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

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

Pat: And Pat McClain. Thanks for joining us.

Scott: Yeah. Glad to have you talk about financial stuff.

Pat: Yes.

Scott: Financial planning is really an interesting...the whole concept of money and managing your money and accumulating some wealth.

Pat: Well, the whole concept of retirement is a relatively new concept.

Scott: Well, most of the world is still struggling to, from paycheck to paycheck. Or not even a paycheck, having a job.

Pat: Yes.

Scott: I had a friend of mine moved to Mozambique, Africa 15 years ago. Kind of...

Pat: Is he a missionary?

Scott: Part mission, part economic development of sorts. So, he's got like a bed and breakfast, like a little inn on this kind of beautiful island right outside of...in Mozambique. He says that his employee, the average employee, their paycheck covers 18 people. The unemployment's so low there...I mean, so massive, employment is so low, the average employee feeds 18 people on [crosstalk 00:01:46.514].

Pat: It's one paycheck?

Scott: That's correct.

Pat: That's amazing. So, essentially if you have 7% employment, you could...That's [crosstalk 00:01:58.123]

Scott: [crosstalk 00:01:59.970] of the economy was, right?

Pat: That's what the numbers say.

Scott: So much of the world still lives...I mean, I picked...that's an extreme example, very poor area. But much of the world's that. So, obviously, this is mostly U.S. based. There's some other, but most of us...

Pat: Did you just say this is rich people problems?

Scott: They're not problems, but look, it's a wonderful luxury to be in a society where we have lots of opportunities. But with that comes...

Pat: Responsibility, right? You've gotta own it.

Scott: Or if not, make sure you've got a good partner that helps you along the way, because it's not that simple. It's really not that simple. And the behavioral finance is the biggest issue. The behaviors, our own human emotions.

Pat: Let's step back for a second. Here's what I think a good financial advisor does, helps you design a plan, but you use them as a sounding board. Right before we went on the air today, Scott, were we not discussing our own personal fine answers with each other?

Scott: We were. We were. We were.

Pat: Right? And what did you say? Well, this money absolutely has to be safe money, and I'm not sure I'm treating it that way. And so, right?

Scott: It's exactly right.

Pat: So, I was just thinking about that like a financial advisor.

Scott: It's a small piece of my overall portfolio.

Pat: That's right. That's right. But a good financial advisor is someone that acts as a sounding board. So, right before we go on the show today, you and I were discussing our own personal finances before we go on this podcast.

Scott: And we are both professionals with 30-plus years of experience. Yeah, that's right.

Pat: Right? Yeah. But we wanted each other's view of the world, correct?

Scott: That's right. Yeah. And I think a good financial advisor does that, and a good financial advisor's one who's going to be there and help guide your decisions as well, and keep you from making mistakes from which you cannot recover.

Pat: Yes.

Scott: Particularly as you get older.

Pat: In educated decision-making, not just, right, emotional, or I've got a gut feeling.

Scott: Yeah. I think, look, one of the reasons we've done this program for 28 years, and we all do all kinds of education material on our website, is so that people can be informed enough to make a wise decision. And I know that, look, we've got 20-some-thousand households as clients at Allworth, and a lot of people hire us because they want someone else to deal with it, which is great. I totally get it, or it's a luxury. It's the point now they're like, I could afford to have someone manage it and that way I don't have to worry about it, and I've got sounding board, and I've got that sort of thing. But even those folks, they needed...I remember years ago, Pat, I had this couple. It was an early retirement. This is a long time ago. They had an early retirement from a company, a pension buyout. Basically, the company said, "Hey, you either take this retirement offer today or tomorrow you get fired. What would you like to do?" So, they took the retirement.

Pat: They called them the tap, right?

Scott: Whatever, yeah. So, and back then they kind of, we did some sort of plan and then they came in and I had a meeting scheduled just to discuss the investments, right? Spend some time to educate them, whatnot. They came in, they said they had like 15 minutes because there was a Beanie...I swear to you, there was a Beanie Baby convention that they had to get to. And I looked at 'em I thought, I mean, "No one cares about your money as much as you." It was the strangest thing but I thought, "You are taking no responsibility for your finances here."

Pat: Well, fortunately, you were helping them, but they should have...

Scott: But people need to be somewhat educated.

Pat: You gotta own this. No one cares about your money as much as you do.

Scott: That's right. And if you don't really understand when markets go through their cycles, when your investment goes down in value, "Oh, my gosh, why did my $800,000 fall to $750,000? What's my advisor doing? He must be an idiot." Well, you're gonna have a hard time moving forward if you don't have a good understanding of what's going on.

Pat: Yeah. Speaking of Beanie Babies, have you watched the documentary about the Beanie Babies?

Scott: I've watched it four times.

Pat: Do you have it now?

Scott: Of course not. Why would I watch a documentary on Beanie Babies?

Pat: I watched it, what does that say about me?

Scott: Well, that's why I poked you like that.

Pat: I think it was fascinating. It was fascinating.

Scott: With just the whole viral aspect?

Pat: Yeah. Yeah. It was...

Scott: Like Taylor Swift today.

Pat: Well, I don't know. I mean, there's some...Oh, I don't even know where to go with that comment, but...

Scott: She's so popular because she's so popular. She can't be that much better of a musician than others.

Pat: Okay. Like this stuffed animal.

Scott: My 13-year-old was saying, "Dad, hey," she says, "why don't you take me to Europe because we can get a Taylor Swift concert ticket less expensive?" I laughed. "We're not going to..." That's how I responded. Because she wanted me to take her to Taylor Swift when she was here touring the States.

Pat: All right. Well, anyway, you should watch the Beanie Baby documentary. It was a supply and demand. It was a classic wow...

Scott: But why did it get so faddish? That's my whole point. It's like, these fads, people get excited about something, the coins...

Pat: Pet Rock when I was a kid.

Scott: Yeah. NFTs, non fungible tokens, Bitcoin.

Pat: Whatever. Human nature. Pet Rocks. Do you remember the Pet Rock?

Scott: I was a little kid that [crosstalk 00:07:35.224]

Pat: Okay. So, for anyone under the age of 50...

Scott: Google Pet Rock.

Pat: Google Pet Rock. They bought these.

Scott: Brilliant marketers.

Pat: So, if you're under the age of 50, Google Pet Rock, and then you'll look at your parents and think, "They really are that stupid."

Scott: Soap on a rope at the same time [crosstalk 00:07:56.224] the same era.

Pat: We had soap on the rope. That's about the same era. All right, let's go to the calls here.

Scott: I had soap on the rope. I got it for Christmas one year.

Pat: That's fine.

Scott: Along with the Pet Rock.

Pat: Well, I bought a Pet Rock for my brother, like in the fourth grade. And I asked my mom, "Why do I need to buy one? Why can't we go to the backyard and get one?" And she had to explain to me, it was the whole instructions on how to take care of the rock. Yeah.

Scott: Okay. All right. And we're gonna go to calls.

Pat: What? No wonder we're in the predicament we are as a society. We bought soap on a rope, Beanie Babies, and Pet Rock.

Scott: The whole concept of soap on a rope seems complicated. It's hanging over the shower, you gotta take it off. I could put on a counter. There's probably someone out there that's still making soap on a rope.

Pat: All right, let's just...let's go to the calls.

Scott: All right. We're in Colorado talking with Leslie. Leslie, you're with Allworth's "Money Matters."

Leslie: Hi, Scott. Hi, Pat.

Scott: Hi, Leslie.

Pat: Hi, Leslie.

Leslie: Great to talk to you.

Pat: Well, thank you for suffering through our little trip through nostalgia land. What can we do for you?

Leslie: Yeah. Well, it was fun. I've got a couple of boxes of Beanie Babies still stored away.

Pat: Okay. You're the one.

Leslie: Yeah. Someday they'll be worth that $25,000 again or whatever it was, but. I actually have to say too, my dad is a huge fan of your show and he introduced me to it about a year ago, and now we're regular listeners.

Scott: Oh, good. Well, thank you.

Leslie: So, because he's always listening to the podcast when he's at the gym, I just have to say, "Hi, dad. I hope you're having a good workout."

Pat: Very nice.

Scott: How cute is that.

Leslie: Anyways, I have a couple of questions for you because I've got some extra cash in my budget, which I think is a good problem, I hope. So here's a little bit of my backstory. I'm 38 and my husband is 42. We have a couple of kids, they're 8 and 5, and we have our total joint gross income is $200,000. And we have a house and we owe $233,000 on our house right now. It's worth about $550,000, and we refinanced a few years ago. We have a good rate 2.3%, and we've only [crosstalk 00:10:21.224]...

Pat: 2.3%?

Scott: Is that a 15-year loan or was that a...?

Leslie: It was. It was a 15-year loan, and here's the thing. I guess here's the point that I will probably come back to. We only have about 10 years left on that mortgage and part of that, we're paying it off ahead of time because we're using about...we have like $250 extra cash in our budget that we've just been dumping into the mortgage.

Scott: Stop. I wouldn't do that.

Pat: Stop that. Stop that.

Leslie: Okay.

Scott: Because you can make 5.5% in a savings account today. So you'd be better off putting the money into the savings account and then plan it to the mortgage.

Pat: This is 100% contrary to the advice I would've given you 24 months ago.

Leslie: Interesting. Okay.

Scott: Yeah. But interest rates are...

Pat: Yeah, correct. The environment changed.

Scott: Yeah. You might not have told her 38 and a 42-year-old to make any extra...their home is gonna be paid off in 10 years anyway.

Pat: Probably. I think you're right.

Scott: Okay.

Leslie: Interesting. Okay.

Pat: So stop that.

Leslie: Okay, so I guess here's a question for you because really the reason I've been doing that is obviously, like, part of it is just my brain, like, doesn't want a mortgage, I don't want debt, right? So, and that's maybe not...that's just the feeling side of me. Like, probably not super logical at this point, but I haven't...you know, I know I've heard you guys mention, like, or offer advice of, like, maybe putting it in an RIA. The reason why I've, like, held off on doing that is because I would like to buy a bigger house in the future. I don't know, like, near future, I can't say when but probably within 10 years. So, my thought is having that money in the house then allows me to kind of like use that for, like, a future house, right?

Pat: But just put it in a high-yield savings account that's spread between what you are earning on this...So let's just say I had $100,000 that you had today, and you could either put it in the high-yield savings account or put it against the mortgage. To put it against the mortgage is gonna cost you $2,700 a year versus keeping it in high...

Scott: $2300. It's...

Pat: Well, I understand, but I'm assuming that high-yield savings account's gonna pay somewhere around 5%, so the spread between that is $2,700. So, if you had $100 grand and you said, "Okay, I wanna pay this down on the mortgage," then I said, "Well, just go and put it in a high-yield savings account, you'll be $2,700 ahead at the end of the year," does that make sense?

Scott: And you still have the cash that you can always apply to the mortgage later.

Pat: That's right. That's why you don't...

Scott: So, I like the concept...Leslie, if your hope and plan is to buy a bigger house sometime down the road, I like the idea of taking this extra money and just having a savings account and earmark it for your future home.

Leslie: Got it. Okay. Perfect.

Pat: Yeah. Easy.

Scott: And then it starts to build up, and then also put you in a position when you find something, you move fast. So, you wanna go to bankrate.com and look to see what the highest yielding government...

Pat: There's probably other programs out there, but that's the one I...

Scott: That's one I use.

Pat: Yeah. Bankrate.

Scott: Bankrate.com and just look for high-yield money market account.

Leslie: Perfect. Okay. I will do that. I have one more question for you. Do you have a little more time?

Scott: By the way, Leslie, you're doing great. You guys are doing great financially and you'll be just fine. You can just tell by your disciplined approach.

Leslie: Okay, that's good to hear. I also have a question for you on our retirement account. So, both my husband and I have 401(k)s, and combined it's about $400,000, and we have a little bit in Roth. Most of it's in a traditional account. Do you have any recommendations as far as what that breakdown should look like for future contributions?

Scott: $200,000, I would do the majority in the tax deferral. Pre-tax.

Leslie: Pre-tax?

Pat: Yeah. I would too. You're probably gonna stay in the same tax bracket most of your life.

Scott: You're at $200,000 today. Where were you guys five years ago?

Leslie: For income?

Scott: Yeah.

Leslie: Probably $150,000.

Scott: Okay. So, income's come up.

Pat: I'd do it pre-tax.

Leslie: Hundred percent? Not like [crosstalk 00:14:49.224]?

Scott: I mean, I'd do Roth IRAs for the both of you. Do you work as well, Leslie, outside the home?

Leslie: Yeah. I do. Yeah. We both make $100,000 a year. So, right now, like my 401(k). for example, it's like 20% Roth, 80% traditional. And my husband, on the other hand, his is almost all traditional, just a little bit of Roth.

Scott: I like your approach because, look, nobody knows what's gonna happen in the future on all these things and you're hedging your bet a bit. The challenge with doing too much Roth, of course, you're choosing to pay taxes today, which you...

Pat: What's the marginal tax rate in the State of Colorado? Is it high? I don't know. Is it medium? Is it low? I mean, that would be a driver.

Scott: I think it's about 6% or something, Colorado, 6% or 7%. I don't remember.

Leslie: Not sure.

Scott: But you can also do a Roth IRA with extra dollars.

Pat: Do you have extra dollars?

Leslie: Outside of that $250 a month, no.

Scott: Okay. And I like the concept of taking the $250 and putting in an account, and that's your dream house account.

Pat: And would you do the Roth versus the...on the 401(k) 80/20, 75/25?

Scott: Well, I mean, the reality is if your husband suddenly switched to 80/20 next week without changing the dollar amount, you would end up funneling more towards your retirement account.

Pat: Because you'd have more net spendable income in retirement.

Scott: Because your tax bill would go up the day after, right? Because if we're not contributing to a Roth, we don't get that tax deduction, so we're...

Leslie: Correct. Yeah.

Scott: Like, if we were looking at saying, I wanna funnel as much money...I want as much net dispensable income in retirement, and we could do in the maximum into our 401(k), the Roth you're funneling more money in than the traditional...

Pat: Because you prepaid the tax.

Scott: ...because you prepaid the tax. But it would cost you a lot more to make that same maximum contribution.

Pat: I think you're fine. I wouldn't mess with it.

Leslie: Okay. I'll continue...

Scott: What percentage are you putting into your retirement accounts?

Pat: Of your pay.

Leslie: Yeah. Right now my retirement account is 20% Roth.

Pat: No, no. What percentage of pay?

Scott: What percentage of $100 grand is going in there?

Leslie: Oh, sorry. I have 15% going pre-tax.

Pat: Great. And your husband?

Leslie: Same.

Scott: Oh, great.

Pat: You're fine.

Scott: You're good.

Leslie: And then we both do 10% Roth today as well, so we're both contributing. Yeah.

Pat: You're fine.

Leslie: We're both maxing out our contribution.

Pat: You're fine.

Scott: Oh, you are...you're good.

Pat: Yeah, yeah, you're fine. You're fine. You're fine. Let sleeping dogs lie.

Leslie: Okay. I like that.

Scott: Yeah. Go worry about other problems of your life. This one you got pretty well taken care of.

Pat: You're good. You're good. And thank your father for telling you to listen to our podcast.

Scott: That's right.

Leslie: Yeah. Good advice.

Scott: Yeah. But then again, Leslie cares about her finances, which is why she listens to our podcast.

Pat: That's right.

Scott: As opposed to someone I bumped into a few months ago at the gym and, "Scott, are you guys still doing the radio show?" He lives in Sacramento region. We've been broadcasting for...I said, "I guess you don't listen much otherwise you'd know the answer to that." He says, "Yeah, I think I got it."

Pat: Okay.

Scott: There we go.

Pat: Okay.

Scott: There we go. You can't live with me in retirement. That's all I can say.

Pat: Why wouldn't you listen to that stuff?

Scott: If you care about your finances, you probably would be listening to our program or something.

Pat: Yes. Yeah.

Scott: But if you don't or if it's just all of a nuisance...some people view it all as a nuisance. Oh, I don't like dealing with money, you know? Whatever. All right, let's talk...

Pat: You know what I've been listening to is "The Wall Street Journal's" podcast on FTX.

Scott: [inaudible 00:18:38.765] myself. Yeah, yeah, yeah, yeah.

Pat: You've been enjoying it?

Scott: I like most of their podcasts they put out, if they have a topic that interests me. But that Sam Bankman-Fried dude was a...

Pat: Scott, I find it absolutely fascinating by how many big investors got sucked into the whole thing. [crosstalk 00:18:56.224]

Scott: Human nature, behavioral finance, the same thing, right? Look it. We've seen it, right? These professional investors have these massive spreadsheets. They have these general analysts to spend, stay up until 2 in the morning working on these massive spreadsheets. If they want an answer, if they wanna move forward on something, they just change the assumptions to make it tell the story they want, then they feel good about it, they check the boxes.

Pat: And then, and the numbers said.

Scott: And then, right? They just change the assumptions a bit.

Pat: Yeah. I mean this is comparable to Theranos, what was her name?

Scott: Elizabeth Holmes.

Pat: Yeah. I just find it absolutely fascinating how people get sucked...How, like, Sequoia Capital got sucked in. I just found it absolutely amazing.

Scott: The number one venture fund in history.

Pat: Yes. I mean I just find it absolutely...with almost no due diligence, they were just like a bunch of lemmings.

Scott: I'm sure they had all kinds of big spreadsheets, Pat. Change the assumptions.

Pat: You know, my son creates those spreadsheets for a living.

Scott: Hey, can you change the assumption on cell 28? All right, let's talk with Ryan. Ryan, you're with Allworth's "Money Matters."

Ryan: Scott and Pat, appreciate you taking my call.

Scott: Thank you. How can we help?

Ryan: Yeah, first I just wanna say I actually started listening to you when I was a 19-year-old college kid and I'm 41 now and, man, over the past 20 years, you guys have totally helped my personal finance a great deal [crosstalk 00:20:26.224].

Pat: Well, listen, you helped your finances.

Scott: You helped your finances.

Pat: If you weren't listening to us, you would've listened to somebody.

Scott: Yeah, 19 years of age, I mean...

Ryan: Well, yeah, I guess so. I guess we'll never know. So yeah, I'm kind of calling to get your guys' advice. I'm thinking about taking out a whole life insurance policy, and not necessarily a traditional policy, but one that's more geared towards allowing me to overfund with the idea that that overfund dollars would grow tax-free. So I kind of wanna just get your guys' take on if I'd be a good fit for something like this.

Pat: And where did this idea come from?

Ryan: Yeah, so I live in California. My wife's a high earner and so anything that is tax-free, it kind of gets my antennas up. So, I'm kind of really just a tax-free [crosstalk 00:21:16.224].

Scott: Are you guys maxing out your 401(k) retirement accounts?

Ryan: Yeah.

Scott: How about Roth IRAs?

Ryan: You know, I stopped doing the Roth once we got into the, you know, like, 32 federal bracket just because I didn't know if it made much sense being in California with that. But so I have like 75 in Roth [crosstalk 00:21:34.224].

Pat: And do you have children?

Ryan: Yeah, 11 and 9. Or, I'm sorry, 9 and 10.

Pat: And have you funded their 529s?

Ryan: You know, oh my god. Here we have $115,000 in it, so it probably won't be fully funded, but that's [crosstalk 00:21:49.224]

Scott: What's your overall net worth?

Ryan: Shoot, man, probably a couple million between real estate...I have some investment real estate and between that and the 401(k)s.

Scott: And the reason...like, I always look at these are like the...this permanent life insurance, like, the very last thing to go to.

Pat: This is number 12 on the list of things you should do. So we're clicking through the list of things you should do. Like your HSA, do you have an HSA account?

Ryan: I do not.

Pat: But it might not have a high deductible. He might have a better plan.

Scott: So, it's really hard for me to answer because I own one of these policies as Scott Hanson. Full disclosure, I got my annual statement in the mail. I looked at my annual statement this morning.

Pat: Oh, you did?

Scott: Yes.

Pat: I mean, mine's done really, really well.

Scott: Yeah, because it's been 30 years and it's a variable life insurance policy.

Pat: It's not whole life.

Scott: Maximum funded.

Pat: Yes. And turned it into a MEC.

Scott: And so mine, the policy value, my cash value is about 60% of what the death benefit is. So I had it so the death benefit didn't increase.

Pat: I haven't made a premium payment on mine in five years.

Scott: I never had, I made one...I made a single...no, I didn't. I paid it over a couple years, so under the...

Pat: So this is a weird...because normally we'd say this is a terrible idea, but it's probably not for you. It might be a great idea for you. And I wouldn't buy a whole life, I'd buy a variable universally.

Scott: It might be a variable whole-life policy. That might make some sense.

Pat: But why would you buy a whole life versus a variable?

Scott: I wouldn't buy that policy today. I wouldn't buy it. You do have an insurance need for the next decade or so.

Ryan: Yeah, and I have term insurance. I definitely wouldn't be buying it, obviously, [crosstalk 00:23:31.224].

Scott: I can't tell you how many people I've seen cash in their whole life or reduce it down to next to nothing because they just don't...they get later in life, they save money, they don't need it.

Pat: What's the family income?

Ryan: $500,000 to $600,000 depending on bonuses.

Pat: Listen, I can...

Scott: But why is that better than just, say, buying an S&P 500 or a total market fund?

Pat: Well, because I don't think he's gonna spend it in his whole lifetime, Scott.

Ryan: Well, and I don't know if this changes my idea. So, I buy long...you know, buy and hold real estate, and so the idea of kind of having money to where if a good deal comes, you know, a rehab or something, the idea is to be able to, you know, borrow against it [crosstalk 00:24:14.224].

Pat: Oh, well that's a terrible idea. That's a terrible idea.

Ryan: Oh, okay.

Scott: No, wouldn't do that at all. The insurance agent talking about how you can borrow against it, but here's a cost for that too.

Pat: But you can borrow against an S&P 500 fund as well. You can margin the thing, right?

Ryan: That's true about that. Okay.

Pat: So these, like bank on yourself, you hear all this garbage commercials like bank on yourself, and you get these all season. Look, there's a question of whether you're being sold one or you're buying one.

Scott: Look, the one I've got, I wouldn't buy that again. And it's done very well but it would've done even better in just a pure index fund because the cost, internal cost would've been less. And I have a term policy because I've got some kids that...I've got a term policy that...the premium I pay for my $2 million term policy is less than...I think I've got a very small amount of death benefit inside this. And I looked at this statement this morning. I'm paying $1200 and some a year for a very small benefit of life insurance.

Pat: So, life insurance is the difference between cash value and the face value. I'm gonna agree with Scott. I'm gonna agree with Scott. I wouldn't buy mine again either.

Scott: And tax laws have changed since...I bought mine 30...we both bought it like 30 years ago.

Pat: Thirty-one years ago.

Scott: I wouldn't bother with that.

Pat: Yeah, no.

Ryan: Well, and then one quick question, and this might be a little too general, but you know, so like I said, I'm 41, my wife's 46, and is there, like, a magic...I self-manage everything right now. Is there an age where you would say, you know, when I'm five years out from retirement or a certain...when I should actually sit down with a planner [crosstalk 00:25:55.224]?

Pat: No, you should do it today, because I'm telling you something, you're missing things. Your portfolio...

Scott: If $500,000 of your income...

Pat: Your portfolio is not as tax-efficient as it should be. I could tell you today, you walk into my office, you sit down with an advisor for 15 minutes and you'll be saying, "Oh, I didn't know that. Oh, that makes sense. Oh." I mean, I'm just...the reality is...yeah. And you could afford it.

Scott: Yeah. You've got a lot. Yeah. It wouldn't take much in the way of some good planning to offset whatever possible. Hey, appreciate the call. Let's talk now with Bruce in California. Bruce, you're with Allworth's "Money Matters."

Bruce: Good day, gentlemen.

Pat: Hello.

Bruce: How are you today?

Pat: Good, Bruce. What can we do to help, please?

Bruce: Well, I'm a product of your podcast. That's where this question comes from. I can go back and look at the market, the three major indexes to when I deposited a large sum of money into a managed account. And today, all three of the indexes are at or where they were back in July of 2021. But looking at my account, that money was all invested, I think, in what they are bonds...electronically traded funds, ETFs. But how do I tell that...? So, the stock market, the three major indexes have returned to at or above where they were when the money was deposited, but that money hasn't recovered. The amount has not recovered from where it was when we deposited it. So, on the bonds, how do I know that I'm in the right bond accounts?

Pat: So, a question for you. Are you taking any income from this account?

Bruce: No.

Pat: Okay. And how much money did you deposit in July of 2021?

Bruce: $850,000.

Pat: And what's the account value today?

Bruce: $779,000.

Pat: And what percentage of it is in stocks versus bonds? Do you know?

Bruce: I think it's all bonds. I think it's distributed across something like 21 ETFs.

Pat: And who's managing the portfolio?

Bruce: It's managed by a company. Not me. I didn't [inaudible 00:28:31.145]

Scott: And you think, so you have 21 different ETFs in bonds.

Pat: Which is a lot.

Scott: Are you sure they're all in bonds?

Bruce: They're all different funds. I mean, there's some in Vanguard and iShares.

Scott: Got it. Okay.

Pat: Okay. And like what is the name on the Vanguard? Do you have an account statement close by?

Bruce: I can probably get that for you.

Scott: You said iShares, my guess is you have a broadly diversified portfolio of stocks and bonds.

Pat: So, comparing this portfolio one for one across the indexes that you've actually...so I assume you're using the S&P.

Scott: Are there a lot of transactions in this?

Bruce: That I can't tell you for sure.

Scott: I mean, because if you had one stock fund and one bond fund, and two years down the road, the indexes on both those were higher, you could have a loss in your portfolio if you were somebody making transactions and buying things at the wrong time, selling low and buying high.

Pat: It shouldn't be at $780,000 if you started at $850,000 in July of 2021.

Scott: Because I'm trying to remember exactly which months did, and I mean it's still a relatively short timeframe, two years, and we went through a bear market. And last year was a rough year for the bond market, so I'm not...I mean, if you're curious about whether this is the right portfolio, have someone do a second opinion on it for you.

Bruce: Okay. Because that's what it...you know, I heard...you know, like I said, I'm an avid listener. You guys are amazing. I've learned a lot. The humor is spectacular.

Scott: Thank you. I mean, a reputable advisor, fiduciary advisor, if your portfolio is in great shape, they'll say your portfolio is in great shape and it's clearly understandable, two years into a relationship with an advisor. Did you just start with this advisor two years ago?

Bruce: No, it was probably a little bit longer than that. It's been longer and we've been happy with the advisor.

Scott: Well, have you just had these questions?

Bruce: And, well, they've come up with...you know, like you were talking a show or two ago about treasuries, you know, they're returning 7%. And that's what I'm wondering, is there another vehicle that this money can go into that it would start returning back to the original amount quicker than whatever these funds are in?

Scott: Well, I imagine the portfolio was quite a bit lower in January, the first of this year, and it's had quite a bit of recovery this year. Is that right?

Bruce: Correct. It has. Well, this year to date, it's had a 7% recovery on this year to date. But...

Scott: My guess is you are heavily weighted in bonds.

Pat: In bonds. Yep. Yep.

Bruce: And I think that's...yeah, because I'm looking at, you know, it's Investco, iShare, iShare, iShare.

Scott: Yeah, but they all have, they all...

Pat: Yeah. My guess is that it's heavily weighted bonds. [crosstalk 00:31:53.224]

Bruce Is there a way to understand, you know, like it's...?

Pat: Oh, yeah, it's easy.

Bruce: Yeah. Listening to your...

Pat: It's easy. If you call an outside advisor, you call our office and they'll set you up. Look, we're not advertising, but many firms, they'll build you a model of your portfolio and tell you what it looks like and give you opinion on it. I mean, it's about a 10-minute job, but a good firm will make it look like it takes days.

Bruce: And that's what I was wondering is, you know, is the bond market just recovering much slower than the stock market?

Pat: Oh, yes.

Scott: Oh, yes.

Pat: Yes, yes, yes, yes. Oh, yes.

Scott: It hasn't recovered.

Pat: Yeah. It's not...

Scott: Every time interest rates go up, it's...

Pat: It can get beat down.

Bruce: Correct.

Pat: How old are you?

Bruce: Sixty-five.

Pat: And is there any other money other than this $800,000?

Bruce: Yes, there's about $1.2 million total in my account. This money was from the proceeds of the sale of a home. We had kind of had our fill of California and sold our home, but we were traveling in our motor home for a year-and-a-half. And I managed to convince...you know, I probably need that marital advice. I managed to convince my wife to take this money and invest it. Well, it went from $850,000 to $720,000. So it's going back, but it's going slow.

Pat: Look, in all fairness to your existing advisor, your portfolio may be perfect.

Scott: I mean, last year was the worst year for the bond market in history.

Pat: Understand, but if you have another $1.2 million somewhere else, and that is over allocated equities...

Scott: But this is also not a retirement account.

Pat: Understand.

Scott: And is this earmarked to buy another home in the future?

Bruce: Yes. Yeah.

Pat: Oh

Bruce: Yeah.

Scott: Then it should probably be...

Bruce: To the advisor's credit, he did not wanna take this money.

Pat: Okay. Okay. Okay.

Scott: Now I understand what [crosstalk 00:34:05.224]. Because it's short term money.

Pat: It's short-term money, and so the advisor...So I know exactly what happened.

Scott: And he did the best...So he said, I'm gonna...what he did, or she, like, I'm gonna put it in a portfolio. I'm gonna try to be as conservative as I can be, not knowing that [crosstalk 00:34:21.224]...

Pat: It's the first bond market in...

Scott: In history, not knowing that this major storm in the fixed-income market was coming down.

Bruce: Who knew? Right.

Scott: And that's what happened.

Pat: Yeah. Well, I mean, to their credit, this portfolio is mostly bond.

Scott: When do you think you'll buy another piece of property?

Bruce: We're starting that search now.

Scott: Okay. I'd have it liquidated to cash immediately.

Bruce: But then I'm gonna need that marital counseling to make up the difference.

Pat: Well, listen, you can't lay all this one on your advisor, right? No, because...

Bruce: Right. No, no, no. I don't. I don't.

Scott: What you don't...Look it, here's the worst thing that could happen is that you find the house, you're in escrow, you go to get the money, and suddenly the markets are, you know...

Pat: Are down even further.

Scott: Something really weird happens.

Pat: But here's what you can do. Add that account and your account together from your IRA, the $1.2 million, and look to it where it was in July of 2021, and then compare it today and see what that number looks like. Because the reason your advisor, like you said, he didn't wanna take the money, or she didn't wanna take the money, is it's because the timeframe was unknown. It was short but and unknown, right? You're driving around your motor home. I've worked with clients, they say they're gonna spend three years in the motor home, and after three months they're done. And I've had others saying they they love the lifestyle and the next thing you know, it's been eight years they're living in a motor home.

Bruce: I would still be in the motor home but my wife needed a little more space.

Scott: Yeah, I get it. Yeah. I'd have it go to cash, put it in treasury bills or something high yielding.

Pat: Yeah. Or go to bankrate.com and look up the highest yielding money market. And then this is just...

Bruce: Buy more Apple stock, because you can't have too much of that, right?

Scott: Okay. I'm not gonna touch that. Not gonna touch that. Anyway, appreciate the call.

Pat: Yeah. I wish you well, Bruce. Hope you guys find that property that you wanna find. Boy, that took some unpacking.

Scott: Well, yeah. Correct. I know, right? That's what people say, I have money, where should I invest it? Like, how do I know? No, it just took unpacking to try to figure out what percentage of the portfolio it was and why it was structured, yeah.

Pat: Yeah. Did take us a while. We're talking with Jen. Jen, you're with Allworth's "Money Matters."

Jen: Hello, thanks for taking my call.

Pat: Hi, Jen.

Jen: Hello. Hello.

Scott: Hello. Hello.

Jen: So, my question is kind of just a general education thing for me. I am not really, really into tracking my portfolio, but I've learned a lot listening to your program. And something I've heard multiple times, kind of at least in passing, is something called Roth conversions. And I've heard it mentioned and seems to be that people think it's a good thing, but I don't really understand, in general, when and why someone would do Roth conversions.

Scott: Yeah. Neither do most Americans, so don't...So, first of all, IRAs, 401(k)s, these retirement plans, right, they've got special tax considerations. So like a traditional IRA or your 401(k) through your employer, when you put dollars in, when you choose to contribute to 'em, the dollars that you put in, you get a tax deduction. So, if your household income was $100,000, you put in $10,000 into your 401(k), you're taxed just like you only earned $90,000. And you'll notice the difference on your W2, your taxable wage is different than your Social Security wage. The money grows tax deferred so as years go on, you're not receiving anything that you have to report on taxes, and it's only at the time of retirement when you withdraw money, those dollars then need to be added on your tax return and they're taxable at that time. Okay? With a Roth...

Jen: Are you taxed on the growth? So say you put in $10,000 and it turns out to be $100,000. So, when you take out $100,000, you're taxed on the $100,000, right?

Scott: Yep. And you're taxed at ordinary income rates even if you bought some stock that went up tenfold and it would be taxed as ordinary income. With a Roth, when you make those contributions, you don't get a tax deduction. So you get no tax deduction going in. It all grows tax deferred and when you pull the money out, it's tax-free. So, you're making a choice and saying, "You know what? I'm gonna forego a tax deduction today, the tax break today, in exchange for a tax break in the future." So that's how Roth works. A conversion is when we take some existing dollars that we have today, typically in an IRA or sometimes even a 401(k), and we move those into a Roth, some of those dollars. And when we do that, that is called a Roth conversion. We're taking money from a traditional, we're converting it to a Roth, and when we do that, we pay tax on the dollar amount that we chose to convert in that tax year.

Pat: So, when do you do this, Scott?

Scott: You do this when you are in a lower income tax bracket than you believe you'll be in the future.

Pat: So, couple of examples.

Scott: You're unemployed for six months. You retire at age 62 and your pension starts at 65 and you're gonna have very low income for 3 years. When you're living off your basic income and you've got your required minimum distributions on your IRA kicking at age 73.

Pat: So, they are great planning techniques.

Scott: But you're only gonna do it if you believe you're gonna be in a higher tax bracket in the future than you're today.

Pat: I had this discussion...I will give you a perfect example. I have a daughter that has worked as a schoolteacher for the last three years, has put the maximum in every year, and gets some money back from her defined benefit pension plan, and she's going to law school and I said, "Well, now we were start converting this money that was deductible into a Roth IRA over the next..."

Scott: She has no income.

Pat: She'll have no income.

Jen: Okay. So as an older person, does it make sense that like RMDs would be something that would put you in a higher tax bracket in the future?

Pat: Yeah, but you wanna do these before your RMDs kick in.

Jen: Right. Right, right, right. But that's why you would do it now because you would have lower RMDs.

Scott: That's right. It's typically if you have a really good size IRA retirement, right?

Pat: Yes.

Scott: Like, if you got a couple million bucks or something, or more.

Pat: And money on the side to actually pay taxes on the conversion. Are you in that situation?

Jen: Well, I don't have much of an IRA but I have a $1.4 million 401(k).

Pat: And how old are you?

Scott: How old are you?

Jen: Fifty-four.

Pat: And how much do you earn?

Jen: Well, I'm about to retire, but like $230,000.

Pat: And what are you gonna live on once you retire?

Jen: Hopefully my brokerage account.

Pat: How much is in the brokerage?

Jen: $1.8 million.

Pat: $3.2 million. You make $230,000 a year. You don't have enough money saved.

Scott: Well, depends how much she's been living off.

Pat: What have you been living on?

Jen: I've been tracking it pretty well and it's about, I would say $110,000, $120,000.

Pat: Okay. All right. You're good.

Scott: You're good. You've got this.

Pat: You are perfect.

Scott: You're like to be the perfect candidate to do some Roth conversions for the next few years.

Pat: And so let's step back a minute. How old are you now?

Jen: Fifty-four.

Pat: And when do you retire?

Jen: Yeah, it's bad timing, unfortunately. In November, I had an opportunity to get a pretty good package from my company [crosstalk 00:42:21.224].

Pat: I know the reason I ask is will you be 55 or older in the year in which you retire?

Jen: No. I wish I were. I know, I know, Scott.

Scott: But she's got nothing outside dollars, so there's no...

Pat: Understand, but maybe she starts the 72(t) at the same time for a lower amount in order to actually spread the tax [crosstalk 00:42:40.224] the Roth IRA until 59-and-a-half.

Scott: Yep. You've got a phenomenal opportunity for Roth conversion. You're like the poster.

Pat: Scott and I are arguing over the different techniques and you're probably thinking, "What are they talking about?" Right?

Jen: Yeah.

Scott: Yeah. So, you've got phenomenal opportunity.

Pat: You've got an unbelievable opportunity for planning. Unfortunately, if you had been 55 over the year...

Jen: I know, I know. But I just got this package and I [crosstalk 00:43:05.224].

Pat: Well listen, they give you a package, it's hard to deny a package. No, you've got some great planning opportunities ahead. And do you think you'll go back to work?

Jen: Possibly. I'm gonna take at least six months, and who knows, and see how I feel and what I think about it all, and I'm not against it but I [crosstalk 00:43:25.224].

Scott: Then she might not have the planning opportunity for the Roth conversion plan.

Pat: Yeah, it's hard to say. It's hard to say. It's hard to say. Well, congrats.

Jen: Okay. All right. Thank you very much.

Pat: Yeah. Hire a good advisor. Do you work for...?

Jen: I do have an advisor.

Pat: Oh, you do?

Jen: I do. And I like them. Yeah.

Scott: Good. Just have this conversation.

Pat: Do you have stock in the company? Stock in the 401(k)?

Jen: Some, not a terrible amount, but yeah, definitely. I wanna get outta that probably.

Pat: Oh, no, no. Well, because there's another planning technique called net unrealized depreciation depending upon what the company stock is and whatever...

Scott: Which company is it?

Jen: Intel.

Scott: Don't know how [crosstalk 00:44:03.224]

Pat: I can't remember, but I know a number of people that getting...

[crosstalk 00:44:09.224]

Pat: It doesn't work.

Scott: Nevermind.

Pat: But I know a couple people that have gotten those packages, so.

Scott: All right, Jen, wish you well.

Pat: All right, thanks Jen.

Scott: And just talk to your advisor about this brand of opportunities. Say you listen to these really smart guys on the podcast.

Pat: And you listen to Allworth's "Money Matters" too.

Scott: That is all the time we have. Greatly appreciate you being here with us. If you haven't been to our website in a while, go to allworthfinancial.com. There's lots of great education tools there as well. We'll see you next week. This has been Scott Hanson and Pat McClain, Allworth's "Money Matters."

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