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

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

Pat: And Pat McClain. Thanks for being here.

Scott: Always good to have people listening.

Pat: Listeners.

Scott: Yes, because we wouldn't have a show otherwise.

Pat: And thank you for the reviews. I go in and read them about once every three months and so thank you for your feedback, we take some of it.

Scott: So some of the reviews, have you ever read 'em?

Pat: Not in years.

Scott: Okay. I do read them.

Pat: I don't like reading negative stuff.

Scott: Mostly the negative stuff 

Pat: Not that there's a lot of negative stuff on our show.

Scott: No, it's not...most of it is fairly positive.

Pat: Anyway, we're glad you...

Scott: Anyway...

Pat: We're glad...

Scott: ...but give us the reviews, please.

Pat: We're glad you're here as we're talking about financial matters and take calls and fun with finance and all that stuff.

Scott: Is it?

Pat: Fun with finance?

Scott: Yeah, is it fun with finance?

Pat: We try to make it fun. Finance isn't always fun.

Scott: It's a pretty boring topic.

Pat: It is increasingly complex. It's really fascinating because we've both been in this industry a long time and the investment world has become increasingly complex, not more simple. And you would think with all the technology and the ease of doing things, I mean, obviously, you can have a Robinhood account and you could do a trade super simply, that's...

Scott: Okay.

Pat: But it's still exceedingly complex when it comes to all the different types of investment products, all the different types of tax strategies that you need to employ.

Scott: I would agree with that.

Pat: The investment...

Scott: Balancing them all together.

Pat: I think that the menu of choices is increased. Our investment philosophy has not changed as a result of that much...

Scott: That's fair.

Pat: ...much.

Scott: Much. A little. So there's new products 

Pat: It's much easier to be tax efficient in today's environment than it was even 10 years ago.

Scott: Yeah, because of technology.

Pat: Technology and friction and trading costs.

Scott: Right, friction.

Pat: Now the friction is in the cash sweep programs.

Scott: Yeah, that's been interesting.

Pat: Do you want to talk about that, the cash sweep programs?

Scott: Yeah. So when you have money in a brokerage account, any of the big firms you can think of, or the smaller firms for that matter, any of the firms, so if the money's not invested, it drops into an interest-bearing account.

Pat: Sometimes it's a bank savings account.

Scott: Sometimes it's a money market.

Pat: Sometimes it's FDIC insured, sometimes it's not.

Scott: It's designed to be stable and liquid. Or if you have a dividend that comes in from your stock and is not reinvested, it drops into that. Well, particularly, as trading fees have gone to zero, a source of revenue for a lot of these firms is the spread that they can earn on the difference between the interest they pay you and the interest they could earn on their own safe liquid dollars.

Pat: Not just a source. For many of 'em, it's number one, two, or three highest revenue source.

Scott: And for a number of years, that revenue source was gone because interest rates were essentially zero.

Pat: There was no money in what they call the spread.

Scott: They couldn't make any...

Scott: ...additional money. There was no additional revenue of it.

Pat: So let's use, you've got an account at Acme Brokerage, right, that's owned by Bank of America. And if you google the news, there's been a lot of...

Scott: It's called cash sweep programs.

Pat: Yeah, there's been a lot 

Scott: And it might pay you 1.5% or 1% or 1.25% on your deposits in that money, but they're turning around and lending it at 3%, 4%...

Pat: They're buying treasuries at [inaudible 00:04:35].

Scott: ..5%, right? They're lending it to someone, either the U.S. government or someone else or overnight lending...

Pat: They're making that spread.

Scott: ...and they're making that spread, which is a huge source of revenue. So what's wrong with that?

Pat: I think it's a disclosure issue. Everyone needs to make money long-term, right? If you've got money at a brokerage firm and that brokerage firm's losing money, long-term, that's not good for anybody, them nor you, right? So, in any business transaction to work for a long time, everyone needs to make a profit. I think the challenge with that, it's the lack of disclosure and the opaqueness. And so as interest rates rose, rather than these firms giving that increase, that benefit to their investors, they kept that.

Scott: That's right.

Pat: That's the challenge. And as a fiduciary, right, you need to pass that on to the client.

Scott: Well, you need to act in your client's best interest.

Pat: That's right. Which might be to use a cash sweep program that applies a lower interest rate because it offsets costs that would have to come in from somewhere else.

Scott: It has to be disclosed though. Every week I've seen a 

Pat: Someone else is getting last action lawsuit. Everyone's gotten slapped for it.

Scott: They'll fix it. It'll work itself out.

Pat: And, I mean, typically if you have a small balance, it doesn't really matter, right, relative to your portfolio if there's a couple percent there, it's not gonna matter. If you've got money set in aside there that you're gonna be using for a down payment on a house in a year from now or two years from now, that's where it makes a tremendous difference.

Scott: A lot of difference.

Pat: Makes a big difference. So anyway, we're gonna take some calls. We also wanna talk about Morningstar did a study on the difference between investment returns and investor returns.

Scott: What did the investment do and how did I do relative to that investment?

Pat: Yes, how come my return wasn't quite what the investment was. And it's not a surprise study. I've seen it over and over, but it's always .

Scott: A good reminder.

Pat: Yes. So anyway, if you wanna join us, we'd love to take your call. You can send us an email at questions@moneymatters.com or you can call 833-99-WORTH to be part of the program. We're talking with Terry. Terry [SP], you're with Allworth's "Money Matters."

Terry: Good morning. How are you?

Scott: Hi, Terry. We're great.

Terry: Great. So I have some questions. I'm about to retire. I'm 68 and I have about $1.25 million in tax...I don't know what you call it. They're gonna be taxed when I take those funds out. I have about...

Pat: 401(k)s, IRAs, 403(b)s, that sort of account?

Terry: And I got two annuities, actually three annuities, IRA, a company retirement, a 403(b).

Pat: Okay.

Terry: Because I'm still working, I'm waiting to transfer all that into...

Pat: So you worked in a hospital or a school?

Terry: I worked for government for almost my entire life so I get almost no Social Security.

Pat: How did you get the 403(b)?

Terry: The government gets a 403(b).

Scott: Was typically 457 or 401(k), but depending on what sector...

Scott: ...you lived in. 

Terry: Right. Well, I work for a university right now.

Pat: Okay.

Scott: Thank you.

Pat: Thank you. It was education. Thank you.

Scott: That's when I said you worked at a school. Okay.

Terry: Oh, sorry.

Scott: That's all right.

Pat: Okay.

Scott: We are just trying to figure out whether these are what called qualified annuities or non-qualified annuities. And they sound like qualified annuities.

Terry: I have one qualified annuities and the two largest are non-qualified, which means they're taxable, right?

Pat: Parts of them are...

Terry: When you take money out.

Pat: ...taxable. And it depends on how you take the money out. How did you end up with two large non-qualified annuities?

Terry: Well, we went with this financial planner who was supposedly a fiduciary. She never asked me and she just took the money I had and kind of put it in these annuities.

Pat: And where was the...

Pat: ...money in, like, a savings account or something?

Terry: No, it was in a Vanguard account.

Pat: Okay.

Terry: In an SEP IRA

Pat: A SEP IRA?

Terry: Yep.

Pat: So they are qualified annuities.

Scott: Is your spouse self-employed?

Terry: He is.

Pat: Okay. All right. I think we're playing kind of a game here.

Scott: And I'm...

Scott: ...sorry, yes.

Pat: But we're just trying to figure out the sources of these things. So these are qualified annuities. Okay. So...

Terry: What does qualified mean?

Pat: It means that it's tax-qualified, that it went in on a pre-tax basis, gross tax deferred and then comes out taxed.

Scott: As opposed...

Terry: Okay. I get...

Scott: ...to saying yanking a bunch of money outta your checking account and buying an annuity that's got a different tax structure.

Pat: Yes, which means that...

Terry: Well...

Pat: ...you put the money in after tax, it grows tax-deferred...

Terry: Got it.

Pat: ...when it comes out, it's partially taxed.

Scott: All right. So sorry...

Pat: Okay. That's okay.

Terry: I just reversed. Sorry about that. 

Scott: No.

Pat: So here's what we got from the conversation. You're married.

Terry: Yes.

Scott: You're about to retire.

Pat: And you're about to retire. And most of this money sounds like it's qualified, which is it's pre-tax. What's the total pre-tax amount between you and your husband?

Scott: Or your spouse?

Terry: Pre-tax...

Pat: Money that came from the SEP IRA, or the 403(b), or an IRA rollover.

Terry: Right. Well, he has an inherited IRA and he also has traditional, he has brokerage. If I add all of that together, like, his total dollars are $768,000 approximately and then $82,000 of that is in a Roth, but the rest is pre-tax.

Pat: Okay. So what is your...

Terry: And then...

Pat: Okay. Keep going.

Terry: I have more, sorry. I have approximately $300,000 that's in non-taxable, in Roths of some sort, or I do have one annuity that I put in post-tax.

Pat: Okay.

Terry: Okay. So we own our own home, but we do have a small mortgage on a solar system we had put on.

Pat: Okay.

Terry: My questions are, one, if I retire now, should I be taking money from my IRA that was pre-tax?

Pat: How much is your...

Terry: Should I be doing...

Pat: How much is your pension gonna be relative to what your current salary is?

Terry: I have no pension.

Pat: Okay. No pension?

Terry: [crosstalk 00:11:25] No pension. Nope. I am currently taking funds from one of the two annuities, the big ones. I mean, I get approximately $1,300 a month and then I get about $800 in Social Security.

Pat: And how about your spouse?

Terry: My spouse is still employed. He owns his own construction building 

Pat: But you're still employed as well. You said you're about to retire.

Terry: I am.

Pat: But you're currently taking Social Security and taking money out of a retirement account?

Terry: Correct. What we did, my husband's a builder and so we were living in the house next door and we wanted to build this one that we're currently living in without any mortgage. So we had to show income to remortgage the other one so we could afford this one.

Pat: Got it. And what's your...

Scott: Terry, you've got a lot of moving parts.

Pat: What's your husband's income?

Pat: All over the map.

Terry: Yeah.

Pat: Some years great, some years bad.

Terry: $40,000 to $60,000 I would say. Mine is currently $88,000.

Pat: And when do you retire?

Terry: Well, it just changed today. Now it goes through October 11th. I was supposed to be done at the end of August.

Pat: And did you already qualify for the loan?

Terry: What loan?

Pat: Well, you said you started income to get a loan.

Terry: Yeah, and that's long gone. We've paid that loan off.

Pat: But you're still taking the income?

Terry: Yeah, should I stop it 

Pat: Yes.

Terry: ...annuity?

Scott: Well, you're about ready to retire, so...

Pat: I would stop in October.

Pat: I mean, we wouldn't bother. Okay.

Scott: That's right.

Pat: So your question for us is about a Roth?

Terry: No. Well, I have three questions actually. Should I take money from my IRA that was pre-tax and use that as income because I'm gonna have pay tax on it anyway? Should I do any Roth conversions because I only have about $300,000, well, close to $500,000 that is post-tax? But as I said, I have this $1.3 million that is pre-tax. And then also I have this annuity, one of the annuities that I didn't annuitize. The 10 years is up in 2027. How should I take that out? Should I take that out all at once [crosstalk 00:13:59] somewhere else?

Pat: Yes, so the answer is...

Scott: That just means your surrender charges of the...or you...

Scott: ...can probably just keep it and not...You don't have to do anything to it.

Pat: And that was a post-tax annuity. You put after-tax money on that one?

Terry: No, that was a pre-tax.

Pat: Okay. Here's the first thing you wanna do.

Terry: Okay.

Pat: Your husband is a contractor and he starts with a plan for a building, right? He starts with a plan, and then he has it engineered, and then...

Scott: Well, let's start with a plan. What is it we're trying to accomplish?

Pat: You build a portfolio by going down to Home Depot and just buying things. That's what 

Scott: That's what this looks like.

Pat: And that through no fault of your own, by...

Scott: That's very common.

Pat: ...the way. It's very common. You ran into an advisor who was selling annuities at the school, at the university, and they're like, "Hey, do this," and then you're like, "What do I do with this $100 grand over there?" And you're like, "I got this beautiful thing here you're gonna love it," right? That's how you...

Scott: You gonna love it.

Pat: You're gonna love it. It's great.

Terry: I don't love it.

Pat: So what happened is you've collected things. And by the way, you did a great job collecting. You're a good saver, right? You're a great saver. As you...

Terry: And I'm still worried I'm gonna run out.

Scott: Well...

Pat: Listen, and most people that have plenty of money worry they're gonna run out or they wouldn't have money. You show me someone that doesn't care about money or worry about it, I'll show you someone that doesn't have any. So your experience in the past, Terry, you've had these financial salespeople that have sold you these products. They call themselves financial advisors. But I...
Pat: ...think what would be...

Terry: ...themselves a fiduciary.

Pat: Well, part-time fiduciaries.

Terry: Anyway, go on. I'm kidding.

Pat: No, but part-time. Look, if you listen to an ad from any of the big firms out there, at the end, they will give two disclosures. They will say...

Scott: They're all part-time fiduciaries.

Pat: They will say security's offered through NASD SIPC and then a registered investment advisory. Look, we own a broker-dealer, right? So you could accuse us of being part-time fiduciaries. We don't put new assets to speak of into the broker dealer, it's just to...

Scott: We don't sell products. Our advisors aren't paid commissions by selling products.

Pat: Like, if someone like you came over and had this annuity that you paid a commission on years ago, we want a place that we can house that, that we can monitor that away from the firm that sold it to you. And we have to own a broker dealer to do that. So, Terry, I think what would be really valuable for you is if you and your husband met with a true financial planner, certified financial planner, even if you said I wanna pay for...I don't think I wanna hire you to do any of my...I just wanna pay you for a financial plan. And they'll go through and look at all these things. First of all, it's like, how much income could you truly afford to take each month from these accounts, right? Your pay is stopping tomorrow so how do we make up that income, how do we have confidence that that income's gonna be able to continue to keep pace with inflation and that when you're 93-years-old, you're still gonna have the income coming in, right?That's the question number one.

Scott: It's do I have enough money for the income that I need to lose?

Pat: Then it's how do we manage all these things in the most efficient manner both from a tax standpoint...? There's lots of moving balls because you've got these SEP IRAs and you've got non-qualified annuities and Roth and where do we take the income from? And a good plan can lay out a strategy for all that. And my guess is that you're going to annuitize that non-qualified annuity because...

Terry: You think so?

Pat: Yes. My guess is because that's the most tax-efficient way to get at it.

Terry: Okay.

Pat: Even if you have to move it into a no-cost, low-cost annuity to do so because you've got this basis in it. So look, I have a client of mine that has this annuity and we're doing exactly that because that's the most efficient way. Then the second question that Scott pointed at is, okay, do we have enough for the income we need and then where do we take it from? And then the third question is what tax efficiency portfolio strategies should we apply here?

Scott: Do we do Roth conversions this year, do we do them next year, do we...?

Pat: How's it affect my tax, how's it affect my Medicare tax, right? But unfortunately, your experience in the past has been kinda you haven't had a relationship. And by the way, go hire a good financial advisor, right, who's also a, you know, fiduciary. So you could be a financial advisor and not manage assets. But you want a fiduciary that's a financial...If they charge you $2,500 to do a plan and you decide to hire them at the end, oftentimes they will actually waive that $2,500 fee if you decide to hire them. But you pay for the financial plan, you get to try it on, you get to ask all these questions from this conversation...

Scott: Afterwards, you'll have a good strategy of what you should be doing and you'll have increased confidence in your own future.

Pat: That's right.

Scott: At this stage of the game, we can't answer the question because it's hard to even figure out what you own and where you...

Pat: That's right.

Scott: ...got it, right?

Pat: Now, imagine [crosstalk 00:19:39]...


Pat: ...at a basic you'll have a nice good spreadsheet that are nice...

Scott: Trap.

Pat: Like, imagine, like, your husband's a contractor and someone just shows up with a truck full of parts and says, "Build me a house." He's like, "Okay. So...

Terry: People do that.

Pat: So where is...

Terry: People...

Pat: They do do...

Terry: People do that.

Pat: ...that, don't they? And what's your husband say?

Terry: They do.

Pat: What's your husband say?

Terry: Oh my God. He's so mad right now at one of his clients because they wanted to be their own general contractor, they didn't order stuff right and they're trying to blame him.

Pat: Well, I think so you understand the difference between a good contractor and a bad contractor. You also understand the difference between a do-it-yourself person who knows what they're doing and a do-it-yourself person who thinks they know what they're doing.

Terry: Yeah. I actually managed all my own until we went with this "financial advisor" when the president that was coming in that was a little bit risky. But I think that was not the best move for me.

Pat: Well, the...

Terry: And we're away from them now, but...

Pat: Understanding.

Terry: ...my husband has another one.

Pat: I'm sorry, say that again.

Terry: My husband has a financial advisor at Vanguard, and I'm probably gonna move 

Pat: It's not the same thing.

Terry: ...over there.

Pat: It's not the same thing. You need...

Terry: It's not?

Pat: You need to sit down with a local financial advisor. What you have at Vanguard is someone that works remotely, that they pay a fee to manage the asset. You're past that.

Terry: Okay.

Scott: I don't wanna disparage thing. My guess is if you look at the call center for financial advisors, they tend to be younger. It's kind of a first step.

Pat: It provides a service. You need a little bit more in-depth than that.

Terry: He offered to do a plan for me, but...

Pat: You can...

Terry: ...I think I should go 

Scott: If its free, yeah, gonna go for it.

Pat: If it's free, give it a shot and ask all these questions and see if they come back with the right answers. If they say...If you ask, should I annuitize this non-qualified annuity, and they don't have a response as to why you should or shouldn't, you'll know you're in the wrong place.

Scott: That's right.

Terry: I did ask 
Pat: If it were me, like, I don't know. If I were at my point of retirement, like, if I had a heart issue, a serious heart issue, I'd want the best heart surgeon available. Truly.

Terry: Absolutely.

Pat: I would say...

Pat: Like, if I had a major health , like, I want the best, or at least if not the best, I wanna at least believe I'm working with the best, right? And if I'm approaching retirement and I've got a couple million bucks saved up in a bunch of different types of accounts, and I'm trying to figure out a strategy, I think I'd want one of the best financial advisors.

Scott: That's right.

Scott: That be me. So we appreciate the call.

Pat: We wish you well, Terry. You know, it's funny...I think because at least if you go to a heart surgeon, you know that that person, they went through medical school, went through all kinds of additional training, all that, right. And there's...

Scott: That would be the hope.

Pat: Well, otherwise, I don't think they could call themselves a specialist.

Scott: Yes.

Pat: And in the financial services industry, the word financial planner means nothing.

Scott: It's nothing.

Pat: At least look for a certified financial planner. You know there's some degree of education there 

Scott: Certified financial consultant.

Pat: ...and you're agreeing to certain guidelines and...

Scott: That sort of thing.

Pat: Certified financial consultant, which is what the old guys have. By the way, Scott, I'm gonna say something about this last call. I noticed this in last week's show. You are the king of the mixed metaphor. You call a lot of...What'd you call it?

Scott: Did I just do it again?

Pat: Yeah, you did it. It's balls in the air. You call balls on the move. You're the king of the mixed metaphor. You always have been.

Scott: I was doing a baseball analogy the other day, and then I talked about moving the ball down the field, right? 

Pat: So you're the king of the mixed metaphor.

Scott: ...in the same.

Pat: You used to say...

Scott: I do.

Pat: ...he's working his tail to the bone.

Scott: Right. Okay. All right. Guilty.

Pat: Which by the way...

Scott: I like to think it makes me a little more charming.

Pat: I don't think you know what's happening.

Scott: I don't.

Pat: It's balls in the air.

Scott: Okay. Balls in the air and balls on the...Okay.

Pat: Balls in the air.

Scott: You're right. You're correct.

Pat: King of the mixed metaphor.

Scott: You're right. All right.

Pat: But it is charming because I've been a...

Scott: Charming?

Pat: ...business partner for 30 years. Since the day...

Scott: That changed.

Pat: ...I met you, it hasn't changed at all.

Scott: You tease me for 30 years on it.

Pat: It's okay.

Scott: It's probably not gonna change.

Pat: It's fingers to the bone...

Scott: Okay.

Pat: ...work the tail off.

Scott: I don't feel like doing either anymore, by the way.

Pat: And where did the word...It's work your tail off like you're some sort of dinosaur, like you've got this tail that you are moving around so much, you're gonna work it off. I don't know where it comes from. Like, you're a lizard? I don't know.

Scott: I don't know.

Pat: I don't know. People make fun of our kids' slang. Think about the slang that...

Scott: We make fun of it.

Pat: We make fun of it. But think about the slang that we have used growing up or our parents' slang.

Scott: My kids, they can't ask a question without starting with "wait." Every question starts with "wait." Like, "Wait, what do you mean?" You want me to pull over the car? What do you mean by wait? Every question starts with "wait." Have you noticed that young people?

Pat: Or they'll say, "You wouldn't believe this," and they'll tell me something and I say, "I can't believe that."

Scott: I've got two teenage girls at home 

Pat: Or I'll say something and they'll say, "What?" and then I'll just repeat it again and they're like, "We're not asking for clarification. That was like, wow." I'm like, "Well, then why didn't you say wow? Why did you say what?"

Together: Okay.

Pat: If there's anyone still listening to our show...

Scott: I wanna be Seinfeld.

Pat: Let's talk to...It looks like we have both Vince and Samantha with us. So Vince and Samantha, welcome to Allworth's "Money Matters."

Samantha: Hi, Scott and Pat. This is Samantha.

Pat: Hi, Samantha.

Scott: Hi Vince.

Samantha: How are you doing?

Pat: We're fantastic.

Vince: Good. We have a couple questions here. We just retired a couple months ago and we're 52 and 55. And...

Pat: How's that going?

Scott: First of all?

Pat: I mean, you're quite young to be retired.

Samantha: It's fantastic.

Pat: Okay.

Vince: We're loving it.

Pat: Good. All right. Good.

Vince: As long as there's things to do, we're doing a lot of pickleball and anything else we can do, you know, taking classes, like a pottery class, we're looking into doing glass blowing, all the things we couldn't do while we were working and stuff like that, so...

Pat: Wow.

Vince: ...it's a...

Pat: How long have you been married?

Vince: Hold on. 26-and-half years.

Scott: Wow.

Pat: Okay.

Scott: Well good for you guys.

Pat: Good for you. All right. What's your questions for us now that we've caught up on young retirees' lifestyle.

Vince: So, you know, we have time, so we're looking to develop some Roth conversion plans we have and, like, how much should we convert, should we worry about the 22%, 24% tax brackets based on what we have, and also in the future, like Social Security, should we wait until 70 to collect so that we can do more Roth conversion so it doesn't add to our total income every year?

Pat: All right. So walk us through on...

Scott: On the Social Security, like the earliest you can qualify is seven years.

Pat: Don't worry about it.

Scott: I wouldn't be spending a lot of time on Social Security.

Pat: We're gonna defer any decision there. So walk us through your assets, what do you have and...?

Vince: I didn't say 7, I said 70, should we wait until...?

Pat: The earliest you can take it is in seven years.

Scott: So for one of you and 10 years for the other so I wouldn't even...

Pat: We're not gonna really address that.

Scott: I wouldn't even worry about it.

Vince: Okay.

Pat: Tell us what the assets are and where they're at and tell us about...

Vince: Okay.

Pat: ...your debt situation.

Vince: All right. So summary, in the traditional IRA and a 457, we have $3 million in there, total. In Roth IRA, we have about $370...

Pat: Wait, one second. Can you actually tell us how much you have in traditional IRAs...

Pat: ...and in 457s separately because the tax rules are significantly different between those two?

Vince: Okay.

Samantha: So in the traditional IRA for both of us, we have about $2 million and then for 457, we have about $900,000 between the both of us.

Pat: Okay.

Scott Got it.

Pat: And do you have pensions?

Samantha: Yes.

Vince: Yes. And for our gross income, including pension, interest from bank CDs and dividends, it's approximately $178,000 and then...Go ahead.

Pat: And how much money do you have in brokerage accounts and in bank CDs, that sort of thing?

Vince: Okay. So at our Roth IRA...

Samantha: Brokerage.

Vince: Brokerage account, sorry. Brokerage account, we have about $760k.

Pat: Okay.

Vince: And then in...Go ahead.

Pat: No, go ahead.

Scott: Roth IRAs?

Vince: I was gonna say...

Pat: $370 Roth.

Vince: ...savings and CDs we have about $700,000 because we sold a house last year and currently we're living in an apartment and trying to figure out where we wanna live, do we wanna buy a house, and things like that. So that's in there right now. And then checking, we have about $50,000 there.

Pat: And do you guys have kids, grown kids?

Vince: They're out of the house.

Pat: Where do they live?

Vince: They live in Sacramento.

Pat: And you're in Sacramento?

Vince: Yeah, I guess I am. 

Pat: So you'll probably stay in California for the...

Vince: We are...

Vince: ...because we also have other family members older than us.

Scott: I get it.

Pat: And why did you sell the house and move to an apartment?

Vince: Different lifestyle and downsize and go to...I mean we're not that far away. We only moved about 40 minutes away, but it was just a kind of, like, make a change in our life because we had lived the other place for about 24 years.

Pat: And the nice...

Vince: And then...

Pat: ...thing now when something breaks, you just call one number, there's not...

Scott: Is the goal to...

Samantha: Exactly.

Scott: Is the goal to buy a house again or to stay in rentals?

Samantha: We're actually not sure at this point.

Vince: We're still exploring. You know, we're still in...It was over a year and a half ago, and so far, I guess it's, like, a different lifestyle and taking our time right now.

Scott: And what was your income for the both of you before you retired, annual income? So your pensions and interest and whatnot's about $178,000. What were you guys earning before you retired?

Vince: Our income was about the same because we were putting so much into our 401 and 457.

Scott: That's what we suspected.

Vince: So our income has not changed at all.

Pat: And so the question for us is Roth conversion, what is it you...

Samantha: Yes.

Pat: ...trying to accomplish?

Vince: So what do you mean?

Samantha: Well, we know we can't avoid taxes, but we want to minimize the amount of taxes.

Vince: In the future because the $3 million in our pre-tax, that's just gonna keep growing and eventually R&Ds are gonna come into play.

Pat: That's right.

Vince: And so that's why we're talking about, like Samantha said, you know, we're trying to minimize it, but there's a fine line, we don't wanna convert $3 million one year and then pay a huge tax...

Scott: Of course...

Vince: ...and then...

Scott: And then you're paying the highest tax bracket.

Pat: Here's the situation. If we convert it to a Roth, it makes sense to do some. But you're in this...I wouldn't wanna use up a lot of that savings of the brokerage account to pay...

Scott: So the...

Pat: ...the tax on it.

Scott: At some point in time, you need to buy another house.

Pat: That would be our advice.

Scott: Just because from an inflationary hedge, it provides a lot of security.

Pat: And you're really young. You're really young.

Scott: And I can understand why you're in no hurry, like...

Pat: My guess is you retired from the state of California, you're both safety workers.

Vince: Yes.

Scott: So let's assume the saving's gonna go for some other future house. And to Pat's point, you wouldn't wanna work so hard at the conversions that you've got down the road and your brokerage account is suddenly at a small place. But you've got enough...Is there much cash in that or would you have to sell something to generate cash to pay a tax liability on a conversion?

Samantha: No, we wouldn't.

Vince: No.

Pat: But Scott, how much would a house cost then? Look, we have listeners all...

Pat: ...over the country. These people happen to be in our backyard. So we're very familiar with the marketplace and we're very familiar with the scenarios because in the sSate of California, you can retire as a safety worker at age 50 with 90% of pay in many cases. So that's how we guessed all these things. A house here would...

Scott: And what about the property tax carry forward? What's the timeframe we have?

Pat: Did we lose any of that?

Scott: [crosstalk 00:33:44] off the top of my head.

Vince: Available property tax, we're not gonna be in that because there's, like, the two years for keeping up with the old property tax. We...

Pat: That's right.

Vince: ...understand that. But like we said, the rental we're doing, it is still within the scheme of our income.

Scott: So let's back up a little further again. You wanna save money on taxes, but you've got roughly, let's just call it $4 million in retirement accounts, right?

[crosstalk 00:34:12]

Pat: And by the way, leave that money in your 457. Do not move that money to an IRA.

Vince: That's why we're doing that...

Scott: Because it's liquid.

Vince: Three days after we retired, we already moved our 401 into traditional IRA...

Scott: So my...

Vince: ...and [crosstalk 00:34:28]...

Pat: But you left that 457 where it's at?

Together: Yes.

Pat: Okay. Got it.

Vince: That was what we did because...

Pat: But I guess...

Vince: ...we know...

Pat: Here's my question, right. So you guys have been good savers. My guess is you were maxing out both the 401(k) and the 457 for a period of time, or at least contributing to both. Your pensions are roughly what your take home pay was before.

Vince: Yes.

Pat: And you're early to mid-50s and you have $4 million for retirement that you're not spending. That'll...

Vince: Yes.

Pat: ...be worth $8 million, let's say in another decade or give or take, right?

Vince: That's $3 million...

Pat: And then...

Vince: ...in the...That's $3 million in the pre-tax. [crosstalk 00:35:11]

Pat: I'm just looking at...I know, but I'm just looking at what are your...I'm taking the $700 grand in the savings...

Vince: [crosstalk 00:35:17] I apologize [crosstalk 00:35:18]...

Pat: No, you don't have to apologize. So you've got $4 million bucks saved that is gonna grow to $8 million, like, so I guess my question is do you want to use any of your retirement savings, what you saved for, you're now retired, to help supplement your lifestyle or do you wanna just do the best you can to maximize your growth and minimize taxes so that this continues to grow for years?

Vince: I see what you're saying. I mean we have, like you said, $4 million. I mean, we're comfortable with that, it's not like our goal to go and generate $20 million and, you know, we want to protect what we have at the same time, but our lifestyle, you know, is not spend, spend, spend, but we want that ability to spend, you know?

Pat: Okay. So...

Vince: And...

Scott: Look, you should absolutely run the test to see how much you could do in a Roth conversion. The thing that I would...

Pat: I would definitely do some Roth conversion every year.

Scott: That's right. And it won't be a ton, but it will be some. But the thing that you really need to consider is this inflation hedge by owning a home, right? I know you're living in an apartment now, it was a big change, but I don't wanna use up all that brokerage account or that savings account to pay taxes on the Roth conversion only to find in three years, four years, five years that you end up buying a house.

Pat: And it might be a condo of some sort, townhouse of some sort.

Scott: Yeah, it might be something. But if you think about real catastrophic events and hyperinflation, that's when if you own your home, it just puts you in a completely different situation, even the way you act as an investor. Like, we led people through the financial crisis and those that owned a home, paid for, had a very different perspective on their future because they're like, "Well, I know that I got my house, like..." And they were able to withstand the markets and stay invested and they benefited by the recovery that...

Pat: Now, if you were 75 or 80 and...

Scott: Be different.

Pat: ....you said, I was living in an apartment, I'd say, "Yeah. Okay. All right." But you're 52 and 55. One of you is gonna live for...

Scott: Forty years.

Pat: ...35, 40 years. And there's a lot of things that can happen in that time period that you leave yourself exposed to inflation, right? And I remembered three years ago when I was looking at a property to buy and that the rents were increasing by 3% a year with no adjustment for inflation and the guy said to me, "What do you care what the leases are? It's above that rate of inflation." And I said, "Don't believe that inflation's gonna be [crosstalk 00:38:24]...

Scott: There was no inflation.

Pat: This is three years ago. Don't believe that inflation won't happen again. And look, inflation is down now, but don't believe it won't happen again because it will happen again, right? The Federal Reserve actually is designed to avoid big booms and busts if it can, but it's not perfect.

Scott: It's not perfect.

Vince: Okay.

Pat: So...

Scott: I clearly like the strategy though of let's see how much we can convert from the pre-tax to the Roth, but I would do it...I wouldn't go hog-wild.

Pat: That's right. I'd do it a little at a time. And then I think about, you know, where...

Scott: Because you are volunteering to pay taxes at a certain rate today for a promise to the future that, it's a winning bet for a portion of the portfolio. As long as we didn't use up all $1.46 million in order to pay those taxes because you might find that you have the perfect house that costs $1.3 million, it's your dream home. Someone comes and mows the lawn every day and empties the trash and it looks like an apartment, like there's nothing to take care of and...

Pat: And you have the financial resources to do that if you want.

Scott: You can pull the trigger in a minute.

Vince: And that's why we're looking at...We're not looking at converting it all at once.

Pat: [crosstalk 00:39:52]

Vince: We know that. But this is more like $20,000, $25,000 a year each to convert. [crosstalk 00:40:00]

Pat: That's probably right. And what you do is...

Scott: Is you run the numbers.

Pat: ...you run the numbers up to the next marginal tax rate, decide what the conversion is, and you do it every November, December. And it's easy.

Vince: And so...

Pat: A good financial...

Vince: [crosstalk 00:40:13 ]

Pat: ...advisor could tell you in a minute or an accountant.

Vince: So it's kind of, like, trying to develop a strategy and I know we can't predict what the taxes are, but, you know,...

Pat: Well, it's...

Vince: [crosstalk 00:40:27]

Pat: ...gonna be fluid. It'll be fluid, so you're gonna wanna do this every fall and look and run the numbers every November and it's like, "All right, how much did we convert this year and this year, $31,000 or $25,000," who knows what the number is, but you do it every year and then you convert that amount, use that money in your brokerage account to pay taxes on it.

Vince: And it doesn't seem like it'll make a big dent into like doing $20,000, $25,000, but at least a K a year conversion, but over the three main, but it's something.

Pat: No, it certainly helps, anything helps because what...

Vince: Exactly.

Pat: ...you're worried about is required minimum distribution for you in, you know, 20 years and 23 years. And that will actually lower that required minimum distribution.

Scott: But I think with this, you need to be pretty confident you're gonna remain in California because you're choosing to send Sacramento about 10% of the tax rate. You're at roughly 9.7%.

Pat: And if you moved to Nevada or Texas or Florida or Washington State, there'd be none of that.

Vince: We would not have retired so early if we couldn't afford to live in California, you know, because we knew that. So it's all within the scheme of our planning of it and taking the leap here and not...it wasn't a blind leap sort of thing.

Pat: And you guys...I'm gonna live here as well.

Scott: Me too.

Pat: That's just the way it is. And by the way, great savers, congratulations. You guys have done a great job saving. And good...

Samantha: Thank you.

Pat: ...investors, I assume, because your IRAs and 457s were all equity investment or most equities over that time period or you wouldn't have grown those account balances that large. Fair statement?

Samantha: We started early.

Pat: But you weren't conservative investors, you were relatively aggressive investors.

Samantha: Yeah. [crosstalk 00:42:23]

Vince: We started $50 bucks, you know, 30 years ago and, you know, over time and...

Scott: Makes such a difference.

Vince: ..., you know, [inaudible 00:42:29] and anyway, you know, we made errors, you know, mistake, we learned, changed it how we did and...

Scott: Great [inaudible 00:42:39]...

Vince: ...you know, it's time period and [crosstalk 00:42:41]...

Scott: Well, congrats. Enjoy the pickleball.

Pat: Enjoy glass blowing.

Scott: I got a text this week from a good friend of mine who...

Pat: Appreciate the call.

Scott: pulled his...

Vince: All right. Thanks guys.

Scott: Thanks. [inaudible 00:42:54]

Samantha: Thank you.

Scott: ...tore his Acilles playing pickleball. Said, "I tore my Achilles. How'd you know I was playing pickleball?"

Pat: You [crosstalk 00:43:01]...

Scott: I can't play it, it tears my knees up.

Pat: You talk to, like, physical therapists, they're like, "It's the greatest thing ever."

Scott: Greatest thing ever.

Pat: This is better than snowboarding for an orthopedist.

Scott: A wrist doctor.

Pat: You're moving your office. Where is your office? Right next to the pickleball court.

Scott: Hey, I want to chat about this when I mentioned the start of the show, the difference between investor and investment returns, okay? So this was Morningstar and I've seen these...Pat, you've seen 'em forever, right?

Pat: Yes.

Scott: Morningstar just released a study showing the 10 years ending on December 31st of last year '23, right, the average investor earned 1.1 percentage points less than the mutual funds and ETFs that they actually owned. How can that be? Well, what happens, this is pretty common, let's say you own six different investments, you own a large-cap growth, you own a large-cap value, you own a mid-cap, you own a small-cap value, you have international, you've got a global, whatever, right, real estate, and each year you look at how these things do and you watch this, "Wow, this one fund, it's really been underperforming. Wow. It's two years in a row underperformance, wow it's third year in a row." And so what ends up happening...

Pat: I've gotta do something.

Scott: ..."I've gotta do something. This thing's been underperforming, I need to move it to something that's performing better." So you move, you sell that, and you buy into something that has already performed better and is up in price, which is why the average investor, average, earned 1.1 percentage points less than the underlying investments. All timing.

Pat: All timing. When I first started in the business 30-some-odd years ago, there's this guy who was considered the investment guru in the firm, Kyle [inaudible 00:45:02.089]. Do you remember Kyle? [crosstalk 00:45:03]

Scott: He's probably still around.

Pat: Maybe he is. I don't know. But he always used to say, "It's time in the market, not timing the market," right.

Scott: I don't know if he coined the term, but anyway, yes.

Pat: But that's what he said. And by the way, I was brand new, so I thought it was him, so...Genius.

Scott: But that just it sounds simple, but it's fighting your base urge.

Pat: Now, if you look at sector funds, right, like technology, energy, whatever, the sector funds the same 10-year period, sector funds, the average investor did 2.9 percentage points worse than had they just owned the basket.

Scott: Makes sense.

Pat: Because you get...even like technology, in 2022, the technology index spider was down 28%, was up 56% the next year, but you had to own it the next year.

Scott: Yes, it didn't help if you had sold it.

Pat: So just a good reminder, like, the hard part is not picking the investments, the hard part is living with the investments, and the biggest risk is not the markets, the biggest risk is the investor.

Scott: Well said.

Pat: Well, that's all the time we have. It's certainly been great being with you. You've been listening to Scott Hanson and Pat McClain...

Scott: Of Allworth Financial.

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.