry.
Pat: Okay, you didn't mention a 401(k) in there. Are you are you going to?
Amit: The 401(k) is part of the $205,000 that is part of our Fidelity accounts.
Pat: Okay, thank you.
Amit: We maxed out our 401(k). My wife, that's 10%. I maxed out mine.
Scott: How have been maxing that out?
Amit: I'm sorry?
Scott: How long have you been maxing that out?
Amit: For the last two years. We consistently save about 15% to 20% of our net pay from our corporate jobs. And then beyond that, we own two daycare businesses. One is operational that we are expecting to see about $120,000 annually going forward. Second one's under construction that once it's fully operational, we'll get about $150,000 from that. And then my wife will manage that at a $65,000 annual salary.
Scott: And that where your cash is... Because you make a relatively good wage, and you don't have a lot saved relative to what your wage is.
Amit: Correct. The majority of our cash went into putting the down...
Scott: Got it.
Amit: ...payment in for the new business, which was around a little under $300,000.
Pat: Do you own the property or just the business?
Amit: Both of them, we're going to own the property and the business. So, we have some concerns, particularly regarding our VUL policies that we have with our current adviser. We know we were sold that given our income, we would be phased out, and this would provide you with opportunity to put more money, almost Roth like. We do the VULs.
Pat: It's variable universal life for the rest of the church.
Amit: Outside of the cost of insurance, all of that goes into S&P 500 index. And we're fully participate. We're not caped, and there's not a floor. We're worried about the high fees that our current investors charging, along with just the high fees related to the wells. Our goal is to build a legacy for our children, as well as save for the college and weddings at some point. So, my questions are, one, are these VULs truly beneficial, or is that money better deployed elsewhere given our concerns and our goals? The second question is, should we consider switching adviser to somebody that's a little more proactive from a tax planning perspective and keeping track of our goals?
Pat: You refer to these corporate jobs. Your wife works for a large corporation now?
Amit: She works for a marketing consulting company, and I work for renewable energy company.
Pat: And what is her income now?
Amit: She makes about $95,000 and then I make about $180,000 plus my bonus.
Pat: And then you mentioned that she's going to leave that and just run the daycare at $65,000s a year. Is that correct?
Amit: She's going to keep both. She'll manage. We'll hire, but she'll be there from an owner perspective. The plan is to ride both of them as much as possible.
Scott: By the way, wealth is created not in passive financial assets like S&P 500, 401(k), VUL, wealth is created in your career. Either you're very talented and somebody pays you a boatload of money or you create a business.
Pat: Or in your case, both.
Scott: I mean, if you look across the spectrum of wealthy people in this country, it's very few is inherited. It's primarily in your career, either a business or you're really good at what you do.
Pat: What did you say was in the 529 plans?
Scott: Let me rephrase that, you're really good at what you do in an area that demands a high wage, because you might be a great violenced and you bring a lot of joy to people's life, but you maybe you're not making a lot.
Pat: Yeah, this follow your dream stuff is garbage.
Scott: I don't know of garbage. You need to get paid too.
Pat: Okay, the 529 plan...
Scott: The intersection between getting paid and your dreams.
Pat: Well, how much is in the 529 plan?
Amit: About $4,000.
Pat: Okay, and let's dig into this VUL. What's the...?
Scott: So, first, variable universal life policy, the way they're structured... Like, Pat and I both started in the industry with a life insurance company, 1989 and 1990. We lasted a couple of years. We learned that if you get trained in the life insurance industry, they teach you that life insurance is the solution for any financial issue you're dealing with. I don't care what it is. A life insurance policy is the answer. That's how they train all their agents and whatnot. A variable universal life policy is a policy where you put money in to this pool. You can choose how it's invested. So, you've chosen to put it in the S&P 500 fund. And then there's a cost of insurance, a life insurance, a death benefit. And how much is your death benefit on your policy?
Amit: For the parents, it's $500,000, for the kids, it's a million.
Scott: Wait, wait, whoa, whoa, whoa. How many policies do you have?
Amit: Each of the family members have a policy. And then we, as parents, also have separate $1 million dollar term policy.
Pat: Okay. And is it the same advisor that sold you this that is actually managing the Roth IRAs?
Amit: Part of them, yes.
Scott: Yeah, the one.
Amit: The one. Some of it, I manage.
Pat: Okay. So, let's break down all four policies. When did you purchase these?
Scott: Well, let's explain how these work.
Pat: Okay, well, thank you.
Scott: So, $500,000 a death benefit on Amit's first policies he's talking about here. And so, if there's no cash in there at all, he has an insurance cost of whatever the insurance costs would be for $500,000 of death benefit. If he had $100,000 of investments in cash in the policy, he would pay. The amount of death benefit would be the difference between that $500,000 and what he's got saved there. My experience, by looking at the cost of insurance on these policies, it tends to be a lot more than it would be on pure term insurance.
Pat: Yes. So, they call that difference the delta pure insurance, and that pure insurance is expensive. And once you're in, you can't requalify because they have big surrender. Most of them have big surrender, which are their terms.
Scott: Plus, the internal costs are 2%, 3% a year.
Pat: There's a load on it typically, and then there's a management fee inside.
Scott: Now, the benefit, what they sell the benefit on these is they grow tax deferred, so you're not taxed at all as things grow. And then when you die, that's tax free. But later in life, you can withdraw your contributions first, your policy premiums first. And then after that, you can take out a loan against the policy.
Pat: And as long as you die with the insurance policy in place, it's tax free. The problem is most people don't die with these insurance policies because the costs actually erode most of the value in there.
Scott: The whole concept of using these policies, funding them and then in life, taking a withdrawal, I can't tell... Pat, I've been doing this 35 years. I cannot think of one situation where I saw someone with a sizable nest egg in a life insurance policy, living off the loans from it.
Pat: Well, Scott...
Scott: I've seen where they're about to implode. And if they collapse on themselves before you die, suddenly, it triggers a massive taxable event.
Pat: You said you and your spouse each have $500,000.
Amit: Correct.
Pat: And what's the cash value in there?
Amit: The cash value for mine is around $65,000, and the cash value for my wife is around $20,000.
Pat: And how much you putting into these?
Amit: Right now, we're putting in $500,000 a month for each person.
Pat: Okay. And you then mentioned that you had two policies, one on each child?
Amit: Correct.
Pat: And what's the face value on those?
Amit: They are a million dollars, and we're putting in $300 a month for each child.
Scott: Holy smokes. Whatever...
Pat: How much cash is in those?
Amit: My eldest has a good amount, a little less of $30,000, and my youngest has been recently born, so he doesn't have much.
Pat: So, my experience has been, the internal cost of the insurance is more than the tax liability would be.
Scott: And why would you buy an insurance policy on a child?
Pat: Because it's such a great tax tool.
Scott: The 529 is completely ignored in this equation. There's $4,000 in the 529 plan. And they're putting $300 a month into these policies.
Pat: Here's what I think you should do, cancel the policies on the kids immediately, and consider some cost. You're going to lose most of the money. Or you could actually... I don't know what it cost. There's this there's a minimum cost every year for these things. But what we do know...
Scott: We got to kind of run the numbers.
Pat: The newborn, you should cancel it. The child that's got a $30,000 cash value, you might want to lower the face value to $100,000, or maybe $50,000. And that way, you're buying less pure insurance, and then slow down or stop the deposits completely. But on the...
Amit: Yes, I was trying to see what the lowest death benefit I can get to without it not being MEC.
Pat: Oh, no, you don't care if it becomes a MEC. You don't care. You don't care. Because the cost of insurance far exceeds any of the downsides of becoming a modified endowment contract. So, just throw that away. In fact, even on your own life insurance...
Scott: But you might want to qualify for some more insurance before you reduce that.
Pat: Talking about the kids first. Okay, so on the kids. So, you're on the right path. So, just see what the lowest face value you could turn those things into.
Scott: I would look at, if the surmounted charges aren't too astronomical, I would just cash the thing out. That's 30 grand, a couple grand and penalties. Take the 28 grand, throw it in the 529. That's what I would do.
Pat: That's right. That's right. That's...
Scott: And if you really want life insurance... I don't know why you'd want life insurance on your kid, but if you want life insurance on your kind, go buy some cheap term insurance.
Pat: You have no need for life insurance on the child. Unless this child is some sort of, is making all kinds of income that's coming into the family. Life insurance is designed to replace income.
Amit: Well, the money we're spending on them, I expect them to be prodigy.
Pat: Okay, I don't know. I don't actually know...
Scott: Wait until they're teenagers.
Pat: I don't know if that's how prodigies work. I don't think you could actually spend your way to a prodigy. So, on those, I agree with Scott. I'd look at either collapsing those policies completely, or at least, the oldest one child turning into a MEC. Your policies, I would turn them into MECs. First of all, I agree with Scott, I would actually go out and buy some term insurance. And by the way, $500,000. How much other term insurance do you have?
Scott: They got a million dollars.
Pat: Are there...?
Amit: A million for each of us.
Pat: That's not enough.
Scott: I would have I would have at least two million.
Pat: Yeah, that's not enough.
Scott: Two million of... And if you're reasonably good health, you're 40 years old, it's cheap.
Pat: So, for both those policies, your policies, I'd either lower that face value as low as I possibly could and turn it into a modified endowment contract or cancel them completely and just take the hit. The 529 is the thing that you missed. I mean...
Scott: Well, he didn't miss. He's followed this advisor.
Pat: Okay, the advisor missed. And the...
Scott: No, the advisor didn't miss. The advisor had a misalignment of, I'm assuming it's a male, his economic benefits compared to Amit's economic benefit. There's a misalignment. He earned a commission. How can you be open minded and actually look for the best solution when you've got this conflict, tremendous conflict?
Pat: Scott, I disagree. I kind of disagree. If he had done every other thing... Let's just say that he had $2 million in there, right? Let's just say we went through the list, he's either uneducated and doesn't understand the other stuff, he's an idiot, or he's unethical, my opinion.
Scott: Or maybe all three.
Pat: But the VUELs are the very last thing on the list of a product that you should use, very last thing, right? Everything else, the 529 should be fully funded...
Scott: Look, with the tax efficiency of ETFs and a synthetic index by a direct index, like, why? Those are such...
Pat: As I said, the very last thing after you've gone through every other thing. You're not there. So, your idea, Amit, of either...
Scott: Look, he followed advice.
Pat: I understand. That's why he's calling.
Scott: I understand.
Pat: He's calling for outside advice.
Scott: I just feel bad.
Pat: But I don't have a dog in this fight. So, the 529, look, you can convert a 529 plan to a Roth IRA if the child doesn't use it. And you talked about legacy. So, these 529 plans should be maximum funded all the way.
Amit: And should I have one for both or one solo?
Pat: No, you can't, you have to have them separate.
Scott: Have two. And what I would do is just, how much is it going to cost to go to education? Work backwards. How much do I need to save on an annual basis?
Pat: So, bring those things to zero or turn them into MECs. Get $2 million term life insurance policy, 10 year level term, at least, on you. Fund the 529 to the maximum. And I would actually make them aggressive. Your wife should increase her 401(k) to the maximum. And you're doing the backdoor Roths. We can see that. I think you're doing great. I think I would clean that up and I'd get another advisor.
Amit: Okay. So, I just need to fire my advisor and stop paying him. That's what I would do.
Scott: That's what I would do, yeah.
Pat: Just give him some...
Scott: Is he is he affiliated with an insurance company?
Amit: He is, yes.
Pat: Yeah. So, he's got a hammer, everything looks like a nail.
Amit: Well, I'm getting ready to pull my hammer, so...
Pat: Amit, thanks for joining us.
Scott: Yep, welcome back to the show.
Pat: Yes. And please bring us up to date. So...
Amit: Hey, guys, can you hear me right?
Scott: Yes, sir.
Amit: Yeah, so we did kind of incorporate the things that you've told us. The previous advisor, we kind of told him to kick rocks. And we opened up the 529 plan, started putting those in there. Given the amount that we had specific for my daughter in her VUL, we lowered the death benefit to as low as possible. So, we're not paying for a lot cost of insurance.
Scott: Just out of curiosity, in running the numbers, you said you kick your other advisor to the rocks. I hope not physically. How did you how did you crunch the numbers to see what was best? Did you just do it yourself, or was there someone else who understood how these policies work in great detail to help you, or what was that process like?
Amit: Yeah. So, my employer has... I reached out to the benefits provider, and he also has his own business and he kind of provides some guidance, didn't charge me at all.
Scott: Beautiful.
Amit: And he said, you know, given the amount that's in my daughter's, probably it's best to kind of go that route, and then just max out the 529 at a level that you feel comfortable with your kids future education so you're not paying for insurance you don't need, and you're not paying somebody else their bonus.
Pat: And how low were you able to get that face value on your daughter's policy?
Amit: $250.
Pat: And that was as low as they thought was reasonable.
Amit: Yes.
Scott: Well, nice. I mean, he was talking to someone that had no skin in the game, right?
Amit: Right.
Pat: Yes. And did the advisor that you talked through your employer, did he feel the same way we did?
Amit: He provided similar guidance, yes, in terms of, you know, you don't need this for your kid. There's better ways to optimize how you use your capital to kind of grow and invest for some of the things that you want to do for your children and a legacy and things like that, and yourself.
Pat: And I'm sorry this happened to you, but for the rest of the listeners, life insurance policies are sold as if they are simple, easy investment vehicles.
Scott: Yeah. And I just got to tell you. So, Pat and I listened to this clip before the show started this morning, your previous clip. After the clip, Pat says, "This stuff is really complicated." And he says, "Can you imagine if the average person called a stock broker from," any name, one of the big firms, I'm not going to mention, and he said, "Those guys would not have a clue how this stuff..." And it's probably fair, just because... And one of the reasons, we started in the industry 35 years ago. The first couple of years of our career was at a life insurance companies. We learned the sales strategies that they employed to sell policies, stuff like this like, "Oh, yeah, they care. Let's get him a million dollar life insurance."
Pat: But the interesting thing is we didn't do very well there.
Scott: Well, no, because we kind of saw what was going on and it wasn't a good fit.
Pat: Yes. And so, what did you end up doing with your policies?
Amit: We did the same thing. But we also got an extra million for each of us in term.
Pat: Perfect.
Amit: So, you know, we have that covered. And hopefully, you know, by the time our kids turn 20 and/or go to college, they'll be set in terms of, you know, there are 529. And if they don't use it, that's great, we'll convert it to a Roth and give them a legacy that way. But I think we have the infrastructure in place to kind of not have to worry about this stuff going forward, hopefully.
Pat: My guess is the legacy you leave your children, well, what you do with them on a day-to-day basis.
Scott: Of course.
Pat: That's always the bigger rough course, but...
Scott: More so than the money. Off topic, did you guys open the second daycare, yet?
Amit: We just received permitting for fire yesterday. So, things are moving relatively quickly now. Hopefully, we'll close on the loan and then begin construction.
Scott: Congrats.
Pat: Good for you.
Scott: Anything else we can answer today?
Amit: No, I think what you kind of helped me with from a thought process and how we should think about structuring this kind of laid the foundation. Now, I'm trying my best to kind of, you know, be wise with my money as my businesses kind of grow. We'll probably at some point need to... I did hire a separate CTA as well to kind of help tax plan not only for the future, like next year and things like that, with what what's going to come from the business in terms of up front depreciation losses and things like that, how we can maybe take advantage of potential conversions and things like that. But as the complexity of my finances changes at some point, we will probably need a financial advisor to start thinking about how to strategically take advantage of whatever laws make it pass from now until then. I know direct indexing is something that I'm probably start getting a little more educated in. Right now, I just don't have a lot in the brokerage account and how to do that.
Scott: Yeah, I know, you got the business.
Amit: Right, you got it.
Scott: Well, here's the difference. So, you're talking about a direct index. You're talking about that's a strategy of owning the small steak and businesses that other people started. You're instead taking the money and putting in a business that you're starting. Well, obviously, you start a business yourself. There's more upside. There's more risk as well. But, I mean...
Pat: In this business, in this is just a bit of advice from someone who... Scott and I have opened multiple businesses together.
Scott: And some of them successful.
Pat: And some of them that we still talk about. Don't be afraid of getting too large of a cash cushion in doing this.
Amit: I do have about nine months' worth of expenses, probably closer to probably a year. You know, if things go sideways, we obviously would probably cut off some of our children's daycare expenses and things like that. But, you know, if I had to guess, probably a year. I guess I did have one question in terms of thinking through the next, you know, potentially 15, 20 years. What are your thoughts on thinking about creating passive income through whether it's dividends or something else as my wife and I get older?
Scott: I would say, focus more on creating net worth. And then whenever you need income from it, then figure out the best way to generate income.
Pat: That's correct.
Scott: As opposed to the whole concept... I mean, what? Are you going to buy fixed income to have guaranteed...?
Pat: Or high dividend treasuries or something?
Scott: Stocks. You think about it, if you can dial 2 daycare centers, my guess is you could dial 4 or 5...
Amit: We're already doing four.
Scott: ...or 8 or 10. And then you don't have to worry about passive income, because then at some point in time, you've got a massive asset that someone's going to cut you a big check for.
Pat: Yeah. And the idea of actually owning the properties, which you did already, and then leasing back to yourself is a form of passive income. And then if you sell off those daycares at some point in time, normally, what you would find is that you'd probably end up keeping the properties and that becomes a form of passive income in retirement.
Scott: Yeah. And lease them back to the new owner.
Pat: And you lease them back to the owner. You sign a big lease before you sell them.
Scott: Because a big operator's probably not going to want to own the real estate.
Pat: Most of the time they do not. They don't want to own the real estate, because it's not what they believe to be an efficient use of their capital. But it might be the greatest use for your capital in retirement.
Scott: Rather than become a student of how direct indexing works, continue to be a student of this industry that you're invested in. So, you go from two to three to four to eight to whatever, if that's what you want to do. But in talking to you...
Amit: I can get the plan, is how do we...?
Scott: ...if you want to create family wealth, that would be the way to do it.
Pat: Yes. Yeah. And obviously, if your wife's working both her regular job and in the daycare, she sounds like she's pretty motivated, or at least, you might be motivating her.
Amit: I'm probably motivating her. We'll see how it plays out in practice. She might be like, "I'm done. You take over." Or, hey, she might quit. Or, you know, she might... Yeah, we'll have to figure out how that works. But...
Pat: Well, it sounds like...
Amit: ...I do think that, you know, lease, these things are very capital intensive. And we own two of them. And if we feel like we're always on edge because we're dropping all of our savings into the next one. But, again...
Scott: You're investing. You're investing in them. You're converting from savings to an investment.
Amit: Fair point. They are capital intensive. So, we might look at, you know... We own two. It doesn't make sense to maybe start leasing. But we're going to have to run the numbers in terms of what the rental rate is and things like that.
Pat: Correct. Or enter into lease options to buy, which allow you to actually develop the properties. And so, the problem with not owning them and actually signing short-term leases on others is it's really you could call it a daycare center, but really, it's a retail space that people bring their children to and they get used to it and it becomes a brand. And the problem with not owning or, at least, getting long-term...
Scott: A little different than an office building that's on floor five in a building.
Pat: That's right. That's right. They become their own personalities, if you will. And the location matters. It really, really matters. And so, what you don't want to do is sign a short-term lease and then get priced out of that particular location as you build up a following.
Scott: Yeah, and you're suddenly a mile and a half away.
Amit: Yeah, we're looking at 15-year lease with two 5-year options with a with a first right of refusal after year 3, which is typically when we ramp up to capacity.
Pat: That is a decently long lease.
Scott: That's a long lease. Then you got to ask yourself if you want that personal guarantee for 15 years.
Pat: Yeah. And are there out in it?
Amit: But the plan is not to be involved. The plan is to structure a management team that can run the day-to-day as well.
Scott: I understand. Oftentimes, when you have a small business, the landlord will say, "That's great. I'm sure business is going to do well, but we'd like a personal guarantee." So, I'd be really careful. Personally, I would not want to sign a 15-year personal guarantee. I would try to negotiate something. I'm happy to do it for three years or something like that. And then... Unless it's managed by some massive REIT or something like that, the landlord is going to have... Every lease is different.
Pat: And just... You sound like you're an engineer by education or computer science, someone is along those, right, STEM?
Amit: I'm a CFA by trade.
Pat: Okay. All right. So, as I always share with my kids, I said, everything works perfect until you involve people. The spreadsheet was beautiful, right? So, just remember that. Hey, Amit, wish you well. Yeah, congrats.
Scott: You've done great. Amit had someone he was working with, a financial professional he was working with, wondered, "Is this really the best?" Reached out to us, got a second opinion, then went to somebody else, got another opinion. And with a little bit of advice and change course. So, if you've got something in your financial life that you're kind of thinking, "Is this the best for me?" Get a second opinion, whether it's from another advisor or this program.
Before we wrap up, I want to let everyone know about, we've got a webinar, Wealth Building Beyond Wall Street. It's exclusive insights reserved for the affluent investor. So, Victoria Bogner, our head of wealth planning is doing this. It's going to talk about why today's 60/40 portfolio falls short for multimillion dollar portfolios, which nonpublic traded strategies may help generate tax, alpha, and yield, how sophisticated allocation and non-traditional assets can support multi-generational wealth goals and more. This webinar is not really for everyone by design. The discussion is tailored to investors managing $5 million-plus or more in investable assets, so $5 million or more. The webinar is Wednesday, October 15th, at 10 a.m. Pacific, Thursday, October 16th, at noon Pacific, Saturday, October 18th, at 9 a.m. Pacific. And register and all the other information at allworthfinancial.com/workshops. 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: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain.
Scott: Glad you are with us. Myself and my co-host here, we're both financial advisors, and been doing this for a long time. And like to talk about... Our whole goal is to help people make wise choices with their money.
Pat: And it's okay.
Scott: And this program's not about, oh, here's the latest best investment.
Pat: And sometimes it's a forum for me to talk about things that are bothering me that I just don't understand. So, this is how we're going to start the show today of that's okay.
Scott: Perhaps. Is it somewhat related to the world of finance and investments?
Pat: Oh, no, it has everything to do with my cell phone. Yes, it's related to the finance and investments.
Scott: Just making sure.
Pat: Well, it just reminded me that I saw this article in the last couple of weeks, "High earners age 50 and older are about to lose a major 401(k) tax break."
Scott: I saw that headline.
Pat: And then I read it, and then I thought, you know, where's the simplification of the tax code? When exactly will this happen?
Scott: Pat, I'm in this business. I'm over 50. I read this article twice. I was still confused.
Pat: I was still. Yes.
Scott: Beginning next year.
Pat: Starting next year.
Scott: The article didn't explain it.
Pat: Well, yeah.
Scott: I'm waiting for our internal. Our internal CPAs will.
Pat: Yeah, but it was a catch up provision. But it brought back to me, Scott, that the tax code, it doesn't get any easier and it changes constantly. It has become a political hammer.
Scott: Completely. But it has been for decades.
Pat: Yes. Well, that's true.
Scott: But the whole financial planning, particularly if you've done well and have some assets, that tax side of things, that is more important than which company you're going to put in your portfolio.
Pat: It's as important as the asset class. Is an asset class. It's very difficult to pick the right company.
Scott: That's why you use that example as opposed to asset class.
Pat: Yes, because you're correct.
Scott: But, yeah, it's as important as the asset allocation.
Pat: And it doesn't get any easier. It does not get any easier.
Scott: Well, in some ways it does, because now there's technology.
Pat: Okay. I'm going to go with that.
Scott: Because it used to be... I mean, we've had financial planning tools forever, but there'd be a tax law change. You have to wait for an update and...
Pat: I'll take that.
Scott: Because there's so many phase outs. Yeah, phase in and phase out.
Pat: Oh, my gosh.
Scott: Even like the SALT, it actually goes up to $40,000 beginning next year instead of $10,000 the SALT deduction. But...
Pat: Unless your income is here and you're over taxable tips, tax free, and your overtime. I mean, well, I was working with my daughter this year. And she's in law school, so she doesn't have a lot of income. So, we did a bunch of Roth conversions from when she was a school teacher. But we did make a mistake. I thought she had some income last year, so I told her to make a Roth contribution at the beginning of the year. So, we had to back it out, which was kind of a pain in the butt. So...
Scott: Yeah, I didn't think you can recharacterize. Was that just on it?
Pat: This was a Roth counter change on that or something.
Scott: No, we were able to.
Pat: There was no penalty. Did we pay penalty? I don't think we paid a penalty. But my point is...
Scott: The point was how complicated it can be.
Pat: Yeah. And fortunately, the tools are there. Maybe that's why it's become so complicated. It's because the government realized that no one really complains about it anymore because the tools are there. Your accountant, it gives them a list of things that they should be aware of when they're looking at that your tax return.
Scott: Yeah, but it's also it's so complicated that... Tax attorneys are employed because it's like, "All right, the code says we can't go from A to F. We can't go a straight line from A to F." So, the tax change says, "That's fine. We're going to go instead from A to B to C to E to F. And if we do it in those steps, then we satisfy the requirement and we're able to do it."
Pat: Yes, yes. That's correct. But the 401(k) was created.
Scott: Like the backdoor Roth conversion is a prime example for the average person. Okay, anyway.
Pat: Well, thanks for listening. I got that off my chest. Yeah. All right. Well, why don't we take calls here, right?
Scott: Yeah. Why don't we take some calls? And we're in Arizona. And if you want to join us, we love taking calls, answering questions. The best way is to send us an email, questions@moneymatters.com, questions@moneymatters.com. We're in Arizona talking with Josh. Josh, you're with Allworth's "Money Matters".
Josh: Hello.
Scott: Hi, Josh.
Josh: I have a question on some certificates that I have. And they were my grandfather's and he passed away. And they're from the 80s. And I just kind of found them. We were going through some paperwork and we don't know quite what to do with them. We've contacted my financial advisor and connected me with the company he thought that they were issued from. But turns out that it was a little bit different, difference in the name. And they said they never went under that name. So, we're back to step 1.
Pat: So, their stock certificates.
Josh: No, I don't think so. I don't believe so. The top of it says Fidelity Federal Savings and Loan Association Federal Security Certificates. And they're not from...
Scott: He was in his 80s, or they're from the 1980s?
Josh: They're from the 1980s and he was in his 80s when he passed, actually. But they're from the 80s, yeah. And on the front of the certificates, there are six of them, and the first one, certificate amount is $5,465, 20%. The interest rate is 14%. It has his name and has a certificate number. The date of the issue was October 7th, 1981. The maturity date, January 4th, 1982. Then it has his Social from the taxpayer ID, ID number...
Scott: Okay. And the maturity date was a year later?
Josh: Yes, it has terms. And each one of them have terms that are like... On the backside of it, they're like these little...
Scott: I wonders if this had anything to do with Charles Keating savings and loans.
Pat: Where are you located? Arizona?
Josh: Yeah, in Arizona.
Pat: Whereabouts?
Josh: Tucson. They were they were purchased and I believe issued from the federal state, the credit institution in Douglas, Arizona, which is no longer in existence.
Pat: How much is the total face value
Scott: Of all the certificates? You're trying to see if there's any money here or if it's all gone.
Josh: Yes, exactly. It's about... Let's see, there's one for $5,000, $5,4000, $6,600, $3,800, $45,000, and $5,500, I'm sorry. And they all have different times of issue and they all have different interest rates.
Pat: Well, we remember in the 80s, the high interest rate.
Scott: I mean, if you think of the savings and loans debacle, well, you might not... I was...
Pat: You might be pretty young.
Scott: Yeah. So, I mean, the savings alone crisis occurred in the 80s. Arizona was like the epicenter, at least, from a from an excess standpoint. Because the Phoenician was built from money from...
Pat: Which is beautiful.
Scott: People thought they were buying a certificate, a deposit at the bank, and they were instead money was going to...
Pat: My guess, but then I'm going to tell you what I would do if I were you. But my guess is...
Scott: These are all worthless.
Pat: ...these are all worthless because they were issued from a bank that is probably no longer in existence.
Scott: And they passed the maturity date.
Pat: And they were probably never FDIC insured, but...
Josh: It says on the list, it was something about the federal charted, it says, "For value fully received. Fidelity Federal Savings and Loan Association of Douglas, a federally chartered association. Fidelity Federal promises to pay to the investors certificate amount together with the interest at the annual interest rate and on the maturity date."
Scott: Okay. So, what makes you think that your grandpa didn't take this the money at maturity and go do something else with it?
Josh: Because my grandfather had a... I mean, he was quite... I mean, he did a lot. We found, like, $20,000, like, in a box that he had in storage. I mean, he had a lot of investments that we're still finding insurance of.
Pat: I'd use the lost asset firm. That's what I would use, a lost...
Scott: This is a good idea.
Pat: Thank you. You're going to go the other direction.
Scott: Because I'm thinking, you go to a forensic account. I mean, it's so many years ago.
Pat: No, you go to a lost asset.
Scott: A lot of people, unless they've been around that long, then I don't even remember.
Pat: So, here's what happens. There's lost asset firms out there that they make their living out of actually... Typically, they find an asset that they call it a sheeted, which means it's been turned over to a state or, normally state. And by the way, you should actually go to your state website and see if there's any lost assets in your grandfather or grandmother's or parents name. But you want to find one of these lost asset firms, and you're going to contact them and say, "Look, we found these assets. They're in my grandfather's name. We don't know whether they're worth anything or not." And they're going to say to you, "All right, we'll find out for you, but you've got to sign this contract that you're going to give us 25% or 30% of the value of whatever assets we find."
Josh: Okay. Actually, originally I called, I traced the successor when it closed, it was a Chase Bank, actually. And then I thought it was Chase. I called Chase and they said it wasn't it, that since the Fidelity was federal, was still open. The main offices were open in San Francisco. So, I contacted them, and then over the phone they said that it was fine that the accounts were open there, they were legit accounts. But then when I went into an office here, after keeping them for a couple days, they said that, you know, it wasn't them, in fact.
Pat: Yes, that's exactly what I would expect.
Josh: Okay, I did...
Pat: They said exactly what I would expect. Someone showed up with a certificate at a bank, the easiest thing for the person working in the bank is, "I don't know."
Scott: "I don't know." I mean, you're thinking that. It's not going to be the basic person working at a branch.
Pat: Yes. So, what you want is a firm that actually specializes in finding lost assets. And like I said, being...
Scott: Because it's matured, so the question is, did it get reinvested into something else?
Pat: It's probably been sold two or three times. It may be off the books. It may be on the books. It may have been written down.
Scott: May have been spent.
Pat: It may have been a sheeted to a government.
Josh: There is a couple that were along with these, two more, actually, and they were stamped like they had already been redeemed, but these had not.
Pat: Okay, I would still... The way I'd handle it is I'd find a... So, go and Google.
Scott: But these could have been redeemed.
Pat: That's quite.
Scott: And your grandpa, maybe he didn't find the certificate, and so, he signed some statements saying that the certificate is lost or destroyed.
Pat: Yeah, just think about it. In the 80s, I mean, you had a passbook where they write your deposits in there. So, you want to find a lost asset firm, contact them, sign a contract with them. And I would take everything and turn it over to them. And I give them all the information about your grandparents and say, "Tell us what's out there." And you'll end up paying 20%, or 25%, maybe even 30% to them. By the way, that number is completely negotiable. And I have friends that run these businesses in California, these lost asset businesses. What they specialize is overseas inherited assets. Or someone in Ireland dies and leaves an estate and they find the lost estate.
Scott: I keep waiting for one of those.
Pat: Oh, Scott, I have a long history of wealth in our family. We haven't discovered it, yet.
Scott: Yeah, sure you do.
Pat: Anyway, good luck to you, Josh. Yeah, that should take care of it.
Josh: Thank you very much. Do you have any recommendations on who I can contact in Arizona.
Pat: I would...
Scott: Just Google.
Pat: Yeah, just Google.
Scott: Yeah, you will always find.
Pat: So, just Google lost asset firms. Thanks.
Josh: Thank you very much. I appreciate the advice.
Pat: Yeah. And I've done it for all my kids. I've Googled in the state of California and state of Colorado assets. I found some money for one of my son.
Scott: You did?
Pat: Like, 400 bucks or so. Yeah.
Scott: From where? What do you mean, you found money, 400 bucks?
Pat: Was in his name.
Scott: From where?
Pat: I don't actually remember.
Scott: Now, I'm getting a little curious. I'm going to look myself up.
Pat: I guess we could own a...
Scott: I could find 400 bucks. Take my wife to dinner or something.
Pat: There you go. You can just spend $400 on dinner.
Scott: No, two dinners, four dinners, eight dinners at Chili's. I've picked on Chili's a couple of times. I meet at Chili's.
Pat: I like Chili's.
Scott: I like Chili's. I think the only time I eat it at Chili's is when I'm in a restaurant. I mean...
Pat: Airport?
Scott: ...I'm in a airport and it's one of the few options.
Pat: We ate at Chili's all the time when kids were young. They're nachos. Mm-hmm.
Scott: My mother's 86, and she gets her, like, treat twice a month is to get salmon. And it's not Chili's, but it's a national chain. You wouldn't expect that as where's... But, "Oh, that's the best salmon, honey."
Pat: It's like, "I hope."
Scott: It might be something like that. I'm sure it's frozen salmon from far. And we could go to other nice restaurants. "Mom, I know you like salmon." "Well, no, I like to get it from..."
Pat: That's so funny.
Scott: Anyway, all right, let's continue on here. We're in Oregon.
Pat: The guy back there said 17-year-old flip and there's salmon.
Scott: The frozen salmon. It's mostly salmon.
Pat: All right, let's go to the next call.
Scott: All right, we're talking with Andy. Andy, you're with Allworth's "Money Matters".
Andy: Hi, Scott and Pat.
Scott: Hi, Andy.
Andy: I've been listening to you guys forever, and I'm real happy to have a chance to get some little advise.
Pat: Oh, cool.
Scott: Well, thank you. I'm glad to call.
Andy: Yeah. So, my questions are around tax efficiency. You know, I have all these investments. I have a little bit of Roth, not much, you know, traditional and deferred and brokerage accounts. And then there's all these different asset types, and I don't know which ones belong in which accounts. And whenever you do research, you see things like, "Oh, this particular investment works best in a Roth." Well, doesn't every investment kind of work better in a Roth? So...
Pat: Excellent point.
Andy: ...you have what you have and you got to work within the confines of where your money is. And I'm trying to figure out, okay, what goes where?
Pat: Okay, so let's just... We'll start with the basic outline that this is driven by your asset allocation. And the reason it's driven by your asset allocation. So, if you said to me, "Okay, McClain, what do you want your equity exposure to be?" And I said, "Oh, 100% stocks, 100% stocks." And you're like, "Why?" I'm like, "Well, because the market goes up more than it goes down. And over time, it'll be okay and I can live through the volatility." Then it wouldn't matter whether it went into an IRA or a brokerage or a Roth IRA.
Andy: Yeah. I get it. And it's only recently that... You know, there used to be no alternative, right? And so, everything I had was equity and it didn't matter. But now that I'm branching out and looking at other things, it kind of matters.
Pat: So, Scott, take it from here.
Scott: Yeah. You want... So, the focus is not necessarily on what your tax return is for 2025. The focus needs to be on what's going to yield the highest net worth down the road.
Pat: Lifetime return.
Scott: Lifetime return. And as we were talking off break, Pat had mentioned that he had got an email from a client recently that said, "My CPA said we need more munis in my portfolio." Pat had a kick out of it, like, the CPA has never even looked at the guy's portfolio. There's no idea what's in the portfolio.
Pat: I've got nothing but equities in his brokerage account, and I've got all his bonds in his IRAs. So, putting munis in the portfolio would ruin the whole strategy.
Scott: Right, so...
Andy: Yes. And I am really interested in the munis. Say, you know, I'm in a high-tax state and a high-tax bracket, and it looks fairly compelling.
Pat: I understand. But if you think about it, give us a breakdown of what's in what. How much money do you have in Roth? How much do you have in brokerage? How much you haven't qualified?
Andy: Okay. So, in deferred and traditional, it's $3.9 million. In brokerage, it's about $700,000. And in Roth, it's about $270,000.
Pat: All right. And what's your stock to bond ratio?
Andy: It's 75% stock, 15% bond, and 10% in cash.
Scott: Where's the cash?
Andy: It's in cash.
Scott: No, I mean, is it in the brokerage account, or is it in IRA?
Andy: Okay, yeah. The cash it's in the traditional. Yeah, it's spread fairly evenly in all the accounts.
Pat: And how old are you?
Andy: 52.
Pat: And when do you expect you're going to start taking distributions?
Andy: That is the question. I like working. I don't have any desire to stop working. Like, probably 10 years still.
Scott: Yeah, you got a lot in your deferred accounts for 52. Is that all your contributions or your spouse as well?
Andy: That's us together.
Pat: So, if you think about it, people get excited about munis, and there's nothing wrong with munis. But if I'm taking a discount on what the muni pays because the federal government is subsidizing the taxation...
Scott: Right, exactly.
Pat: ...why would I hold them at all? Why wouldn't I just have bonds inside of an IRA or a Roth IRA and get that higher return? And that's how you should think about munis, right, which is...
Scott: If you flip these numbers, if you had $3.9 million in a brokerage account and $700,000 in your IRAs, we would say, munis might be a great thing for you. But almost everything you have is in tax-deferred accounts.
Pat: And what's your approximate family income?
Andy: Yeah, our HDI this year is probably around $830,000.
Pat: Is that a pretty consistent?
Andy: No, it's not.
Pat: This is a high year for you, or low year?
Andy: Yeah, it's a higher. And that's actually, that's post deferral, so I'm, like, deferring as much as I can.
Pat: That's right. So, when you look at this, you should have no munis in the portfolio...
Scott: Today.
Pat: ...today.
Scott: But based on your income, in another decade, my guess is you're going to start accumulating more and more in your brokerage.
Andy: Mm-hmm.
Pat: Yeah. And then at that point in time, you could look at mixing munis in. But remember, these municipal bonds are subsidized by the federal government, which is actually for years and years, the federal government subsidized high-tax rate states by allowing the state and local tax deduction. And you think about it, I hated it when Trump passed that thing, because it hurt me directly. But I realized that...
Scott: I remember talking to my congressman. I said, "Well, personally, I don't like it at all. But philosophically, I think it makes a lot of sense to get rid of that."
Pat: That's right. That's right. So, you should have all your highly appreciated assets in your brokerage account and mix the rest of the portfolio everywhere else.
Scott: You want to have that as highly efficient tax as possible. And again, because the vast majority of your wealth is in tax-deferred accounts, which would mean you're going to have some fixed income.
Pat: You're going to...
Scott: Until the point you have no fixed income in your brokerage accounts, you're not going to benefit from munis.
Pat: Yeah, keep the fixed income.
Scott: I misspoke. The day you have no fixed income in your tax-deferred accounts is the day it's going to make some sense to have some municipal bonds.
Pat: So, Scott, one of my favorite parts of the show is that sections segment we call House Calls, where we check in with a caller from the past and see if our advice was sound or ridiculous.
Scott: Or crazy, yeah. And there are times we might be out there. Anyway, in June, we spoke with Amit from Texas. He's not an Allworth client, but wanted to know how to invest the family's money for retirement in a tax-efficient manner. And as we talked to him, we also discovered he had been sold quite a bit of insurance. So, let's hear that clip right now.
Amit: My wife and I are 40 and 37, respectively. Combined gross income of $310,000 annually from our corporate jobs. We currently have $125,000 in Roth retirement accounts that we converted that is managed by an advisor that charges 75 basis points, and invested very aggressively in genomics and innovation tech companies showing healthy returns. However, we self-manage the rest of our investments. About another $200,000 IRAs, $15,000 in a separate Roth, all primarily invested in low-cost index funds. We have about $4,000 in a 529 plans for our two kids, and then about $20,000 in HSA that are also invested in index funds.
Pat: You mean you...
Amit: I maxed out my... Sorry.
Pat: Okay, you didn't mention a 401(k) in there. Are you are you going to?
Amit: The 401(k) is part of the $205,000 that is part of our Fidelity accounts.
Pat: Okay, thank you.
Amit: We maxed out our 401(k). My wife, that's 10%. I maxed out mine.
Scott: How have been maxing that out?
Amit: I'm sorry?
Scott: How long have you been maxing that out?
Amit: For the last two years. We consistently save about 15% to 20% of our net pay from our corporate jobs. And then beyond that, we own two daycare businesses. One is operational that we are expecting to see about $120,000 annually going forward. Second one's under construction that once it's fully operational, we'll get about $150,000 from that. And then my wife will manage that at a $65,000 annual salary.
Scott: And that where your cash is... Because you make a relatively good wage, and you don't have a lot saved relative to what your wage is.
Amit: Correct. The majority of our cash went into putting the down...
Scott: Got it.
Amit: ...payment in for the new business, which was around a little under $300,000.
Pat: Do you own the property or just the business?
Amit: Both of them, we're going to own the property and the business. So, we have some concerns, particularly regarding our VUL policies that we have with our current adviser. We know we were sold that given our income, we would be phased out, and this would provide you with opportunity to put more money, almost Roth like. We do the VULs.
Pat: It's variable universal life for the rest of the church.
Amit: Outside of the cost of insurance, all of that goes into S&P 500 index. And we're fully participate. We're not caped, and there's not a floor. We're worried about the high fees that our current investors charging, along with just the high fees related to the wells. Our goal is to build a legacy for our children, as well as save for the college and weddings at some point. So, my questions are, one, are these VULs truly beneficial, or is that money better deployed elsewhere given our concerns and our goals? The second question is, should we consider switching adviser to somebody that's a little more proactive from a tax planning perspective and keeping track of our goals?
Pat: You refer to these corporate jobs. Your wife works for a large corporation now?
Amit: She works for a marketing consulting company, and I work for renewable energy company.
Pat: And what is her income now?
Amit: She makes about $95,000 and then I make about $180,000 plus my bonus.
Pat: And then you mentioned that she's going to leave that and just run the daycare at $65,000s a year. Is that correct?
Amit: She's going to keep both. She'll manage. We'll hire, but she'll be there from an owner perspective. The plan is to ride both of them as much as possible.
Scott: By the way, wealth is created not in passive financial assets like S&P 500, 401(k), VUL, wealth is created in your career. Either you're very talented and somebody pays you a boatload of money or you create a business.
Pat: Or in your case, both.
Scott: I mean, if you look across the spectrum of wealthy people in this country, it's very few is inherited. It's primarily in your career, either a business or you're really good at what you do.
Pat: What did you say was in the 529 plans?
Scott: Let me rephrase that, you're really good at what you do in an area that demands a high wage, because you might be a great violenced and you bring a lot of joy to people's life, but you maybe you're not making a lot.
Pat: Yeah, this follow your dream stuff is garbage.
Scott: I don't know of garbage. You need to get paid too.
Pat: Okay, the 529 plan...
Scott: The intersection between getting paid and your dreams.
Pat: Well, how much is in the 529 plan?
Amit: About $4,000.
Pat: Okay, and let's dig into this VUL. What's the...?
Scott: So, first, variable universal life policy, the way they're structured... Like, Pat and I both started in the industry with a life insurance company, 1989 and 1990. We lasted a couple of years. We learned that if you get trained in the life insurance industry, they teach you that life insurance is the solution for any financial issue you're dealing with. I don't care what it is. A life insurance policy is the answer. That's how they train all their agents and whatnot. A variable universal life policy is a policy where you put money in to this pool. You can choose how it's invested. So, you've chosen to put it in the S&P 500 fund. And then there's a cost of insurance, a life insurance, a death benefit. And how much is your death benefit on your policy?
Amit: For the parents, it's $500,000, for the kids, it's a million.
Scott: Wait, wait, whoa, whoa, whoa. How many policies do you have?
Amit: Each of the family members have a policy. And then we, as parents, also have separate $1 million dollar term policy.
Pat: Okay. And is it the same advisor that sold you this that is actually managing the Roth IRAs?
Amit: Part of them, yes.
Scott: Yeah, the one.
Amit: The one. Some of it, I manage.
Pat: Okay. So, let's break down all four policies. When did you purchase these?
Scott: Well, let's explain how these work.
Pat: Okay, well, thank you.
Scott: So, $500,000 a death benefit on Amit's first policies he's talking about here. And so, if there's no cash in there at all, he has an insurance cost of whatever the insurance costs would be for $500,000 of death benefit. If he had $100,000 of investments in cash in the policy, he would pay. The amount of death benefit would be the difference between that $500,000 and what he's got saved there. My experience, by looking at the cost of insurance on these policies, it tends to be a lot more than it would be on pure term insurance.
Pat: Yes. So, they call that difference the delta pure insurance, and that pure insurance is expensive. And once you're in, you can't requalify because they have big surrender. Most of them have big surrender, which are their terms.
Scott: Plus, the internal costs are 2%, 3% a year.
Pat: There's a load on it typically, and then there's a management fee inside.
Scott: Now, the benefit, what they sell the benefit on these is they grow tax deferred, so you're not taxed at all as things grow. And then when you die, that's tax free. But later in life, you can withdraw your contributions first, your policy premiums first. And then after that, you can take out a loan against the policy.
Pat: And as long as you die with the insurance policy in place, it's tax free. The problem is most people don't die with these insurance policies because the costs actually erode most of the value in there.
Scott: The whole concept of using these policies, funding them and then in life, taking a withdrawal, I can't tell... Pat, I've been doing this 35 years. I cannot think of one situation where I saw someone with a sizable nest egg in a life insurance policy, living off the loans from it.
Pat: Well, Scott...
Scott: I've seen where they're about to implode. And if they collapse on themselves before you die, suddenly, it triggers a massive taxable event.
Pat: You said you and your spouse each have $500,000.
Amit: Correct.
Pat: And what's the cash value in there?
Amit: The cash value for mine is around $65,000, and the cash value for my wife is around $20,000.
Pat: And how much you putting into these?
Amit: Right now, we're putting in $500,000 a month for each person.
Pat: Okay. And you then mentioned that you had two policies, one on each child?
Amit: Correct.
Pat: And what's the face value on those?
Amit: They are a million dollars, and we're putting in $300 a month for each child.
Scott: Holy smokes. Whatever...
Pat: How much cash is in those?
Amit: My eldest has a good amount, a little less of $30,000, and my youngest has been recently born, so he doesn't have much.
Pat: So, my experience has been, the internal cost of the insurance is more than the tax liability would be.
Scott: And why would you buy an insurance policy on a child?
Pat: Because it's such a great tax tool.
Scott: The 529 is completely ignored in this equation. There's $4,000 in the 529 plan. And they're putting $300 a month into these policies.
Pat: Here's what I think you should do, cancel the policies on the kids immediately, and consider some cost. You're going to lose most of the money. Or you could actually... I don't know what it cost. There's this there's a minimum cost every year for these things. But what we do know...
Scott: We got to kind of run the numbers.
Pat: The newborn, you should cancel it. The child that's got a $30,000 cash value, you might want to lower the face value to $100,000, or maybe $50,000. And that way, you're buying less pure insurance, and then slow down or stop the deposits completely. But on the...
Amit: Yes, I was trying to see what the lowest death benefit I can get to without it not being MEC.
Pat: Oh, no, you don't care if it becomes a MEC. You don't care. You don't care. Because the cost of insurance far exceeds any of the downsides of becoming a modified endowment contract. So, just throw that away. In fact, even on your own life insurance...
Scott: But you might want to qualify for some more insurance before you reduce that.
Pat: Talking about the kids first. Okay, so on the kids. So, you're on the right path. So, just see what the lowest face value you could turn those things into.
Scott: I would look at, if the surmounted charges aren't too astronomical, I would just cash the thing out. That's 30 grand, a couple grand and penalties. Take the 28 grand, throw it in the 529. That's what I would do.
Pat: That's right. That's right. That's...
Scott: And if you really want life insurance... I don't know why you'd want life insurance on your kid, but if you want life insurance on your kind, go buy some cheap term insurance.
Pat: You have no need for life insurance on the child. Unless this child is some sort of, is making all kinds of income that's coming into the family. Life insurance is designed to replace income.
Amit: Well, the money we're spending on them, I expect them to be prodigy.
Pat: Okay, I don't know. I don't actually know...
Scott: Wait until they're teenagers.
Pat: I don't know if that's how prodigies work. I don't think you could actually spend your way to a prodigy. So, on those, I agree with Scott. I'd look at either collapsing those policies completely, or at least, the oldest one child turning into a MEC. Your policies, I would turn them into MECs. First of all, I agree with Scott, I would actually go out and buy some term insurance. And by the way, $500,000. How much other term insurance do you have?
Scott: They got a million dollars.
Pat: Are there...?
Amit: A million for each of us.
Pat: That's not enough.
Scott: I would have I would have at least two million.
Pat: Yeah, that's not enough.
Scott: Two million of... And if you're reasonably good health, you're 40 years old, it's cheap.
Pat: So, for both those policies, your policies, I'd either lower that face value as low as I possibly could and turn it into a modified endowment contract or cancel them completely and just take the hit. The 529 is the thing that you missed. I mean...
Scott: Well, he didn't miss. He's followed this advisor.
Pat: Okay, the advisor missed. And the...
Scott: No, the advisor didn't miss. The advisor had a misalignment of, I'm assuming it's a male, his economic benefits compared to Amit's economic benefit. There's a misalignment. He earned a commission. How can you be open minded and actually look for the best solution when you've got this conflict, tremendous conflict?
Pat: Scott, I disagree. I kind of disagree. If he had done every other thing... Let's just say that he had $2 million in there, right? Let's just say we went through the list, he's either uneducated and doesn't understand the other stuff, he's an idiot, or he's unethical, my opinion.
Scott: Or maybe all three.
Pat: But the VUELs are the very last thing on the list of a product that you should use, very last thing, right? Everything else, the 529 should be fully funded...
Scott: Look, with the tax efficiency of ETFs and a synthetic index by a direct index, like, why? Those are such...
Pat: As I said, the very last thing after you've gone through every other thing. You're not there. So, your idea, Amit, of either...
Scott: Look, he followed advice.
Pat: I understand. That's why he's calling.
Scott: I understand.
Pat: He's calling for outside advice.
Scott: I just feel bad.
Pat: But I don't have a dog in this fight. So, the 529, look, you can convert a 529 plan to a Roth IRA if the child doesn't use it. And you talked about legacy. So, these 529 plans should be maximum funded all the way.
Amit: And should I have one for both or one solo?
Pat: No, you can't, you have to have them separate.
Scott: Have two. And what I would do is just, how much is it going to cost to go to education? Work backwards. How much do I need to save on an annual basis?
Pat: So, bring those things to zero or turn them into MECs. Get $2 million term life insurance policy, 10 year level term, at least, on you. Fund the 529 to the maximum. And I would actually make them aggressive. Your wife should increase her 401(k) to the maximum. And you're doing the backdoor Roths. We can see that. I think you're doing great. I think I would clean that up and I'd get another advisor.
Amit: Okay. So, I just need to fire my advisor and stop paying him. That's what I would do.
Scott: That's what I would do, yeah.
Pat: Just give him some...
Scott: Is he is he affiliated with an insurance company?
Amit: He is, yes.
Pat: Yeah. So, he's got a hammer, everything looks like a nail.
Amit: Well, I'm getting ready to pull my hammer, so...
Pat: Amit, thanks for joining us.
Scott: Yep, welcome back to the show.
Pat: Yes. And please bring us up to date. So...
Amit: Hey, guys, can you hear me right?
Scott: Yes, sir.
Amit: Yeah, so we did kind of incorporate the things that you've told us. The previous advisor, we kind of told him to kick rocks. And we opened up the 529 plan, started putting those in there. Given the amount that we had specific for my daughter in her VUL, we lowered the death benefit to as low as possible. So, we're not paying for a lot cost of insurance.
Scott: Just out of curiosity, in running the numbers, you said you kick your other advisor to the rocks. I hope not physically. How did you how did you crunch the numbers to see what was best? Did you just do it yourself, or was there someone else who understood how these policies work in great detail to help you, or what was that process like?
Amit: Yeah. So, my employer has... I reached out to the benefits provider, and he also has his own business and he kind of provides some guidance, didn't charge me at all.
Scott: Beautiful.
Amit: And he said, you know, given the amount that's in my daughter's, probably it's best to kind of go that route, and then just max out the 529 at a level that you feel comfortable with your kids future education so you're not paying for insurance you don't need, and you're not paying somebody else their bonus.
Pat: And how low were you able to get that face value on your daughter's policy?
Amit: $250.
Pat: And that was as low as they thought was reasonable.
Amit: Yes.
Scott: Well, nice. I mean, he was talking to someone that had no skin in the game, right?
Amit: Right.
Pat: Yes. And did the advisor that you talked through your employer, did he feel the same way we did?
Amit: He provided similar guidance, yes, in terms of, you know, you don't need this for your kid. There's better ways to optimize how you use your capital to kind of grow and invest for some of the things that you want to do for your children and a legacy and things like that, and yourself.
Pat: And I'm sorry this happened to you, but for the rest of the listeners, life insurance policies are sold as if they are simple, easy investment vehicles.
Scott: Yeah. And I just got to tell you. So, Pat and I listened to this clip before the show started this morning, your previous clip. After the clip, Pat says, "This stuff is really complicated." And he says, "Can you imagine if the average person called a stock broker from," any name, one of the big firms, I'm not going to mention, and he said, "Those guys would not have a clue how this stuff..." And it's probably fair, just because... And one of the reasons, we started in the industry 35 years ago. The first couple of years of our career was at a life insurance companies. We learned the sales strategies that they employed to sell policies, stuff like this like, "Oh, yeah, they care. Let's get him a million dollar life insurance."
Pat: But the interesting thing is we didn't do very well there.
Scott: Well, no, because we kind of saw what was going on and it wasn't a good fit.
Pat: Yes. And so, what did you end up doing with your policies?
Amit: We did the same thing. But we also got an extra million for each of us in term.
Pat: Perfect.
Amit: So, you know, we have that covered. And hopefully, you know, by the time our kids turn 20 and/or go to college, they'll be set in terms of, you know, there are 529. And if they don't use it, that's great, we'll convert it to a Roth and give them a legacy that way. But I think we have the infrastructure in place to kind of not have to worry about this stuff going forward, hopefully.
Pat: My guess is the legacy you leave your children, well, what you do with them on a day-to-day basis.
Scott: Of course.
Pat: That's always the bigger rough course, but...
Scott: More so than the money. Off topic, did you guys open the second daycare, yet?
Amit: We just received permitting for fire yesterday. So, things are moving relatively quickly now. Hopefully, we'll close on the loan and then begin construction.
Scott: Congrats.
Pat: Good for you.
Scott: Anything else we can answer today?
Amit: No, I think what you kind of helped me with from a thought process and how we should think about structuring this kind of laid the foundation. Now, I'm trying my best to kind of, you know, be wise with my money as my businesses kind of grow. We'll probably at some point need to... I did hire a separate CTA as well to kind of help tax plan not only for the future, like next year and things like that, with what what's going to come from the business in terms of up front depreciation losses and things like that, how we can maybe take advantage of potential conversions and things like that. But as the complexity of my finances changes at some point, we will probably need a financial advisor to start thinking about how to strategically take advantage of whatever laws make it pass from now until then. I know direct indexing is something that I'm probably start getting a little more educated in. Right now, I just don't have a lot in the brokerage account and how to do that.
Scott: Yeah, I know, you got the business.
Amit: Right, you got it.
Scott: Well, here's the difference. So, you're talking about a direct index. You're talking about that's a strategy of owning the small steak and businesses that other people started. You're instead taking the money and putting in a business that you're starting. Well, obviously, you start a business yourself. There's more upside. There's more risk as well. But, I mean...
Pat: In this business, in this is just a bit of advice from someone who... Scott and I have opened multiple businesses together.
Scott: And some of them successful.
Pat: And some of them that we still talk about. Don't be afraid of getting too large of a cash cushion in doing this.
Amit: I do have about nine months' worth of expenses, probably closer to probably a year. You know, if things go sideways, we obviously would probably cut off some of our children's daycare expenses and things like that. But, you know, if I had to guess, probably a year. I guess I did have one question in terms of thinking through the next, you know, potentially 15, 20 years. What are your thoughts on thinking about creating passive income through whether it's dividends or something else as my wife and I get older?
Scott: I would say, focus more on creating net worth. And then whenever you need income from it, then figure out the best way to generate income.
Pat: That's correct.
Scott: As opposed to the whole concept... I mean, what? Are you going to buy fixed income to have guaranteed...?
Pat: Or high dividend treasuries or something?
Scott: Stocks. You think about it, if you can dial 2 daycare centers, my guess is you could dial 4 or 5...
Amit: We're already doing four.
Scott: ...or 8 or 10. And then you don't have to worry about passive income, because then at some point in time, you've got a massive asset that someone's going to cut you a big check for.
Pat: Yeah. And the idea of actually owning the properties, which you did already, and then leasing back to yourself is a form of passive income. And then if you sell off those daycares at some point in time, normally, what you would find is that you'd probably end up keeping the properties and that becomes a form of passive income in retirement.
Scott: Yeah. And lease them back to the new owner.
Pat: And you lease them back to the owner. You sign a big lease before you sell them.
Scott: Because a big operator's probably not going to want to own the real estate.
Pat: Most of the time they do not. They don't want to own the real estate, because it's not what they believe to be an efficient use of their capital. But it might be the greatest use for your capital in retirement.
Scott: Rather than become a student of how direct indexing works, continue to be a student of this industry that you're invested in. So, you go from two to three to four to eight to whatever, if that's what you want to do. But in talking to you...
Amit: I can get the plan, is how do we...?
Scott: ...if you want to create family wealth, that would be the way to do it.
Pat: Yes. Yeah. And obviously, if your wife's working both her regular job and in the daycare, she sounds like she's pretty motivated, or at least, you might be motivating her.
Amit: I'm probably motivating her. We'll see how it plays out in practice. She might be like, "I'm done. You take over." Or, hey, she might quit. Or, you know, she might... Yeah, we'll have to figure out how that works. But...
Pat: Well, it sounds like...
Amit: ...I do think that, you know, lease, these things are very capital intensive. And we own two of them. And if we feel like we're always on edge because we're dropping all of our savings into the next one. But, again...
Scott: You're investing. You're investing in them. You're converting from savings to an investment.
Amit: Fair point. They are capital intensive. So, we might look at, you know... We own two. It doesn't make sense to maybe start leasing. But we're going to have to run the numbers in terms of what the rental rate is and things like that.
Pat: Correct. Or enter into lease options to buy, which allow you to actually develop the properties. And so, the problem with not owning them and actually signing short-term leases on others is it's really you could call it a daycare center, but really, it's a retail space that people bring their children to and they get used to it and it becomes a brand. And the problem with not owning or, at least, getting long-term...
Scott: A little different than an office building that's on floor five in a building.
Pat: That's right. That's right. They become their own personalities, if you will. And the location matters. It really, really matters. And so, what you don't want to do is sign a short-term lease and then get priced out of that particular location as you build up a following.
Scott: Yeah, and you're suddenly a mile and a half away.
Amit: Yeah, we're looking at 15-year lease with two 5-year options with a with a first right of refusal after year 3, which is typically when we ramp up to capacity.
Pat: That is a decently long lease.
Scott: That's a long lease. Then you got to ask yourself if you want that personal guarantee for 15 years.
Pat: Yeah. And are there out in it?
Amit: But the plan is not to be involved. The plan is to structure a management team that can run the day-to-day as well.
Scott: I understand. Oftentimes, when you have a small business, the landlord will say, "That's great. I'm sure business is going to do well, but we'd like a personal guarantee." So, I'd be really careful. Personally, I would not want to sign a 15-year personal guarantee. I would try to negotiate something. I'm happy to do it for three years or something like that. And then... Unless it's managed by some massive REIT or something like that, the landlord is going to have... Every lease is different.
Pat: And just... You sound like you're an engineer by education or computer science, someone is along those, right, STEM?
Amit: I'm a CFA by trade.
Pat: Okay. All right. So, as I always share with my kids, I said, everything works perfect until you involve people. The spreadsheet was beautiful, right? So, just remember that. Hey, Amit, wish you well. Yeah, congrats.
Scott: You've done great. Amit had someone he was working with, a financial professional he was working with, wondered, "Is this really the best?" Reached out to us, got a second opinion, then went to somebody else, got another opinion. And with a little bit of advice and change course. So, if you've got something in your financial life that you're kind of thinking, "Is this the best for me?" Get a second opinion, whether it's from another advisor or this program.
Before we wrap up, I want to let everyone know about, we've got a webinar, Wealth Building Beyond Wall Street. It's exclusive insights reserved for the affluent investor. So, Victoria Bogner, our head of wealth planning is doing this. It's going to talk about why today's 60/40 portfolio falls short for multimillion dollar portfolios, which nonpublic traded strategies may help generate tax, alpha, and yield, how sophisticated allocation and non-traditional assets can support multi-generational wealth goals and more. This webinar is not really for everyone by design. The discussion is tailored to investors managing $5 million-plus or more in investable assets, so $5 million or more. The webinar is Wednesday, October 15th, at 10 a.m. Pacific, Thursday, October 16th, at noon Pacific, Saturday, October 18th, at 9 a.m. Pacific. And register and all the other information at allworthfinancial.com/workshops. We'll see you next week.
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