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September 10, 2022

Pension advice, asset allocation guidance, the danger of financial insurance products, and where to draw income from in the first years of retirement.

On this week’s Money Matters, Scott and Pat help an Alaska woman decide whether now is the time to draw from her pension.  A 61-year-old from Seattle spends her birthday asking about tax implications related to her real estate holdings.  You’ll hear why Scott and Pat think a Colorado man should weather the current market volatility.  Finally, a North Carolina woman learns the best way to generate income if she and her husband wait to draw from a pension and Social Security.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's CEOs Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here.  You can also be on the air by emailing Scott and Pat at

Download and rate our podcast here.


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

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

Pat: Pat McClain, thanks for joining us, right?

Scott: It's this time of year, kids back in school, back in college, all those other kind of things.

Pat: Yes.

Scott: For most of the country.

Pat: Yes. And you have two in high school and one in what? Middle school? Is that what they call it or?

Scott: Yeah. Sixth grade, and she goes to a charter school. So, it's first grade... Actually, kindergarten through 12, K through 12 charter school.

Pat: Really small classrooms, I assume.

Scott: A huge waiting list. They just bought another building. It's interesting... We're gonna get back to it, but it's interesting how parents are so much more involved now because the way it's structured in California, like, if a charter school opens, it can't have any economic damage to any other existing school, which by its very nature it's going to, but there were so many parents that showed up for the school board meeting that I think the people on the board looking like, "Well, if we vote no, we're gonna be booted out come election time." And anyway. But...

Pat: And she likes the school?
Scott: Yeah. She loves the school.

Pat: Everyone loves the school. The charter school.

Scott: Like, it's classical education. They read the books on the classics and... So, anyway.

Pat: I'd like to go.

Scott: Sure you would. All right, we didn't wanna talk about that because this is a financial program. We're gonna talk about the market. I was just bringing it up that, like, most of us were back in whatever mode we were in before.

Pat: But I was interested in how your kids were doing.

Scott: I appreciate that. My kids are long gone. It's funny, Pat and I have been working together for 30-plus years. We do this show together. We work together. My wife will ask some question about your personal life. I'm like, "I have no idea." She's like, "Don't you guys work together?" "Yeah, but."

Pat: I said the only time we really talk about personal stuff is on the radio show, which is strange.

Scott: Sorry.

Pat: Sorry, you have to listen to that.

Scott: All right. You know what, we're gonna start right off with calls today. 833-99-WORTH is to join the number, and we are in Alaska talking with Anna. Anna, you're with Allworth's "Money Matters."

Anna: Well, hello. Good morning, gentleman.

Scott: Hi, Anna.

Pat: Anna, may I ask a question? Well, I will. What part of Alaska do you live in?

Anna: Well, actually, I thought your question will be like anyone from lower 48, "Do you live in a igloo?"

Scott: That's what... What part do you live in?

Anna: Anchorage, Alaska.

Pat: Oh, you do? And for the rest of the listeners, I have been to Alaska three times for... The last time I went there, I was there for 10 days. I was there once before for 10 days. It is absolutely one of the most beautiful places I have ever been. It is rough and rugged, and if you get too far off the highway, you become part of the food chain. So...

Anna: That's right.

Pat: Yes. But Anchorage is a beautiful town. But you didn't call about that, what could we do to help you?

Anna: Well, just to let you know, and all the listeners, if you want to visit Alaska, May and June are the months you want to come. And I lived there for the last 26 years, but originally I am from Europe.

Pat: Oh, you are?

Anna: My question is... Mm-hmm. So, my question is, I'm 52. I work for local government, and obviously, I am eligible to fully retire at the age of 60. However, I could potentially retire at the age of 55. That would be an earlier retirement. But then, of course, I'm a subject penalty beginning of 55. If I were to start drawing, the penalty is 33%, which is pretty steep. So...

Pat: Yes, correct. And by the way, most pension plans work exactly like this, which is the years and age-weighted. And even one year could mean a significant difference in the amount that you'd receive either in a lump sum or monthly pension.

Anna: Absolutely. Seven percent for each year that I get closer to the full retirement. So, I'm...

Scott: Plus, plus, your wage is probably gonna increase. So, the wage base which it's factored upon continues to grow.

Anna: Of course, of course. So my question is, you know, I am thinking, what if, right? If I was to quit at the age of 55 but not start drawing until later. And of course, I have my 457, and then I receive a little money because my husband passed away suddenly. So, I receive a little pension from that. But my 457 was not, until long time ago, allocated in very aggressive way. Well, as a result, I have also lost. So, my question for you primarily, knowing that I may potentially have seven years until full retirement, or three or four more, should I be allocating the funds in the more conservative or keep the aggressive?

Scott: Let me ask, why would you wanna retire at 55?

Anna: Well, because I want to travel and I want to enjoy the world. And I have worked since I was 19. And, you know, life is short.

Scott: And if you retire, do you think... So, your husband passed away. Sorry about that. Do you have kids?

Anna: No.

Pat: Okay. And how much money is in your 457?

Anna: So, right now, after my loss, it's probably around a little over 600,000.

Pat: And is your home paid for? Do you own a home?

Anna: Yes.

Pat: And it's paid for? Completely paid for?

Anna: Correct.

Pat: Okay. And how much money do you make?

Anna: I'm sorry.

Pat: How much money do you earn?

Anna: Per year, around 70,000.

Pat: Seventy thousand. And how much would your pension be if you retired at 55?

Anna: Around 4,300.

Scott: And if you waited till 60?

Anna: No, I'm sorry. If I waited until 60, it would be 4,300. It would significantly go down...

Pat: So, it would be a third of that.

Anna: Yeah, depending on that, 7% per year.

Scott: This is the one thing I don't like about pensions, right? Because if you factor in how much you earn in total year 55, year, 60, 56, year 57, etc., it's pretty significant because the impact on your pension.

Pat: And what if you calculated what's called the net present value of that stream of income based on normal life expectancy, so, if you retired at 55, your pension would be approximately $2,900 a month?

Anna: Yeah. Yeah.

Pat: And, you know...

Scott: How much are you saving in your 457?

Anna: How much am I saving?

Scott: Yeah, on an annual basis. How much are you throwing in there?

Anna: Right now, that would not be as significant. I had much higher-paid job earlier. So, back in the days, it would be around 15,000 17,000. Right now, probably 5,000, 6,000.

Scott: Okay.

Pat: Okay. And so your question for us is what?

Anna: The allocation-wise.

Pat: And how is it allocated today?

Anna: Well, it would be probably right now we have changed that. So, right now, I would probably have a 70% conservative, a more conservative way. But after I've already got the loss. So, I'm going back and forth. Should I go back to the same allocation that I just had?

Pat: Yeah, you should go back to the same allocation. You should be exactly the opposite.

Scott: Yeah, that's what I would think.

Pat: And so you've got a couple things going. One is that your Social Security could kick in at 60 on a spousal...

Anna: My husband died.

Pat: ... benefit. Which is massive, which allows yours to continue to run forward. There's a very, very high probability that you're not going to spend a lot of that money in that 457 plan for a lot of years just based on the pension.

Anna: Yeah. I'm a very conservative spender. Very conservative spender.

Pat: How much money do you have in the bank?

Anna: Right now, probably around 250,000.

Pat: Two hundred fifty thousand in the bank. So, I want you to increase your 457 to the maximum. And if you have to spend some of that money that you've got in the bank to live on, what you wanna do is set that up to come to you on a monthly basis. So, if you were my sister, I would say, "Anna, what I want you to do is put more money in that 457." Do you have a 401(k)?

Scott: It might make sense to do the Roth on it just to wait... She is tax-wise.

Pat: Or split the difference.

Scott: Or split the... That some probably some pre-tax and some probably Roth. And do you have a 401(k) as well?

Anna: No, We both worked for the government, and you know, we have opted out from 401 towards 457...

Scott: Yeah. Some municipalities and some states have both of them.

Pat: Have both. So, I agree with Scott. So, I would put that to the maximum. And you're like, "Well, I can't afford to live on that." I would have the difference come to me from that $250,000, and I would set it up so it automatically transfers into that spending account so you can spend it. So, you've got way too much money in cash. Way, way, way too much money in cash.

Scott: And then, so it makes it, like, that 457, you have 250,000 in cash, and you have 600,000 in your retirement account. That retirement account should probably be 70%, 80% in stocks.

Pat: Easy. Easy.

Scott: Because even if you retired in three years from now, you're not gonna spend it all day one.

Anna: No. I wasn't planning on taking anything out of it until I'm at least 65 if...

Pat: Well, I would kind of disagree with that. I would like to see you actually tap it a little bit early, and based on what you told us so far...

Scott: And your government pension probably has guaranteed cost of living adjustment. My guess. Security does.

Pat: You could retire at 55.

Anna: Well, only if I will stay in Alaska, okay? I'm actually thinking about going back to Europe because that's more beneficial for me. When it comes to health benefits, living abroad, I would not have to apply for Medicare. I would be on that primary health insurance for the state.

Pat: And when you say Europe, I mean, Europe's a big country. If you're gonna move to a part of Portugal, you could live cheaply, but if you're gonna move to Zurich, you're out of luck.

Anna: Or Monaco, right?

Scott: Zurich, Monaco, right?

Anna: Yeah, I'm originally from Poland.

Pat: Okay.

Scott: Okay. You won't have medical with your government pension?

Anna: I will and that primary medical works abroad. You know, it's just a matter of completing the forms or reimbursement, da da da. And then...

Scott: And it would really be helpful for you to do some what-if scenarios with some good financial planning software with a good financial planner where you can say, "Okay, let's pretend I retire at 55. I never work another day again. What's the probability of me being able to maintain my lifestyle the rest of the year?" Now then, you could throw in, "Okay, what if I have these medical issues and it's gonna cost me these extra dollars in medicine, what...?"

Pat: "I sell my house at Alaska. I buy a house in Poland. What's the difference?" But without any of that, we want you to increase your 457 to the maximum. And my guess is half a deductible, half Roth. Without going through a big financial plan, you know, that's, you know, my thumbnail sketch of it. But you're fine. I mean, 55.

Scott: You're a good saver.

Pat: You're incredible.

Scott: House paid off, money in the bank, money in your retirement account.

Pat: Worked for the government for a lot of years.

Pat: And you might choose to retire at 55, you might say... Like, as you said, life's short. I mean, if you love what you're doing, then maybe not. But if you're like... , but Monday mornings are painful.

Pat: You're 457...

Anna: It's a different option.

Pat: Oh, my gosh. That's what allows lots of options, for your 457 needs to go 70% equities and 30% bonds and cash.

Scott: At a minimum.

Pat: At a minimum, especially if the [crosstalk 00:13:03]

Scott: Given the pension you've got, the house paid off the money in the bank.

Pat: Yes. Yes.

Anna: Okay. Well, I got a bad financial advisor then.

Pat: You have a financial advisor now?

Anna: Well, you know, you do. Working for the government, this is managed by a company, right? And so...

Scott: They won't give you advice, though, on how to allocate your 401(k).

Anna: Well, so every year, because I used to work for the municipality and now the state, so every year you have this three-month free program that they can manage the money for you. But, you know, they don't do anything, right?

Pat: They just allocate the portfolio.

Anna: Yeah. I mean, anyways...

Pat: But you're everything. Nothing exists in a vacuum. Nothing exists in a vacuum. So, you called us for our allocation, right? We asked a bunch of questions and had a conversation about you before we actually came to a conclusion.

Scott: Not thinking, oh, feds are raising rates, interest rates are high. Looks like recession.

Pat: Yeah. Yeah. So...

Scott: That's all noise.

Pat: ...You probably didn't get financial advice. You probably got a portfolio allocation. And that's a big difference. There's a big difference there. So, you're doing great, by the way. You're just... Yeah. And when you move to Poland, we're gonna actually miss you here in the United States.

Anna: Aw.

Pat: We really will. I mean, that is...

Anna: I've heard that one of you may be looking for a sister or if you would to be my sister. I've heard that statement. I could potentially look for a stepbrother.

Scott: Well, Poland is one place I've never been to, and I would be... Certainly, I'd like to go. I'm sure [crosstalk 00:14:45] beautiful sponsor of that one.

Pat: Anyway, appreciate the call.

Scott: Thank you, Anna. I do love Alaska, though. I gotta tell you. I mean, just... I couldn't live there, though. I mean, my wife and I went like about 30 years ago. We were newlyweds, and we went up there, and I remember we rented a car and drove from Anchorage to the Kenai Peninsula. Anyone who have ever been there, you've probably done the same thing. And I was looking at our flight, and I said, "Oh." I looked at the map. I said, "Let's just... We'll find some nice little spot on the coast to have dinner." Little did I know there was no civilization whatsoever for hundreds of miles. And we were hungry by the time we got there.

Pat: Did you?

Scott: There was like...

Pat: Oh, the Kenai is beautiful.

Scott: I just wasn't thinking it was that desolate, that close to... I thought, "Chill, it'll be a little bed and breakfasts, little inns here. Nice little restaurant, all overlooking the water."

Pat: Okay.

Scott: Not so much, but I have not gone back.

Pat: We went last summer, my wife and four kids.

Scott: I don't wanna, anyway.

Pat: That's enough. That's not a travel show.

Scott: No. 833-99-WORTH is our number. Where you're in Seattle talking to JR. JR, you are with Allworth's "Money Matters."

JR: Well, I've been to Glacier Bay, Alaska, and Krakow, Poland, which was a lovely old town. But I do get it's not a travel show. I just highly recommend the place.

Pat: Well, good for you.

JR: And if any of your listeners, Scott and Pat, wanna mediocre trophy spouse, I'm available. I get myself...

Pat: Mediocre.

Scott: My wife might have an issue with that, but I appreciate that.

Pat: Well, you know what, when we start talking about your finances, just stay away from the guy that's looking for a nurse and a purse.

JR: Well, that's it. I want someone who won't be around, ideally.

Pat: Someone who's got a relatively short life expectancy?

JR: ...I'll be on the arm. I'll talk artificial intelligence. You know? That's why I say mediocre, you know.

Pat: Okay. All right, J. What can we do for you?

JR: Well, I am the big six-one today, as a matter of fact.

Scott: Happy birthday.

JR: Thank you. Thank you. And I'm not one of these people comfortable investing in the stock market. So, I took my stock, and I put it into real estate. I live in the Pacific Northwest, so it tends to retain its value pretty well. So, I have a lake house that's paid off. I have a rental house that's paid off. I have another rental house that still has about a quarter million mortgage on it that needs to be updated a little bit before it can be rented again. But I'm looking at that now. And then, I have a mortgage on the primary house that I live in. I also have a...

Pat: Is the primary the lake house?

JR: No, the primary is about 20 minutes from the lake house. It's lovely. I just bought and moved into it last October.

Pat: Okay.

JR: And then I also have a strip of land, three-quarters of an acre. That's to the side of the lake house to keep it private.

Pat: Okay. And the lake house, is that a vacation rental or is that a full-time rental?

JR: It is. I bought it with cash. It is just I go there in the afternoon.

Pat: Okay. But it's not an investment. You consume this.

JR: It's not generating any money. Yeah.

Pat: Okay. Okay. Alrighty.

Scott: What's the lake house on the lot, those combined? What is that worth, you think?

JR: So, the lake house right now is 1.65, and was the primary, the other one you were asking about?

Pat: No, no. The lot...

Scott: What's the lot worth?

Pat: ...The lot worth?

JR: Oh, the lot. I just bought it for 235.

Pat: Okay. So what's your question for us?

JR: So, to manage these properties, do I start like an S-corp or LLC? Is that kind of the way to go for tax purposes?

Pat: It doesn't matter.

JR: I've never run rental properties before.

Pat: Yeah. It really doesn't matter.

Scott: It's not gonna change anything for tax purposes.

Pat: It's not gonna change anything for tax purposes.

Scott: Washington might have... If you set up an LLC, they might have an annual tax that you gotta pay regardless of what's happening inside it.

Pat: Yeah. So it... Excuse me. For taxes, it makes no difference.

Scott: From a liability standpoint, but you can insure your way around that.

Pat: Yeah. So what you want to do is have a big umbrella liability policy, like 5 million or 10 million. In fact, I was... This weekend, I was actually... Spent some time with a judge who was a... He obviously was an attorney before, well, maybe not obvious, but he was an attorney before he was a judge. And we got on the interesting subject of liability. And he said, "Oh, Pat, look, first thing you do before you sue anyone is you do an asset search, and you go deep." And he said, "Because everyone thinks the liability policy is the only thing that matters." He said, "It is not." He said, "Because you can pierce, go above a liability policy on, and then you actually go after a real asset for that person." So in your situation, I would have a 5 million or a 10 million liability policy on this. [crosstalk 00:20:40]

An umbrella to make sure that the rentals are covered.

JR: Gotcha. I like that.

Pat: Yeah. And I, I mean, I personally carry a $10 million life, which is a terrible thing to say on the radio. If someone's gonna run in front of my car, this like, [inaudible 00:20:56]. Slip and fall at my house, the Amazon guy. You want that. But for tax purposes, the LLC or the S-corp...

Scott: It's not gonna make any difference.

Pat: It doesn't make any difference.

JR: So, there's nothing I can write off really well as part of managing the property.

Pat: Well, it all flows through to your... You write that off anyway, but it all flows through to your individual tax return. Yeah.

JR: It just, it doesn't need a corporation or anything behind it.

Pat: Yeah. It doesn't mean you shouldn't have one.

Scott: I don't know. I...

Pat: But how many rentals do you have? Two?

JR: Two.

Pat: I don't know why I'd bother.

Scott: I have a residential rental that's not in a... It's just in my family trust. It's not in an... I didn't create...

Pat: It just didn't bother me. Yeah. It's like, what's the point?

Scott: Yeah. No point.

JR: I have a friend who I was thinking about appointing as a property manager who's a former MMA fighter, and people look at him, and they're either attracted or scared of him immediately. So, you know...

Scott: I don't if that's the quality. I don't know if that's a qualifier for a property manager.

JR: He looks like one of the Seahawks, and his wife, who's my real estate agent, looks like a Kardashian. So when I go out with them, they ignore me. People ignore me and pay attention to them every time. So, what I was gonna do because I don't...

Pat: You're killing me, JR. You need to get your own podcast.

JR: I don't deal well with problems. And I like, you know, to push someone that people won't mess with.

Scott: Well, JR, are you still working then?

JR: Yes. Yes. I work for a tech start-up.

Pat: Okay. And by the way, JR, you said that you don't do stock. But...

JR: I'm just not experienced in the stock market. I have a 401(k) kind of a basic nest egg, and the company that's managing it, you know, it went from a... It's already 50% of what it was a year ago...

Pat: If that's 50, there's something going on there. No, no. There's something wrong there.

Scott: Fifty percent? The markets are down, but...

Pat: Yeah. There's something wrong there. But my point being is, look, every asset class lives in, you know, its own little time-frame. So, people say, "What do you think about real estate?" I'm like, "What real estate?" Or, "What do you think about stocks?" I'm like, "What stocks or bonds?" You know, there's...

Scott: What's the objective, and how long are you planning on holding it?

Pat: Inherently, and so I own all of those.

Scott: Like even real estate, if someone says they're gonna buy a house, they're gonna sell it in two years, I'd be like, mmm.

Pat: Yeah. But you should spend a little bit more time on your 401(k), and you should be putting the maximum into the 401(k), and you should have it allocated correctly because it should not be down 50%. That is crazy.

JR: I agree with your advice 100%. I just have to find a better manager for it.

Pat: All right, well, there's plenty around.

Scott: Yeah.

JR: Okay.

Scott: Thanks for calling JR. I hope that was helpful.

JR: Thank you.

Pat: Yeah, and enjoy, enjoy, enjoy.

Scott: Enjoy what?

Pat: Just enjoy life, I guess. Because we need to tell JR to enjoy life.

Scott: No, it sounds like JR enjoys life.

Pat: Then there's 61st birthday.

Scott: Look, what was she saying she's looking for? A part-time husband or something?

Pat: Someone that's gonna die soon. That's what I got outta it.

Scott: Someone who's not around very much.

Pat: Someone that travels.

Scott: I'm glad my wife didn't say that to me. It's funny. I was talking to a friend of mine. He was complaining that his wife, like, whenever he goes somewhere, he gives her hard... Like, he wants to take a guys trip, golfing, or whatever. And she doesn't like it. I said, "Well, look, you should be glad that your wife wants you around. Oh." Because I know a guy who's like, "What are you doing home? Like when do you go back on the road? Like, why don't you go on a guy's trip? Can you please get outta my life?" Right?

Pat: Oh yeah, yeah. Yes. Yes.

Scott: Because I usually do a ski trip once a year and I'll do it home and I... Like, I know I have to figure the right time to bring it up to my wife right. You wanna... I'm like, was tonight the right night to bring this up, or do I wait for another opportunity?

Pat: We would still like... My wife likes it when I travel.

Scott: Your kids are out of the house.

Pat: That's right.

Scott: Yeah.

Pat: Yeah. She's not. I'm like, "Hey, I gotta go on a business trip. I'll be gone for five days."

Scott: Yeah. My wife's like, "Who's gonna help with the carpool? We got volleyball. We got theater. [inaudible 00:25:31]

Pat: Oh, yeah. I remember those days. Anyway, let's take a quick break. We'll come back, have some more calls when we return. This is Allworth's "Money Matters."

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

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

Pat: Pat McClain. Thanks for sticking with us.

Scott: Yeah. We haven't heard... You know, it's not been in the news a ton lately. It's crypto assets.

Pat: Yes. I still don't get the ones that are pegged to the dollar, though. I just don't understand it. First of all, why would you take the risk if it's pegged to a dollar? Because why wouldn't you just own the dollar? But some of them pay really, really high interest. Like unbelievably high interest.

Scott: They did, they did.

Pat: Actually, I shouldn't say they pay it. They say they're going to pay it. And there's a difference between saying you're gonna pay high interest. But yes, yes. The crypto thing continues. But...

And the challenge... I mean, the SEC is trying to figure out how to regulate. I don't know why the SEC was... Why weren't they more involved early on? Like they wait until things blow up. The market value of crypto went from, what, $3 trillion to $1 trillion.

Pat: That's a pretty big drop.

Scott: Think about it, $2 trillion of wealth has evaporated in the crypto markets in the last few months.

Pat: Well, how much was actually created in that run-up?

Scott: Yeah, well, that's a good point, right?

Pat: I don't know. Obviously, a lot of that was as well. But there are plenty of Main Street people that invested in these cryptos. Not when it was cheap.

Scott: Yes, but, well, I don't know when it's expensive, [crosstalk 00:27:40] backwards.

Pat: So, Tether, it's the world's largest stablecoin, which just seems like an oxymoron for a cryptocurrency to call itself stablecoin.

Scott: Is it stable?

Pat: No, it's not stable. None of them are stable. So, they're actually talking about actually stopping withdrawals right now. So, you know, just stay away from this stuff. Please, please, please stay away from the bright and shiny objects that are floating around the room. Just stay away from.

Scott: You knew. You know, when I knew the crypto was at its peak is when I had an 83-year-old client call me and say, "Should we invest in this?" And I'm like, "Wow." You're thinking you've made it to 83 years through your life without it, like, correct. How is your life gonna be any different if you own any, like?

Pat: Yeah, you've got plenty of money. You saw this thing...

Scott: Is it gonna make life better?

Pat: It's floating around in the universe, all this...

Scott: My guess is she's not calling now to...

Pat: No, no, no, no, no, no.

Scott: And unlike other assets, when things are cheap, there's great buying opportunities. I cannot say the same thing about the cryptocurrencies. Yeah. But look, blockchain is here to stay.

Pat: A hundred percent.

Scott: Right?

Pat: Just because you create a product based upon a technology, it doesn't mean that that product in and of itself is awesome.

Pat: That's right.

Scott: Just because the technology behind it's awesome.

Pat: Yes. Yes. So again, as we have always said, stay away from the crypto.

Scott: Yeah. So anyway, let's head to the calls here. 833-99-WORTH is the number. We're in Colorado talking with Bob. Bob, you're with Allworth's "Money Matters."

Bob: Thank you.

Scott: Hi, Bob.

Bob: Hey, I was just wanted to get your guy's opinion on Defined Outcome ETFs.

Scott: On what?

Bob: Given the volatility in the market and stuff, I've been thinking about those, but the cost seems a little high.

Pat: It's called defined outcome what?

Bob: ETFs

Pat: ETFs

Bob: Where they have a cap on the upside and a buffer on the low side.

Pat: It's just a collared option. You could call it whatever you want. I've never heard it called a Defined Outcome, but what they're talked about is collared. So, you called 'em Defined Outcome. I'm actually gonna Bing it right now.

Scott: And so this, your upside's limited. Your downside's limited. Is your downside limited a hundred percent of the time? Because I've seen some of these structured products work where like, you're guaranteed your principle unless the underlying investments fall 30% or more, and then you're screwed. Excuse my language.

Pat: Yeah, if they blow through...

Scott: I've seen that.

Pat: If they blow through the collars.

Scott: I'm not a big... I tend not to be... To your point, Bob, you said they seem expensive. I tend not to be a big fan of these structured products like this that are designed to limit some loss. There's no such thing as a free lunch, right?

Bob: Correct.

Scott: Right. So if we're willing... If we say, "Look, I wanna have a much lower return because I don't wanna take the volatility," there's...

Pat: So you sell the upside, and you buy the downside, right?

Scott: I just don't think it's a good long-term strategy.

Pat: Well, it's not a long-term strategy because the cost of it...

Scott: The markets go up more than they go down.

Pat: Yeah. And the cost of the insurance will eventually. [crosstalk 00:31:22] portfolio over time.

Scott: What this is, it's an insurance. Think of it like insurance.

Pat: So, what are you trying to achieve? Tell us what you're trying to achieve.

Bob: Well, I was trying to achieve something that would protect volatility on the downside for me. And I started looking at these, and it kind of piqued my interest, but they reset every year, and they don't provide you the dividend reinvestment if you say track to the S&P.

Pat: That's right.

Bob: So, I'm kind like on the fence going, you know, it seems like a high cost where I might be able to do something myself through changing my weighting of my portfolio.

Pat: Well, so that is a great way to look at it. So, what you just said was, "I don't like volatility. I can pay an insurance premium to protect me on my downside, but it limits my upside." That's what this defined outcome... And by the way, they go by a lot of different names, but I just looked it up. There's over 134 of 'em. And this is as of last year, the end of last year. And they had...I'm sure there's more now, almost $10 billion invested across the 134, which isn't...

Scott: Very much.

Pat: Isn't very much in each one.

Scott: I bet they're also by brokers.

Pat: And a lot of 'em are actually sold by the same people that actually manufacture annuities that have very similar internal structures in them.

Scott: I like these better than I like equity index annuities.

Pat: I would agree with that. So, what you wanna do is, what is your allocation right now, your stock to bond allocation right now in your portfolio?

Bob: So, I'm about 30% equities, 40% bond, and 40, 50, 70, 30% just money market cash, like that.

Pat: How old are you?

Bob: I'm 62.

Pat: How much money is in here?

Bob: A million four.

Pat: And what percentage is that of your net worth is it?

Bob: Probably 50%.

Pat: And are you retired?

Bob: Maybe a little more. Yes.

Pat: Let me ask you, at the very beginning of the pandemic, and there was a downturn in the market, how did you respond in your portfolio?

Bob: I didn't do much because I felt like I had the right weighting.

Pat: And what was the weighting then? Was it similar as to what it is today?

Bob: It was a little more equity, a little less bond.

Pat: Okay. And were you working at the time, or were you retired then?

Bob: Retired then.

Pat: And so, what changed between back then and now that's causing you to wanna put this insurance or even adjust the allocation in the portfolio? What changed? Have you developed an illness? Is there something that took place in your life externally that has caused you to react to the portfolio differently than you did then?

Bob: No. To be honest, it's just when you look at what's going on in the world as well as the country, when is that next big event gonna happen?

Pat: So, I mean, the way we like to approach it is saying, "Look, when will that next big event happen?" We don't know. Will it happen again? It might, right? So, maybe we'll have another time when the markets will fall 50% like they have twice in the last two decades. I mean, that's possible, right? So, instead of saying, let's use some products that are gonna limit our upside, and while limit our downside? It's, let's only allocate those dollars to those growth areas where we've got a long enough time horizon where we can let the market cycles do what the market cycles do. Because all these declines have always been temporary. The Dow Jones Industrial Average is 33, whatever, it's 30 some odd thousand, right?

Bob: Mm-hmm.

Pat: Are you taking income from this portfolio?

Bob: Not at the moment.

Pat: Okay. So, you know, I'm gonna... Sure, if you want to buy the Defined Outcome fund, it's a waste of your money, right? Just buy it if you want. If it makes you feel better, sleeps better at night. You'd be hard-pressed to get actually a more conservative portfolio than this with less volatility. If you use what's called modern portfolio theory and look at the curve on the chart, the only way, you could get a portfolio less aggressive than this would be to go to all cash, like CDs and/or 20% equity and the rest bonds.

Scott: And that ignores inflation risk entirely.

Pat: Which ignores inflation risk entirely. So, right now, you have at least some inflation risk in your portfolio, which is the hidden killer, right? How many houses in the US are destroyed by termites versus tornadoes? Huh?

Bob: Right?

Scott: I don't know.

Pat: Right.

Scott: You have no idea.

Pat: I don't know the answer either, but it's a great example.

Scott: I've never actually seen a house collapse because of termites.

Pat: I don't know, but I just made...

Scott: I see 'em tented.

Pat: I just made that analogy up. My guess is more houses in the US actually are destroyed by termites than tornadoes. But your portfolio right now is... Like, if you came into my office and said, "I want more risk out of this portfolio," I would say, "Okay, let's move it to 10-year treasuries or one-year treasuries or bank CDs or treasury inflation-protected securities." But, even then, you're exposing yourself to inflation. So, you shouldn't be doing a thing. You should quit worrying about it. You should make share the allocation stays. In fact, I would make the argument, Bob, that you don't have enough in equities.

Scott: I would agree.

Pat: You know, I would make the argument that your equity position should be 40%, not 30%, and that you just live with that volatility. And the reason I know you can live with a volatility is because you did it before. You were retired at the beginning of the pandemic, you held your portfolio firm during a really sudden downturn in the market, and then an increase in the market when the whole world was coming apart, when people were wearing masks when they told you not to go out on the street.

Scott: How are you living now? Do you have a pension that covers all of your expenses?

Bob: For the most part, yes.

Scott: Okay. And you have not collected Social Security yet?

Bob: No.

Scott: So, if you never touch these dollars, you can essentially do whatever you want.

Bob: Yeah. But that's not in my plan. I'm gonna have to start dipping into that here in the next couple years.

Pat: Okay. Well, then dip into it. But you're 62. You've got years and years in front of you. Leave it alone.

Scott: I don't like those structured products. [crosstalk 00:39:12].

Pat: I wouldn't buy one. I would...

Scott: We never recommend 'em to our clients.

Pat: I would live through the volatility before I bought a defined outcome, right? And it's cheaper to change your emotion than it is to change the premium insurance on the...

Scott: So, I mean, really the biggest issue, Bob, is for you to figure out a plan forward, not for the financial markets, but for Bob, and for your comfort level to be able to withstand some of those things because...

Bob: Yeah, I feel like my weighting right now, like I said, I feel pretty comfortable, but you know, there's always that "what if."

Pat: Well, I know, but you're 62 years of age. How many what ifs have we gone through in your lifetime while you have amassed this money over time? You amassed this money over, I assume, saving years and years, or did you inherit it?

Bob: Oh no, no. I started when I was 25.

Pat: Okay, so, let's just do some quick math. I'm gonna show off here. You've been saving it for 37 years. How many what ifs, scenarios have you gone through in 37 years in order to get this money? Right?

Scott: A lot.

Pat: A lot.

Bob: [inaudible 00:40:19] Number. Couple of them.

Pat: A lot. A lot. And you're gonna live through a bunch more.

Scott: They're always temporary declines. And if we ever get to the time they're not temporary declines, it's not gonna matter where your money is.

Pat: I'm guessing this probably has more to do with your political affiliation than it does with the portfolio itself.

Bob: In what way?

Pat: People that have a tendency to lean right are more worried about their portfolios when Democrats are in office. Democrats are more worried about their portfolios when Republicans are in office. I'm just telling you, it's the fact. Right? Because your team's not...

Bob: Yeah, I'm by nature conservative.

Pat: Okay. But my guess is that in many of these situations, and we had a behavioral psychologist, finance doctorate on a couple weeks ago that talked about this. When your team's in charge, you feel better about the markets and the world than when the other team's in charge. And historically, statistically...

Scott: But Pat, we've got war going on with Ukraine. We've got China, like, doing their military exercise in Taiwan, they might invade Taiwan, and we got to make a decision, and Russia's angry with us, and we're gonna get dragged into World War III.

Pat: And this isn't just directed to me.

Scott: Then we got inflation.

Pat: Bob, this is not just directed to you. It's directed to all our listeners. Just because the other side is in charge doesn't mean that your portfolio historically has performed either better or worse, be it, Democrat or Republican. That's just the numbers. That's not an opinion.

Scott: Actually, it's slightly better under democratic presidents.

Pat: It's not statistically significant. Anyway, we appreciate the call.

Scott: Yeah, thanks. And let's go now to North Carolina talking with Elaine. Hi Elaine. Welcome to Allworth's "Money Matters."

Elaine: Hi, thanks for taking my call.

Scott: Yeah, thanks, Elaine.

Elaine: I'd like to get your thoughts on providing income in the first years of retirement if we delay taking my husband's pension and/or Social Security.

Pat: Okay. I like the question so far. Tell us about your situation.

Elaine: My husband is 60. I'm 61. He plans to work until 67. It'd be nice to wait a little bit to either take the pension and Social Security or maybe just one or the other. His pension at age 67 will be worth about 60,000. And it also increases, as does Social Security. So...

Pat: So, he's 60 now?

Elaine: Yes.

Scott: Can I ask a question that has nothing to do with what you called about? Well, if he were to pass away today, let's say got hit by a bus, what happens to that pension?

Elaine: I would still get something. I can't remember exactly what the...

Pat: Would you get 45% of what the amount would be?

Elaine: No, I would get more than that.

Pat: Oh, you would. And by the way, Scott, you'd be more likely to be hit by an Amazon van in your own parking in your own driveway than you would ever a bus. So, are we talking about making the decision now that's gonna affect us since...

Scott: We have to make this decision?

Pat: ... Seven years. What are...?

Elaine: No, we don't have to make the decision now, but I didn't know if it made a difference in terms of how we invest or where we put money between now and...

Pat: Got it. Yes.

Scott: I mean, it would certainly give you an... It would give you a window of time with little income to do Roth conversions. So, depending on the situation, Well, I could see giving someone advice saying, "Hey, delay your pension for two years, delay Social Security. We're gonna use these two calendar years to move as much money from these large retirement accounts to Roth." That's if somebody is in a relatively high income and has probably a couple million bucks or more in the current account.

Pat: So he works now, correct?

Elaine: Yes. That's not us.

Scott: Okay. He works now, correct?

Elaine: Yes, he's currently working.

Scott: And how much does he make on an annual basis?

Elaine: About 130.

Scott: Okay. And how much longer does he plan on working for?

Elaine: Until 67, probably, possibly 65.

Scott: Okay. And then, do you work?

Elaine: I do not.

Scott: Okay. I was gonna say outside of the home. And so, this pension that you're talking about is it from his current employer or previous employer?

Elaine: Yeah.

Scott: It's from his current employer. So, they allow him to collect this pension while he's working? No, no, no, no, no. The question is, seven years from now, should they defer the pension for you?

Elaine: How do you plan on and count on some income, like, once you retire...

Scott: Okay. Okay. [crosstalk 00:45:19]

Elaine: ...Or a pension yet.

Scott: Okay. And by the way, how much would this pension be in seven years?

Pat: 60 grand.

Scott: A year.

Pat: Yes.

Elaine: Sixty.

Scott: Okay. So, my question would be, why would you wanna defer this?

Elaine: It seems to make good financial sense in terms of kind of long-term.

Scott: It's actually based'll be based upon life expectancies.

Pat: So, it would make sense. It's all the same number to the pension actuary. It only makes sense if he has above normal life expectancy, then it is in your favor. If he has a below-normal life expectancy, then it blows against you. So, where it may drive sub-decision making is on how you invest the rest of your money. So, you could make an argument that this is a fixed income portion of the portfolio and therefore...and therefore he should invest, you should invest more monies in equities or stocks.

Scott: Growth investments.

Pat: In investments, because this will act like a bond in retirement. How much money do you have saved in your 401(k)s or 403(b)s or those things?

Elaine: He has a 403(b) that's 350,000. We have about 380 in Roth, and we have about another 90 in a brokerage account.

Scott: Oh, good for you.

Pat: Okay. And how's the 403(b) and the Roth invested?

Elaine: The 403(b) is about 65, 35. Just with three main stocks. We don't have very many options. So, it's kind of total...

Scott: Three stocks or three funds?

Elaine: Three funds.

Scott: Okay. Three funds. Okay.

Elaine: Yeah. Sorry. You know, large-cap, mid-cap, you know, total bond.

Scott: Okay. And then the Roth?

Elaine: The Roths are a little more aggressive. 85, 15.

Scott: Oh, my gosh. You are on top of this.

Pat: That's why she's calling because she's a planner.

Scott: She is. You're really good at this. I don't know if your husband appreciates this. But you should actually take...

Elaine: He does.

Scott: You should play this for him with us confirming it.

Pat: So, I mean, here's how I look... Seven year's not a long time. Let's assume he was retiring today. And your options were the same thing. Do we take the pension? Like, what I'd say is live off some of those dollars in your brokerage account.

Elaine: Okay.

Pat: And, and use that as an opportunity to convert some of that 403(b) to a Roth that...

Scott: Essentially 0% or 10% tax.

Pat: That's right. That's right. End bill. Okay.

Scott: And maybe start social security then, and maybe not. But you've got yourself an opportunity in seven years, assuming the tax laws are the same. And I gotta tell you, I think based upon what you just said, I suspect that you've weathered the ups and downs in the markets over the last 20 years without a lot of angst, or have you? Is that a fair statement?

Elaine: Yeah, pretty much.

Scott: I think you should increase your equity exposure in your 403(b).

Elaine: Okay.

Scott: And the reason is, think about this. You're not going to spend, you know, between the $60,000 in pension and Social Security for the both of you in retirement. You're going to have plenty to live on. I doubt you're gonna really touch the 403(b) or the Roth for any extended period of time.

Pat: I would agree.

Scott: And it appears to be, at least from our short conversation, that you are comfortable investing. You knew what the allocations were. The Roth that you have more control over, you've got it more...

Pat: Higher in equity.

Scott: ... in equity.

Pat: Actually she knows that it's the last dollar she's gonna spend.

Scott: And that over time, the higher the equity exposure, the better. I think you should increase your equity exposure to 85% in the 403(b). And then not worry about anything until you go to retire. And the day you retire, then decide whether you should take [crosstalk 00:49:31], and part of it will be driven by...

Pat: Our tax law.

Scott: ... And his health.

Elaine: Okay.

Scott: That is correct. And his health.

Elaine: So, don't try to plan ahead...

Scott: No.

Elaine: ...And buckets...

Pat: Well, you've got plenty of cash. I mean, how much money do you have in the bank?

Elaine: CDs and bonds and cash, we've got close to a hundred.

Pat: And is your home paid for?

Elaine: No, but we owe a hundred on a $400,000...

Pat: Okay. Well, just pay this home off between now and retirement age and spend everything else. Continue to save to the maximum. I mean it. Continue to save to the maximum on the 403(b), make sure the home off is...

Scott: Between the pension and social security is gonna be making up his take-home pay now.

Pat: Yeah. And then your home, your standard of living. So, if you were my... Well, you're 61. If you were my... You could be my wife at this age.

Scott: Sounds a little awkward. You've got two husbands.

Pat: I know.

Scott: He's got the North Carolina family and the California family.

Pat: At least I've got that $60,000 pension to look at with my brother. What do we call 'em? My husband brother. My husband brother. So, yeah, I would just amortize that mortgage over the next seven years so it's paid off the day you retire. Maximize the 403(b)...

Scott: And the reason, and I would agree with Pat, it's just one less bill you have to deal with.

Pat: Yeah, and then I'd spend everything else that came through the house.

Scott: Yeah. I mean, in other words, not worry about saving.

Pat: Not worry about saving.

Scott: Because you've done a great job saving, and you've got a great pension and social security...

Pat: Yeah. Yeah.

Scott: Between social security and your pension, that's gonna replace this stay campaign now, and the rest is just gravy.

Pat: Yeah. So, I think you're doing a great job. Yeah.

Elaine: All right. Great. Thanks. Appreciate it.

Scott: We are out of time as...

Pat: That is always quick. If you are listening to this on podcast, will you please do us a favor and rate it?

Scott: Yeah, go give us a review and wherever you're listening to. Takes just a couple moments, and we appreciate it.

Pat: Yeah. And then we would... You know, we're trying to go mass market here. We're trying to build a big, huge...

Scott: Yeah, I don't think so. But anyway, enjoy the rest of your weekend. This has been Allworth's "Money Matters."

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